##### Table of Contents






UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to           .                                 

Commission file number: 000-21291



---

Introgen Therapeutics, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 74-2704230                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  
|301 Congress Avenue, Suite 1850
    Austin, Texas                  |  | 78701                                      
|(Address of principal executive
    offices)                       |  | (Zip Code)                                 

Registrants telephone number, including
area code:

(512) 708-9310


Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 par value


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

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

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

The aggregate market value of the voting stock
(common stock) held by non-affiliates of the Registrant, as of
the last day of the Registrants second fiscal quarter, was
approximately $21.3 million based upon the last sale price
reported on the Nasdaq National Market for June 28, 2002.
For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding shares of
common stock and shares held by executive officers and directors
of the Registrant have been excluded because such persons may be
deemed to be affiliates. This determination is not necessarily
conclusive.

As of March 24, 2003, the Registrant had
21,516,371 shares of common stock, $0.001 par value, issued and
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 10, 11, 12
and 13 of Form 10-K is incorporated by reference to the
Registrants proxy statement (2003 Proxy
Statement) for the 2003 Annual Stockholders Meeting,
which will be filed with the Securities and Exchange Commission
within 120 days after the close of the Registrants
fiscal year ended December 31, 2002.









---

TABLE OF CONTENTS



|                                                   |                                                                                                         |  |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                 
|PART I                                            
|                                                   | Item 1. Business                                                                                       
|                                                   | Item 2. Properties                                                                                     
|                                                   | Item 3. Legal Proceedings                                                                              
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                           
|                                                   | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                   | Item 6. Selected Consolidated Financial Data                                                           
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                   | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|                                                   | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|                                                   | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                   | Item 11. Executive Compensation                                                                        
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                   | Item 13. Certain Relationships and Related Transactions                                                
|                                                   | Item 14. Controls and Procedures                                                                       
|PART IV                                           
|                                                   | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                        
|POWER OF ATTORNEY                                 
|CERTIFICATIONS                                    
|EX-23.1 Consent of Ernst & Young LLP              
|EX-23.2 Information Re: Consent of Arthur Andersen
|EX-99.1 Certification Pursuant to 18 U.S.C. 1350  



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC.

ANNUAL REPORT ON FORM 10-K






TABLE OF CONTENTS


|               |  |                                                                                           |    |  |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I        
|ITEM 1.        |  | BUSINESS                                                                                  |    |  | 1  | 
|ITEM 2.        |  | PROPERTIES                                                                                |    |  | 24 | 
|ITEM 3.        |  | LEGAL PROCEEDINGS                                                                         |    |  | 24 | 
|ITEM 4.        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                   |    |  | 24 | 
|PART II       
|ITEM 5.        |  | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS                 |    |  | 24 | 
|ITEM 6.        |  | SELECTED CONSOLIDATED FINANCIAL DATA                                                      |    |  | 26 | 
|ITEM 7.        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS |    |  | 27 | 
|ITEM 7A.       |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                            |    |  | 45 | 
|ITEM 8.        |  | CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                              |    |  | 45 | 
|ITEM 9.        |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE  |    |  | 45 | 
|PART III      
|ITEM 10.       |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                        |    |  | 46 | 
|ITEM 11.       |  | EXECUTIVE COMPENSATION                                                                    |    |  | 46 | 
|ITEM 12.       |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT                        |    |  | 46 | 
|ITEM 13.       |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                            |    |  | 46 | 
|PART IV       
|ITEM 14.       |  | CONTROLS AND PROCEDURES                                                                   |    |  | 47 | 
|ITEM 15.       |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K                       |    |  | 48 | 
|SIGNATURES     |  |                                                                                           | 52 | 
|CERTIFICATIONS |  |                                                                                           | 53 | 

i



---



##### Table of Contents






PART I




Item 1.     Business

This Annual Report on Form 10-K contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
statements include, among others, statements concerning our
future operations, financial condition and prospects, and our
business strategies. The words believe,
expect, anticipate and other similar
expressions generally identify forward-looking statements.
Investors in our common stock are cautioned not to place undue
reliance on these forward-looking statements. These
forward-looking statements are subject to substantial risks and
uncertainties that could cause our future business, financial
condition, or results of operations to differ materially from
historical results or currently anticipated results. Investors
should carefully review the information contained under the
caption Factors Affecting Future Operating Results
in Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in, or
incorporated by reference into, this Annual Report on
Form 10-K.

Access to Company Information

Our Internet website address is
www.introgen.com. Our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available free of charge
through our website as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission. Our website and the
information contained therein or connected thereto is not
intended to be incorporated into this Annual Report on Form 10-K.

Overview

Introgen Therapeutics, Inc. was incorporated in
Delaware on June 17, 1993. We are a leading developer of
gene therapy products for the treatment of cancer and other
diseases. Our drug discovery and development programs have
resulted in innovative approaches by which physicians may use
genes to treat cancer and other diseases. Our lead product
candidate, ADVEXIN® gene therapy, combines the p53 gene,
one of the most potent members of a group of naturally occurring
tumor suppressor genes, which act to protect cells from becoming
cancerous, with an adenoviral gene delivery system that we have
developed and extensively tested. We are conducting pivotal
Phase 3 clinical trials of ADVEXIN gene therapy in head and neck
cancer. Pivotal Phase 3 trials are typically the final trials
required for FDA approval. We have completed a Phase 2 clinical
trial of ADVEXIN gene therapy in non-small cell lung cancer, a
category that includes approximately 80% of the various types of
lung cancer, and are developing FDA registration plans. We are
conducting a Phase 2 trial of ADVEXIN gene therapy in breast
cancer. Phase 2 trials are efficacy trials. We are conducting
Phase 1 clinical trials, or safety trials, of ADVEXIN gene
therapy in other types of cancer. To date, doctors at clinical
sites in North America, Europe and Japan have treated hundreds
of patients with ADVEXIN gene therapy, establishing a large
safety database. We hold the worldwide rights for pre-clinical
and clinical development, manufacturing, marketing and
commercialization of ADVEXIN gene therapy. ADVEXIN gene therapy
is designated as an orphan drug under the Orphan Drug Act, which
gives us seven years of marketing exclusivity for ADVEXIN gene
therapy if approved by the FDA.

We are developing additional gene therapy product
candidates that we believe may be effective in treating certain
cancers, including those based on the mda-7 and PTEN genes, as
well as associated vector technologies for delivering the
gene-based products into target cells. Our INGN 241 product
candidate, which combines the mda-7 gene with our gene delivery
system, is undergoing safety testing in a clinical trial, with
one of the objectives also being to determine if this technology
displays anti-tumor activity.

We are investigating other vector technologies
for delivering gene-based products into targeted cells. Through
our strategic collaboration with VirRx, Inc., we are developing
replication-competent viral therapies in which viruses bind
directly to cancer cells, replicate in those cells, and cause
those cancer cells to die. We

1



---



##### Table of Contents



anticipate pursuing clinical confirmation as to
whether this self-amplifying delivery system can complement our
existing adenoviral gene delivery system, which is replication
disabled, in selected therapeutic scenarios.


We believe our research and development expertise
gained in gene therapy treatment for cancer is also applicable
to other diseases that, like cancer, result from cellular
dysfunction and uncontrolled cell growth. As a result, we are
conducting research in collaboration with medical institutions
to understand the safety and effectiveness of our gene therapy
product candidates in the treatment of cardiovascular disease
and rheumatoid arthritis. In addition, we have developed a
variety of technologies, which we refer to as enabling
technologies, for administering gene therapy products to
patients and enhancing the effects of these products. We also
have specialized manufacturing expertise and a manufacturing
facility to support our continued product development and
commercialization efforts.

As a supplement to our gene therapy product
programs, we are evaluating the development of mebendazole, our
first small molecule candidate, which we refer to as INGN 601.
The use of the mebendazole compound is approved by the FDA for
the oral treatment of parasitic diseases. Pre-clinical trials
suggest that mebendazole may also be an effective treatment of
cancer. The results of pre-clinical trials involving mebendazole
and lung cancer are published in the January 2003 edition of
Molecular Cancer Therapeutics.We are working with The
University of Texas M. D. Anderson Cancer Center to further
evaluate this molecule as a cancer treatment.

We place substantial emphasis on developing and
maintaining a strong intellectual property program. We own or
exclusively control numerous patents and pending patent
applications in the United States and elsewhere that cover
ADVEXIN gene therapy in particular, adenoviral p53 in general,
clinical applications of adenoviral and other forms of p53, and
adenoviral production. Certain of our patents are licensed from
The University of Texas System and from Aventis Pharmaceuticals,
Inc. The patents directed to clinical applications of p53
broadly cover the use of p53 in combination with standard
chemotherapy and clinical therapy with adenoviral p53 in
general. Our adenoviral production patent position is of
particular potential commercial importance in that it covers
most methods currently in use by us and others for commercial
scale adenoviral production and purification processes. We have
recently been successful in having certain European patents held
by our competitors revoked by the European patent office,
subject to appeal by the patent holder, and we are pursuing
similar proceedings with respect to an additional European
patent. In addition to our p53 intellectual property position,
we also own or have exclusively licensed rights in a number of
other patents and applications directed to the clinical
application of various other tumor suppressor genes.

We own and operate a manufacturing facility that
we believe complies with the FDAs current Good
Manufacturing Practices requirements, commonly known as CGMP
requirements. We have produced ADVEXIN gene therapy in this
facility for use in our Phase 1, 2 and 3 clinical trials. The
designs of the facility and the processes operated therein have
been reviewed with the FDA. Our work to validate our
manufacturing processes in accordance with FDA regulations is
ongoing. We plan to use this facility for our market launch of
ADVEXIN gene therapy. We have produced over 20 batches of
ADVEXIN gene therapy clinical material, including all clinical
material used in the Phase 2 and Phase 3 clinical trials for
this product candidate. In addition, we have entered into
agreements with third parties under which we have provided
process development and manufacturing services related to
products they are developing. We also have produced in a
separate facility INGN 241 for use in our Phase 1 clinical
trials.

Background

Gene Function and Genomics

A typical living cell in the body contains
thousands of different proteins essential to cellular structure,
growth and function. The cell produces proteins according to a
set of genetic instructions encoded by DNA, which contains all
the information necessary to control the cells biological
processes. DNA is organized into segments called genes, with
each gene containing the information required to produce one or
more specific proteins. Production of a protein that a
particular gene encodes requires gene expression, or activity.
Many of the proteins inside a cell interact to form pathways
that enable a cell to perform its various functions. The

2



---



##### Table of Contents



improper expression of one or more genes can
alter these pathways and affect a cells normal function,
frequently resulting in disease.


In recent years, scientists have made significant
progress toward understanding the nature of the set of human
genes, the human genome, and evaluating the role that genes play
in both normal and disease states. Academic and governmental
initiatives have sequenced all of the genes that comprise the
human genome. As new genes are discovered and decoded,
scientists are identifying and understanding their functions.
These discoveries provide opportunities to develop therapeutic
applications for individual genes, including treatment and
prevention of disease.

Gene Therapy

Gene therapy uses genes to regulate cellular
function or to correct cellular dysfunction. These processes
involve the introduction of genes into cells to restore missing
gene functions, correct aberrant gene functions, augment normal
gene activity, neutralize the activity of defective genes or
induce cell death. In order to perform these processes, a gene
for disease treatment, or therapeutic gene, is often combined
with a vector for gene delivery, which enables the gene to enter
the target cell and make its gene product. For in vivo gene
therapy, physicians typically inject the vector containing the
therapeutic gene directly into a patients tissue, body
cavity or bloodstream.

The genes used for disease treatment are
typically the normal counterparts of genes that are defective or
inadequately expressed in the diseased cell. In some cases, the
therapeutic gene will simply act to replace a missing protein or
to augment the level of a protein that is otherwise inadequate
to prevent disease. In other cases, the therapeutic gene will
act to eliminate the diseased cells through a process that
scientists refer to as apoptosis. Apoptosis, or cell death, is a
normal process that the body uses to eliminate damaged cells and
cells that are no longer necessary.

The delivery system must be able to deliver a
sufficient dose of genes for disease treatment to the correct
tissue in order to cause a therapeutic effect. The most common
delivery systems currently in use are modified versions of
viruses such as adenoviruses. Scientists often use viruses as
delivery systems because viruses have the ability to efficiently
infect cells and carry their genetic material, or genome, into
the cells where they will initiate a program to produce more
virus. Scientists can modify these viruses by deleting pieces of
the viral genome that are necessary for viral reproduction and
replacing the deleted pieces with a therapeutic gene. The
resulting viral vector retains the ability of the
virus to efficiently deliver its genes, which now include a
gene, or genes, for disease treatment, into cells, but has lost
the ability to reproduce itself and spread to other cells.
Scientists have also developed synthetic substances such as
liposomes, which are structures made of fatty materials that
have no viral pieces. The synthetic systems that lack any viral
pieces, or non-viral systems, can also deliver genetic material
to host cells. Scientists have developed these systems to mimic
the characteristics of viral systems in order to expand the
disease targets that can be treated with gene therapy.

Many of the clinical trials currently ongoing
that involve gene therapy use adenoviral vectors. Scientists
create adenoviral vectors using adenoviruses, which are among
several common cold viruses. These vectors have been modified so
that their ability to reproduce and spread will be inhibited in
a human host. The DNA of adenoviral vectors rarely becomes
incorporated into the cell genome. Instead, it remains as an
independent genetic unit and eventually disintegrates. This
feature protects normal cells that might have taken up the viral
vector. For cancer treatment, where the goal is to rapidly kill
or repair the cancer cells, the relatively short life of the
adenoviral vector and its ability to carry sufficient genes for
disease treatment makes its use particularly appropriate.

Cancer, a Genetic Disease

Cancer is the second leading cause of death in
the United States, surpassed only by heart disease. In the
United States, approximately 1.3 million people are newly
diagnosed with cancer and over 557,000 people die from the
disease each year. Although the prevalence of specific cancers
varies among different populations, we believe that the overall
incidence of cancer worldwide is similar to that experienced in
the United States. The

3



---



##### Table of Contents



American Cancer Society estimates the annual
direct cost of treating cancer patients in the United States is
approximately $61 billion.


Cancer is a group of diseases in which the
bodys normal self-regulatory mechanisms no longer control
the growth of some kinds of cells. Cells are frequently exposed
to a variety of agents, from both external and internal sources,
which damage DNA. Even minor DNA damage can have profound
effects, causing certain genes to become overactive, to undergo
partial or complete inactivation, or to function abnormally.
Genes control a number of protective pathways in cells that
prevent cells from becoming cancerous. For example, pathways
that transmit signals for a cell to divide have on-off switches
that control cell division. Cells also have mechanisms that
allow them to determine if their DNA has been damaged, and they
have pathways to repair that damage or eliminate the cell.

The failure of any of these protective pathways
can lead to the development of cancer. Cancer is one of the more
attractive initial applications for gene therapy, because in
contrast to more complex genetic disorders, which may require
long-term function of the transferred gene, the treatment for
cancer restores just those functions that will lead to the
destruction of the cancer cell. The introduction of normal tumor
suppressor genes, such as p53, into cancer cells is among the
most promising of these approaches.

Tumor Suppressor Genes

Tumor suppressor genes are one class of genes
that play a crucial role in preventing cancer and its spread.
This class of genes includes the p53, mda-7 and PTEN genes,
among others.

The best known and most studied of the tumor
suppressor genes is the p53 gene. Initially mislabeled an
oncogene, or cancer-causing gene, p53 is now known to be a
powerful tumor suppressor gene that acts to block cancer
development by preventing the accumulation of DNA damage. The
p53 gene is involved in multiple cellular processes, including
control of cell division, DNA repair, cell differentiation,
genome integrity, apoptosis, and inhibition of blood vessel
growth, or anti-angiogenesis. Angiogenesis refers to the process
by which new blood vessels are formed, such as those that supply
blood and nutrients to tumors to feed their growth. The p53 gene
is capable of such wide-ranging effects because it orchestrates
the activity of a host of other genes and proteins. If a cell
suffers DNA damage, p53 responds to the damage by initiating a
cascade of protective processes to either repair the DNA damage
or to destroy the damaged cell through apoptosis. These
p53-mediated processes prevent damaged cells from multiplying
and progressing towards cancer. Therefore, the presence of a
normally functioning p53 pathway allows the body to naturally
suppress tumor growth. Most cancers have found ways to block the
normal function of the p53 pathway; approximately 50% of human
cancers have done this through mutation of the p53 gene itself.
Scientists describe tumors with that mutation as p53 mutant
tumors.

Current Treatment of Cancer

Despite advances in cancer research in recent
years, better treatments for cancer are urgently needed. The
conventional therapeutic approaches, including surgery,
chemotherapy and radiation therapy, are ineffective or only
partially effective in treating many types of cancer. Surgery is
inadequate for many patients because the cancer is inaccessible
or impossible to remove completely. Surgery, although applicable
to over half of all cancer cases, is also inadequate where the
cancer has spread, or metastasized. For certain cancers such as
head and neck cancer, surgery can be an effective treatment of
the cancer, but may result in severe disfigurement of and
disability to the patient. Radiation therapy and chemotherapy
are, by their nature, toxic procedures that damage both normal
and cancerous tissue. Physicians must carefully control
administration of these therapies to avoid life-threatening side
effects, and many patients are unable to withstand the most
effective doses due to toxicity. These conventional therapies
typically cause debilitating side effects such as bone marrow
suppression, nausea, vomiting and hair loss, often requiring
additional and costly medications to ameliorate such side
effects. Further, the usefulness of certain chemotherapies may
be limited in tumors that have developed mechanisms to evade the
action of the drugs, a phenomenon known as multi-drug resistance.

Due to the various limitations of current cancer
therapies, the treatment of cancer remains complex. Physicians
refer to the first treatment regimen for a newly-diagnosed
cancer, usually surgery if possible, or

4



---



##### Table of Contents



radiation therapy, as primary treatment. If the
primary treatment is not successful, the cancer will re-grow or
continue to grow, which is referred to as recurrent disease. In
most cases, recurrent cancer is not curable, with secondary
treatment regimens, usually chemotherapy, only providing
marginal benefits for a limited period of time. Physicians
consider recurrent cancer that has proven resistant to a
secondary treatment to be refractory. Most new cancer treatments
are tested initially in patients with either recurrent or
refractory disease because the effects of the new therapy are
more quickly apparent.


Given that established cancer therapies often
prove to be incomplete, ineffective or toxic to the patient,
there is a need for new treatment modalities that either
complement established therapies or replace them by offering
better therapeutic outcomes. For example, for a limited number
of cancers, immunotherapy, which seeks to stimulate a
patients own immune system to kill cancer cells, has
rapidly become widely accepted by improving on the shortcomings
of existing therapy. However, for a broad range of cancers,
additional approaches are needed to improve the toxicity and
marginal benefits common to current cancer treatments. Gene
therapy directly addresses the cellular dysfunction that causes
cancer, compared with small molecule drugs or immunotherapeutic
agents, which may act indirectly.

The Introgen Approach

We believe that the emerging field of gene
therapy presents a new approach for treating many cancers
without the toxic side effects common to traditional therapies.
We have developed significant expertise in identifying
therapeutic genes, which are genes that may be used to treat
disease, and in using what we believe are safe and effective
delivery systems to transport these genes to the cancer cells.
We believe that we are able to treat a number of cancers in a
way that kills cancer cells without harming normal cells.

Because most cancers are amenable to local
treatment, we generally administer gene therapy directly into a
patients cancerous tumor by hypodermic syringe. We have
initially focused on advanced cancers that lack effective
treatments and in which local tumor growth control, where the
tumor stops growing or shrinks, is likely to lead to measurable
benefit. We believe our clinical trials have shown that our gene
therapy can be used alone and in combination with conventional
treatments such as surgery, radiation therapy and chemotherapy.
To date, doctors at clinical sites in North America, Europe and
Japan have treated hundreds of patients with our lead product
candidate, ADVEXIN gene therapy, establishing a large safety
database.

We have developed ADVEXIN gene therapy by
inserting the p53 gene into the adenoviral delivery system we
have developed and extensively tested. Evidence from laboratory,
pre-clinical and clinical trials suggests that the p53 tumor
suppressor gene may be sufficient to slow, stop or kill many
cancer cell types. We believe that ADVEXIN gene therapy holds
promise as an effective anti-cancer therapeutic that kills
cancer cells without harming normal cells, both in combination
with conventional cancer treatment and as a stand-alone
treatment for patients who are resistant to or unable to receive
conventional therapies. In addition, data obtained from a Phase
1 clinical trial in patients with advanced cancer provide
evidence that systemic, or intravenous, administration of
ADVEXIN gene therapy is safe and well tolerated. We have also
developed INGN 241 by inserting the mda-7 gene into the
adenoviral delivery system we have developed and extensively
tested, and believe it also holds promise as an effective
anti-cancer therapeutic.

The Introgen Strategy

Our objective is to be the leader in the
development of gene therapy and other products for the treatment
of cancer and other diseases that, like cancer, result from
cellular dysfunction and uncontrolled cell growth. To accomplish
this objective, we are pursuing the following strategies:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Develop and Commercialize ADVEXIN Gene Therapy
    and INGN 241 for Multiple Cancer
    Indications.We plan to continue
    developing ADVEXIN gene therapy using the p53 gene and our INGN
    241 product using the mda-7 gene in multiple cancer indications.
    Using ADVEXIN gene therapy, we are conducting pivotal Phase 3
    clinical trials in head and neck cancer and Phase 2 clinical
    trials in non-small cell lung cancer and breast cancer. In
    cooperation with the National Cancer Institute, or NCI, we have
    concluded five trials and are presently conducting two Phase 1
    clinical trials using ADVEXIN gene therapy. We have also
    completed enrollment in a Phase 1 clinical trial of ADVEXIN gene

5



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | therapy delivered intravenously. Using INGN 241,
    we are conducting testing in a Phase 1/2 clinical trial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Develop Our Portfolio of Gene Therapy and
    Other Drug Products.Utilizing our
    significant research, clinical, and regulatory expertise, we are
    pursuing additional gene therapy and other drug products for
    various cancers. We have established an efficient process for
    evaluating new drug candidates and rapidly progressing them from
    pre-clinical to clinical development. We have identified and
    licensed multiple technologies, which we intend to combine with
    our adenoviral vector system and which we believe are attractive
    development targets for the treatment of various cancers.                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Expand Our Delivery System
    Technologies.We believe no single
    gene delivery system will be applicable to all clinical needs.
    At present, we have a broad portfolio of delivery technologies
    under development. We are leveraging our experience gained with
    our existing adenoviral vector systems to develop next
    generation vectors for both viral and non-viral delivery
    systems. Through our strategic collaboration with VirRx, Inc.,
    we are developing replication-competent viral therapies in which
    viruses bind directly to cancer cells, replicate in those cells,
    and cause those cancer cells to die. To further augment our
    portfolio, we will continue to examine new licensing
    opportunities and develop collaborations in the area of novel
    delivery and targeting technologies.                                                                                                                                             
|
| |  | Leverage Our Manufacturing Capabilities to
    Produce Additional Gene Therapy Drug
    Products.We have developed
    significant expertise and infrastructure for process development
    and manufacturing of therapeutic genes and delivery systems. We
    have built and validated a manufacturing facility that we
    believe meets CGMP requirements. We believe that this facility
    is capable of supporting the market launch of ADVEXIN gene
    therapy and the clinical testing requirements of INGN 241. We
    have also established a variety of process methodologies,
    formulation strategies and quality release assays to produce
    clinical grade materials at commercial scale. We intend to
    utilize these processing and production capabilities to advance
    clinical development and commercialization of our pipeline of
    gene therapy product candidates, as well as capitalize on
    opportunities to produce other companies products for them.
|
| |  | Establish Targeted Sales and Marketing
    Capabilities.Because the oncology
    market is characterized by a concentration of specialists in
    relatively few major cancer centers, it can be effectively
    addressed by a small, focused sales force. We will address this
    market by building a direct sales force as part of the ADVEXIN
    gene therapy commercialization process and by pursuing marketing
    and distribution agreements with corporate partners for ADVEXIN
    gene therapy as well as additional gene therapy products.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Expand Our Market Focus to Non-Cancer
    Indications.Our long-term strategy is
    to leverage our scientific, research and process competencies in
    gene function and vector development to pursue gene-based
    therapies for a variety of other diseases and conditions. We
    believe that gene therapy holds promise for diseases such as
    cardiovascular disease and rheumatoid arthritis, which, like
    cancer, result from cellular dysfunction or uncontrolled cell
    growth.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

7



---



##### Table of Contents



Product Development Programs

The following table summarizes the status of our
gene therapy product development programs.

|                                              |  |                                                                                                                                                                                            |  |                                                                                                                                                                                              
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                             
|                                             
|Product (Gene)                                |  | Cancer Indication                                                                                                                                                                          |  | Development Status                                                                                                                                                                           
|                                             
|                                             
|ADVEXIN® Gene Therapy (p53)                   |  | Head and Neck
    Non-Small Cell Lung
    Breast
    Prostate
    Intravenous Administration
    Ovarian
    Bladder
    Brain (glioblastoma)
    Bronchoalveolar
    Rheumatoid Arthritis |  | Phase 3
    Phase 2 completed
    Phase 2*
    Phase 1 completed
    Phase 1 completed
    Phase 1 completed**
    Phase 1 completed**
    Phase 1 completed**
    Phase 1**
    Pre-clinical
|                                             
|                                             
|INGN 241 (mda-7)                              |  | Various (solid tumors)
    Pancreatic
    Breast                                                                                                                                           |  | Phase 1/2
    Pre-clinical
    Pre-clinical                                                                                                                                                  
|                                             
|                                             
|INGN 251 (PTEN)***                            |  | Colorectal
    Brain (glioblastoma)                                                                                                                                                        |  | Pre-clinical
    Pre-clinical                                                                                                                                                                
|                                             
|                                             
|BAK Program                                   |  | Various                                                                                                                                                                                    |  | Research                                                                                                                                                                                     
|                                             
|                                             
|FUS-1 Program
    p16 Program
    Mebendazole |  | Various
    Pancreatic
    Gastro-intestinal                                                                                                                                               |  | Research
    Research
    Research                                                                                                                                                           
|                                             



---



| |   |                                                
| | - | -----------------------------------------------
| | * | Aventis Pharma provides funding for this trial.



| |    |                                                                 
| | -- | ----------------------------------------------------------------
| | ** | Conducted in conjunction with the National Cancer
    Institute.



|    |                                      
|--- | -------------------------------------
|*** | Assigned to our subsidiary Gendux AB.

Indications for
ADVEXIN®Gene Therapy (p53)

ADVEXIN gene therapy combines the p53 gene with
an adenoviral vector for gene delivery. Physicians typically
inject ADVEXIN gene therapy directly into the tumor. The
importance of the p53 gene in controlling tumor growth suggests
that ADVEXIN gene therapy is applicable to multiple cancers. Our
initial development strategy for ADVEXIN gene therapy is to
obtain approval for cancer indications, such as head and neck
and lung cancer, which have few or no treatment options
available and have near-term clinical endpoints.

We have conducted a number of Phase 1 and
Phase 2 clinical trials to establish the safety and evaluate the
efficacy of ADVEXIN gene therapy both alone and in combination
with radiation therapy, chemotherapy and/or surgery. We
evaluated efficacy by measuring tumors during each trial to
analyze whether tumors had regressed, remained stable or
progressed during treatment. We supplemented these analyses,
where possible, with microscopic tissue analysis, or biopsy, to
determine the presence of residual cancer cells within the
treated area. We further evaluated efficacy by measuring the
survival time of the patients treated in all of these trials.

Head
and Neck Cancer

Head and neck cancer, encompassing cancers of the
tongue, mouth, vocal cords and tissues surrounding them, has a
worldwide incidence of approximately 400,000 new cases per year.
In the United States, the annual incidence of squamous cell
cancer, a cancer of cells that line the oral cavity, pharynx and
larynx, is

8



---



##### Table of Contents



approximately 37,000 with annual deaths of
approximately 11,000. Head and neck cancer is frequently fatal,
with most patients dying from local and regional disease, rather
than from metastasis to other organs. Primary treatments for
head and neck cancer are surgery and radiation therapy. However,
these treatments are debilitating and have permanent side
effects, including loss of teeth, loss of voice or
disfigurement. Moreover, a large number of patients with head
and neck cancer experience recurrence. Once the disease recurs,
few patients survive despite secondary treatment with
conventional therapies, with median patient survival of less
than 12 months. Although often used as a secondary
treatment, there are no chemotherapy drugs available today that
have been approved by the FDA for treatment of patients with
recurrent head and neck cancer.


Because physicians can administer ADVEXIN gene
therapy locally, we believe it is a viable candidate for
treatment of head and neck cancer. Based on clinical results
from our Phase 1 and Phase 2 clinical trials, we are
currently enrolling patients in and conducting two
multi-national pivotal Phase 3 clinical trials that the FDA has
reviewed, and if successful, will be used to support regulatory
approval. We intend these trials to demonstrate the efficacy of
ADVEXIN gene therapy for treatment of patients with squamous
cell carcinoma of the head and neck, regardless of whether the
p53 gene is mutant or non-mutated, in whom standard treatment of
surgery and radiation therapy have not been effective and who
have recurrent or refractory disease. The first trial compares
the efficacy of ADVEXIN gene therapy to a standard chemotherapy
treatment in patients with refractory disease. The second trial
compares the efficacy of ADVEXIN gene therapy when it is used in
combination with a standard chemotherapy treatment to that of
standard chemotherapy treatment used alone in patients with
recurrent disease.

The first Phase 3 clinical trial is planned
for 240 patients with refractory disease. Patients in the
control group receive weekly methotrexate, a standard
chemotherapy treatment for this condition, while patients in the
treatment group receive twice weekly injections of ADVEXIN gene
therapy. The trials primary endpoint, or result that we
will principally evaluate, is survival. The investigators will
measure a possible survival advantage by comparing how long the
ADVEXIN gene therapy group patients live relative to how long
the control group patients live. The second Phase 3 clinical
trial is planned for 288 patients with recurrent head and neck
cancer. These patients will not have previously been treated
with chemotherapy. The control group will receive a standard
chemotherapy treatment with the drugs cisplatin and
5-fluorouracil and the treatment group will receive the same
drugs plus ADVEXIN gene therapy. Each treatment will be repeated
every three weeks, which is a standard interval for
chemotherapy. The primary endpoint will be the duration of tumor
growth control in the head and neck region as measured by a
patients tumor growth beyond the patients baseline,
or tumor size at the beginning of the trial. These trials are
complementary, with the primary endpoint in each serving as a
secondary endpoint, or result that we will evaluate secondarily,
in the other. Both are randomized trials, meaning that neither
the doctor nor the patient knows whether the patient will be in
the control group or the treatment group at the time the patient
is enrolled in either trial. An independent data safety
monitoring board oversees safety for the trials and conducts a
specified interim data analysis for each trial. Both of these
Phase 3 clinical trials are being conducted at numerous
cancer centers in the United States, Canada and Europe. Both of
these trials have been extensively discussed with the FDA.

We conducted a Phase 2 clinical trial of
ADVEXIN gene therapy in 112 patients with either recurrent or
refractory head and neck cancers at 18 clinical centers in the
United States and Europe, using the highest dose of ADVEXIN gene
therapy tested in the Phase 1 clinical trial discussed below.
This trial did not have a treatment control arm and the main
purpose of the trial was to evaluate the safety, side effects
and efficacy of ADVEXIN gene therapy administered alone to
tumors of various sizes. The primary measure of efficacy was to
assess patient response to ADVEXIN gene therapy by periodically
measuring the size of all tumors in the patient compared to
their size at the start of treatment. A positive response is
defined as the disappearance of the tumor, shrinkage of the
tumor or the absence of additional tumor growth beyond 25% of
pre-treatment measurements, an accepted indicator of tumor
growth control.

In order to design pivotal Phase 3 clinical
trials and to identify the patient characteristics most amenable
to ADVEXIN gene therapy, we conducted a preliminary analysis on
the first 88 patients treated and evaluated in our Phase 2
clinical trial. This analysis showed that approximately 25% of
the patients that the investigators injected and evaluated had a
positive response to treatment. In addition, because a subset of
patients had multiple tumors treated, the preliminary analysis
also evaluated individual tumor response. The analysis

9



---



##### Table of Contents



showed that 60% of the individual tumors that the
investigators injected and evaluated had a positive response.
Tumors with non-mutated p53 genes and those with mutant p53
genes both responded to ADVEXIN gene therapy. The patients in
this Phase 2 clinical trial tolerated ADVEXIN gene therapy
well, without the significant side effects common to
conventional cancer treatments. Side effects were consistent
with those experienced in the Phase 1 clinical trial discussed
below.


This preliminary analysis also provided important
data with regard to the effect of ADVEXIN gene therapy on the
median survival time of the patients. The data showed a median
patient survival time from the start of treatment of
7.5 months for a subset of patients with refractory disease
and tumors below a specified size. Patients with these
characteristics comprise the population for our first
Phase 3 clinical trial. Based on an historical expected
survival time that our clinical advisors estimate to be
four months, this median survival time of 7.5 months
suggests an 88% increase in survival time for these patients.

Previously, ADVEXIN gene therapy was tested in a
Phase 1 safety clinical trial with patients with recurrent head
and neck cancer. In this trial, 33 patients received a total of
429 doses. We believe this trial demonstrates that physicians
can safely inject ADVEXIN gene therapy into head and neck tumors
repetitively over many months. Side effects were minimal,
consisting of pain at the site of the injection and flu-like
symptoms that could be readily treated without disrupting the
administration of the drug. No patient had treatment stopped or
reduced because of toxicity, even at the maximum dose. In 15 of
these patients, we showed that surgery could be safely combined
with ADVEXIN gene therapy without increasing the risk of wound
infections or inhibiting healing.

Non-Small
Cell Lung Cancer

Lung cancer is the most common cause of
cancer-related death in the United States, with an estimated
172,000 new cases diagnosed annually. An estimated 157,000
people die from the disease annually. The five-year survival
rate for patients diagnosed with lung cancer is 15%. Non-small
cell, or NSC, lung cancer comprises approximately 80% of all
lung cancer cases. Surgery can be an effective treatment, but
only a minority of patients are eligible because early-stage
diagnosis is uncommon. Only approximately 30% of these patients
will have a complete surgical resection of their disease. The
remaining patients typically undergo a combination of surgery,
radiation and chemotherapy. This combination treatment is only
effective in a small percentage of cases. Of patients who have
unresectable disease, approximately 80% will again have active
cancer cells three months after completing a full course of
radiation. Due to the ineffective treatment of NSC lung cancer
in many patients, a significant, unmet need for better
treatments exists. The opportunity for a new beneficial
treatment is great, particularly if it can be combined with
existing treatments without increasing the toxicity of those
treatments.

We have completed a Phase 2 clinical trial
of ADVEXIN gene therapy in combination with radiotherapy as the
primary treatment for patients who had newly-diagnosed,
inoperable NSC lung cancer and who could not tolerate
chemotherapy. Radiotherapy is the standard treatment for
patients in this condition. All patients in this trial received
three ADVEXIN gene therapy injections into their tumors during a
five-to-six week course of radiotherapy. These patients were
evaluated for the efficacy, safety and side effects of the
treatment to ascertain whether the combination of ADVEXIN gene
therapy with radiation was tolerated. Objectives of this trial
were to determine if the addition of ADVEXIN gene therapy
injected directly into the tumor with standard radiotherapy
improved the response rate of the injected tumor in patients
with inoperable NSC lung cancer, and to evaluate the
tolerability of the combination treatment. An evaluation was
performed three months after treatment was completed, consisting
of a radiograph to assess the size of the treated tumor mass,
supplemented by a biopsy to assess for living cancer cells
within the tumor at the site of treatment. The patients were
then followed without further treatment for clinical evidence of
disease progression.

We conducted an analysis of 19 patients that the
investigators treated and evaluated in the Phase 2 clinical
trial of ADVEXIN gene therapy. This analysis included both the
radiographs and the tumor biopsies that we refer to above. The
results of this analysis established an acceptable safety
profile and showed evidence of local tumor control and
reductions in tumor size. Fifteen of the 19 patients that the
investigators treated, or 79%, had radiographic evidence of
local tumor growth control, including twelve complete or partial
responses

10



---



##### Table of Contents



of the tumor that the investigators injected.
Furthermore, the preliminary analysis showed that nine of these
twelve patients had no living tumor cells in the biopsy that the
investigator took from the site of the gene therapy injection.
Based on the preliminary results of this Phase 2 clinical
trial using gene therapy with radiation therapy, a larger trial
is being designed to evaluate whether ADVEXIN gene therapy
enhances the effectiveness of radiation therapy and chemotherapy
when investigators use them together to treat NSC lung cancer.


We conducted a Phase 1 safety clinical trial
of ADVEXIN gene therapy in 53 patients with end-stage NSC lung
cancer who had failed surgery, radiation and chemotherapy. In
one arm of the trial, 29 patients received ADVEXIN gene therapy
injected into a single tumor site. In the other arm, 24 patients
received ADVEXIN gene therapy in combination with cisplatin, a
commonly used chemotherapeutic agent. The patients in this trial
tolerated the ADVEXIN gene therapy well, and the most severe
side effects noted were consistent with those experienced with
the use of cisplatin alone. Also, the National Cancer Institute
(NCI) is initiating a Phase 1 safety clinical trial
using ADVEXIN gene therapy in combination with radiation therapy
in patients with NSC lung cancer.

Breast
Cancer

Physicians diagnose an estimated 213,000 new
cases of breast cancer annually in the United States, and
approximately 40,000 of these people are estimated to die from
the disease each year. We are conducting, and Aventis Pharma SA,
or Aventis, is funding, a Phase 2 clinical trial using
ADVEXIN gene therapy administered alone and in combination with
chemotherapy in women who have locally advanced breast cancers.
Also, the NCI has concluded a Phase 1 clinical trial using
ADVEXIN gene therapy in patients with locally recurrent breast
cancer involving the chest wall.

Prostate
Cancer

Prostate cancer is one of the most common forms
of cancer. Approximately 221,000 new cases occur annually in the
United States and approximately 29,000 people are estimated to
die from the disease each year. Most prostate cancer patients
are treated with either surgery or radiation therapy. Because
newer and simpler methods of diagnosis that detect the disease
at an earlier stage exist today, a significant number of
patients who are diagnosed with prostate cancer before it has
metastasized may benefit from local treatment therapies such as
ADVEXIN gene therapy.

We have completed enrollment and treatment in a
Phase 1 clinical trial of 30 patients where investigators
injected ADVEXIN gene therapy into the prostate gland with a
subsequent surgical resection of the gland. The patients
tolerated the ADVEXIN gene therapy injections well. In a
preliminary analysis, 27% of the patients showed measurable
evidence of tumor shrinkage from the ADVEXIN gene therapy
injections.

Other
Cancers

There are several other cancer indications for
which ADVEXIN gene therapy is in earlier stages of clinical
development. To evaluate the possible use of ADVEXIN gene
therapy in these indications, we have entered into a Cooperative
Research and Development Agreement, or CRADA, with the NCI.
Under this program the NCI has conducted certain clinical trials
and is conducting other clinical trials with ADVEXIN gene
therapy at leading cancer centers using clinical protocols that
we have developed in connection with the NCI. These protocols
are designed to demonstrate the safety of ADVEXIN gene therapy
in these indications and by various routes of administration.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ovarian Cancer.There are an estimated 25,000 new
    cases of ovarian cancer and 14,000 deaths attributed to ovarian
    cancer in the United States each year. In approximately 80% of
    patients with advanced disease, the cancer remains localized
    within the peritoneal, or abdominal, cavity. This allows ready
    access to cancer cells for simple intraperitoneal
    administration, that is, administration into the abdominal
    cavity of gene therapeutic agents. The NCI has conducted a Phase
    1 clinical trial of ADVEXIN gene therapy in this population.

11



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bladder Cancer.There are an estimated 57,000 new
    cases of bladder cancer each year in the United States. The
    annual number of deaths from this indication in the United
    States is estimated to be 12,000. The anatomy of the bladder
    allows uniform delivery of high concentrations of gene
    therapeutic agents via catheter. The NCI has conducted a Phase 1
    clinical trial using ADVEXIN gene therapy in this indication.                                                                                                                                                                                                     
|
| | Brain Cancer (Glioblastoma).An estimated 13,000 people die from
    cancers of the brain and central nervous system in the United
    States each year. Glioblastoma multiforme, or GBM, is a
    particularly deadly form of primary brain cancer that afflicts
    children as well as adults. This condition occurs in
    approximately 30% of all brain cancer patients in the United
    States. GBM is not effectively treated with conventional
    therapies because the lesions are deep within the brain and are
    large and grow rapidly. The NCI has conducted a Phase 1 clinical
    trial using ADVEXIN gene therapy in recurrent GBM.
|
| | Bronchoalveolar Cancer.It is estimated that physicians
    diagnose an estimated 10,000 new cases of bronchoalveolar cancer
    in the United States each year. Bronchoalveolar cancer is a form
    of non-small cell lung cancer that spreads throughout the lungs,
    but does not spread elsewhere in the body. Current treatments
    are not effective for this condition. The NCI is conducting a
    Phase 1 clinical trial in bronchoalveolar cancer with ADVEXIN
    gene therapy administered by directly bathing the airway leading
    to the diseased lung segments.                                                                    



| |                                 
| | --------------------------------
| | Indications for INGN-241 (mda-7)

The mda-7 gene is a promising tumor suppressor
gene that we believe, like p53, has broad potential to induce
apoptosis in many types of cancer. We have combined the mda-7
gene with our adenoviral vector system to form INGN 241. Our
pre-clinical trials have determined that INGN 241 suppresses
growth of many cancer cells, including those of the breast,
lung, colon, prostate and central nervous system, while not
affecting growth of normal cells. Because INGN 241 kills cancer
cells, even if other tumor suppressor genes, including p53 or
p16, are not functioning properly, it appears that mda-7
functions via a novel mechanism of tumor suppression.

Our pre-clinical trials also indicate that in
addition to its known activity as a tumor suppressor gene, the
mda-7 gene may also stimulate the bodys immune system to
protect it against cancer, thereby offering the potential of
providing an added advantage in treating various cancers because
it may attack cancer using two different mechanisms. The mda-7
gene may work effectively as a radiation sensitizer to make
several types of human cancer cells more susceptible to the
anti-cancer effect of radiation therapy as indicated in our
pre-clinical work. We have also published the results of a
pre-clinical trial indicating INGN 241 may suppress the
growth in vivo of non-small cell lung cancer through apoptosis,
or programmed cell death, in combination with anti-angiogenesis.

We have an exclusive license to the mda-7 gene
for gene therapy applications from Corixa Corporation. We are
currently conducting a Phase 1 clinical trial using INGN 241
testing safety and mechanism of action in approximately 15
patients with solid tumors. Our pre-clinical program with
INGN 241 has included research at The University of Texas
M. D. Anderson Cancer Center, Columbia University and
Corixa Corporation.

Research and Development Programs

In addition to our clinical programs underway
with ADVEXIN gene therapy and INGN 241, we are conducting a
number of pre-clinical and research programs involving a variety
of therapeutic genes for the treatment of cancer. These programs
involve genes that act through diverse mechanisms to inhibit the
growth of or kill cancer cells.

We have combined the PTEN tumor suppressor gene
with our adenoviral vector system to form INGN 251.
Researchers have linked mutations in the PTEN tumor suppressor
gene to a variety of common human cancers, including brain,
prostate and breast cancers. Preliminary trials have
demonstrated that

12



---



##### Table of Contents



INGN 251 can inhibit the growth of
colorectal, prostate and brain cancer cells and promote
apoptosis in many of these cells. Our pre-clinical program with
INGN 251 has included trials with Imperial Cancer Research
Technology Limited in London, or ICRT. We obtained an exclusive
license to the PTEN gene from ICRT, which we have assigned to
our subsidiary Gendux AB.


In addition to our pre-clinical programs, we are
conducting research on additional genes, including BAK and p16,
which hold promise as therapeutic candidates. BAK is a
pro-apoptotic gene that kills cancer cells. We are working with
our collaborators at M. D. Anderson Cancer Center to identify
and develop both viral and non-viral vectors containing this
gene. We had exclusive rights to use the BAK gene under a
license with LXR Biotechnology, Inc., the rights of which were
subsequently sold to Tanox, Inc. We have licensed the adenoviral
vector containing the p16 gene, a widely known tumor suppressor
gene, from M. D. Anderson Cancer Center and have demonstrated
that the gene inhibits tumor growth in animal models.

We license from M. D. Anderson Cancer
Center a group of genes known as the 3p21.3 family of genes.
This family of genes includes the FUS-1 gene. Pre-clinical
research performed on these genes by collaborators at The
University of Texas Southwestern Medical Center and
M. D. Anderson Cancer Center suggests that the 3p21.3
genes play a critical role in the suppression of tumor growth in
lung and other cancers. We are working with
M. D. Anderson Cancer Center to further evaluate FUS-1
and other 3p21.3 genes as clinically relevant therapeutics.

As a supplement to our gene therapy product
programs, we are evaluating the development of mebendazole, our
first small molecule candidate, which we refer to as
INGN 601, for treatment of cancer and other
hyperproliferative diseases. The use of the mebendazole compound
is approved by the FDA for the oral treatment of parasitic
diseases. Pre-clinical trials suggest that mebendazole may also
be an effective treatment of cancer. The results of pre-clinical
trials involving mebendezole and lung cancer are published in
the October 2002 edition of Clinical Cancer Researchand
the January 2003 edition of Molecular Cancer Therapeutics.We are working with The University of Texas M. D. Anderson
Cancer Center to further evaluate this molecule as a cancer
treatment.

Introgen Enabling Technologies

We have a portfolio of technologies, referred to
as enabling technologies, for administering gene therapy
products to patients and for enhancing the effects of these
products, which we plan to exploit to develop additional gene
therapy products to treat cancer and other diseases which, like
cancer, result from cellular dysfunction and uncontrolled cell
growth.



| |                       
| | ----------------------
| | Viral Delivery Systems

Adenoviral Systems.We have demonstrated that ADVEXIN gene therapy and INGN 241,
which use our adenoviral vector system, enter tumor cells and
express their proteins despite the bodys natural immune
response to the adenoviral vector. While the adenoviral vector
system used is appropriate for the treatment of cancer by local
administration, we have developed a number of additional systems
that utilize modified adenoviral vectors for gene delivery.
These systems also may be applicable to indications where
activity of the gene for disease treatment is required for
longer periods of time or where systemic administration may be
necessary.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Viral Gene Expression Modulation
    System.We are developing this
    technology to block production of viral proteins in the patient
    to reduce immune response to the vector, thus prolonging the
    activity of the disease treatment gene.                                                                                                                                                                        
|
| |  | Expanded Payload
    Systems.We are developing these
    technologies to allow the removal of very large pieces of the
    genome in order to increase the amount of genetic material that
    can be carried to the cell, allowing multiple genes to be
    incorporated into a single vector. Also, since many viral genes
    are deleted, we expect that the immune response against these
    vectors will be reduced.

Replication-Competent
Systems.Through our strategic
collaboration with VirRx, Inc., we are developing
replication-competent viral therapies in which viruses bind
directly to cancer cells, replicate in those cells,

13



---



##### Table of Contents



and cause those cancer cells to die. We
anticipate pursuing clinical confirmation as to whether this
self-amplifying delivery system can complement our existing
adenoviral gene delivery system, which is replication disabled,
in selected therapeutic scenarios.




| |                           
| | --------------------------
| | Non-Viral Delivery Systems

We have in-licensed and are developing a
non-viral delivery platform as a potential alternative to viral
delivery for certain types of cancers, or clinical indications,
particularly those that require systemic administration.
Although we are not currently using non-viral vector technology
in our clinical programs, we have completed proof-of-concept
trials in animal models that suggest that this system may be a
useful way to deliver tumor suppressor genes for systemic cancer
treatment.



| |                                 
| | --------------------------------
| | Additional Enabling Technologies

We are also developing a number of additional
technologies that expand our capabilities.



| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multi-Gene Vector
    System.This technology is designed to
    combine multiple genes with a vector. This has the potential to
    be used with both viral and non-viral delivery systems to allow
    the activity of more than one gene for disease treatment at a
    time.                                                                                           
|
| |  | Pro-Apoptotic Gene Delivery
    System.This technology is designed to
    allow the activity of pro-apoptotic, or apoptosis-inducing,
    genes during treatment only, while temporarily suppressing the
    ability of the gene for disease treatment to kill cells during
    production. This will facilitate production of the gene
    therapeutic at higher volumes.
|
| |  | Tissue-Specific Targeting
    Systems.This technology is designed
    to limit the activity of the gene for disease treatment to
    particular cell types. It is intended to be applied to both
    viral and non-viral vectors.                                                                                                                                         
|
| |  | Selective Inhibition of Gene
    Expression.This technology is
    designed to block the dysfunctional activity or expression of
    certain genes, like cancer-promoting oncogenes.                                                                                                                                                                                      
|
| |  | Gene Screen Vector
    System.This technology is designed to
    aid in the rapid screening of genes for therapeutic potential.
    This system should allow us to quickly evaluate genes of unknown
    function for their potential as cancer treatments.                                                                                                               

Manufacturing and Process
Development

Commercialization of a gene therapy product
requires process methodologies, formulations and quality release
assays in order to produce high quality materials at a large
scale. We believe that the expertise we have developed in the
areas of manufacturing and process development represents a
competitive advantage. We have developed scale-up methodologies
for both upstream and downstream production processes,
formulations that are safe and stable, and quality release
assays that ensure product quality.

We own and operate a state-of-the-art, validated
manufacturing facility that we believe complies with the
FDAs CGMP requirements. We produce ADVEXIN gene therapy in
this facility for use in our Phase 1, 2 and 3 clinical
trials. The design and processes of this facility have been
reviewed with the FDA. The validation of our manufacturing
processes is ongoing. We plan to use this facility for our
market launch of ADVEXIN gene therapy. To date, we have produced
over 20 batches of ADVEXIN gene therapy clinical material,
including all clinical material used in the Phase 2 and
Phase 3 clinical trials for this product candidate. In
addition, we have entered into agreements with third parties
under which we have provided process development and
manufacturing services related to products they are developing.
We also have produced in a separate facility INGN 241 for
use in our Phase 1 clinical trials.

14



---



##### Table of Contents



Business and Collaborative
Arrangements



| |            
| | -----------
| | VirRx, Inc.

We are working with VirRx, Inc. (VirRx) to
investigate other vector technologies for delivering gene-based
products into targeted cells. We have an agreement with VirRx,
which began in 2002, to purchase shares of VirRxs
Series A Preferred Stock. We purchased $525,000 of this
stock for cash during 2002, which we have recorded as research
and development expense. We have agreed to purchase an
additional $150,000 of this stock for cash on the first day of
each quarter through January 1, 2006. VirRx is required to
use the proceeds from these stock sales in accordance with the
terms of a collaboration and license agreement between us and
VirRx for the development of VirRxs technologies. We may
unilaterally terminate this collaboration and license agreement
with 90 days prior notice at any time after March 7,
2003, which would also terminate the requirement for us to make
any additional stock purchases. Provided the collaboration and
license agreement remains in place, we will make additional
milestone stock purchases, either for cash or through the
issuance of our common stock, upon the completion of
Phase 1, Phase 2 and Phase 3 clinical trials
involving technologies licensed under this agreement and we will
make a $5.0 million cash milestone payment to VirRx, for
which we receive no VirRx stock, upon approval by the FDA of a
biologics license application involving these technologies. To
the extent we have already made cash milestone payments, we may
receive a credit of 50% of the Phase 2 clinical trial
milestone payments and 25% of the Phase 3 clinical trial
milestone payments against this $5.0 million cash milestone
payment. The additional milestone stock purchases and cash
payment are not anticipated to be required in the near future.
We have an option to purchase all outstanding shares of VirRx at
any time until March 2007.



| |                  
| | -----------------
| | Aventis Pharma AG

In October 1994, we entered into two
collaboration agreements with Rhône-Poulenc Rorer
Pharmaceuticals Inc., which ultimately became part of Aventis
Pharma, or Aventis, a global pharmaceutical company. In June
2001, we restructured this collaborative relationship and
assumed responsibility for the worldwide development of all p53
and K-ras products, and acquired all marketing and
commercialization rights with respect to those products. We also
assumed the control and performance of ongoing clinical trials
for p53- and K-ras-based products and full responsibility for
all pre-clinical research and development and clinical trials
for new gene therapy products. In connection with this
restructuring and pursuant to a stock purchase agreement
executed on June 30, 2001, Aventis purchased
$25.0 million of non-voting preferred stock from us. During
the quarter ended September 30, 2001, we made a one-time
payment of $2.0 million to Aventis in consideration for internal
costs it incurred in facilitating the transition of control and
performance of these clinical trials from Aventis to us.

Under the restructured p53 and K-ras
collaboration agreement, we have the exclusive, worldwide right
to market and manufacture the products developed under each of
the prior collaboration agreements, as well as any new p53- or
K-ras-based gene therapy products. Aventis licensed or
transferred to us all of its patents covering the manufacture,
sale, offering for sale, importation or use of ADVEXIN gene
therapy and other K-ras patents, delivery patents and targeting
technologies, as well as all trademarks and goodwill associated
with ADVEXIN gene therapy. Aventis also agreed, for a period of
seven years, not to conduct any activities directed to the
development or commercialization of any gene therapy products
using the p53 or K-ras genes. We are not pursuing any research
and development programs with respect to the K-ras genes at this
time.

Prior to the restructuring of the collaboration
agreements, Aventis provided us with approximately
$57.2 million in the form of funding for early-stage
development programs and purchases of ADVEXIN gene therapy
product for later-stage clinical development and purchased over
$39.4 million of preferred stock from us. These purchases
of preferred stock were made upon the achievement of the
milestones contemplated in our stock purchase agreement with
Aventis.

Separate from the collaboration agreement
discussed above, we and Aventis have a sponsored research
agreement, pursuant to which we conduct and Aventis funds a
Phase 2 clinical trial in breast cancer.

15



---



##### Table of Contents





| |                           
| | --------------------------
| | Gendux, Inc. and Gendux AB

We established our wholly-owned subsidiary,
Gendux, Inc., and its wholly-owned subsidiary Gendux AB, which
is based in Stockholm, Sweden, in order to create a European
presence with which to extend our technology and product
development opportunities and enhance our interactions with
European academic and commercial institutions. We have assigned
to Gendux AB certain rights in the PTEN technologies, as well as
a non-exclusive license to use our vector technology in
commercializing gene therapy products.



| |                                  
| | ---------------------------------
| | Academic and Other Collaborations

Academic collaboration agreements have been a
cost-effective way of expanding our intellectual property
portfolio, generating data necessary for regulatory submissions,
accessing industry expertise and finding new technology
in-license candidates, all without building a large internal
scientific and administrative infrastructure.



| |                                                         
| | --------------------------------------------------------
| | The University of Texas M. D. Anderson Cancer
    Center

Many of our core technologies were developed by
scientists at M. D. Anderson Cancer Center in Houston, Texas,
one of the largest academic cancer centers in the world. We
sponsor research conducted at M. D. Anderson Cancer Center to
further the development of technologies that have potential
commercial viability. Through these sponsored research
agreements, we have access to M. D. Anderson Cancer
Centers resources and expertise for the development of our
technology. In addition, we have the right to include certain
patentable inventions arising from these sponsored research
agreements under our exclusive license with M. D. Anderson
Cancer Center.

We entered into this license agreement with
M. D. Anderson Cancer Center in 1994. It terminates on
July 20, 2009. The agreement is also terminable upon our
insolvency, either partys breach or upon our notice on a
patent-by-patent basis. The technologies we have licensed from
M. D. Anderson Cancer Center, under the exclusive license
agreement, relate to p53 and the 3p21.3 family of genes. Under
the agreement, we have agreed to pay M. D. Anderson
Cancer Center royalties on sales of products utilizing these
technologies. We are obligated to reimburse any of M. D.
Anderson Cancer Centers costs that may be incurred in
connection with obtaining patents related to the licensed
technologies. Our strategy for product development is designed
to take advantage of the significant multidisciplinary resources
available at M. D. Anderson Cancer Center. These
efforts have resulted in our becoming one of the largest
corporate sponsors of activities at M. D. Anderson Cancer
Center in recent years and have yielded to us exclusive patent
and licensing rights to numerous technologies.



| |                          
| | -------------------------
| | National Cancer Institute

We have entered into a cooperative research and
development agreement, or CRADA, with the NCI. The CRADA has a
flexible duration, but is terminable upon the mutual consent of
the parties or upon 30 days notice of either party. Under
the CRADA, NCI agreed to sponsor and conduct pre-clinical and
human clinical trials to evaluate the effectiveness and
potential superiority to other treatments of ADVEXIN gene
therapy against a range of designated cancers, including breast
cancer, ovarian cancer, bladder cancer and brain cancer. To
date, NCI has conducted five Phase 1 clinical trials and is
currently conducting two Phase 1 clinical trials. NCI
provided most of the funding for these activities. We supplied
NCI with ADVEXIN gene therapy product to be administered in
these trials. We have exclusive rights to all pre-clinical and
clinical data accumulated under the CRADA.



| |                   
| | ------------------
| | Corixa Corporation

We have entered into a research and license
agreement with Corixa Corporation pursuant to which we acquired
an exclusive, worldwide license to the mda-7 gene for gene
therapy applications. The agreement is effective until the
expiration of the subject patents. It is terminable upon the
breach or insolvency of either party, or upon our notice on a
patent-by-patent or product-by-product basis. Under the
agreement, we paid Corixa an initial license fee and have agreed
to make additional payments upon the achievement of

16



---



##### Table of Contents



development milestones, as well as royalty
payments on product sales. We also made research payments to
Corixa in connection with research it performed involving the
mda-7 gene.




| |                                                
| | -----------------------------------------------
| | Imperial Cancer Research Technology
    Limited

We have a license agreement with Imperial Cancer
Research Technology Limited, or ICRT, for the PTEN gene. We have
assigned this license to Gendux AB, our subsidiary in
Stockholm, Sweden. ICRT is the technology and licensing unit of
the Imperial Cancer Research Fund, which conducts over one-third
of all cancer research in the United Kingdom. This agreement is
terminable upon either partys breach or insolvency, or by
ICRT upon our failure to make required payments.

Marketing and Sales

We are focusing our current product development
and commercialization efforts on the oncology market. This
market is characterized by its concentration of specialists in
relatively few major cancer centers, which we believe can be
effectively addressed by a small, focused sales force. We will
likely address this market by building a direct sales force as
part of the ADVEXIN gene therapy commercialization process and
by pursuing marketing and distribution arrangements with
corporate partners for ADVEXIN gene therapy as well as
additional gene therapy products.

Patents and Intellectual Property



| |              
| | -------------
| | Our Portfolio

Our success will depend in part on our ability to
develop and maintain proprietary aspects of our technology. To
this end, we have an intellectual property program directed at
developing proprietary rights in technology that we believe may
be important to our success. We also rely on a licensing program
to ensure continued strong technology development and technology
transfer from companies and research institutions with whom we
work. In addition to our intellectual property license with
Aventis, we have entered into a number of exclusive license
agreements or options with companies and institutions, including
M. D. Anderson Cancer Center, Sidney Kimmel Cancer
Center, Corixa, the Imperial Cancer Research Fund and LXR
Biotechnology, Inc., with the LXR rights being subsequently sold
to Tanox, Inc. In addition to patents, we rely on trade secrets
and proprietary know-how, which we seek to protect, in part,
through confidentiality and proprietary information agreements.

We currently own or have an exclusive license to
a large number of issued and pending United States and foreign
patents and patent applications. If we do not seek a patent term
extension, the currently issued United States patents that we
own or have exclusively licensed will expire between the years
2010 and 2017. The exclusive licenses that give us rights on the
patents, and applications that such licenses cover, will expire
no earlier than the life of any patent covered under the license.



| |                                              
| | ---------------------------------------------
| | Adenoviral p53 Compositions and
    Therapies

In developing our patent portfolio, we have
focused our efforts in part on protecting our potential products
and how they will be used in the clinical trials. Arising out of
our work with M. D. Anderson Cancer Center, we
currently have an exclusive license to a number of United States
and corresponding international patent applications directed to
adenoviruses that contain the p53 gene, referred to as
adenoviral p53, adenoviral p53 pharmaceutical compositions and
the use of adenoviral p53 compositions in various cancer
therapies and protocols. One of these applications, directed to
the clinical use of adenoviral p53 to treat cancer, has issued
as a United States patent. Two other United States patents have
issued to which we have licensed exclusive rights, which are
directed to adenoviral p53 compositions in general, as well as a
patent covering the DNA core of adenoviral p53. We have also
exclusively licensed from Aventis a patent application directed
to adenoviral p53 and its clinical applications. We also have an
exclusive license to a United States patent application and
corresponding international applications directed to the use of
the p53 gene in the treatment of cancer patients whose tumors
appear to express a normal p53 protein.

17



---



##### Table of Contents





| |                                          
| | -----------------------------------------
| | Combination Therapy with the p53
    Gene

We have also focused our portfolio development on
protecting clinical therapeutic strategies that combine the use
of the p53 gene with traditional cancer therapies. In this
regard, also arising out of our work with M. D. Anderson Cancer
Center, we have an exclusive license to two issued United States
patents, with corresponding international applications, directed
to cancer therapy using the p53 gene in combination with
DNA-damaging agents such as conventional chemotherapy or
radiotherapy. This patent and corresponding international
applications concern the therapeutic application of the p53 gene
before, during or after chemotherapy or radiotherapy. We have
also exclusively licensed from Aventis a United States patent
and corresponding international applications directed to therapy
using the p53 gene together with taxanes such as Taxol® or
Taxotere®. Furthermore, we have exclusively licensed a
United States patent application, and corresponding
international applications, directed to the use of the p53 gene
in combination with surgical intervention in cancer therapy.



| |                                                        
| | -------------------------------------------------------
| | Adenovirus Production, Purification and
    Formulation

Another focus of our research has involved the
development of procedures for the commercial scale production of
our potential adenoviral-based gene therapy products, including
that of ADVEXIN gene therapy. In this regard, we own an issued
United States patent as well as a number of pending United
States applications, and corresponding international
applications, directed to commercial scale processes for
producing adenoviral gene therapy compositions having a high
level of purity, as well as to storage-stable formulations.
These applications include procedures for preparing commercial
quantities of recombinant adenoviruses for gene therapy and
include procedures applicable to the p53 gene, as well as any of
the other of our potential gene therapy products. We have also
licensed from Aventis a United States application and
corresponding international applications directed to processes
for the production of purified adenoviruses, which are useful
for gene therapy applications.



| |                             
| | ----------------------------
| | Other Tumor Suppressor Genes

We either own or have exclusively licensed rights
in a number of other patents and applications directed to the
clinical application of various tumor suppressor genes other
than the p53 gene, including the p16, PTEN, mda-7, BAK, the
3p21.3 gene family (FUS-1) and anti-sense K-ras genes. We have
exclusively licensed or optioned rights in two issued United
States patents covering the use of the BAK and mda-7 genes, a
United States patent relating to the PTEN gene and a United
States patent directed to the use of the adenoviral p16 in
cancer therapy.



| |                                                            
| | -----------------------------------------------------------
| | Other Therapeutic, Composition and Process
    Technologies

We also own or have exclusively licensed a number
of United States and international patent applications on a
range of additional technologies. These include various
applications relating to the p53 gene, combination therapy with
2-methoxyestradiol, anti-proliferative factor technologies,
retroviral delivery systems, stimulation of anti-p53, screening
and product assurance technologies, as well as second-generation
p53 gene molecules. We have exclusively licensed a number of
United States and international applications directed to various
improved gene therapy vectors for use in gene therapy protocols,
gene therapy employing more than one gene for disease treatment,
as well as applications directed to the delivery of genes for
disease treatment without the use of a vector, or
non-viral therapy. We also have exclusive rights in
an issued United States patent and corresponding international
applications directed to a low toxicity analogue of IL-2, also
called F42K.



| |                                                        
| | -------------------------------------------------------
| | Benzimidazole Small Molecule Cancer Therapy
    Program

We also have exclusively licensed a United States
and a corresponding international patent application directed to
the use of a family of known anti-helminthic benzimidazole
molecules, most notably mebendazole, in the therapy of cancer.
These applications are directed generally to the use of small
molecules of the benzimidazole family to induce apoptosis in
cancers, as well as to treat cancer patients, particularly those
having p53-related cancers. Both of these therapeutic actions
are based on the discovery by our scientists and

18



---



##### Table of Contents



their collaborators that members of the
benzimidazole family will actively induce apoptosis in cancer
cells, particularly in conjunction with the action of endogenous
or exogenously added p53.




| |              
| | -------------
| | Trade Secrets

We rely on trade secrets law to protect
technology where we believe patent protection is not appropriate
or obtainable. However, trade secrets are difficult to protect.
In addition, we generally require employees, academic
collaborators and consultants to enter into confidentiality
agreements. Despite these measures, we may not be able to
adequately protect our trade secrets or other proprietary
information. We are a party to various license agreements that
give us rights to use specified technologies in our research and
development processes. If we are not able to continue to license
this technology on commercially reasonable terms, our product
development and research may be delayed. In addition, in the
case of technologies that we have licensed, we do not have the
ability to make the final decisions on how the patent
application process is managed, and accordingly are unable to
exercise the same degree of control over this intellectual
property as we exercise over our internally developed
technology. Our research collaborators and scientific advisors
have rights to publish data and information in which we have
rights. If we cannot maintain the confidentiality of our
technology and other confidential information in connection with
our collaborations, then our ability to receive patent
protection or protect our proprietary information will be
diminished.

Government Regulation

The production and marketing of our proposed
products and our research and development activities are subject
to regulation for safety, effectiveness and quality by numerous
governmental authorities in the United States and other
countries. In the United States, drugs and research personnel
are subject to rigorous FDA and National Institutes of Health,
or NIH, regulations. The Federal Food, Drug and Cosmetic Act
(the FDC Act), as amended, the regulations promulgated under the
FDC Act, and other federal and state statutes and regulations
govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, advertising
and promotion of our products. Product development and approval
within this regulatory framework takes a number of years and
involves the expenditure of substantial resources.

The FDA recently placed a clinical hold on gene
therapy clinical trials using retroviral vectors to transduce
hematopoietic stem cells after two participants in such a trial
for the X-linked form of severe combined immune deficiency
disease (X-SCID) being conducted in Europe developed what
appeared to be a leukemia-like illness. This clinical hold
requires a case-by-case review of the use of retroviral vectors
in these trials. We are not developing products using the
process used in those clinical trials, and we do not use
retroviral vectors in our ongoing clinical trials. We have
received no communications from the FDA to indicate this
clinical hold will affect our clinical trials, and we anticipate
no future negative effects on us from this event. Our
pharmacovigilance department monitors every patient in our
clinical trials for safety and reports all side effects to the
FDA and the National Institutes of Health according to
applicable regulations. We have witnessed no adverse effects in
our clinical trials that even remotely resemble what occurred in
the X-SCID trial. Due to the fundamental differences between
retrovirus vectors and the adenovirus vector employed in ADVEXIN
gene therapy, we believe the likelihood of our encountering an
event such as that experienced in the X-SCID trial is remote.



| |                          
| | -------------------------
| | The Drug Approval Process

The steps required before our proposed products
may be marketed in the United States include pre-clinical
testing, the submission to the FDA of an investigational new
drug, or IND, application for clinical trials, clinical trials
to establish the safety and effectiveness of the drug, the
submission to the FDA of a BLA (for a biologic) or an NDA (for a
drug) and the FDA approval of the BLA or NDA prior to any
commercial sale of the drug. Our products will be regulated as
biologics. In addition to obtaining FDA approval for each
product, each domestic manufacturing establishment must be
registered with, and approved by, the FDA. Domestic
manufacturing establishments are subject to biennial inspections
by the FDA and must comply with CGMP requirements. To supply
products for use in the United States, foreign manufacturing
establishments, including third party facilities, must comply
with CGMP requirements and are subject to periodic inspection

19



---



##### Table of Contents



by the FDA or by corresponding regulatory
agencies in such countries under reciprocal agreements with the
FDA.




| |                     
| | --------------------
| | Pre-Clinical Testing

Pre-clinical testing includes laboratory
evaluation of product chemistry and formulation as well as
animal trials to assess the potential safety and effectiveness
of the product. Compounds must be adequately manufactured and
pre-clinical safety tests must be conducted in compliance with
FDA Good Laboratory Practices regulations. The results of the
pre-clinical tests are submitted to the FDA as part of an IND
application to be reviewed by the FDA prior to the commencement
of human clinical trials. Submission of an IND application may
not result in FDA authorization to commence clinical trials, but
the IND becomes effective if not rejected by the FDA within
30 days. The IND application must indicate: the results of
previous testing; how, where and by whom the clinical trials
will be conducted; the chemical structure of the compound; the
method by which it is believed to work in the human body; any
toxic effects of the compound found in the animal trials; and
how the compound is manufactured.



| |                
| | ---------------
| | Clinical Trials

Clinical trials involve the administration of the
IND to healthy volunteers or to patients, under the supervision
of qualified principal investigators. All clinical trials must
be conducted in accordance with Good Clinical Practices
regulations, under protocols that detail the objectives of the
trial, the parameters to be used to monitor safety and the
effectiveness criteria to be evaluated. Each protocol must be
submitted to the FDA for review as part of the IND application
prior to commencing the trial. Further, each clinical trial must
be conducted under the auspices of an independent review panel,
the Institutional Review Board, or IRB, at the institution at
which the trial will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects,
informed consent and the possible liability of the institution.
Progress reports detailing the results of the clinical trials
must be submitted at least annually to the FDA.

Clinical trials are typically conducted in three
sequential phases, but the phases often overlap. In Phase 1, the
initial introduction of the drug into healthy volunteers or
patients, the drug is tested for safety or adverse effects,
dosage tolerance, absorption, distribution, metabolism,
excretion and clinical pharmacology. Phase 2 involves clinical
trials in a limited patient population to determine the
effectiveness of the drug for specific, targeted indications,
determine dosage tolerance and optional dosage and identify
possible adverse effects and safety risks. When a compound is
found to be effective and to have an acceptable safety profile
in Phase 2 evaluations, Phase 3 clinical trials are
undertaken to further evaluate clinical effectiveness and to
further test for safety within an expanded patient population at
geographically dispersed clinical trial sites. Phase 3 clinical
trials conducted to seek marketing approval by the FDA are
called pivotal trials.



| |                              
| | -----------------------------
| | National Institutes of Health

The National Institute of Health, or NIH,
publishes guidelines concerning gene therapy products. The NIH
guidelines require that human gene therapy protocols subject to
the guidelines that involve a novel product, disease indication,
route of administration or other component be discussed at the
quarterly meetings of the NIH Recombinant DNA Advisory
Committee, or RAC. Companies involved in clinical trials as
sponsors are expected to report all serious adverse events to
the NIH.

Following routine procedure, we report to the FDA
and the NIH serious adverse events, whether treatment-related or
not, that occur in our clinical trials, including deaths. Often,
gene therapy clinical trials include cancer patients who have
failed all conventional treatments available to them, and who
therefore have short life expectancies and who sometimes die
before completion of their clinical trials.



| |                       
| | ----------------------
| | Marketing Applications

After the completion of all three clinical trial
phases, if the data indicate that the drug is safe and
effective, a BLA or an NDA is filed with the FDA for approval of
the marketing and commercial shipment of

20



---



##### Table of Contents



the drug. This marketing application must contain
all of the information on the drug gathered to that date,
including data from the clinical trials. It is often over
100,000 pages in length.


The FDA reviews all marketing applications
submitted to it before it accepts them for filing and may
request additional information, rather than accepting the
application for filing. In such event, the application must be
re-submitted with the additional information and the application
is again subject to review before filing. Once the submission is
accepted for filing, the FDA begins an in-depth review of the
BLA or NDA. Under the FDC Act, the FDA has 180 days in
which to review it and respond to the applicant. The review
process is often significantly extended by FDA requests for
additional information or clarification of information already
provided in the submission. The FDA may refer the application to
an appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation as to
whether the application should be approved. However, the FDA is
not bound by the recommendation of an advisory committee. If the
FDA evaluations of the marketing application and the
manufacturing facilities are favorable, the FDA may issue either
an approval letter or an approvable letter. An approvable letter
usually contains a number of conditions that must be met in
order to secure final approval of the application. When, and if,
those conditions have been met to the FDAs satisfaction,
the FDA will issue an approval letter, authorizing commercial
marketing of the drug for certain indications. Approvals may be
withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing. If
the FDAs evaluation of the submission or manufacturing
facilities is not favorable, the FDA may refuse to approve the
BLA or NDA or issue a not-approvable letter.

If the FDA approves the BLA or NDA, the drug
becomes available for physicians to prescribe. Periodic reports
must be submitted to the FDA, including descriptions of any
adverse reactions reported. The FDA may request additional
trials, referred to as Phase 4 clinical trials, to evaluate
long-term effects. Phase 4 clinical trials and post-marketing
trials may also be conducted to explore new indications and to
broaden the application and use of the drug and its acceptance
in the medical community.



| |                
| | ---------------
| | Orphan Drug Act

We have received orphan drug designation for
ADVEXIN gene therapy for the treatment of head and neck cancer
under the Orphan Drug Act. This act provides incentives to
manufacturers to develop and market drugs for rare diseases and
conditions affecting fewer than 200,000 people in the United
States. The first developer to receive FDA marketing approval
for an orphan drug is entitled to a seven-year exclusive
marketing period in the United States following FDA approval of
that product. However, the FDA will allow the sale of a drug
clinically superior to or different from another approved orphan
drug, although for the same indication, during the seven-year
exclusive marketing period.

We will pursue orphan drug designation for other
products we are developing. We cannot be sure that any of those
potential products will ultimately receive orphan drug
designation, or that the benefits currently provided by such a
designation will not subsequently be amended or eliminated. The
Orphan Drug Act has been controversial, and legislative
proposals have from time to time been introduced in Congress to
modify various aspects of the Orphan Drug Act, particularly the
market exclusivity provisions. New legislation may be introduced
in the future that could adversely affect the availability or
attractiveness of orphan drug status for our potential products.
Orphan drug designation does not convey any advantage in, or
shorten the duration of, the regulatory review and approval
process.



| |                
| | ---------------
| | Off-Label Use

Physicians may prescribe drugs for uses that are
not described in the products labeling that differ from
those tested by us and approved by the FDA. Such
off-label uses are common across medical specialties
and may constitute the best treatment for many patients in
various circumstances. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA does, however,
restrict manufacturers communications on the subject of
off-label use. Companies cannot actively promote FDA-approved
drugs for off-label uses. However, new regulations, if followed,
provide a safe harbor from FDA enforcement action that would
allow us to disseminate to physicians articles published in
peer-reviewed journals, like the New England

21



---



##### Table of Contents



Journal of Medicine, that discuss off-label uses of approved products. We cannot
disseminate articles concerning drugs that have not been
approved for any indication.


FDAMA

The Food and Drug Administration Modernization
Act of 1997, or FDAMA, was enacted, in part, to ensure the
timely availability of safe and effective drugs, biologics and
medical devices, by expediting the FDA review process for new
products. FDAMA established a statutory program for the approval
of fast track products. The fast track provisions
essentially codify FDAs Accelerated Approval regulations
for drugs and biologics. A fast track product is
defined as a new drug or biologic intended for the treatment of
a serious or life-threatening condition that demonstrates the
potential to address unmet medical needs for such a condition.
Under the new fast track program, the sponsor of a new drug or
biologic may request the FDA to designate the drug or biologic
as a fast track product at any time during the
clinical development of the product. FDAMA specifies that the
FDA must determine if the product qualifies for fast track
designation within 60 days of receipt of the sponsors
request. Approval of an NDA for a fast track product can be
based on a clinical endpoint or on a surrogate endpoint that is
reasonably likely to predict clinical benefit. Approval of a
fast track product may be subject to (1) post-approval
trials to validate the surrogate endpoint or confirm the effect
on the clinical endpoint and (2) prior review of copies of
all promotional material. If a preliminary review of the
clinical data suggests efficacy, the FDA may initiate review of
sections of an application for a fast track product
before the application is complete. This rolling
review is available if the applicant provides a schedule
for submission of remaining information and pays applicable user
fees.

We may seek fast track designation to secure
expedited review of appropriate products. It is uncertain
whether we will obtain fast track designation. We cannot predict
the ultimate effect, if any, of the new fast track process on
the timing or likelihood of FDA approval of any of our potential
products.

International

Steps similar to those in the United States must
be undertaken in virtually every other country comprising the
market for our products before any such product can be
commercialized in those countries. The approval procedure and
the time required for approval vary from country to country and
may involve additional testing. We cannot be sure that approvals
will be granted on a timely basis, or at all. In addition,
regulatory approval of prices is required in most countries,
other than the United States. There can be no assurance that the
resulting prices would be sufficient to generate an acceptable
return to us.

Competition

The biotechnology and pharmaceutical industries
are subject to rapid and intense technological change. We face,
and will continue to face, competition in the development and
marketing of our product candidates from academic institutions,
government agencies, research institutions and biotechnology and
pharmaceutical companies. Competition may arise from other drug
development technologies, methods of preventing or reducing the
incidence of disease, including vaccines, and new small molecule
or other classes of therapeutic agents. Developments by others
may render our product candidates or technologies obsolete or
non-competitive.

We compete with pharmaceutical and biotechnology
companies, including Canji, Inc., Genvec, Inc., Vical
Incorporated and Onyx Pharmaceuticals, Inc., which are pursuing
other forms of treatment for the diseases ADVEXIN gene therapy
and our other product candidates target. There are many other
companies, both publicly and privately held, including
well-known pharmaceutical companies, engaged in developing
products for human therapeutic applications. We also compete
with universities and other research institutions in the
development of products, technologies and processes. In many
instances, we compete with other commercial entities in
acquiring products or technologies from universities and other
research institutions.

We expect that competition among products
approved for sale will be based, among other things, on product
efficacy, safety, reliability, availability, price, patent
position and sales, marketing and distribution capabilities. Our
competitive position also depends upon our ability to attract
and retain qualified personnel,

22



---



##### Table of Contents



obtain patent protection or otherwise develop
proprietary products or processes, and secure sufficient capital
resources for the often substantial period between technological
conception and commercial sales.


Human Resources

As of March 14, 2003, we had approximately
50 employees and contracted personnel engaged in research and
development, regulatory affairs, clinical affairs, manufacturing
and quality, finance, and corporate development activities. Our
employees include eight holders of a Ph.D. or M.D. degree. Many
of our employees have extensive experience in the pharmaceutical
and biotechnology industries.

In addition to our full-time staff, we provide
financial support through sponsored research agreements for
numerous research scientists and technicians at M. D. Anderson
Cancer Center and other institutions who serve as investigators
for us on clinical and pre-clinical research projects. We have
also entered into part-time consulting arrangements with several
M. D. Anderson Cancer Center scientists and clinicians.

Our sponsored research projects with M. D.
Anderson Cancer Center involve investigators in a wide range of
specialties, including thoracic and cardiovascular surgery,
neurology, gynecology, urology and gastrointestinal medicine.
The human resources devoted to development of our technology and
products are further augmented by our collaborators at the
numerous other institutions where sponsored research work is
performed.

Scientific Advisory Board

We receive guidance on a broad range of
scientific, clinical and technical issues from our Scientific
Advisory Board. Members of our Scientific Advisory Board are
recognized experts in their respective fields of research and
clinical medicine related to molecular oncology. The members of
the Scientific Advisory Board are:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Jack A. Roth, M.D.,
    Chairman of the Scientific Advisory Board, is Chairman of the
    Department of Thoracic and Cardiovascular Surgery at M. D.
    Anderson Cancer Center. Dr. Roth was one of our founders
    and is our Chief Medical Advisor. Dr. Roth is a
    widely-recognized pioneer in the application of gene therapy to
    the treatment of cancer. He is the primary inventor of the
    technology upon which our gene therapy products are based. He
    received his M.D. from The Johns Hopkins University School of
    Medicine.
|
| | Carol L. Prives,
    Ph.D., is a professor of biology at
    Columbia University. She is the Chair of the NIH Experimental
    Virology Trial Section, a member of the NCI Intramural
    Scientific Advisory Board, and a member of the Advisory Board of
    the Dana-Farber Cancer Center in Boston. Dr. Prives is an
    editor of the Journal of Virology and serves on the editorial
    boards of three other prominent journals. She received her Ph.D.
    in biochemistry from McGill University.                                               
|
| | Daniel D. Von Hoff,
    M.D., is the Director of the Arizona
    Cancer Center in Tucson, Arizona, and a professor of medicine in
    the Department of Medicine of the University of Arizona.
    Dr. Von Hoff is the President of the American Association
    for Cancer Research. Dr. Von Hoff is certified in medical
    oncology by the American Board of Internal Medicine.                                                                                                                                                                       
|
| | Elizabeth Grimm,
    Ph.D., is a professor of tumor biology
    at M. D. Anderson Cancer Center. Dr. Grimm has served as
    Cancer Expert, Surgical Branch of the NCI. She received her
    Ph.D. in microbiology from the University of California, Los
    Angeles School of Medicine.                                                                                                                                                                                                                                                                 
|
| | Michael J. Imperiale,
    Ph.D., is the Director of Cancer
    Biology Training Programs at the University of Michigan Cancer
    Center and holds a concurrent position in the Department of
    Microbiology and Immunology at the University of Michigan.
    Dr. Imperiale earned his Ph.D. degree in biological
    sciences from Columbia University and received postdoctoral
    training at the Rockefeller University Laboratory of Molecular
    Cell Biology, where he studied the regulation of early
    adenovirus gene expression.        

23



---



##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

We lease from TMX Realty Corporation, our
wholly-owned subsidiary, facilities in Houston, Texas, totaling
approximately 42,000 square feet in two buildings. These
buildings consist of a 12,000 square foot CGMP production
facility designed to support an ADVEXIN gene therapy product
launch, as well as support multiple vector manufacturing, and a
30,000 square foot building which contains our research and
development laboratories and administrative offices. We sublease
to M. D. Anderson Cancer Center approximately 10,000 square feet
of space in our Houston research and development facility at
prevailing market rates under a lease with an initial term
expiring in 2009. Our corporate offices are located in Austin,
Texas. We expect our current facilities to satisfy our
requirements for at least the next four years.

TMX Realty Corporation leases the land for these
facilities from a third party. The buildings are financed under
mortgage notes, and such buildings are pledged as collateral for
the notes. Certain equipment in the buildings is financed under
leases, and such equipment is pledged as collateral for the
leases. See the discussion under Liquidity and Capital
Resources in this Report for a summary of our obligations
under these mortgage notes and leases.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are involved from time to time in legal
proceedings relating to claims arising out of our operation in
the ordinary course of business, including actions relating to
intellectual property rights.

We do not believe that the outcome of any
present, or all litigation in the aggregate, other than our
opposition of three European patents controlled by Canji
discussed under Factors Affecting Future Operating
Results will have a material effect on our business. You
can read the discussion of our opposition of the patents under
Factors Affecting Future Operating Results.






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

No matter was submitted to a vote of security
holders during the fourth quarter of the fiscal year covered by
this Report.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and
    Related Stockholder Matters

Market and Equityholder Information

Our common stock has been traded on the Nasdaq
National Market under the symbol INGN since our
initial public offering in October 2000. Prior to October 2000,
there was no established public trading market for our common
stock. The following table sets forth, for the periods
indicated, the high and low closing prices reported on the
Nasdaq National Market.

|                                     |                       |      |   |      |  |  |   |      | 
|------------------------------------ | --------------------- | ---- | - | ---- |  |  | - | ---- | 
|                                     |                       | High |   | Low 
|                                     |                       |      |   |     
|Fiscal Year Ended December 31, 2001: |                       |      |   |      |  |  |   |     
|                                     | First Fiscal Quarter  |      | $ | 8.25 |  |  | $ | 3.31 | 
|                                     | Second Fiscal Quarter |      |   | 7.80 |  |  |   | 3.20 | 
|                                     | Third Fiscal Quarter  |      |   | 5.50 |  |  |   | 2.61 | 
|                                     | Fourth Fiscal Quarter |      |   | 6.74 |  |  |   | 3.24 | 
|Fiscal Year Ended December 31, 2002: |                       |      |   |      |  |  |   |     
|                                     | First Fiscal Quarter  |      | $ | 5.59 |  |  | $ | 3.56 | 
|                                     | Second Fiscal Quarter |      |   | 4.97 |  |  |   | 1.80 | 
|                                     | Third Fiscal Quarter  |      |   | 2.80 |  |  |   | 1.35 | 
|                                     | Fourth Fiscal Quarter |      |   | 2.58 |  |  |   | 1.48 | 

24



---



##### Table of Contents



At December 31, 2002, there were 21,487,116
shares of our common stock issued and outstanding held by 166
stockholders of record. We estimate we have approximately 3,719
beneficial stockholders.

Dividend Policy

We have never declared or paid any dividends on
our capital stock. We currently expect to retain all of our
future earnings, if any, to support the development of our
business and do not anticipate paying any cash dividends in the
foreseeable future.

25



---



##### Table of Contents








|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data

Our selected consolidated financial data
presented below is derived from the consolidated financial
statements of Introgen Therapeutics, Inc. and our subsidiaries,
which appear in Part IV of this Report. Those consolidated
financial statements were derived from the audited consolidated
financial statements included in this report and in reports we
have previously filed with the SEC, except for the six months
ended December 31, 2000 and the year ended
December 31, 2001, both which are unaudited. The selected
consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Report.

|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |        | 
|------------------------------------------------------------------ | ---------------------------------- | --------------------------------------- | ------ | ----------------------------- |  | ----------------------- | ------ | ------ |  | ----------- | ------ | ------ |  | ----------- | ------- | ------ |  | - | ------ | ----- |  | - | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                   |                                    |                                         |        |                               |  |                        
|                                                                   |                                    | Year Ended June 30,                     |        | Six Months Ended December 31, |  | Year Ended December 31,
|                                                                   |                                    |                                         |        |                               |  |                        
|                                                                   |                                    | 1998                                    |        | 1999                          |  | 2000                    |        | 2001   |  | 2000        |        | 2001   |  | 2001        |         | 2002  
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |       
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  | (Unaudited) |        |        |  | (Unaudited) |         |       
|                                                                   |                                    |                                        
|                                                                   |                                    | (In thousands except per share amounts)
|Statement of Operations Data:                                      |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Contract services, grants and other revenue                        |                                    |                                         |       |                               |  |                         |       |        |  |             | 97     |        |  |             | 684     |        |  |   | 391    |       |  |   | 298     |        |  |   | 591     |        |  |   | 1,173   |       
|Collaborative research and development revenues
    from affiliate |                                    | $                                       | 8,606  |                               |  | $                       | 6,714  |        |  | $           | 6,204  |        |  | $           | 3,016   |        |  | $ | 3,016  |       |  | $ |        |        |  | $ |        |        |  | $ |        |       
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Product sales to affiliate                                         |                                    |                                         | 2,505  |                               |  |                         | 1,475  |        |  |             | 2,087  |        |  |             | 1,500   |        |  |   | 1,500  |       |  |   |        |        |  |   |        |        |  |   |        |       
|Cost of product sales                                              |                                    |                                         | 1,729  |                               |  |                         | 994    |        |  |             | 1,476  |        |  |             | 2,488   |        |  |   | 2,488  |       |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Gross margin on product sales                                      |                                    |                                         | 776    |                               |  |                         | 481    |        |  |             | 611    |        |  |             | (988    | )      |  |   | (988   | )     |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Other revenue                                                      |                                    |                                         |       |                               |  |                         |       |        |  |             | 97     |        |  |             | 684     |        |  |   | 391    |       |  |   | 298     |        |  |   | 591     |        |  |   | 1,173   |       
|Operating costs and expenses:                                      |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|                                                                   | Research and development           |                                         |        | 10,361                        |  |                         |        | 7,539  |  |             |        | 10,075 |  |             |         | 15,014 |  |   |        | 5,153 |  |   |         | 10,063 |  |   |         | 19,923 |  |   |         | 21,512 | 
|                                                                   | General and administrative         |                                         |        | 1,825                         |  |                         |        | 2,977  |  |             |        | 4,701  |  |             |         | 4,875  |  |   |        | 2,040 |  |   |         | 3,526  |  |   |         | 6,361  |  |   |         | 6,722  | 
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|                                                                   | Total operating costs and expenses |                                         |        | 12,186                        |  |                         |        | 10,516 |  |             |        | 14,776 |  |             |         | 19,889 |  |   |        | 7,193 |  |   |         | 13,589 |  |   |         | 26,284 |  |   |         | 28,234 | 
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Loss from operations                                               |                                    |                                         | (2,804 | )                             |  |                         | (3,321 | )      |  |             | (7,864 | )      |  |             | (17,177 | )      |  |   | (4,774 | )     |  |   | (13,291 | )      |  |   | (25,693 | )      |  |   | (27,061 | )     
|Interest income (expense), net                                     |                                    |                                         | 789    |                               |  |                         | 675    |        |  |             | 140    |        |  |             | 381     |        |  |   | 403    |       |  |   | 445     |        |  |   | 423     |        |  |   | (207    | )     
|Other income                                                       |                                    |                                         |       |                               |  |                         |       |        |  |             |       |        |  |             | 354     |        |  |   |       |       |  |   | 518     |        |  |   | 871     |        |  |   | 1,139   |       
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Net loss                                                           |                                    | $                                       | (2,015 | )                             |  | $                       | (2,646 | )      |  | $           | (7,724 | )      |  | $           | (16,442 | )      |  | $ | (4,371 | )     |  | $ | (12,328 | )      |  | $ | (24,399 | )      |  | $ | (26,129 | )     
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Net loss per share, basic and diluted                              |                                    | $                                       | (0.51  | )                             |  | $                       | (0.66  | )      |  | $           | (1.89  | )      |  | $           | (1.02   | )      |  | $ | (0.39  | )     |  | $ | (0.58   | )      |  | $ | (1.14   | )      |  | $ | (1.22   | )     
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       
|Shares used in computing basic and diluted net
    loss per share  |                                    |                                         | 3,923  |                               |  |                         | 4,006  |        |  |             | 4,096  |        |  |             | 16,163  |        |  |   | 11,121 |       |  |   | 21,440  |        |  |   | 21,440  |        |  |   | 21,471  |       
|                                                                   |                                    |                                         |        |                               |  |                         |        |        |  |             |        |        |  |             |         |        |  |   |        |       |  |   |         |        |  |   |         |        |  |   |         |       

|                                                   |  |          |        |              |  |                |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | -------- | ------ | ------------ |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                   |  |          |        |             
|                                                   |  | June 30, |        | December 31,
|                                                   |  |          |        |             
|                                                   |  | 1998     |        | 1999         |  | 2000           |         | 2001 |  | 2001 |         | 2002
|                                                   |  |          |        |              |  |                |         |      |  |      |         |     
|                                                   |  |          |        |              |  |                |         |      |  |     
|                                                   |  |          |        |              |  | (In thousands) |         |      |  |     
|Balance Sheet Data:                                |  |          |        |              |  |                |         |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents, and short-term investments |  | $        | 16,848 |              |  | $              | 15,761  |      |  | $    | 11,765  |      |  | $ | 34,977  |   |  | $ | 48,825  |   |  | $ | 23,467  |  
|Working capital                                    |  |          | 15,944 |              |  |                | 14,226  |      |  |      | 10,263  |      |  |   | 54,296  |   |  |   | 43,175  |   |  |   | 18,852  |  
|Total assets                                       |  |          | 17,766 |              |  |                | 25,741  |      |  |      | 24,855  |      |  |   | 72,347  |   |  |   | 60,424  |   |  |   | 33,316  |  
|Long-term debt obligations, net of current portion |  |          |       |              |  |                | 3,388   |      |  |      | 8,021   |      |  |   | 9,798   |   |  |   | 9,037   |   |  |   | 7,435   |  
|Accumulated deficit                                |  |          | (8,375 | )            |  |                | (11,021 | )    |  |      | (18,744 | )    |  |   | (35,186 | ) |  |   | (47,515 | ) |  |   | (73,643 | )
|Stockholders equity                               |  |          | 16,322 |              |  |                | 19,187  |      |  |      | 13,592  |      |  |   | 56,069  |   |  |   | 44,566  |   |  |   | 19,835  |  

26



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with our condensed consolidated financial
statements and the related notes thereto included in this Report
on Form 10-K. The discussion and analysis contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
statements include the statements below under Factors
Affecting Future Operating Results. These forward-looking
statements are based on our current expectations and entail
various risks and uncertainties. Our actual results could differ
materially from those projected in the forward-looking
statements as a result of various factors, including those set
forth below under Factors Affecting Future Operating
Results.

Overview

We are a leading developer of gene therapy
products for the treatment of cancer and other diseases. Our
lead product candidate, ADVEXIN® gene therapy, combines the
p53 gene, one of the most potent members of a group of naturally
occurring tumor suppressor genes, which act to protect cells
from becoming cancerous, with an adenoviral gene delivery system
that we have developed and extensively tested. We are conducting
pivotal Phase 3 clinical trials of ADVEXIN gene therapy in head
and neck cancer. We have completed a Phase 2 clinical trial of
ADVEXIN gene therapy in non-small cell lung cancer and are
conducting a Phase 2 clinical trial of ADVEXIN gene therapy in
breast cancer. We are conducting Phase 1 clinical trials, or
safety trials, of ADVEXIN gene therapy in other types of cancer.
We hold the worldwide rights for pre-clinical and clinical
development, manufacturing, marketing and commercialization of
ADVEXIN gene therapy.

ADVEXIN gene therapy is designated by the FDA as
an orphan drug under the Orphan Drug Act, which gives us seven
years of marketing exclusivity for ADVEXIN gene therapy if
approved by the FDA. We are developing additional cancer gene
therapy product candidates, including those based on the mda-7
and PTEN genes, as well as associated vector technologies for
delivering the gene-based products into target cells. Our INGN
241 product candidate, which combines the mda-7 gene with our
proprietary gene delivery system, is undergoing safety testing
in a Phase 1 clinical trial.

We are investigating other vector technologies
for delivering gene-based products into targeted cells,
specifically those involving replication-competent viral
therapies in which viruses bind directly to cancer cells,
replicate in those cells, and cause those cancer cells to die.
As a supplement to our gene therapy product programs, we are
evaluating the development of mebendazole, our first small
molecule candidate. Pre-clinical trials suggest that mebendazole
may also be an effective treatment of cancer.

We own and operate a manufacturing facility that
we believe complies with the FDAs current Good
Manufacturing Practices requirements, commonly known as CGMP
requirements. We have produced ADVEXIN gene therapy in this
facility for use in our Phase 1, 2 and 3 clinical trials and
INGN 241 for use in our Phase 1 clinical trials. We have also
produced in a separate facility INGN 241 for use in our Phase 1
clinical trials.

Since our inception in 1993, we have used our
resources primarily to conduct research and development
activities, primarily for ADVEXIN gene therapy and, to a lesser
extent, for other product candidates. At December 31, 2002,
we had an accumulated deficit of approximately
$73.6 million. It is possible we will incur losses in the
future that will be greater than cumulative losses incurred in
prior years. At December 31, 2002, we had cash and cash
equivalents of $23.5 million. During the year ended
December 31, 2002, we used $23.6 million of cash for
operating activities. It is possible this cash usage rate could
increase in future periods as we continue our ADVEXIN gene
therapy Phase 3 clinical trials and expand our research and
development of various other gene therapy technologies. We
reduced our workforce by approximately one third in February
2003 to lower our cash usage rate. We believe our existing
working capital can fund our operations for the next fifteen to
eighteen months. Since our inception, our only significant
revenues have been payments from Aventis under collaborative
research and development agreements for our early-stage
development work on ADVEXIN gene therapy and Aventis
purchases of ADVEXIN gene therapy product we manufactured for
its use in later-stage clinical trials it previously performed.
We have also earned interest income on cash placed in short-term
investments. We may need to raise additional funds through
public or private equity offerings, debt

27



---



##### Table of Contents



financings or additional corporate collaboration
and licensing arrangements. We do not know whether such
additional financing will be available when needed, or on terms
favorable to us or our stockholders.


Collaborative Relationship With
Aventis

In October 1994, we entered into two
collaboration agreements with Rhône-Poulenc Rorer
Pharmaceuticals Inc., which ultimately became part of Aventis
Pharma, or Aventis, a global pharmaceutical company. In June
2001, we restructured this collaborative relationship and
assumed responsibility for the worldwide development of all p53
and K-ras products, and acquired all marketing and
commercialization rights with respect to those products. We also
assumed the control and performance of ongoing clinical trials
for p53- and K-ras-based products and full responsibility for
all pre-clinical research and development and clinical trials
for new gene therapy products. In connection with this
restructuring and pursuant to a stock purchase agreement
executed on June 30, 2001, Aventis purchased
$25.0 million of non-voting preferred stock from us. During
the quarter ended September 30, 2001, we made a one-time
payment of $2.0 million to Aventis in consideration for internal
costs it incurred in facilitating the transition of control and
performance of these clinical trials from Aventis to us.

Under the restructured p53 and K-ras
collaboration agreement, we have the exclusive, worldwide right
to market and manufacture the products developed under each of
the prior collaboration agreements, as well as any new p53- or
K-ras-based gene therapy products. Aventis licensed or
transferred to us all of its patents covering the manufacture,
sale, offering for sale, importation or use of ADVEXIN gene
therapy and other K-ras patents, delivery patents and targeting
technologies, as well as all trademarks and goodwill associated
with ADVEXIN gene therapy. Aventis also agreed, for a period of
seven years, not to conduct any activities directed to the
development or commercialization of any gene therapy products
using the p53 or K-ras genes.

Under the prior collaboration agreements, we
generally received quarterly payments from Aventis for
early-stage development activities in advance. We recorded these
payments as revenue as we performed the collaboration work and
incurred the related expenses. We recorded as deferred revenue
collaborative research and development payments that we received
but for which the related expenses had not yet been incurred.
Under the restructured collaboration, Aventis no longer funds
any of our research and development.

Prior to the restructuring of the collaboration
agreements, Aventis provided us with approximately
$57.2 million in the form of funding for early-stage
development programs and purchases of ADVEXIN gene therapy
product for later-stage clinical development and purchased over
$39.4 million of preferred stock from us. These purchases
of preferred stock were made upon the achievement of the
milestones contemplated in our stock purchase agreement with
Aventis. We recorded revenue from ADVEXIN gene therapy product
sales to Aventis upon completion of production and delivery and
Aventis acceptance of the product. Under the restructured
collaboration, we no longer receive research funding from or
sell ADVEXIN gene therapy to Aventis.

Separate from the collaboration agreement
discussed above, we and Aventis have a sponsored research
agreement, pursuant to which we conduct and Aventis funds a
Phase 2 clinical trial in breast cancer.

Critical Accounting Policies

Use of Estimates.The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.

Short-Term
Investments.Short-term investments
consisted of investments in short-term, investment-grade
securities, which consist primarily of federal and state
government obligations, commercial paper and/or corporate bonds
with various maturity dates not exceeding one year. All
short-term investments have been classified as held-to-maturity
and are carried at amortized cost. At any point in time,
amortized costs may be greater or less than fair value. If
investments are sold prior to maturity, we could incur a
realized gain or loss

28



---



##### Table of Contents



based on the fair market value of the investments
at the date of sale. Additionally, we could incur future losses
on investments if the investment issuer becomes impaired or the
investment is downgraded.


Research and Development
Costs.In conducting our pivotal Phase
3 clinical trials of ADVEXIN gene therapy, we procure services
from numerous third-party vendors. The cost of these services
constitutes a significant portion of the cost of these trials
and of our research and development expenses in general. These
vendors do not necessarily provide us billings for their
services on a regular basis and, accordingly, are not a timely
source of information to determine the costs we have incurred
relative to their services for any given accounting period. As a
result, we make significant accounting estimates as to the
amount of costs we have incurred relative to these vendors in
each accounting period. These estimates are based on numerous
factors, including, among others, costs set forth in our
contracts with these vendors, the period of time over which the
vendor will render the services and the rate of enrollment of
patients in our clinical trials. Using these estimates, we
record expenses and accrued liabilities in each accounting
period that we believe fairly represent our obligations to these
vendors. Actual results could differ from these estimates
resulting in increases or decreases in the amount of expense
recorded and the related accrual.

Recent Accounting Pronouncements

In June 2002 the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an
exit or disposal plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002. The
Company does not believe that the adoption of SFAS No. 146
will have a material impact on its financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment
of FASB Statement No. 123. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net
income of an entitys accounting policy decisions with
respect to stock-based employee compensation. Finally, this
Statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those
effects in interim financial information. Since the Company is
continuing to account for stock-based compensation according to
APB 25, adoption of SFAS No. 148 requires the Company to
provide prominent disclosures about the affects of FAS 123 on
reported income (loss) and will require the Company to disclose
these affects in the interim financial statements as well.

Results of Operations

Comparison of Years Ended December 31,
2002 and 2001

Revenues

Contract Services, Grant and Other
Revenue.This revenue was
$1.2 million in 2002 and $591,000 in 2001. This 103%
increase was due to a higher level of manufacturing and process
development contract services activity for third parties in 2002
compared to 2001 and funding received from Aventis in 2002 to
support a Phase 2 clinical trial of ADVEXIN gene therapy in
breast cancer.

Costs and Expenses

Research and
Development.Research and development
expenses, excluding amortization of deferred stock compensation
of $399,000 in 2002 and $462,000 in 2001, were
$21.1 million in 2002 and $19.5 million in 2001. This
8% increase was primarily due to our assumption in the third
quarter of 2001 and thereafter of responsibility for conducting,
managing and funding the Phase 2 and Phase 3 clinical
trials activities for ADVEXIN gene therapy under the terms of
the restructuring of our collaboration with Aventis. In 2002, we
incurred $525,000 of research and development expenses in
conjunction with our collaboration and license agreement with
VirRx.

29



---



##### Table of Contents



General and
Administrative.General and
administrative expenses, excluding amortization of deferred
stock compensation of $978,000 in 2002 and $1.2 million in
2001, were $5.7 million in 2002 and $5.2 million in
2001. This 10% increase in was due primarily to the additional
cost of providing administrative support for our conduct and
management of the Phase 2 and Phase 3 clinical trials activities
for ADVEXIN gene therapy, the responsibility for which we
assumed in the third quarter of 2001 under the terms of the
restructuring of our collaboration with Aventis.

Amortization of Deferred
Compensation.Amortization of deferred
stock compensation was $1.4 million in 2002 and
$1.7 million in 2001. This 18% decrease was due primarily
to deferred compensation for certain options becoming fully
amortized during 2002. For options currently outstanding, we
expect to record amortization expense for deferred compensation
of $965,000 during 2003 and $11,000 during 2004, after which
time deferred compensation for options currently outstanding
becomes fully amortized. The amount of deferred compensation
expense to be recorded in future periods may decrease if
unvested options for which deferred compensation has been
recorded are subsequently forfeited or may increase if
additional options are issued at prices below the deemed fair
value of the common stock.

Interest Income and Interest
Expense.Interest income was $596,000
in 2002 and $1.4 million in 2001. This 57% decrease was due
to lower average cash balances and interest rates during 2002
compared to 2001. Interest expense was $803,000 in 2002 and
$936,000 in 2001. This 14% decrease was due primarily to lower
average principal balances outstanding under mortgage notes
payable and capital leases as principal was amortized through
normal debt service and lease payments.

Other Income.Other
income was $1.1 million in 2002 compared to $871,000 in
2001. This 26% increase was due to 2002 being the first full
year in which we earned rental income related to our sublease of
research laboratories in our facilities to M. D. Anderson Cancer
Center.



| |                                                                     
| | --------------------------------------------------------------------
| | Comparison of Six-Month Periods Ended
    December 31, 2001 and 2000



| |         
| | --------
| | Revenues

Revenue from
Collaborations.Collaborative research
and development revenues from Aventis were zero for the
six-month period ended December 31, 2001 and
$3.0 million for the six-month period ended
December 31, 2000. This decrease was due to the
restructuring of our collaboration with Aventis, which resulted
in our not receiving payments from Aventis subsequent to
December 31, 2000, for early-stage research and development
related to p53-based gene therapy products. Prior to this
restructuring, we earned revenue for the early-stage research
and development we performed under our collaboration agreements
with Aventis.

Revenue from Product Sales to
Affiliate.Revenues from product sales
to Aventis were zero for the six-month period ended
December 31, 2001 and $1.5 million for the six-month
period ended December 31, 2000. This decrease was due to
the restructuring of our collaboration with Aventis, which
resulted in no product sales subsequent to December 31,
2000. The restructuring eliminated our product sales to Aventis
since we are using the product internally for the future
development of ADVEXIN gene therapy. We do not expect to
generate revenues from the commercial sale of products in the
foreseeable future, and we may never generate revenues from the
sale of products.

Other Revenue.Other
revenue was $298,000 for the six-month period ended
December 31, 2001 and $391,000 for the six-month period
ended December 31, 2000. This decrease was due to a decline
in amounts earned under research grants from U.S. Government
agencies and contract manufacturing work for third parties.



| |                   
| | ------------------
| | Costs and Expenses

Cost of Product
Sales.Cost of product sales was zero
for the six-month period ended December 31, 2001 and
$2.5 million for the six-month period ended
December 31, 2000. This decrease was due to the
restructuring of our collaboration with Aventis, which resulted
in no product sales subsequent to December 31, 2000,
thereby eliminating our cost of product sales.

30



---



##### Table of Contents



Research and
Development.Research and development
expenses, excluding amortization of deferred stock compensation
of $229,000 for the six-month period ended December 31,
2001 and $209,000 for the six-month period ended
December 31, 2000, were $9.8 million for the six-month
period ended December 31, 2001, and $4.9 million for the
six-month period ended December 31, 2000. The 100% increase
in 2001 compared to 2000 was primarily due to our assumption of
responsibility for conducting, managing and funding the
Phase 2 and Phase 3 clinical trials activities for
ADVEXIN gene therapy under the terms of the restructuring of our
collaboration with Aventis.

General and
Administrative.General and
administrative expenses, excluding amortization of deferred
stock compensation of $570,000 for the six-month period ended
December 31, 2001 and $537,000 for the six-month period
ended December 31, 2000, were $3.0 million in 2001 and
$1.5 million in 2000. The 100% increase in 2001 was due
primarily to the additional, ongoing costs associated with
operating as a public company, subsequent to our initial public
offering in October 2000, and the cost of providing
administrative support for our conduct and management of the
Phase 2 and Phase 3 clinical trials activities for
ADVEXIN gene therapy, the responsibility for which we assumed
under the terms of the restructuring of our collaboration with
Aventis.

Amortization of Deferred
Compensation.Amortization of deferred
stock compensation was $799,000 for the six-month period ended
December 31, 2001 and $746,000 for the six-month period
ended December 31, 2000. The 7% increase in 2001 was due
primarily to deferred compensation arising from the issuance to
an officer in April 2001 of an option to purchase shares of
our common stock.

Interest Income and Interest
Expense.Interest income was $912,000
for the six-month period ended December 31, 2001 and
$783,000 for the six-month period ended December 31, 2000.
The 16% increase was primarily due to higher average cash and
investment balances in 2001 on which interest was earned as a
result of our initial public offering in October 2000. Interest
expense was $467,000 for the six-month period ended
December 31, 2001 and $380,000 for the six-month period
ended December 31, 2000. The 23% increase in 2001 was
primarily due to higher balances under notes payable in 2001
compared to 2000 as a result of borrowings to finance tenant
improvements to our facility related to our sublease of space to
M. D. Anderson Cancer Center.

Other Income.Other
income was $518,000 for the six-month period ended
December 31, 2001 compared to zero for the six-month period
ended December 31, 2000 due to 2001 being the first year in
which we earned rental income related to our sublease of
research laboratories in our facilities to M. D. Anderson Cancer
Center.



| |                                                            
| | -----------------------------------------------------------
| | Comparison of Fiscal Years Ended June 30,
    2001 and 2000



| |         
| | --------
| | Revenues

Revenue from
Collaborations.Collaborative research
and development revenues from Aventis were $3.0 million in
2001 and $6.2 million in 2000. This 51% decrease was
primarily due to the restructuring of our collaboration with
Aventis, which resulted in our not receiving payments from
Aventis for early-stage research and development related to
p53-based gene therapy products subsequent to December 31,
2000. Prior to this restructuring, we earned revenue for the
early-stage research and development we performed under our
collaboration agreements with Aventis.

Revenue from Product Sales to
Affiliate.Revenues from product sales
to Aventis were $1.5 million in 2001 and $2.1 in 2000. This
31% decrease occurred because there were no product sales
subsequent to December 31, 2000, due to the restructuring
of our collaboration with Aventis. The restructuring eliminated
our need to sell product to Aventis since we are using the
product internally for the future development of ADVEXIN gene
therapy.

Other Revenue.Other
revenue was $684,000 in 2001 and $97,000 in 2000. This increase
was due to funding received under research grants from U.S.
Government agencies and contract manufacturing work for third
parties.

31



---



##### Table of Contents





| |                   
| | ------------------
| | Costs and Expenses

Cost of Product
Sales.Cost of product sales was
$2.5 million in 2001 and $1.5 million in 2000. This
67% increase was due to a reduction in the number of batches of
clinical material in production during the quarter ended
December 31, 2000, which resulted in an increase in the
amount of the costs of our manufacturing operations that were
expensed as incurred instead of capitalized as part of
inventory. This situation did not continue subsequent to
December 31, 2000, due to the restructuring of the Aventis
collaboration that ended sales of clinical materials to Aventis,
thereby eliminating our cost of product sales.

Research and
Development.Research and development
expenses, excluding amortization of deferred stock compensation
of $442,000 in 2001 and zero in 2000, were $14.6 million in
2001 and $10.1 million in 2000. This 45% increase was
primarily due to (1) increased activity related to the
development of INGN 241 and (2) expenses associated with
the restructuring of the Aventis collaboration, including
(a) $826,000 related to the write-off of accounts
receivable, inventory and deferred revenue,
(b) $2.2 million related to the assumption of
responsibility for Phase 2 and 3 clinical trials for
ADVEXIN gene therapy and (c) no costs being capitalized as
inventory subsequent to December 31, 2000, as a result of
the Aventis collaboration restructuring, which eliminated future
inventory sales to Aventis. These increases were offset by a
decreased level of early-stage research and development
performed by us prior to the restructuring of the Aventis
agreement relative to products based on the p53 gene, as
such products had evolved into later-stage development, which
Aventis performed at that time prior to restructuring of that
collaboration.

General and
Administrative.General and
administrative expenses, excluding amortization of deferred
stock compensation of $1.1 million in 2001 and
$2.1 million in 2000, were $3.8 million in 2001 and
$2.6 million in 2000. This 42% increase was due primarily
to the additional, ongoing costs associated with operating as a
public company subsequent to our initial public offering in
October 2000 and costs associated with the Aventis
collaboration restructuring.

Amortization of Deferred
Compensation.Amortization of deferred
stock compensation was $1.6 million in 2001 and
$2.1 million in 2000. This 23% decrease was due primarily
to 2000 including a one-time compensation charge related to the
accelerated vesting of options held by a member of our Board of
Directors concurrent with the individuals resignation from
our Board of Directors.

Interest Income and Interest
Expense.Interest income was
$1.2 million in 2001 and $722,000 in 2000. This 70%
increase was primarily due to higher average cash and investment
balances in 2001 on which interest was earned as a result of our
initial public offering in October 2000. Interest expense
was $849,000 in 2001 and $582,000 in 2000. This 46% increase was
primarily due to balances under notes payable to finance our new
facilities and equipment being outstanding for all of 2001 as
compared to being outstanding for only a portion of 2000.

Other Income.Other
income was $354,000 in 2001 and zero in 2000. This increase was
due to 2001 being the first year in which we earned rental
income related to our sublease to M. D. Anderson
Cancer Center of research laboratories in our facilities.

Liquidity and Capital Resources

We have incurred annual operating losses since
our inception, and at December 31, 2002, we had an
accumulated deficit of $73.6 million. Since inception
through December 31, 2002, we have financed our operations
primarily using $49.7 million of collaborative research and
development payments from Aventis, $32.2 million of net
proceeds from our initial public offering in October 2000,
$39.4 million of private equity sales to Aventis,
$14.6 million of private equity sales, net of offering
costs, to others, $7.5 million of sales of ADVEXIN gene
therapy product to Aventis for use in later-stage clinical
trials, $9.2 million in mortgage financing from banks for
our facilities, $4.3 million in leases from commercial
leasing companies to acquire equipment pledged as collateral for
those leases and $5.7 million from interest income earned
on cash and short- and long-term investments.

At December 31, 2002, we had cash and
short-term investments of $23.5 million, compared with
$48.8 million at December 31, 2001. This decrease was
primarily a result of the use of cash to fund our

32



---



##### Table of Contents



operations. For at least the next two years, we
expect to focus our activities primarily on conducting Phase 3
clinical trials, conducting data analysis, preparing regulatory
documentation including FDA submissions and conducting
pre-marketing activities for ADVEXIN gene therapy. We also
expect to continue our research and development of various other
gene therapy technologies. The majority of our expenditures over
this two-year period will most likely relate to the clinical
trials of ADVEXIN gene therapy. These activities may increase
the rate at which we use cash in the future as compared to the
cash we used for operating activities during the year ended
December 31, 2002. We believe our existing working capital
can fund our operations for the next fifteen to eighteen months,
although unforeseen events could shorten that time period. We
are taking measures to reduce the amount of cash used in our
operating activities. Our existing resources may not be
sufficient to support the commercial introduction of any of our
product candidates. We may need to raise additional funds
through public or private equity offerings, debt financings or
additional corporate collaboration and licensing arrangements.
We do not know whether such additional financing will be
available when needed, or on terms favorable to us or our
stockholders.


Net cash used in operating activities was
$23.6 million for the year ended December 31, 2002,
compared with $17.4 million for the year ended
December 31, 2001. In general, this increase in cash used
was due to our having responsibility for conducting the
Phase 2 and Phase 3 clinical trials for ADVEXIN gene
therapy throughout 2002 whereas we did not have this
responsibility in 2001 until June of that year. Specifically,
the increase in cash used was primarily the result of a higher
net loss in 2002 compared to 2001, after considering adjustments
for depreciation and compensation related to the issuance of
stock options, offset primarily by (1) a decrease in
receivables and inventory that was smaller in 2002 than in 2001
due to the primary activity in these accounts in 2001 being
related to the restructuring of the Aventis collaboration in
2001, (2) a decrease in accounts payable and accrued
liabilities in 2002 compared to an increased in these accounts
in 2001 because the 2001 increase included $2.0 million
related to expenses we agreed to pay Aventis in connection with
the restructuring of the Aventis collaboration in 2001, and
(3) an increase in deferred revenue in 2002 compared to a
decrease in this amount in 2001 due to (a) the deferral of
the recognition of income under the lease of space to
M. D. Anderson Cancer Center, which was in effect for
the entire 2002 period but for only a portion of the 2001 period
and (b) a decrease in deferred revenue in 2001 relating to
the earning of revenue on sales of inventory to Aventis, an
activity that no longer exists due to the restructuring of the
Aventis collaboration in June 2001.

Net cash provided by investing activities was
$11.3 million for the year ended December 31, 2002,
compared to net cash provided by investing activities of
$45.6 million for the year ended December 31, 2001.
The change in the amounts of purchases and maturities of
short-term investments 2002 compared to 2001 was due to a
significant portion of our investment activity in the 2001
period being in short-term investments, followed by a period
subsequent to September 11, 2001, during which we
concentrated our investments in cash and cash equivalents, which
was then followed in the 2002 period by more investments in
short-term securities. The costs associated with purchases of
property and equipment declined in 2002 compared to 2001 because
2001 included costs related to the completion of tenant
improvements to the space leased to M. D. Anderson Cancer
Center, for which there were no similar costs in 2002. While we
have no obligations at this time to purchase significant amounts
of additional property or equipment, our needs may change. It
may be necessary for us to purchase larger amounts of property
and equipment to support our clinical programs and other
research, development and manufacturing activities. We may need
to obtain debt or lease financing to facilitate such purchases.
If that financing is not available, we may need to use our
existing resources to fund those purchases, which could result
in a reduction in the cash, cash equivalents and short-term
investments available to fund operating activities.

Net cash used in financing activities was
$1.6 million for the year ended December 31, 2002, and
net cash provided by financing activities was $25.3 million
for the year ended December 31, 2001. This change between
periods is due to the 2001 period including the receipt of
proceeds from (1) the purchase of preferred stock by
Aventis in connection with the restructuring of our
collaboration agreement with them and (2) a note payable
used to finance tenant improvements for the lease of space to
M. D. Anderson Cancer Center, whereas there were no
similar events in 2002. Offsetting these items were higher
principal payments under notes payable and capital lease
obligations in 2002 compared to 2001 due to debt service
payments on the note payable for tenant

33



---



##### Table of Contents



improvements being made for all of 2002, but for
only a portion of 2001, and a larger portion of debt service
payments on all mortgage notes and capital lease obligations
applying to principal as the principal balances under these
obligations continue to be amortized.


We have an ongoing agreement that began in 2002
with VirRx, Inc. to purchase shares of VirRxs
Series A Preferred Stock. We purchased $525,000 of this
stock for cash during 2002. We have agreed to purchase an
additional $150,000 of this stock for cash on the first day of
each quarter through January 1, 2006. VirRx is required to
use the proceeds from these stock sales in accordance with the
terms of a collaboration and license agreement between VirRx and
us for the development of VirRxs technologies. We may
unilaterally terminate this collaboration and license agreement
with 90 days prior notice after March 7, 2003, which
would also terminate our requirement to make any additional
stock purchases. Provided the collaboration and license
agreement remains in place, we will make additional milestone
stock purchases, either for cash or through the issuance of our
common stock, upon the completion of Phase 1, Phase 2
and Phase 3 clinical trials involving technologies licensed
under this agreement and we will make a $5.0 million cash
milestone payment to VirRx, for which we receive no VirRx stock,
upon FDA approval of a biologics license application involving
these technologies. To the extent we have already made cash
milestone payments, we may receive a credit of 50% of the Phase
2 clinical trial milestone payments and 25% of the Phase 3
clinical trial milestone payments against this $5.0 million
cash milestone payment. The additional milestone stock purchases
and cash payment are not anticipated to be required in the near
future. We have an option to purchase all outstanding shares of
VirRx at any time until March 2007.

We have fixed debt service and lease payment
obligations under notes payable and capital leases for which the
liability is reflected on our balance sheet. We used the
proceeds from these notes payable and leases to finance
facilities and equipment. Aggregate payments due under these
obligations are as follows (in thousands):

|                                                                                                               |                                                                           |  |        |        |  
|-------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- |  | ------ | ------ | -
|Total debt service and lease payments due
    during the year ending December 31:                              |                                                                           |  |        |       
|                                                                                                               | 2003                                                                      |  | $      | 2,173  |  
|                                                                                                               | 2004                                                                      |  |        | 1,395  |  
|                                                                                                               | 2005                                                                      |  |        | 1,268  |  
|                                                                                                               | 2006                                                                      |  |        | 842    |  
|                                                                                                               | 2007                                                                      |  |        | 537    |  
|Thereafter                                                                                                     |                                                                           |  | 9,133  |       
|                                                                                                               |                                                                           |  |        |       
|Total debt service and lease payments                                                                          |                                                                           |  | 15,348 |       
|                                                                                                               | Less portion representing interest                                        |  |        | (6,326 | )
|                                                                                                               |                                                                           |  |        |       
|                                                                                                               | Total principal balance at December 31, 2002                              |  | $      | 9,022  |  
|                                                                                                               |                                                                           |  |        |       
|Principal balance presented on the
    December 31, 2002 balance sheet as liabilities in these
    categories: |                                                                           |  |        |       
|                                                                                                               | Current portion of obligations under capital
    leases and notes payable |  | $      | 1,587  |  
|                                                                                                               | Capital lease obligations, net of current portion                         |  |        | 125    |  
|                                                                                                               | Notes payable, net of current portion                                     |  |        | 7,310  |  
|                                                                                                               |                                                                           |  |        |       
|                                                                                                               | Total principal balance at December 31, 2002                              |  | $      | 9,022  |  
|                                                                                                               |                                                                           |  |        |       

We have a fixed rent obligation under a ground
lease for the land on which we built our facilities. Since this
is an operating lease, there is no liability reflected on our
balance sheet for this item, which is in accordance with
generally accepted accounting principles. We make total annual
rent payments of $144,000 under this lease which will continue
until the expiration of the initial term of this lease in
September 2026. We have other operating leases expiring in 2002
with significantly smaller rent payments that we also account for

34



---



##### Table of Contents



as operating leases. Future annual rental
payments due under all operating leases are as follows (in
thousands):


|                                                        |            |   |       |       | 
|------------------------------------------------------- | ---------- | - | ----- | ----- | 
|Year ending December 31,                                |            |   |       |      
|                                                        | 2003       |   | $     | 279   | 
|                                                        | 2004       |   |       | 281   | 
|                                                        | 2005       |   |       | 202   | 
|                                                        | 2006       |   |       | 144   | 
|                                                        | 2007       |   |       | 144   | 
|                                                        | Thereafter |   |       | 2,707 | 
|                                                        |            |   |       |      
|Total minimum lease payments under operating
    leases |            | $ | 3,757 |      
|                                                        |            |   |       |      

In the normal course of business, we enter into
various long-term agreements with vendors to provide services to
us. Some of these agreements require up-front payment prior to
services being rendered, some require periodic monthly payments
and some provide for the vendor to bill us for their services as
they are rendered. In substantially all cases, we may cancel
these agreements at any time with minimal or no penalty and pay
the vendor only for services actually rendered. Regardless of
the timing of the payments under these agreements, we record the
expenses incurred in the periods in which the services are
rendered.

We pay consulting fees of approximately $175,000
per annum to a company that is owned by the Chairman of our
Board of Directors and that formerly employed one of our
directors. We are obligated to continue paying this fee until we
terminate the services of that company at our option.

We have a consulting agreement with an individual
primarily responsible for the creation of the technology upon
which ADVEXIN gene therapy is based, who is also a stockholder
of ours. This agreement provides for payments of approximately
$182,000 per annum until September 30, 2003, and $200,000
per annum thereafter through the end of its term on
September 30, 2009, with such future payments subject to
adjustment for inflation. We may terminate this agreement at our
option upon one years advance notice. Had we terminated
this agreement as of December 31, 2002, we would have been
obligated to make final payments to this individual totaling
$186,000.



| |                                                                     
| | --------------------------------------------------------------------
| | Comparison of Six-Month Periods Ended
    December 31, 2001 and 2000

At December 31, 2001, we had cash and
short-term investments of approximately $48.8 million,
compared with $36.4 million at December 31, 2000. Net
cash used by operating activities was $10.4 million and
$1.7 million for the six-month period ended
December 31, 2001 and the six-month period ended
December 31, 2000, respectively. This increase in cash used
by operating activities was primarily due to a higher net loss
from operations and payment of accrued liabilities, offset
partially by a smaller increase in accounts receivable and the
absence of a decrease in inventory during 2001 as compared to
2000. The payment of accrued liabilities was higher due to the
increased level of activity associates with our Phase 3
clinical trials of ADVEXIN gene therapy. The smaller increase in
accounts receivable and the absence of the decrease in inventory
was due to the elimination of sales of ADVEXIN gene therapy to
Aventis as a result of the restructuring of our collaboration
with them.

Net cash provided by investing activities was
$9.2 million for the six-month period ended
December 31, 2001, and net cash used in investing
activities was $30.0 million for the six-month period ended
December 31, 2000. During the six-month period ended
December 31, 2000, we invested a portion of our cash in
short-term investments with maturities in excess of
90 days. During the six-month period ended
December 31, 2001, we modified our investment policy and
concentrated our investing activities in instruments with
maturities shorter than 90 days. This change in policy
resulted in a decrease in cash used by investing activities. We
also purchased less property and equipment in the 2001 period
compared to the 2000 period since the 2000 period included our
activities related to the finish-out of a portion of our
facilities for lease to M. D. Anderson Cancer Center.

35



---



##### Table of Contents



Net cash provided by financing activities was
$24.3 million for the six-month period ended
December 31, 2001 and $34.6 million for the six-month
period ended December 31, 2000. This decline was primarily
due to the proceeds from our initial public offering of common
stock in October 2000 being greater than the proceeds from our
sale of preferred stock to Aventis in July 2001, and a decline
in the amount of new notes payable in 2001 compared to 2000 due
to the leasehold improvements related to our sublease of space
to M. D. Anderson Cancer Center being completed and
all financing related thereto in place in early 2001. At
December 31, 2001, we had $8.8 million outstanding
under notes payable for our facilities and $1.8 million
outstanding under capital leases to finance the purchase of
equipment.



| |                                                            
| | -----------------------------------------------------------
| | Comparison of Fiscal Years Ended June 30,
    2001 and 2000

At June 30, 2001, we had cash and short-term
investments of approximately $35.0 million, compared with
$11.8 million at June 30, 2000. Net cash used by
operating activities was $8.8 million and $5.5 million
for the years ended June 30, 2001 and 2000, respectively.
This increase in cash used by operating activities was primarily
due to a higher net loss from operations and a decrease in
deferred revenue, offset partially by an increase in accrued
liabilities. Deferred revenue decreased as a result of no longer
receiving collaborative research revenue from Aventis as a
result of the restructuring of our collaboration agreement with
them. The increase in accrued liabilities arose from our
assumption of responsibility for the Phase 3 clinical
trials for ADVEXIN gene therapy under that collaboration
restructuring.

Net cash provided by investing activities was
$14.4 million for the year ended June 30, 2001, and
$2.6 million for the year ended June 30, 2000. This
change is primarily due to a higher level of purchases of
short-term investments due to the availability of funds from our
initial public offering in October 2000.

Net cash provided by financing activities was
$35.6 million and $2.6 million for the years ended
June 30, 2001 and 2000, respectively. This was primarily
due to the receipt of proceeds from our initial public offering
of common stock in October 2000 offset by a decline in the
amount of new notes payable and capital lease borrowings since
our new facilities and related equipment were complete,
outfitted and initially financed in 2000. At June 30, 2001,
we had $9.1 million outstanding under notes payable for our
facilities and $2.1 million outstanding under capital
leases to finance the purchase of equipment.

Quarterly Results of Operations

The following table sets forth certain unaudited
quarterly financial data for the years ended December 31,
2001 and 2002. This information has been prepared on the same
basis as the Consolidated Financial Statements and all necessary
adjustments have been included in the amounts stated below to
present fairly the

36



---



##### Table of Contents



selected quarterly information when read in
conjunction with the Consolidated Financial Statements and Notes
thereto. Historical quarterly financial results and trends may
not be indicative of future results.


|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |       | 
|----------------------------------------------------------------- | -------------------------- | -------------------------------------- | ------ | -------- |  | --------- | ------ | -------- |  | --------- | ------ | -------- |  | --------- | ------ | -------- |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                  |                            |                                       
|                                                                  |                            | Three Months Ended                    
|                                                                  |                            |                                       
|                                                                  |                            | March 31,                              |        | June 30, |  | Sept. 30, |        | Dec. 31, |  | March 31, |        | June 30, |  | Sept. 30, |        | Dec. 31,
|                                                                  |                            | 2001                                   |        | 2001     |  | 2001      |        | 2001     |  | 2002      |        | 2002     |  | 2002      |        | 2002    
|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |         
|                                                                  |                            |                                       
|                                                                  |                            | (Unaudited)                           
|                                                                  |                            |                                       
|                                                                  |                            | In thousands, except per share amounts
|Statement of Operations Data:                                     |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      
|Contract services, grant and other revenue                        |                            |                                        | 24     |          |  |           | 269    |          |  |           | 15     |          |  |           | 283    |          |  |   | 229    |       |  |   | 322    |       |  |   | 453    |       |  |   | 170    |      
|Operating expenses:                                               |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      
|                                                                  | Research and development   |                                        |        | 3,784    |  |           |        | 6,077    |  |           |        | 5,045    |  |           |        | 5,018    |  |   |        | 6,699 |  |   |        | 5,805 |  |   |        | 4,633 |  |   |        | 4,375 | 
|                                                                  | General and administrative |                                        |        | 1,204    |  |           |        | 1,631    |  |           |        | 1,685    |  |           |        | 1,841    |  |   |        | 1,755 |  |   |        | 1,679 |  |   |        | 1,729 |  |   |        | 1,559 | 
|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      
|Loss from operations                                              |                            |                                        | (4,964 | )        |  |           | (7,439 | )        |  |           | (6,715 | )        |  |           | (6,576 | )        |  |   | (8,225 | )     |  |   | (7,162 | )     |  |   | (5,909 | )     |  |   | (5,764 | )    
|Interest income (expense), net                                    |                            |                                        | (116   | )        |  |           | 95     |          |  |           | 375    |          |  |           | 70     |          |  |   | (28    | )     |  |   | (38    | )     |  |   | (45    | )     |  |   | (96    | )    
|Other income                                                      |                            |                                        | 162    |          |  |           | 191    |          |  |           | 237    |          |  |           | 281    |          |  |   | 316    |       |  |   | 333    |       |  |   | 261    |       |  |   | 229    |      
|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      
|Net loss                                                          |                            | $                                      | (4,918 | )        |  | $         | (7,153 | )        |  | $         | (6,103 | )        |  | $         | (6,225 | )        |  | $ | (7,937 | )     |  | $ | (6,867 | )     |  | $ | (5,693 | )     |  | $ | (5,631 | )    
|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      
|Basic and diluted net Loss per share                              |                            | $                                      | (0.23  | )        |  | $         | (0.34  | )        |  | $         | (0.28  | )        |  | $         | (0.29  | )        |  | $ | (0.37  | )     |  | $ | (0.32  | )     |  | $ | (0.27  | )     |  | $ | (0.26  | )    
|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      
|Shares used in computing basic and diluted net
    loss per share |                            |                                        | 21,268 |          |  |           | 21,335 |          |  |           | 21,435 |          |  |           | 21,445 |          |  |   | 21,450 |       |  |   | 21,463 |       |  |   | 21,465 |       |  |   | 21,471 |      
|                                                                  |                            |                                        |        |          |  |           |        |          |  |           |        |          |  |           |        |          |  |   |        |       |  |   |        |       |  |   |        |       |  |   |        |      

Pre-Approval of Non-Audit Services

Pursuant to Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing the approval of non-audit services approved by the
Audit Committee of our Board of Directors to be performed by
Ernst & Young LLP, our independent auditors. Non-audit
services are defined as services other than those provided in
connection with an audit or a review of our financial
statements. Except as set forth below, the services approved by
the Audit Committee are each considered by the Audit Committee
to be audit-related services that are closely related to the
financial audit process. Each of the audit-related services was
pre-approved by the Audit Committee.

The Audit Committee has also pre-approved
additional engagements of Ernst & Young LLP for the
non-audit services of preparation of state and federal tax
returns.

Factors Affecting Future Operating
Results

We
may encounter delays or difficulties in clinical trials for our
product candidates, which may delay or preclude regulatory
approval of some or all of our product candidates.

In order to commercialize our product candidates,
we must obtain regulatory approvals. Satisfaction of regulatory
requirements typically takes many years, and involves compliance
with requirements covering research and development, testing,
manufacturing, quality control, labeling and promotion of drugs
for human use. To obtain regulatory approvals, we must, among
other requirements, complete clinical trials demonstrating that
our product candidates are safe and effective for a particular
cancer type or other disease.

We are conducting Phase 3 clinical trials of our
lead product candidate, ADVEXIN® gene therapy, for the
treatment of head and neck cancer, have completed a Phase 2
clinical trial of ADVEXIN gene therapy for the treatment of
non-small cell lung cancer, are conducting a Phase 2
clinical trial of ADVEXIN gene therapy for the treatment of
breast cancer and are conducting several Phase 1 and
Phase 2 clinical trials of ADVEXIN gene therapy for other
cancer types. Current or future clinical trials may demonstrate
that ADVEXIN gene therapy is neither safe nor effective.

37



---



##### Table of Contents



While we are conducting a Phase 1/2 clinical
trial of INGN 241, a product candidate based on the mda-7
gene, our most significant clinical trial activity and
experience has been with ADVEXIN gene therapy. We will need to
continue conducting significant research and animal testing,
referred to as pre-clinical testing, to support performing
clinical trials for our other gene therapy product candidates.
It will take us many years to complete pre-clinical testing and
clinical trials, and failure could occur at any stage of
testing. Current or future clinical trials may demonstrate that
INGN 241 or our other product candidates are neither safe
nor effective.

Any delays or difficulties we encounter in our
pre-clinical research and clinical trials, in particular the
Phase 3 clinical trials of ADVEXIN gene therapy for the
treatment of head and neck cancer, may delay or preclude
regulatory approval. Our product development costs will increase
if we experience delays in testing or regulatory approvals or if
we need to perform more or larger clinical trials than planned.
Any delay or preclusion could also delay or preclude the
commercialization of ADVEXIN gene therapy or any other product
candidates. In addition, we or the FDA might delay or halt any
of our clinical trials of a product candidate at any time for
various reasons, including:



| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | the failure of the product candidate to be more
    effective than current therapies;                                     
|
| |  | the presence of unforeseen adverse side effects
    of a product candidate, including its delivery system;                
|
| |  | a longer than expected time required to determine
    whether or not a product candidate is effective;                    
|
| |  | the death of patients during a clinical trial,
    even though the product candidate may not have caused those
    deaths;
|
| |  | the failure to enroll a sufficient number of
    patients in our clinical trials;                                         
|
| |  | the inability to produce sufficient quantities of
    a product candidate to complete the trials; or                      
|
| |  | the inability to commit the necessary resources
    to fund the clinical trials.                                          

We may encounter delays or rejections in the
regulatory approval process because of additional government
regulation from future legislation or administrative action or
changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Failure to comply
with applicable FDA or other applicable regulatory requirements
may result in criminal prosecution, civil penalties, recall or
seizure of products, total or partial suspension of production
or injunction, as well as other regulatory action against our
product candidates or us.

Outside the United States, our ability to market
a product is contingent upon receiving clearances from the
appropriate regulatory authorities. This foreign regulatory
approval process includes all of the risks associated with FDA
clearance described above.

We
have a history of operating losses and expect to incur
significant additional operating losses.

We have generated operating losses since we began
operations in June 1993. As of December 31, 2002, we had an
accumulated deficit of approximately $73.6 million. We expect to
incur substantial additional operating expenses and losses over
the next several years as our research, development,
pre-clinical testing and clinical trial activities increase. We
have no products that have generated any commercial revenue.
Presently, we earn minimal revenue from contract services
activities, grants, interest income and rent from the lease of a
portion of our facilities to M. D. Anderson Cancer
Center. Prior to December 31, 2000, we earned revenue from
Aventis under collaborative agreements for research and
development and sales of ADVEXIN gene therapy for use in
Aventis clinical trials, which are revenues we no longer
receive. We do not expect to generate revenues from the
commercial sale of products in the foreseeable future, and we
may never generate revenues from the commercial sale of products.

If we continue to incur operating losses for a
period longer than we anticipate and fail to obtain the capital
necessary to fund our operations, we will be unable to advance
our development program and complete our clinical
trials.

38



---



##### Table of Contents



Developing a new drug and conducting clinical
trials for multiple disease indications is expensive. We expect
that we will fund our operations over the next fifteen to
eighteen months with our current working capital, resulting
primarily from the net proceeds from our initial public offering
in October 2000, the sale of Series A Non-Voting
Convertible Preferred Stock to Aventis in June 2001, income from
contract services and research grants, debt financing of
equipment acquisitions, the lease of a portion of our facilities
to M. D. Anderson Cancer Center and interest on
invested funds. We may need to raise additional capital sooner,
however, due to a number of factors, including:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | an acceleration of the number, size or complexity
    of our clinical trials;                              
|
| |  | slower than expected progress in developing
    ADVEXIN gene therapy, INGN 241 or other product candidates;
|
| |  | higher than expected costs to obtain regulatory
    approvals;                                             
|
| |  | higher than expected costs to pursue our
    intellectual property strategy;                               
|
| |  | higher than expected costs to further develop our
    manufacturing capability;                            
|
| |  | higher than expected costs to develop our sales
    and marketing capability; and                          
|
| |  | slower than expected progress in reducing our
    operating costs.                                         

We do not know whether additional financing will
be available when needed, or on terms favorable to us or our
stockholders. We may need to raise any necessary funds through
public or private equity offerings, debt financings or
additional corporate collaboration and licensing arrangements.
To the extent we raise additional capital by issuing equity
securities, our stockholders will experience dilution. If we
raise funds through debt financings, we may become subject to
restrictive covenants. To the extent that we raise additional
funds through collaboration and licensing arrangements, we may
be required to relinquish some rights to our technologies or
product candidates, or grant licenses on terms that are not
favorable to us.

If we cannot maintain our corporate and
academic arrangements and enter into new arrangements, product
development could be delayed.

Our strategy for the research, development and
commercialization of our product candidates may require us to
enter into contractual arrangements with corporate
collaborators, academic institutions and others. We have entered
into sponsored research and/or collaborative arrangements with
several entities, including M. D. Anderson Cancer
Center, ICRT, the National Cancer Institute, VirRx and Corixa
Corporation. Our success depends upon our collaborative partners
performing their responsibilities under these arrangements. We
cannot control the amount and timing of resources our
collaborative partners devote to our research and testing
programs or product candidates, which can vary because of
factors unrelated to such programs or product candidates. These
relationships may in some cases be terminated at the discretion
of our collaborative partners with only limited notice to us. We
may not be able to maintain our existing arrangements, enter
into new arrangements or negotiate current or new arrangements
on acceptable terms, if at all. Some of our collaborative
partners may also be researching competing technologies
independently from us to treat the diseases targeted by our
collaborative programs.

If we are not able to create effective
collaborative marketing relationships, we may be unable to
market ADVEXIN gene therapy successfully or in a cost-effective
manner.

To effectively market our products, we will need
to develop sales, marketing and distribution capabilities. In
order to develop or otherwise obtain these capabilities, we may
have to enter into marketing, distribution or other similar
arrangements with third parties in order to successfully sell,
market and distribute our products. To the extent that we enter
into any such arrangements with third parties, our product
revenues are likely to be lower than if we directly marketed and
sold our products, and any revenues we receive will depend upon
the efforts of such third parties. We have no experience in
marketing or selling pharmaceutical products and we currently
have no sales, marketing or distribution capability. We may be
unable to develop sufficient sales, marketing and distribution
capabilities to successfully commercialize our products.

39



---



##### Table of Contents



Serious unwanted side effects attributable to
gene therapy may result in governmental authorities imposing
additional regulatory requirements or a negative public
perception of our products.

Serious unwanted side effects attributable to
treatment, which physicians classify as treatment-related
adverse events, occurring in the field of gene therapy may
result in greater governmental regulation and negative public
perception of our product candidates, as well as potential
regulatory delays relating to the testing or approval of our
product candidates. The FDA recently placed a clinical hold on
gene therapy clinical trials using retroviral vectors to
transduce hematopoietic stem cells after two participants in
such a trial for the X-linked form of severe combined immune
deficiency disease (X-SCID) being conducted in Europe developed
what appeared to be a leukemia-like illness. This clinical hold
requires a case-by-case review of the use of retroviral vectors
in these trials. We are not developing products using the
process used in those clinical trials, and we do not use
retroviral vectors in our ongoing clinical trials. We have
received no communications from the FDA to indicate this
clinical hold will affect our clinical trials, and we anticipate
no future negative effects on us from this event. Our
pharmacovigilance department monitors every patient in our
clinical trials for safety and reports all side effects to the
FDA and the National Institutes of Health according to
applicable regulations. We have witnessed no adverse effects in
our clinical trials that even remotely resemble what occurred in
the X-SCID trial. Due to the fundamental differences between
retrovirus vectors and the adenovirus vector employed in ADVEXIN
gene therapy, we believe the likelihood of our encountering an
event such as that experienced in the X-SCID trial is remote.

The United States Senate has held hearings
concerning the adequacy of regulatory oversight of gene therapy
clinical trials, as well as the adequacy of research subject
education and protection in clinical research in general, and to
determine whether additional legislation is required to protect
healthy volunteers and patients who participate in such clinical
trials. The Recombinant DNA Advisory Committee, or RAC, which
acts as an advisory body to the National Institutes of Health,
or NIH, has expanded its public role in evaluating important
public and ethical issues in gene therapy clinical trials.
Implementation of any additional review and reporting procedures
or other additional regulatory measures could increase the costs
of or prolong our product development efforts or clinical
trials. Implementation of any additional review and reporting
procedures or other additional regulatory measures could
increase the costs of or prolong our product development efforts
or clinical trials.

Following routine procedure, we report to the FDA
and other regulatory agencies serious adverse events that we
believe may be reasonably related to our gene therapy treatment.
Such serious adverse events, whether treatment-related or not,
could result in negative public perception of our gene therapy
treatment and require additional regulatory review or measures,
which could increase the cost of or prolong our clinical trials.

To date no governmental authority has approved
any gene therapy product for sale in the United States or
internationally. The commercial success of our products will
depend in part on public acceptance of the use of gene
therapies, which are a new type of disease treatment for the
prevention or treatment of human diseases. Public attitudes may
be influenced by claims that gene therapy is unsafe, and gene
therapy may not gain the acceptance of the public or the medical
community. Negative public reaction to gene therapy could also
result in greater government regulation and stricter clinical
trial oversight.

If we fail to adequately protect our
intellectual property rights, our competitors may be able to
take advantage of our research and development efforts to
develop competing drugs.

Our commercial success will depend in part on
obtaining patent protection for our products and other
technologies and successfully defending these patents against
third party challenges. Our patent position, like that of other
biotechnology and pharmaceutical companies, is highly uncertain.
One uncertainty is that the United States Patent and Trademark
Office, or PTO, or the courts, may deny or significantly narrow
claims made under patents or patent applications. This is
particularly true for patent applications or patents that
concern biotechnology and pharmaceutical technologies, such as
ours, since the PTO and the courts often consider these
technologies to involve unpredictable sciences. Another
uncertainty is that any patents that may be issued or licensed
to us may not provide any competitive advantage to us and they
may be successfully challenged, invalidated or circumvented in
the future. In addition, our competitors, many of which have
substantial resources and have made significant investments in
competing technologies, may seek to apply for

40



---



##### Table of Contents



and obtain patents that will prevent, limit or
interfere with our ability to make, use and sell our potential
products either in the United States or in international markets.


Our ability to develop and protect a competitive
position based on our biotechnological innovations, innovations
involving genes, gene therapy, viruses for delivering the genes
to cells, formulations, gene therapy delivery systems that do
not involve viruses, and the like, is particularly uncertain.
Due to the unpredictability of the biotechnological sciences,
the PTO, as well as patent offices in other jurisdictions, has
often required that patent applications concerning
biotechnology-related inventions be limited or narrowed
substantially to cover only the specific innovations exemplified
in the patent application, thereby limiting their scope of
protection against competitive challenges. Similarly, courts
have invalidated or significantly narrowed many key patents in
the biotechnology industry. Thus, even if we are able to obtain
patents that cover commercially significant innovations, our
patents may not be upheld or our patents may be substantially
narrowed.

Through our exclusive license from The University
of Texas System for technology developed at
M. D. Anderson Cancer Center, we have obtained and are
currently seeking further patent protection for adenoviral p53,
including ADVEXIN gene therapy, and its use in cancer therapy.
Further, the PTO issued us a United States patent for our
adenovirus production technology. We also control, through
licensing arrangements, four issued United States patents for
combination therapy involving the p53 gene and conventional
chemotherapy or radiation, one issued United States patent
covering the use of adenoviral p53 in cancer therapy, an
issued United States patent covering adenoviral p53 as a
product and an issued United States patent covering the core DNA
of adenoviral p53. Our competitors may challenge the
validity of one or more of our patents in the courts or through
an administrative procedure known as an interference. The courts
or the PTO may not uphold the validity of our patents, we may
not prevail in such interference proceedings regarding our
patents and none of our patents may give us a competitive
advantage.

We have been notified by the European Patent
Office, or EPO, that Schering-Plough has filed an opposition
against the issuance of our European patent directed to
combination therapy with p53 and conventional chemotherapy
and/or radiation. An opposition is an administrative proceeding
instituted by a third party and conducted by the EPO to
determine whether a patent should be maintained or revoked in
part or in whole, based on evidence brought forth by the party
opposing the patent. We expect that the EPO will hold an initial
oral proceeding to determine whether the patent should be
maintained in late 2003 or early 2004. Resolution of this
opposition will require that we expend time, effort and money.
If the party opposing the patent ultimately prevails in having
our European patent revoked in whole or in part then the scope
of our protection for our product in Europe will be reduced. We
would not expect, however, such a result to have a significant
impact on our commercialization efforts in Europe.

Third-party claims of infringement of
intellectual property could require us to spend time and money
to address the claims and could limit our intellectual property
rights.

The biotechnology and pharmaceutical industry has
been characterized by extensive litigation regarding patents and
other intellectual property rights, and companies have employed
intellectual property litigation to gain a competitive
advantage. We are aware of a number of issued patents and patent
applications that relate to gene therapy, the treatment of
cancer and the use of the p53 and other tumor suppressor genes.
Schering-Plough Corporation, including its subsidiary Canji,
Inc., controls various United States patent applications and a
European patent and applications, some of which are directed to
therapy using the p53 gene, and others to adenoviruses that
contain the p53 gene, or adenoviral p53, and to methods for
carrying out therapy using adenoviral p53. In addition,
Canji controls an issued United States patent and its
international counterparts, including a European patent,
involving a method of treating mammalian cancer cells lacking
normal p53 protein by introducing a p53 gene into the
cancer cell.

While we believe that our potential products do
not infringe any valid claim of the Canji p53 patents, Canji or
Schering-Plough could assert a claim against us. We may also
become subject to infringement claims or litigation arising out
of other patents and pending applications of our competitors, if
they issue, or additional interference proceedings declared by
the PTO to determine the priority of inventions. The defense and
prosecution of intellectual property suits, PTO interference
proceedings and related legal and administrative proceedings are
costly and time-consuming to pursue, and their outcome is
uncertain. Litigation may be

41



---



##### Table of Contents



necessary to enforce our issued patents, to
protect our trade secrets and know-how or to determine the
enforceability, scope and validity of the proprietary rights of
others. An adverse determination in litigation or interference
proceedings to which we may become a party could subject us to
significant liabilities, require us to obtain licenses from
third parties, or restrict or prevent us from selling our
products in certain markets. Although patent and intellectual
property disputes are often settled through licensing or similar
arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. Furthermore,
the necessary licenses may not be available to us on
satisfactory terms, if at all. In particular, if we were found
to infringe a valid claim of the Canji p53 issued United
States patent, our business could be materially harmed.


We are currently involved in opposing three
European patents in proceedings before the EPO, in which we are
seeking to have the EPO revoke three different European patents
owned or controlled by Canji. These European patents relate to
the use of a p53 gene, or the use of tumor suppressor
genes, in the preparation of therapeutic products. In one
opposition involving a European patent directed to the use of a
tumor suppressor gene, the EPO revoked the European patent in
its entirety. Canji has appealed this revocation. In the second
opposition, involving a patent directed to therapeutic and other
applications of the p53 gene that is owned by Johns Hopkins
and, we understand, controlled by Schering-Plough, the EPO
recently revoked the patent in its entirety. The patent owner
will have an opportunity to appeal this decision. In a third
case involving the use of a p53 gene, the European patent
at issue was upheld following an initial hearing. A second
hearing to determine whether this patent should be revoked will
be upcoming. If we do not ultimately prevail in one or more of
these oppositions, our competitors could seek to assert by means
of litigation any patent surviving opposition against European
commercial activities involving our potential products. If our
competitors are successful in any such litigation, it could have
a significant detrimental effect on our ability to commercialize
our potential commercial products in Europe.

Competition and technological change may make
our product candidates and technologies less attractive or
obsolete.

We compete with pharmaceutical and biotechnology
companies, including Canji, Inc., Genvec, Inc., Vical
Incorporated and Onyx Pharmaceuticals, Inc., which are pursuing
other forms of treatment for the diseases ADVEXIN gene therapy
and our other product candidates target. We also may face
competition from companies that may develop internally or
acquire competing technology from universities and other
research institutions. As these companies develop their
technologies, they may develop competitive positions that may
prevent or limit our product commercialization efforts.

Some of our competitors are established companies
with greater financial and other resources than ours. Other
companies may succeed in developing products earlier than we do,
obtaining FDA approval for products more rapidly than we do or
developing products that are more effective than our product
candidates. While we will seek to expand our technological
capabilities to remain competitive, research and development by
others may render our technology or product candidates obsolete
or non-competitive or result in treatments or cures superior to
any therapy developed by us.

Even if we receive regulatory approval to
market ADVEXIN gene therapy, INGN 241 or other product
candidates, we may not be able to commercialize them
profitably.

Our profitability will depend on the
markets acceptance of ADVEXIN gene therapy, INGN 241
and our other product candidates. The commercial success of our
product candidates will depend on whether:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | they are more effective than alternative
    treatments;                              
|
| |  | their side effects are acceptable to patients and
    doctors;                        
|
| |  | we produce and sell them at a profit; and                                             
|
| |  | we market ADVEXIN gene therapy, INGN 241 and
    other product candidates effectively.

42



---



##### Table of Contents



If we are unable to manufacture our products
in sufficient quantities or obtain regulatory approvals for our
manufacturing facility, or if our manufacturing process is found
to infringe a valid patented process of another company, then we
may be unable to meet demand for our products and lose potential
revenues.

The completion of our clinical trials and
commercialization of our product candidates requires access to,
or development of, facilities to manufacture a sufficient supply
of our product candidates. We use a manufacturing facility in
Houston, Texas, which we constructed and own, to manufacture
ADVEXIN gene therapy, INGN 241 and other product candidates
for currently planned clinical trials. This facility will be
used for the initial commercial launch of ADVEXIN gene therapy.
We have no experience manufacturing ADVEXIN gene therapy,
INGN 241 or any other product candidates in the volumes
that would be necessary to support commercial sales. If we are
unable to manufacture our product candidates in clinical or,
when necessary, commercial quantities, then we will need to rely
on third-party manufacturers to produce our products for
clinical and commercial purposes. These third-party
manufacturers must receive FDA approval before they can produce
clinical material or commercial product. Our products may be in
competition with other products for access to these facilities
and may be subject to delays in manufacture if third parties
give other products greater priority than ours. In addition, we
may not be able to enter into any necessary third-party
manufacturing arrangements on acceptable terms. There are very
few contract manufacturers who currently have the capability to
produce ADVEXIN gene therapy, INGN 241 or our other product
candidates, and the inability of any of these contract
manufacturers to deliver our required quantities of product
candidates timely and at commercially reasonable prices would
negatively affect our operations.

Before we can begin commercially manufacturing
ADVEXIN gene therapy, INGN 241 or any other product candidate,
we must obtain regulatory approval of our manufacturing facility
and process. Manufacturing of our product candidates for
clinical and commercial purposes must comply with CGMP and
foreign regulatory requirements. The CGMP requirements govern
quality control and documentation policies and procedures. In
complying with CGMP and foreign regulatory requirements, we will
be obligated to expend time, money and effort in production,
record keeping and quality control to assure that the product
meets applicable specifications and other requirements. We must
also pass a pre-approval inspection prior to FDA approval.

Our current manufacturing facilities have not yet
been subject to an FDA or other regulatory inspection. Failure
to pass a pre-approval inspection may significantly delay FDA
approval of our products. If we fail to comply with these
requirements, we would be subject to possible regulatory action
and may be limited in the jurisdictions in which we are
permitted to sell our products. Further, the FDA and foreign
regulatory authorities have the authority to perform unannounced
periodic inspections of our manufacturing facility to ensure
compliance with CGMP and foreign regulatory requirements. Our
facility in Houston, Texas is our only manufacturing facility.
If this facility were to incur significant damage or
destruction, then our ability to manufacture ADVEXIN gene
therapy or any other product candidates would be significantly
hampered and we would incur delays in our pre-clinical testing,
clinical trials and commercialization efforts.

Canji controls a United States patent and
corresponding international applications, including a European
counterpart, relating to the purification of viral or adenoviral
compositions. While we believe that our manufacturing process
does not infringe upon this patent, Canji could still assert a
claim against us. We may also become subject to infringement
claims or litigation if our manufacturing process infringes upon
other patents. The defense and prosecution of intellectual
property suits and related legal and administrative proceedings
are costly and time-consuming to pursue, and their outcome is
uncertain.

We rely on only one supplier for some of our
manufacturing materials. Any problems experienced by any such
supplier could negatively affect our operations.

We rely on third-party suppliers for some of the
materials used in the manufacturing of ADVEXIN gene therapy,
INGN 241 and our other product candidates. Some of these
materials are available from only one supplier or vendor. Any
significant problem that one of our sole source suppliers
experiences could result in a delay or interruption in the
supply of materials to us until that supplier cures the problem
or until we locate an alternative source of supply. Any delay or
interruption would likely lead to a delay or interruption in our
manufacturing operations, which could negatively affect our
operations.

43



---



##### Table of Contents



The CellCubeTM Module 100 bioreactor,
which Corning (Acton, MA) manufactures, and Benzonase®,
which EM Industries (Hawthorne, NY) manufactures, are currently
available only from these suppliers. Any significant
interruption in the supply of either of these items would
require a material change in our manufacturing process. We
maintain inventories of these items, but we do not have a supply
agreement with either manufacturer.

If product liability lawsuits are successfully
brought against us, we may incur substantial damages and demand
for the products may be reduced.

The testing and marketing of medical products is
subject to an inherent risk of product liability claims.
Regardless of their merit or eventual outcome, product liability
claims may result in:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | decreased demand for our product candidates;                 
|
| |  | injury to our reputation and significant media
    attention;
|
| |  | withdrawal of clinical trial volunteers;                     
|
| |  | costs of litigation; and                                     
|
| |  | substantial monetary awards to plaintiffs.                   

We currently maintain product liability insurance
with coverage of $5.0 million per occurrence with a
$15.0 million annual aggregate limit. This coverage may not
be sufficient to protect us fully against product liability
claims. We intend to expand our product liability insurance
coverage to include the sale of commercial products if we obtain
marketing approval for any of our product candidates. Our
inability to obtain sufficient product liability insurance at an
acceptable cost to protect against product liability claims
could prevent or limit the commercialization of our products.

We use hazardous materials in our business,
and any claims relating to improper handling, storage or
disposal of these materials could harm our business.

Our business involves the use of a broad range of
hazardous chemicals and materials. Environmental laws impose
stringent civil and criminal penalties for improper handling,
disposal and storage of these materials. In addition, in the
event of an improper or unauthorized release of, or exposure of
individuals to, hazardous materials, we could be subject to
civil damages due to personal injury or property damage caused
by the release or exposure. A failure to comply with
environmental laws could result in fines and the revocation of
environmental permits, which could prevent us from conducting
our business.

Our stock price may fluctuate
substantially.

The market price for our common stock will be
affected by a number of factors, including:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the announcement of new products or services by
    us or our competitors;                                                                                    
|
| |  | quarterly variations in our or our
    competitors results of operations;                                                                                    
|
| |  | failure to achieve operating results projected by
    securities analysts;                                                                                    
|
| |  | changes in earnings estimates or recommendations
    by securities analysts;                                                                                  
|
| |  | developments in our industry; and                                                                                                                             
|
| |  | general market conditions and other factors,
    including factors unrelated to our operating performance or the
    operating performance of our competitors.

In addition, stock prices for many companies in
the technology and emerging growth sectors have experienced wide
fluctuations that have often been unrelated to the operating
performance of such companies. Many factors may have a
significant adverse effect on the market price of our common
stock, including:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | results of our pre-clinical and clinical trials;                                                  
|
| |  | announcement of technological innovations or new
    commercial products by us or our competitors;

44



---



##### Table of Contents





| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | developments concerning proprietary rights,
    including patent and litigation matters;                                       
|
| |  | publicity regarding actual or potential results
    with respect to products under development by us or by our
    competitors;
|
| |  | regulatory developments; and                                                                                                   
|
| |  | quarterly fluctuations in our revenues and other
    financial results.                                                        

Any acquisition we might make may be costly
and difficult to integrate, may divert management resources or
dilute stockholder value.

As part of our business strategy, we may acquire
assets or businesses principally relating to or complementary to
our current operations, and we have in the past evaluated and
discussed such opportunities with interested parties. Any
acquisitions that we undertake will be accompanied by the risks
commonly encountered in business acquisitions. These risks
include, among other things:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | potential exposure to unknown liabilities of
    acquired companies;                               
|
| |  | the difficulty and expense of assimilating the
    operations and personnel of acquired businesses;
|
| |  | diversion of management time and attention and
    other resources;                                
|
| |  | loss of key employees and customers as a result
    of changes in management;                      
|
| |  | the incurrence of amortization expenses; and                                                       
|
| |  | possible dilution to our stockholders.                                                             

In addition, geographic distances may make the
integration of businesses more difficult. We may not be
successful in overcoming these risks or any other problems
encountered in connection with any acquisitions.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about
    Market Risk

Our exposure to market risk for changes in
interest rates relates primarily to our fixed rate long-term
debt and short-term investments in investment grade securities,
which consist primarily of federal and state government
obligations, commercial paper and corporate bonds. Investments
are classified as held-to-maturity and are carried at amortized
costs. We do not hedge interest rate exposure or invest in
derivative securities. A hypothetical 100-basis point decrease
in the interest rates of our investments at the investment
balances as of December 31, 2002 would decrease our
interest income by approximately $290,000.

At December 31, 2002, the fair value of our
fixed-rate debt approximated its carrying value based upon
discounted future cash flows using current market prices.




Item 8.     Consolidated
Financial Statements and Supplementary Data

The information required by this Item is set
forth in our Financial Statements and Notes thereto beginning at
page F-3 of this Report.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants
    on Accounting and Financial Disclosure

On March 6, 2002, we dismissed Arthur
Andersen LLP as our independent public accountants, effective
upon completion of Arthur Andersen LLPs services in
connection with the filing of our Transition Report on
Form 10-KT for the six-month transition period ended
December 31, 2001.

Arthur Andersen LLPs reports on our
financial statements for each of the years ended June 30,
2000 and 2001 and for the six-month transition period ended
December 31, 2001 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles.

The decision to change independent public
accountants was recommended by the Audit Committee of our Board
of Directors and was approved by our Board of Directors.

45



---



##### Table of Contents



During each of the two years ended June 30,
2000 and 2001 and for the six-month transition period ended
December 31, 2001, and through March 20, 2002, there
were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused it to make reference to the
subject matter of the disagreement in connection with its report.

During each of the two years ended June 30,
2000 and 2001 and for the six-month transition period ended
December 31, 2001, and through March 20, 2002, Arthur
Andersen LLP did not advise us of any reportable
events as described in Item 304(a)(1)(v) of
Regulation S-K under the Securities Act of 1933, as amended.

On March 6, 2002, we engaged Ernst &
Young LLP as our principal accountants to audit our financial
statements.

During each of the two years ended June 30,
2000 and 2001 and for the six-month transition period ended
December 31, 2001, and through March 6, 2002, we did
not consult Ernst & Young LLP on any matters described in
Items 304(a)(2)(i) or 304(a)(2)(ii) of Regulation S-K.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this item is
incorporated by reference to the information under the sections
captioned Election of Directors, Executive
Officers and Section 16(a) Beneficial Ownership
Reporting Compliance contained in the 2003 Proxy Statement.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference to the information under the section
captioned Executive Compensation contained in the
2003 Proxy Statement.






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters

The information required by this item related to
security ownership of certain beneficial owners and management
is incorporated by reference to the information under the
sections captioned Security Ownership contained in
the 2003 Proxy Statement.

Equity Compensation Plan Information

|                                                               |  |                   |       |                  |  |                      |      |  |  |  |       | 
|-------------------------------------------------------------- |  | ----------------- | ----- | ---------------- |  | -------------------- | ---- |  |  |  | ----- | 
|                                                               |  |                   |       |                  |  | (c)Number of        
|                                                               |  |                   |       |                  |  | Securities          
|                                                               |  | (a)Number of      |       |                  |  | Remaining Available 
|                                                               |  | Securities to be  |       | (b)Weighted-     |  | for Future Issuance 
|                                                               |  | Issued Upon       |       | Average Exercise |  | Under Equity        
|                                                               |  | Exercise of       |       | Price of         |  | Compensation Plans  
|                                                               |  | Outstanding       |       | Outstanding      |  | (Excluding          
|                                                               |  | Options, Warrants |       | Options,         |  | Securities Reflected
|                                                               |  | and Rights        |       | Warrants and     |  | in Column (a))      
|Plan Category                                                  |  | (in Thousands)    |       | Rights           |  | (in Thousands)      
|                                                               |  |                   |       |                  |  |                     
|Equity compensation plans approved by security
    holders     |  |                   | 3,986 |                  |  | $                    | 2.18 |  |  |  | 1,123 | 
|Equity compensation plans not approved by
    security holders |  |                   | 0     |                  |  |                      | 0    |  |  |  | 0     | 
|                                                               |  |                   |       |                  |  |                      |      |  |  |  |       | 
|Total                                                          |  |                   | 3,986 |                  |  | $                    | 2.18 |  |  |  | 1,123 | 
|                                                               |  |                   |       |                  |  |                      |      |  |  |  |       | 






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is
incorporated by reference to the information under the sections
captioned Certain Relationships and Related
Transactions and Compensation Committee Interlocks
and Insider Participation contained in the 2003 Proxy
Statement.

46



---



##### Table of Contents








|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within 90 days prior to the date of filing
this Report, an evaluation was performed under the supervision
and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended). Based on and as of the time
of such evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that
our disclosure controls and procedures were effective in timely
alerting them to material information relating to the company
required to be included in our reports filed or submitted under
the Securities Exchange Act of 1934, as amended. There have been
no significant changes in our internal controls or in other
factors that could significantly affect internal controls and
procedures subsequent to the time of such evaluation.

47



---



##### Table of Contents






PART IV




Item 15.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

1.     Consolidated
Financial Statements

The following financial statements are filed as
part of this Report:

|                                                    |  |      |     | 
|--------------------------------------------------- |  | ---- | --- | 
|                                                    |  | Page
|                                                    |  |     
|Report of Independent Auditors                      |  |      | F-1 | 
|Report of Past Independent Auditors                 |  |      | F-2 | 
|Consolidated Balance Sheets                         |  |      | F-3 | 
|Consolidated Statements of Operations               |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity |  |      | F-5 | 
|Consolidated Statements of Cash Flows               |  |      | F-6 | 
|Notes to Consolidated Financial Statements          |  |      | F-7 | 

2.     Financial
Statement Schedules

All financial statement schedules are omitted
because they are not applicable or not required, or because the
required information is included in the consolidated financial
statements or notes thereto.

3.     Exhibits

(a) Exhibits

|        |             |  |  |                         |  |                                                                                                                                                                                                     
|------- | ----------- |  |  | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |  |  |                        
|Number  |             |  |  | Description of Document
|        |             |  |  |                        
|        | 3.1(a)(6)   |  |  |                        |  | Certificate of Incorporation as currently in
    effect                                                                                                                                             
|        | 3.1(b)(6)   |  |  |                        |  | Amendment to Certificate of Incorporation,
    effective as of December 21, 2001                                                                                                                    
|        | 3.2(4)      |  |  |                        |  | Bylaws of Introgen as currently in effect                                                                                                                                                           
|        | 4.1(2)      |  |  |                        |  | Specimen Common Stock Certificate                                                                                                                                                                   
|        | 4.2(5)      |  |  |                        |  | Certificate of Designations of Series A
    Non-Voting Convertible Preferred Stock                                                                                                                  
|        | 10.1(1)     |  |  |                        |  | Form of Indemnification Agreement between
    Introgen and each of its directors and officers                                                                                                       
|        | 10.2(1)     |  |  |                        |  | 1995 Stock Plan and form of stock option
    agreement thereunder                                                                                                                                   
|        | 10.3(3)     |  |  |                        |  | 2000 Stock Option Plan and forms of stock option
    agreements thereunder                                                                                                                          
|        | 10.4(3)     |  |  |                        |  | 2000 Employee Stock Purchase Plan and forms of
    agreements thereunder                                                                                                                            
|        | 10.5(1)     |  |  |                        |  | Form of Series C Preferred Stock Purchase
    Agreement among Introgen and certain investors                                                                                                        
|        | 10.6(1)     |  |  |                        |  | Registration Rights Agreement, dated
    October 31, 1997                                                                                                                                           
|        | 10.7(a)(1)  |  |  |                        |  | Assignment of Leases, dated November 23,
    1998, by TMX Realty Corporation and Riverway Bank, and other
    related agreements                                                                    
|        | 10.7(b)(1)  |  |  |                        |  | Lease Agreement, dated June 7, 1996, by and
    between Introgen and Plaza del Oro Business Center                                                                                                  
|        | 10.7(c)(2)  |  |  |                        |  | Amendment No. 1 to Lease Agreement,
    effective as of May 9, 1997                                                                                                                                 
|        | 10.7(d)(2)  |  |  |                        |  | Amendment No. 2 to Lease Agreement,
    effective as of July 31, 1998                                                                                                                               
|        | 10.7(e)(2)  |  |  |                        |  | Amendment No. 3 to Lease Agreement,
    effective as of June 29, 2000                                                                                                                               
|        | 10.8(a)(1) |  |  |                        |  | Patent and Technology License Agreement,
    effective as of July 20, 1994, by and between the Board of
    Regents of The University of Texas System, M. D. Anderson Cancer
    Center and Introgen
|        | 10.8(b)(1) |  |  |                        |  | Amendment No. 1 to Patent License Agreement,
    effective as of September 1, 1996                                                                                                                  

48



---



##### Table of Contents



|        |              |  |  |                         |  |                                                                                                                                                
|------- | ------------ |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |              |  |  |                        
|Number  |              |  |  | Description of Document
|        |              |  |  |                        
|        | 10.9(3)     |  |  |                        |  | Sponsored Research Agreement for Clinical Trial,
    No. CS 93-27, dated February 11, 1993, between
    Introgen and M. D. Anderson, as amended
|        | 10.10        |  |  |                        |  | [Reserved]                                                                                                                                     
|        | 10.11(3)    |  |  |                        |  | Sponsored Research Agreement No. SR 93-04,
    dated February 11, 1993 between M. D. Anderson and Introgen, as
    amended                     
|        | 10.12        |  |  |                        |  | [Reserved]                                                                                                                                     
|        | 10.13(3)    |  |  |                        |  | Sponsored Research Agreement No. SR 96-004
    between Introgen and M. D. Anderson, dated January 17, 1996                                     
|        | 10.14        |  |  |                        |  | [Reserved]                                                                                                                                     
|        | 10.15(3)    |  |  |                        |  | License Agreement, dated March 29, 1996
    between Introgen and SKCC                                                                          
|        | 10.16(1)     |  |  |                        |  | Consulting Agreement between Introgen and Jack A.
    Roth, M. D., effective as of October 1, 1994                                             
|        | 10.17(1)     |  |  |                        |  | Consulting Agreement between EJ Financial
    Enterprises, Inc. and Introgen, effective as of July 1, 1994                                     
|        | 10.18(a)(1)  |  |  |                        |  | Employment Agreement dated as of August 1,
    1996 between Introgen and David G. Nance                                                        
|        | 10.18(b)(1)  |  |  |                        |  | Amendment No. 1 to Employment Agreement,
    effective as of August 1, 1998                                                                    
|        | 10.18(c)(1)  |  |  |                        |  | Amendment No. 2 to Employment Agreement,
    effective as of February 15, 2000                                                                 
|        | 10.19(1)     |  |  |                        |  | Service Agreement, effective as of July 1,
    1994, between Introgen and Domecq Technologies, Inc.                                            
|        | 10.20(a)(1) |  |  |                        |  | Collaboration Agreement (p53 Products), effective
    as of October 7, 1994, between Introgen and RPR, as amended                              
|        | 10.20(b)(3) |  |  |                        |  | Addendum No. 1 to Collaboration Agreement
    (p53 Products), dated January 23, 1996, between Introgen
    and RPR                             
|        | 10.20(c)(1) |  |  |                        |  | 1997 Agreement Memorandum, effective as of
    July 22, 1997, between Introgen and RPR                                                         
|        | 10.20(d)(3) |  |  |                        |  | Letter Agreement, dated April 19, 1999, from
    Introgen to RPR regarding manufacturing process for ADVEXIN gene
    therapy                  
|        | 10.21(a)(1) |  |  |                        |  | Collaboration Agreement (K-ras Products),
    effective as of October 7, 1994, between Introgen and RPR,
    as amended                        
|        | 10.21(b)(1)  |  |  |                        |  | Amendment No. 1 to Collaboration Agreement
    (K-ras Products), effective as of September 27, 1995,
    between Introgen and RPR              
|        | 10.22(3)    |  |  |                        |  | Collaborative Research and Development Agreement
    dated October 30, 1998 between Introgen, RPR and NCI                                      
|        | 10.23(1)    |  |  |                        |  | Non-Exclusive License Agreement, effective as of
    April 16, 1997, by Introgen and Iowa Research Foundation                                  
|        | 10.24(3)    |  |  |                        |  | Option Agreement, effective as of June 1,
    1998, by Introgen and Imperial Cancer Research Technology
    Limited (ICRT)                   
|        | 10.25(3)    |  |  |                        |  | Option Agreement, effective as of January 1,
    1999, by Introgen and ICRT                                                                    
|        | 10.26(3)    |  |  |                        |  | Exclusive License Agreement, effective as of
    July 19, 1999, by Introgen and Corixa Corporation                                             
|        | 10.27(a)     |  |  |                        |  | [Reserved]                                                                                                                                     
|        | 10.27(b)(1)  |  |  |                        |  | Letter dated January 28, 2000, from Introgen
    to LXR Biotechnology (LXR), notifying LXR of its
    exercise of its option                 
|        | 10.27(c)(2) |  |  |                        |  | Exclusive License Agreement, effective as of
    May 16, 2000, by and between Introgen and LXR                                                 
|        | 10.28(3)    |  |  |                        |  | Administrative Services and Management Agreement,
    effective as of January 1, 1999, by and between Introgen
    and Gendux, Inc.            
|        | 10.29(3)    |  |  |                        |  | Research and Development Agreement, effective as
    of January 1, 1999, by and between Introgen and Gendux, Inc.                              

49



---



##### Table of Contents



|        |            |  |  |                         |  |                                                                                                                                                                              
|------- | ---------- |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |  |  |                        
|Number  |            |  |  | Description of Document
|        |            |  |  |                        
|        | 10.30(3)  |  |  |                        |  | Delivery Technology License Agreement, effective
    as of January 1, 1999, by and between Introgen and Gendux,
    Inc.                                                     
|        | 10.31(3)  |  |  |                        |  | Target Gene License Agreement, effective as of
    January 1, 1999, by and between Introgen and Gendux, Inc.                                                                 
|        | 10.32(1)  |  |  |                        |  | Non-Exclusive License Agreement, effective as of
    August 17, 1998, by and between Introgen and National
    Institutes of Health                                          
|        | 10.33      |  |  |                        |  | [Reserved]                                                                                                                                                                   
|        | 10.34(2)   |  |  |                        |  | Master Lease Agreement, effective as of
    August 4, 1999, by and between Introgen and Finova Capital
    Corporation                                                       
|        | 10.35(2)   |  |  |                        |  | Construction Loan Agreement, effective as of
    July 24, 2000, by and between Introgen and Compass Bank                                                                     
|        | 10.36(5)  |  |  |                        |  | Restated p53 and K-ras Agreement, effective as of
    June 30, 2001, by and among Introgen, Aventis
    Pharmaceuticals Inc. (API) and Aventis Pharma S.A.
    (Aventis) 
|        | 10.37(5)   |  |  |                        |  | p53 Assignment Agreement, effective as of
    June 30, 2001, by and among Introgen, API and Aventis                                                                          
|        | 10.38(5)   |  |  |                        |  | K-ras Assignment Agreement, effective as of
    June 30, 2001, by and among Introgen, API and Aventis                                                                        
|        | 10.39(5)   |  |  |                        |  | Registration Rights Agreement, effective as of
    June 30, 2001, by and among Introgen, API and RPR                                                                         
|        | 10.40(5)   |  |  |                        |  | Voting Agreement, effective as of June 30,
    2001, by and among Introgen, API and RPR                                                                                      
|        | 10.41(7)  |  |  |                        |  | Master Services Agreement, effective as of
    July 9, 2001, by and between Introgen and PPD Development,
    LLC                                                            
|        | 10.42(8) |  |  |                        |  | Series A Preferred Stock Purchase Agreement,
    effective as of March 7, 2002, by and between Introgen and
    VirRx, Inc.                                                  
|        | 10.43(8) |  |  |                        |  | Collaboration and License Agreement, effective as
    of March 7, 2002, by and between Introgen and VirRx, Inc.                                                              
|        | 21.1(1)    |  |  |                        |  | List of subsidiaries of Introgen                                                                                                                                             
|        | 23.1       |  |  |                        |  | Consent of Ernst & Young LLP, independent
    auditors                                                                                                                       
|        | 23.2       |  |  |                        |  | Information Regarding Consent of Arthur Andersen
    LLP                                                                                                                     
|        | 24.1       |  |  |                        |  | Power of Attorney (See page 52)                                                                                                                                              
|        | 99.1       |  |  |                        |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



---



|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the same-numbered
    exhibit filed with Introgens Registration Statement on
    Form S-1 (No. 333-30582) filed with the Securities and
    Exchange Commission on February 17, 2000.                                               
|   
|(2) | Incorporated by reference to the same-numbered
    exhibit filed with Amendment No. 2 to Introgens
    Registration Statement on Form S-1 (No. 333-30582) filed
    with the Securities and Exchange Commission on September 8, 2000.                            
|   
|(3) | Incorporated by reference to the same-numbered
    exhibit filed with Amendment No. 3 to Introgens
    Registration Statement on Form S-1 (No. 333-30582) filed
    with the Securities and Exchange Commission on October 4,
    2000.                          
|   
|(4) | Incorporated by reference to the same-numbered
    exhibit filed with Introgens Quarterly Report on
    Form 10-Q, for the quarter ended December 31, 2000, (File
    No. 000-21291), filed with the Securities and Exchange
    Commission on February 14, 2001.
|   
|(5) | Incorporated by reference to the same-numbered
    exhibit filed with Introgens Annual Report on
    Form 10-K for the fiscal year ended June 30, 2001
    (File No. 000-21291), filed with the Securities and
    Exchange Commission on September 19, 2001.    

50



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Incorporated by reference to the same-numbered
    exhibit filed with Introgens Transition Report on
    Form 10-KT for the six-month transition period ended
    December 31, 2001 (File No. 000-21291), filed with the
    Securities and Exchange Commission on March 20, 2002.                       
|   
|(7) | Incorporated by reference to the same-numbered
    exhibit filed with Amendment No. 1 to Introgens
    Transition Report on Form 10-KT for the six-month
    transition period ended December 31, 2001 (File
    No. 000-21291), filed with the Securities and Exchange
    Commission on March 26, 2002.
|   
|(8) | Incorporated by reference to the same-numbered
    exhibit filed with Introgens Quarterly Report on
    Form 10-Q, for the quarter ended March 31, 2002 (File
    No. 000-21291), filed with the Securities and Exchange
    Commission on May 15, 2002.                                                 



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | Confidential treatment has been granted for
    portions of this exhibit.



|   |                                                                            
|-- | ---------------------------------------------------------------------------
| | Confidential treatment has been requested for
    portions of this exhibit.

(b) Reports on Form 8-K



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We did not file any Current Reports on
    Form 8-K during the last quarter of our fiscal year ended
    December 31, 2002.

(c) Exhibits



| |                      
| | ---------------------
| | See Item 15(3) above.

(d) Financial Statement Schedules



| |                      
| | ---------------------
| | See Item 15(2) above.

51



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934 the Registrant
has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned thereunto duly
authorized in the City of Austin, Texas, this March 31,
2003.



| |                            
| | ---------------------------
| | INTROGEN THERAPEUTICS, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ DAVID G. NANCE

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | David G. Nance                                     
| | President, Chief Executive Officer and
    Director
| | (Principal Executive Officer)                      



| |     |                           
| | --- | --------------------------
| | By: | /s/ JAMES W. ALBRECHT, JR.

| |                                                 
| | ------------------------------------------------
| |                                                 
| | James W. Albrecht, Jr.                          
| | Chief Financial Officer                         
| | (Principal Financial and Accounting
    Officer)




POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints David G. Nance and James W.
Albrecht, Jr. and each of them acting individually, as his
or her attorney-in-fact, each with full power of substitution,
for him or her in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the
same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission.

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this Report on Form 10-K
has been signed on behalf of the Registrant by the following
persons in the capacities and on the dates indicated:

|                                                               |  |                                                                                    |  |      |                | 
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ---- | -------------- | 
|Signature                                                      |  | Title                                                                              |  | Date
|                                                               |  |                                                                                    |  |     
|/s/ DAVID G. NANCE(David G. Nance)                             |  | President, Chief Executive Officer, and Director
    (Principal Executive Officer) |  |      | March 31, 2003 | 
|                                                              
|/s/ JAMES W. ALBRECHT, JR.(James W. Albrecht, Jr.)             |  | Chief Financial Officer (Principal Financial and
    Accounting Officer)           |  |      | March 31, 2003 | 
|                                                              
|/s/ JOHN N. KAPOOR, PH.D.(John N. Kapoor, Ph.D.)               |  | Chairman of the Board and Director                                                 |  |      | March 31, 2003 | 
|                                                              
|/s/ WILLIAM H. CUNNINGHAM, PH.D.(William H. Cunningham, Ph.D.) |  | Director                                                                           |  |      | March 31, 2003 | 
|                                                              
|/s/ CHARLES E. LONG(Charles E. Long)                           |  | Director                                                                           |  |      | March 31, 2003 | 
|                                                              
|/s/ ROBERT L. MOORE(Robert L. Moore)                           |  | Director                                                                           |  |      | March 31, 2003 | 
|                                                              
|/s/ MAHENDRA G. SHAH, PH.D.(Mahendra G. Shah, Ph.D.)           |  | Director                                                                           |  |      | March 31, 2003 | 

52



---



##### Table of Contents






CERTIFICATIONS

I, David G. Nance, certify that:

1. I have reviewed this annual report on
Form 10-K of Introgen Therapeutics, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
Introgen as of, and for, the periods presented in this annual
report;

4. Introgens other certifying officer
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for Introgen and we have:



| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to
    Introgen, including its consolidated subsidiaries, is made known
    to us by others within those entities, particularly during the
    period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of
    Introgens disclosure controls and procedures as of a date
    within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                          

5. Introgens other certifying officer
and I have disclosed, based on our most recent evaluation, to
Introgens auditors and the audit committee of
Introgens board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect
    Introgens ability to record, process, summarize and report
    financial data and have identified for Introgens auditors
    any material weaknesses in internal controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in Introgens internal controls; and                                                                                                                                          

6. Introgens other certifying officer
and I have indicated in this Annual Report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                   
| | --- | ------------------
| | By: | /s/ DAVID G. NANCE

| |                        
| | -----------------------
| |                        
| | David G. Nance         
| | Chief Executive Officer

Date: March 31, 2003

53



---



##### Table of Contents



I, James W. Albrecht, Jr., certify that:

1. I have reviewed this annual report on
Form 10-K of Introgen Therapeutics, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
Introgen as of, and for, the periods presented in this annual
report;

4. Introgens other certifying officer
and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for Introgen and we have:



| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to
    Introgen, including its consolidated subsidiaries, is made known
    to us by others within those entities, particularly during the
    period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of
    Introgens disclosure controls and procedures as of a date
    within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                          

5. Introgens other certifying officer
and I have disclosed, based on our most recent evaluation, to
Introgens auditors and the audit committee of
Introgens board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect
    Introgens ability to record, process, summarize and report
    financial data and have identified for Introgens auditors
    any material weaknesses in internal controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in Introgens internal controls; and                                                                                                                                          

6. Introgens other certifying officer
and I have indicated in this annual report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                           
| | --- | --------------------------
| | By: | /s/ JAMES W. ALBRECHT, JR.

| |                        
| | -----------------------
| |                        
| | James W. Albrecht, Jr. 
| | Chief Financial Officer

Date: March 31, 2003

54



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

Introgen Therapeutics, Inc. and Subsidiaries:


We have audited the accompanying consolidated
balance sheet of Introgen Therapeutics, Inc. and subsidiaries as
of December 31, 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for the year then ended. These financial statements are
the responsibility of Introgen Therapeutics, Inc.s
management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial
statements of Introgen Therapeutics, Inc. and subsidiaries for
the six months ended December 31, 2001 and for the years
ended June 30, 2001 and 2000, were audited by other
auditors whose report dated January 18, 2002, expressed an
unqualified opinion on those statements.

We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Introgen Therapeutics, Inc.
and subsidiaries at December 31, 2002, and the consolidated
results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally
accepted in the United States.

/s/ Ernst & Young LLP

Austin, Texas

January 21, 2003


F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of

Introgen Therapeutics, Inc.:


We have audited the accompanying consolidated
balance sheets of Introgen Therapeutics, Inc. (a Delaware
corporation), and subsidiaries as of June 30, 2000 and 2001
and December 31, 2001, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three years in the period ended
June 30, 2001 and for the six months ended
December 31, 2001. These financial statements are the
responsibility of Introgen Therapeutics, Inc.s management.
Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Introgen Therapeutics, Inc., and subsidiaries as of
June 30, 2000 and 2001 and December 31, 2001, and the
results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001 and the six
months ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Austin, Texas

January 18, 2002


THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY
ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH INTROGEN
THERAPEUTICS, INC.S FILING ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING
ON FORM 10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.

F-2



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)


|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |         |        | 
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ------- | ------ |  | ----- | ------- | ------ | 
|                                                                                               |                                                                                                                                                  |                                           
|                                                                                               |                                                                                                                                                  | December 31,                              
|                                                                                               |                                                                                                                                                  |                                           
|                                                                                               |                                                                                                                                                  | 2001                                       |        | 2002   
|                                                                                               |                                                                                                                                                  |                                            |        |        
|ASSETS                                                                                        
|Current Assets:                                                                                |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               | Cash and cash equivalents                                                                                                                        |                                            | $      | 37,397  |        |  | $     | 23,467  |       
|                                                                                               | Short-term investments                                                                                                                           |                                            |        | 11,428  |        |  |       |        |       
|                                                                                               | Prepaid expenses and other current assets                                                                                                        |                                            |        | 811     |        |  |       | 812     |       
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               |                                                                                                                                                  | Total current assets                       |        |         | 49,636 |  |       |         | 24,279 | 
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|Property and equipment, net of accumulated
    depreciation of $6,406 and $8,228, respectively |                                                                                                                                                  |                                            | 10,443 |         |        |  | 8,742 |        
|Other assets                                                                                   |                                                                                                                                                  |                                            | 345    |         |        |  | 295   |        
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               |                                                                                                                                                  | Total assets                               |        | $       | 60,424 |  |       | $       | 33,316 | 
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                      
|Current Liabilities:                                                                           |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               | Accounts payable                                                                                                                                 |                                            | $      | 946     |        |  | $     | 1,774   |       
|                                                                                               | Accrued liabilities                                                                                                                              |                                            |        | 4,029   |        |  |       | 1,997   |       
|                                                                                               | Deferred revenues from affiliate                                                                                                                 |                                            |        |        |        |  |       | 69      |       
|                                                                                               | Current portions of capital lease obligations and
    notes payable                                                                              |                                            |        | 1,486   |        |  |       | 1,587   |       
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               |                                                                                                                                                  | Total current liabilities                  |        |         | 6,461  |  |       |         | 5,427  | 
|Capital lease obligations, net of current portion                                              |                                                                                                                                                  |                                            | 957    |         |        |  | 125   |        
|Notes payable, net of current portion                                                          |                                                                                                                                                  |                                            | 8,079  |         |        |  | 7,310 |        
|Deferred revenue, long-term                                                                    |                                                                                                                                                  |                                            | 361    |         |        |  | 619   |        
|Commitments and Contingencies                                                                  |                                                                                                                                                  |                                            |        |         |        |  |       |        
|Stockholders Equity:                                                                          |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               | Series A non-voting convertible preferred
    stock, $.001 par value; 100 shares authorized, issued and
    outstanding                          |                                            |        | 1       |        |  |       | 1       |       
|                                                                                               | Common stock, $.001 par value; 50,000 shares
    authorized; 21,446, and 21,487 shares issued and outstanding in
    2001 and 2002, respectively |                                            |        | 21      |        |  |       | 21      |       
|                                                                                               | Additional paid-in capital                                                                                                                       |                                            |        | 94,544  |        |  |       | 94,430  |       
|                                                                                               | Deferred compensation                                                                                                                            |                                            |        | (2,485  | )      |  |       | (974    | )     
|                                                                                               | Accumulated deficit                                                                                                                              |                                            |        | (47,515 | )      |  |       | (73,643 | )     
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               |                                                                                                                                                  | Total stockholders equity                 |        |         | 44,566 |  |       |         | 19,835 | 
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        
|                                                                                               |                                                                                                                                                  | Total liabilities and stockholders equity |        | $       | 60,424 |  |       | $       | 33,316 | 
|                                                                                               |                                                                                                                                                  |                                            |        |         |        |  |       |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

(Amounts in thousands, except per share
amounts)


|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |        |         |  
|------------------------------------------------------------------ | ----------------------------- | ---------------------------------- | ------ | ---------------- | ------ | ------------ | ------- | ------ | ------- | ---- | ------ | ----- | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                   |                               |                                    |        |                  |        |              |         |       
|                                                                   |                               |                                    |        | Six Months Ended |        | Year Ended  
|                                                                   |                               | Year Ended June 30,                |        | December 31,     |        | December 31,
|                                                                   |                               |                                    |        |                  |        |             
|                                                                   |                               | 2000                               |        | 2001             |        | 2000         |         | 2001   |         | 2002
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |     
|                                                                   |                               |                                   
|                                                                   |                               | (Unaudited)                       
|Contract services, grant and other Revenue                         |                               | $                                  | 97     |                  |        | $            | 684     |        |         | $    | 391    |       |        | $ | 298     |        |         | $ | 1,173   |       
|Collaborative research and development revenues
    from affiliate |                               |                                    | 6,204  |                  |        |              | 3,016   |        |         |      | 3,016  |       |        |   |        |        |         |   |        |       
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|Product sales to affiliate                                         |                               |                                    | 2,087  |                  |        |              | 1,500   |        |         |      | 1,500  |       |        |   |        |        |         |   |        |       
|Cost of product sales                                              |                               |                                    | 1,476  |                  |        |              | 2,488   |        |         |      | 2,488  |       |        |   |        |        |         |   |        |       
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|                                                                   | Gross margin on product sales |                                    |        | 611              |        |              |         | (988   | )       |      |        | (988  | )      |   |         |       |         |   |         |       |        
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|Operating costs and expenses:                                      |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|                                                                   | Research and development      |                                    |        | 10,075           |        |              |         | 15,014 |         |      |        | 5,153 |        |   |         | 10,063 |         |   |         | 21,512 |        
|                                                                   | General and administrative    |                                    |        | 4,701            |        |              |         | 4,875  |         |      |        | 2,040 |        |   |         | 3,526  |         |   |         | 6,722  |        
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|                                                                   |                               | Total operating costs and expenses |        |                  | 14,776 |              |         |        | 19,889  |      |        |       | 7,193  |   |         |        | 13,589  |   |         |        | 28,234  |  
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|Loss from operations                                               |                               |                                    | (7,864 | )                |        |              | (17,177 | )      |         |      | (4,774 | )     |        |   | (13,291 | )      |         |   | (27,061 | )     
|Interest income                                                    |                               |                                    | 722    |                  |        |              | 1,230   |        |         |      | 783    |       |        |   | 912     |        |         |   | 596     |       
|Interest expense                                                   |                               |                                    | (582   | )                |        |              | (849    | )      |         |      | (380   | )     |        |   | (467    | )      |         |   | (803    | )     
|Other income                                                       |                               |                                    |       |                  |        |              | 354     |        |         |      |       |       |        |   | 518     |        |         |   | 1,140   |       
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|                                                                   |                               | Net loss                           |        | $                | (7,724 | )            |         | $      | (16,442 | )    |        | $     | (4,371 | ) |         | $      | (12,328 | ) |         | $      | (26,128 | )
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|Net loss per share, basic and diluted                              |                               | $                                  | (1.89  | )                |        | $            | (1.02   | )      |         | $    | (0.39  | )     |        | $ | (0.58   | )      |         | $ | (1.22   | )     
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       
|Shares used in computing basic and diluted net
    loss per share  |                               |                                    | 4,096  |                  |        |              | 16,163  |        |         |      | 11,120 |       |        |   | 21,440  |        |         |   | 21,471  |       
|                                                                   |                               |                                    |        |                  |        |              |         |        |         |      |        |       |        |   |         |        |         |   |         |       

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | --------------- |  | ------------ | -- | ---------- |  | -------- | --- | ----------- |  | ------- | - | ------------ |  | ------- | ------ | ----- |  | - | -- |  |  | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |        
|                                                                                                                                      |  |                        |        | Series A Non-   |  |              |    |            |  |          |     |             |  |         |   |             
|                                                                                                                                      |  | Series A, B, C and     |        | Voting          |  |              |    |            |  |          |     |             |  |         |   |             
|                                                                                                                                      |  | D Convertible          |        | Convertible     |  |              |    |            |  |          |     |             |  |        
|                                                                                                                                      |  | Preferred Stock        |        | Preferred Stock |  | Common Stock |    | Additional |  |          |     |             |  |        
|                                                                                                                                      |  |                        |        |                 |  |              |    | Paid-In    |  | Deferred |     | Accumulated |  |        
|                                                                                                                                      |  | Shares                 |        | Amount          |  | Shares       |    | Amount     |  | Shares   |     | Amount      |  | Capital |   | Compensation |  | Deficit |        | Total
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |      
|                                                                                                                                      |  |                       
|                                                                                                                                      |  | (Amounts in thousands)
|Balance, June 30, 1999                                                                                                                |  |                        | 6,419  |                 |  | $            | 6  |            |  |          |    |             |  | $       |  |              |  |         | 4,006  |       |  | $ | 4  |  |  | $ | 31,975 |   |  | $ | (1,778 | ) |  | $ | (11,021 | ) |  | $ | 19,187  |  
|Issuance of common stock in connection with
    Exercise of stock options and warrants                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         | 128    |       |  |   |   |  |  |   | 58     |   |  |   |       |   |  |   |        |   |  |   | 58      |  
|Deferred compensation relating to issuance of
    stock options, net of reversals                                                     |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   | 3,929  |   |  |   | (3,929 | ) |  |   |        |   |  |   |        |  
|Amortization of deferred compensation and
    stock-based compensation                                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   | 574    |   |  |   | 1,497  |   |  |   |        |   |  |   | 2,071   |  
|Net loss                                                                                                                              |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   | (7,724  | ) |  |   | (7,724  | )
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance, June 30, 2000                                                                                                                |  |                        | 6,419  |                 |  | $            | 6  |            |  |          |    |             |  | $       |  |              |  |         | 4,134  |       |  | $ | 4  |  |  | $ | 36,536 |   |  | $ | (4,210 | ) |  | $ | (18,745 | ) |  | $ | 13,592  |  
|Issuance of common stock in connection with
    initial public offering, net of offering costs of $4,575                              |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         | 4,600  |       |  |   | 5  |  |  |   | 32,221 |   |  |   |       |   |  |   |        |   |  |   | 32,226  |  
|Conversion of preferred stock to common stock                                                                                         |  |                        | (6,419 | )               |  |              | (6 | )          |  |          |    |             |  |         |  |              |  |         | 12,326 |       |  |   | 12 |  |  |   | (6     | ) |  |   |       |   |  |   |        |   |  |   |        |  
|Issuance of common stock in connection with
    Exercise of stock options and warrants                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         | 331    |       |  |   |   |  |  |   | 204    |   |  |   |       |   |  |   |        |   |  |   | 204     |  
|Issuance of preferred stock in June 2001 in
    accordance stock purchase agreement with affiliate, net of
    offering costs of $100 |  |                        |       |                 |  |              |   |            |  |          | 100 |             |  |         | 1 |              |  |         |       |       |  |   |   |  |  |   | 24,900 |   |  |   |       |   |  |   |        |   |  |   | 24,900  |  
|Deferred compensation relating to issuance of
    stock options, net of reversals                                                     |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   | 720    |   |  |   | (720   | ) |  |   |        |   |  |   |        |  
|Amortization of deferred compensation and
    stock-based compensation                                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   |       |   |  |   | 1,589  |   |  |   |        |   |  |   | 1,589   |  
|Net loss                                                                                                                              |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   | (16,442 | ) |  |   | (16,442 | )
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance, June 30, 2001                                                                                                                |  |                        |       |                 |  | $            |   |            |  |          | 100 |             |  | $       | 1 |              |  |         | 21,391 |       |  | $ | 21 |  |  | $ | 94,575 |   |  | $ | (3,341 | ) |  | $ | (35,187 | ) |  | $ | 56,069  |  
|Issuance of common stock in connection with
    Exercise of stock options and warrants                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         | 55     |       |  |   |   |  |  |   | 26     |   |  |   |       |   |  |   |        |   |  |   | 26      |  
|Deferred compensation relating to issuance of
    stock options, net of reversals                                                     |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   | (57    | ) |  |   | 57     |   |  |   |        |   |  |   |        |  
|Amortization of deferred compensation and
    stock-based compensation                                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   |       |   |  |   | 799    |   |  |   |        |   |  |   | 799     |  
|Net loss                                                                                                                              |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   | (12,328 | ) |  |   | (12,328 | )
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2001                                                                                                            |  |                        |       |                 |  | $            |   |            |  |          | 100 |             |  | $       | 1 |              |  |         | 21,446 |       |  | $ | 21 |  |  | $ | 94,544 |   |  | $ | (2,485 | ) |  | $ | (47,515 | ) |  | $ | 44,566  |  
|Issuance of common stock in connection with
    Exercise of stock options and warrants                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         | 41     |       |  |   |   |  |  |   | 21     |   |  |   |       |   |  |   |        |   |  |   | 21      |  
|Deferred compensation relating to issuance of
    stock options, net of reversals                                                     |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   | (135   | ) |  |   | 135    |   |  |   |        |   |  |   |        |  
|Amortization of deferred compensation and
    stock-based compensation                                                                |  |                        |       |                 |  |              |   |            |  |          |    |             |  |         |  |              |  |         |       |       |  |   |   |  |  |   |       |   |  |   | 1,376  |   |  |   |        |   |  |   | 1,376   |  
|Net loss                                                                                                                              |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   | (26,128 | ) |  |   | (26,128 | )
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2002                                                                                                            |  |                        |       |                 |  | $            |   |            |  |          | 100 |             |  | $       | 1 |              |  |         | 21,487 |       |  | $ | 21 |  |  | $ | 94,430 |   |  | $ | (974   | ) |  | $ | (73,643 | ) |  | $ | 19,835  |  
|                                                                                                                                      |  |                        |        |                 |  |              |    |            |  |          |     |             |  |         |   |              |  |         |        |       |  |   |    |  |  |   |        |   |  |   |        |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |         |       |         |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------- | ---------------- | ----- | ------------ | ------ | ------- | ----- | ------- | ----- | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ----- | ------- | -
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |        
|                                                                            |                                                                                              |                                                               |                                                         | Six Months Ended |       | Year Ended  
|                                                                            |                                                                                              | Year Ended June 30,                                           |                                                         | December 31,     |       | December 31,
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |             
|                                                                            |                                                                                              | 2000                                                          |                                                         | 2001             |       | 2000         |        | 2001    |       | 2002   
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |        
|                                                                            |                                                                                              |                                                              
|                                                                            |                                                                                              | (Unaudited)                                                  
|                                                                            |                                                                                              | (Amounts in thousands)                                       
|Cash flows from operating activities:                                       |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Net loss                                                                                     |                                                               | $                                                       | (7,724           | )     |              | $      | (16,442 | )     |         | $     | (4,371  | )     |         | $      | (12,328 | )     |         | $      | (26,128 | )    
|                                                                            | Adjustments to reconcile net loss to net cash
    used in operating activities:              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |         |      
|                                                                            |                                                                                              | Depreciation                                                  |                                                         |                  | 1,711 |              |        |         | 2,226 |         |       |         | 1,066 |         |        |         | 1,191 |         |        |         | 1,801 |        
|                                                                            |                                                                                              | Compensation related to issuance of certain stock
    options |                                                         |                  | 2,071 |              |        |         | 1,589 |         |       |         | 746   |         |        |         | 800   |         |        |         | 1,511 |        
|                                                                            |                                                                                              | Changes in assets and liabilities:                            |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |         |       |        
|                                                                            |                                                                                              |                                                               | Decrease (increase) in receivable from affiliate        |                  |       |             |        |         |       |        |       |         |       | (709    | )      |         |       |        |        |         |       |        |  
|                                                                            |                                                                                              |                                                               | Decrease (increase) in inventory                        |                  |       | (110         | )      |         |       | 1,734   |       |         |       | 984     |        |         |       |        |        |         |       |        |  
|                                                                            |                                                                                              |                                                               | Decrease (increase) in other assets                     |                  |       | (908         | )      |         |       | (437    | )     |         |       | (371    | )      |         |       | (294    | )      |         |       | 49      |  
|                                                                            |                                                                                              |                                                               | Increase (decrease) in accounts payable                 |                  |       | (1,752       | )      |         |       | 113     |       |         |       | 582     |        |         |       | 568     |        |         |       | 829     |  
|                                                                            |                                                                                              |                                                               | Increase (decrease) in accrued liabilities              |                  |       | 763          |        |         |       | 3,376   |       |         |       | 479     |        |         |       | (372    | )      |         |       | (2,032  | )
|                                                                            |                                                                                              |                                                               | Increase (decrease) in deferred revenue                 |                  |       | 407          |        |         |       | (917    | )     |         |       | (155    | )      |         |       | 73      |        |         |       | 326     |  
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            |                                                                                              |                                                               | Net cash used in operating activities                   |                  |       | (5,542       | )      |         |       | (8,758  | )     |         |       | (1,749  | )      |         |       | (10,362 | )      |         |       | (23,644 | )
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|Cash flows from investing activities:                                       |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Purchases of property and equipment                                                          |                                                               |                                                         | (1,022           | )     |              |        | (3,581  | )     |         |       | (2,954  | )     |         |        | (127    | )     |         |        | (121    | )    
|                                                                            | Purchases of short-term investments                                                          |                                                               |                                                         | (21,585          | )     |              |        | (83,143 | )     |         |       | (47,076 | )     |         |        | (19,400 | )     |         |        | (71,734 | )    
|                                                                            | Maturities of short-term investments                                                         |                                                               |                                                         | 25,224           |       |              |        | 72,343  |       |         |       | 20,075  |       |         |        | 28,749  |       |         |        | 83,184  |      
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            |                                                                                              |                                                               | Net cash provided by (used in) investing
    activities |                  |       | 2,617        |        |         |       | (14,381 | )     |         |       | (29,955 | )      |         |       | 9,222   |        |         |       | 11,329  |  
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|Cash flows from financing activities:                                       |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Proceeds from sale of preferred and common stock,
    net of offering costs                  |                                                               |                                                         | 59               |       |              |        | 33,105  |       |         |       | 33,070  |       |         |        | 25,026  |       |         |        | (114    | )    
|                                                                            | Proceeds from issuance of note payable                                                       |                                                               |                                                         | 2,814            |       |              |        | 3,263   |       |         |       | 1,932   |       |         |        |        |       |         |        |        |      
|                                                                            | Principal payments under capital lease
    obligations and notes payable                     |                                                               |                                                         | (305             | )     |              |        | (818    | )     |         |       | (387    | )     |         |        | (689    | )     |         |        | (1,501  | )    
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            |                                                                                              |                                                               | Net cash provided by financing activities               |                  |       | 2,568        |        |         |       | 35,550  |       |         |       | 34,615  |        |         |       | 24,337  |        |         |       | (1,615  | )
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            |                                                                                              |                                                               | Net increase (decrease) in cash                         |                  |       | (357         | )      |         |       | 12,411  |       |         |       | 2,911   |        |         |       | 23,197  |        |         |       | (13,930 | )
|Cash, beginning of period                                                   |                                                                                              |                                                               | 2,146                                                   |                  |       |              | 1,789  |         |       |         | 1,789 |         |       |         | 14,200 |         |       |         | 37,397 |        
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|Cash, end of period                                                         |                                                                                              | $                                                             | 1,789                                                   |                  |       | $            | 14,200 |         |       | $       | 4,700 |         |       | $       | 37,397 |         |       | $       | 23,467 |        
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|Supplemental disclosure of cash flow information:                           |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            |                                                                                              |                                                               | Cash paid for interest                                  |                  | $     | 608          |        |         | $     | 917     |       |         | $     | 280     |        |         | $     | 459     |        |         | $     | 803     |  
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Purchases of equipment under capital lease
    obligations                                   |                                                               | $                                                       | 2,780            |       |              | $      |        |       |         | $     |        |       |         | $      |        |       |         | $      |        |      
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Retirement of fully-depreciated assets                                                       |                                                               | $                                                       | 484              |       |              | $      |        |       |         | $     |        |       |         | $      |        |       |         | $      |        |      
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Receivable for issuance of preferred stock                                                   |                                                               | $                                                       |                 |       |              | $      | 25,000  |       |         | $     |        |       |         | $      |        |       |         | $      |        |      
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        
|                                                                            | Offering costs deferred in 2000, netted against
    initial public offering proceeds in 2001 |                                                               | $                                                       |                 |       |              | $      | 776     |       |         | $     | 776     |       |         | $      |        |       |         | $      |        |      
|                                                                            |                                                                                              |                                                               |                                                         |                  |       |              |        |         |       |         |       |         |       |         |        |         |       |         |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-6



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002


(Information pertaining to the six-month period
ending December 31, 2000 is unaudited)


1.      Formation
and Business of the Company

Introgen Therapeutics, Inc., a Delaware
corporation, and its subsidiaries (Introgen) is a leading
developer of gene therapy products for the treatment of cancer
and other diseases. Our lead product candidate, ADVEXIN®
gene therapy, combines the p53 gene, one of the most potent
members of a group of naturally occurring tumor suppressor
genes, which act to protect cells from becoming cancerous, with
our adenoviral delivery system. We are conducting pivotal
Phase 3 clinical trials of ADVEXIN gene therapy in head and
neck cancer. We have completed a Phase 2 clinical trial of
ADVEXIN in non-small cell lung cancer and are conducting a
Phase 2 trial of ADVEXIN gene therapy in breast cancer. We
are conducting Phase 1 clinical trials, or safety trials,
of ADVEXIN gene therapy in other types of cancer. We are
developing additional cancer gene therapy product candidates,
including those based on the mda-7 and PTEN genes, as well as
associated vector technologies for delivering the gene-based
products into target cells. Our INGN 241 product candidate,
which combines the mda-7 gene with our proprietary gene delivery
system, is undergoing safety testing in a Phase 1 clinical
trial. We hold the worldwide rights for pre-clinical and
clinical development, manufacturing, marketing and
commercialization of ADVEXIN gene therapy. ADVEXIN gene therapy
is designated by the FDA as an orphan drug under the Orphan Drug
Act, which gives us seven years of marketing exclusivity for
ADVEXIN gene therapy if approved by the FDA.

We are investigating other vector technologies
for delivering gene-based products into targeted cells,
specifically those involving replication-competent viral
therapies in which viruses bind directly to cancer cells,
replicate in those cells, and cause those cancer cells to die.
As a supplement to our gene therapy product programs, we are
evaluating the development of mebendazole, our first small
molecule candidate. Pre-clinical trials suggest that mebendazole
may also be an effective treatment of cancer.

We own and operate a manufacturing facility that
we believe complies with the FDAs current Good
Manufacturing Practices requirements, commonly known as CGMP
requirements. We have produced ADVEXIN gene therapy in this
facility for use in our Phase 1, 2 and 3 clinical trials
and INGN 241 for use in our Phase 1 clinical trials.

We have not yet generated any significant
revenues from unaffiliated third parties, nor is there any
assurance of future product revenues. Our research and
development activities involve a high degree of risk and
uncertainty, and our ability to successfully develop,
manufacture and market our proprietary products is dependent
upon many factors. These factors include, but are not limited
to, the need for additional financing, the reliance on
collaborative research and development arrangements with
corporate and academic affiliates, and the ability to develop
manufacturing, sales and marketing experience. Additional
factors include uncertainties as to patents and proprietary
technologies, competitive technologies, technological change and
risk of obsolescence, development of products, competition,
government regulations and regulatory approval, and product
liability exposure. As a result of the aforementioned factors
and the related uncertainties, there can be no assurance of our
future success.

Prior to June 30, 2001, we developed
therapeutics based on p53 and on K-ras pathway inhibition under
two collaboration agreements originally entered into in October
1994 with Rhône-Poulenc Rorer Pharmaceuticals Inc., which
ultimately became part of Aventis Pharma, or Aventis. In June
2001, we and Aventis restructured this collaborative
relationship whereby we assumed responsibility for the worldwide
development of all p53 and K-ras products and acquired all
worldwide marketing and commercialization rights with respect to
those products. We assumed responsibility for the control and
performance of ongoing clinical trials for p53- and K-ras-based
products and for the development and clinical trials for new
gene therapy products. Aventis licensed or transferred to us all
of its patents covering the manufacture, sale, offering for
sale, importation or use of ADVEXIN gene therapy and other K-ras
patents, delivery patents and targeting technologies, as well as
all trademarks and goodwill associated with ADVEXIN gene
therapy. Aventis also

F-7



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

agreed, for a period of seven years, not to
conduct any activities directed to the development or
commercialization of any gene therapy products using the p53 or
K-ras genes. In connection with this restructuring, Aventis
purchased $25.0 million of non-voting preferred stock from
us. During the quarter ended September 30, 2001, we made a
one-time payment of $2.0 million to Aventis in
consideration for internal costs they incurred in facilitating
the transition of control and performance of these clinical
trials from Aventis to us.

Since our inception in 1993, we have used our
resources primarily to conduct research and development
activities, primarily for ADVEXIN gene therapy and, to a lesser
extent, for other product candidates. At December 31, 2002,
we had an accumulated deficit of approximately
$73.6 million. It is possible we will incur losses in the
future that will be greater than cumulative losses incurred in
prior years. We expect that cash needed for operating activities
will increase as we continue to expand our research and
development of various gene therapy technologies. Since
inception, our only significant revenues have been payments from
Aventis under the collaborative agreements discussed above for
Aventis early-stage development work on ADVEXIN gene
therapy and Aventis purchases of ADVEXIN gene therapy
product we manufactured for Aventis use in later-stage
clinical trials it previously performed. We no longer receive
these revenues. We have also earned revenue from federal
research grants, contract manufacturing and process development
activities and interest income on cash placed in short-term
investments.

Unless indicated otherwise, amounts disclosed in
these footnotes are rounded to the nearest thousand.

2.      Summary
of Significant Accounting Policies

Basis
of Presentation

The accompanying consolidated financial
statements include our accounts and all of our subsidiaries.
Intercompany transactions and balances are eliminated in
consolidation. In October 2001, we announced a change in the
ending date of our accounting year from June 30 to
December 31.

Use
of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash
and Cash Equivalents

Cash and cash equivalents include amounts on
deposit with financial institutions and investments with
original maturities of 90 days or less.

Short-Term
Investments

Our short-term investments consist of investments
in short-term, investment-grade securities in the form of
federal and state government obligations, commercial paper
and/or corporate bonds with various maturity dates not exceeding
one year. All short-term investments have been classified as
held-to-maturity and are carried at amortized cost. At any point
in time, amortized costs may be greater or less than fair value.
If investments are sold prior to maturity, we could incur a
realized gain or loss based on the fair market value of the
investments at the date of sale. Additionally, we could incur
future losses on investments if the investment issuer becomes
impaired or the investment is downgraded.

F-8



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property
and Equipment

Property and equipment are carried at cost, less
accumulated depreciation. Maintenance, repairs and minor
replacements are charged to expense as incurred. Significant
renewals and betterments are capitalized. Depreciation is
provided generally using accelerated methods based on useful
lives of fifteen years for research, manufacturing and
administrative facilities and five to seven years for equipment.
Interest incurred during construction of facilities is
capitalized as a cost of those facilities.

Property and equipment consists of the following
items (in thousands):

|                              |                              |              |        |        |  |   |        |        | 
|----------------------------- | ---------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                              |                              |             
|                              |                              | December 31,
|                              |                              |             
|                              |                              | 2001         |        | 2002  
|                              |                              |              |        |       
|Facilities                    |                              | $            | 11,570 |        |  | $ | 11,594 |       
|Equipment                     |                              |              | 5,279  |        |  |   | 5,376  |       
|                              |                              |              |        |        |  |   |        |       
|                              | Total property and equipment |              |        | 16,849 |  |   |        | 16,970 | 
|Less accumulated depreciation |                              |              | (6,406 | )      |  |   | (8,228 | )     
|                              |                              |              |        |        |  |   |        |       
|                              | Net property and equipment   |              | $      | 10,443 |  |   | $      | 8,742  | 
|                              |                              |              |        |        |  |   |        |       

As of December 31, 2001 and 2002, $3,077,000
of equipment was held under capital lease obligations and is
being depreciated over the applicable lease term (see
Note 7).

Federal
Income Taxes

We recognize deferred tax liabilities and assets
for the expected future tax consequences of events that have
been recognized differently between the financial statements and
tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the
financial statement carrying amounts and tax bases of
liabilities and assets using enacted tax rates and laws in
effect in the years in which the differences are expected to
reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation
should be provided.

Accrued
Liabilities

Accrued liabilities consist of the following
significant items (in thousands):

|                                            |                           |              |       |       |  |   |     |       | 
|------------------------------------------- | ------------------------- | ------------ | ----- | ----- |  | - | --- | ----- | 
|                                            |                           |             
|                                            |                           | December 31,
|                                            |                           |             
|                                            |                           | 2001         |       | 2002 
|                                            |                           |              |       |      
|Pre-clinical costs due to unrelated parties |                           | $            | 960   |       |  | $ | 490 |      
|Property taxes                              |                           |              | 213   |       |  |   | 314 |      
|Clinical costs due affiliate                |                           |              | 1,163 |       |  |   | 300 |      
|Vacation                                    |                           |              | 218   |       |  |   | 284 |      
|Clinical costs due unrelated parties        |                           |              | 365   |       |  |   | 275 |      
|Legal fees                                  |                           |              | 500   |       |  |   | 150 |      
|Other                                       |                           |              | 610   |       |  |   | 184 |      
|                                            |                           |              |       |       |  |   |     |      
|                                            | Total accrued liabilities |              | $     | 4,029 |  |   | $   | 1,997 | 
|                                            |                           |              |       |       |  |   |     |      

In conducting our pivotal Phase 3 clinical
trials of ADVEXIN gene therapy, we procure services from
multiple third party vendors. The cost of these services
constitutes a significant portion of the cost of these trials
and of our research and development expenses in general. Some of
our vendors do not necessarily bill us for their services on a
regular basis and, accordingly, make it difficult for us to
determine the costs we have incurred relative to their services
for any given accounting period. As a result, we make
significant accounting

F-9



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimates as to the amount of costs we have
incurred relative to these vendors in each accounting period.
These estimates are based on many factors, including, among
others, costs set forth in our contracts with these vendors, the
period of time over which the vendor has rendered the services
and the rate of enrollment of patients in our clinical trials.
Using these estimates, we record expenses and accrued
liabilities in each accounting period that we believe fairly
represent our obligations to these vendors. Actual results could
differ from these estimates resulting in increases or decreases
in the amount of expense recorded and the related accrual.

Revenue
Recognition

Contract services revenue is recognized as the
related contract services are performed. Deferred revenue is
recorded for cash received for which the related expenses had
not been incurred.

In accordance with the terms of the grant, grant
revenue is recognized as research expenses relating to the grant
are incurred, provided that the amounts received are not
refundable if the research is not successful.

Collaborative research payments received prior to
the restructuring of the Aventis collaboration were recognized
as revenue as we performed our obligations related to such
research agreements. Deferred revenue was recorded for cash
received for which the related expenses had not been incurred.
We have not received such payments subsequent to
December 31, 2000.

Prior to the restructuring of the Aventis
collaboration, we sold gene-therapy based products to Aventis at
specified prices and payment terms with no rights to return
delivered and accepted product. Revenue from product sales to
the affiliate was recognized upon completion of production and
delivery requirements and acceptance by Aventis and when
collection was reasonably assured. Deferred revenue was recorded
for cash received for product which had not been delivered to
and accepted by Aventis. We have not sold product to Aventis
subsequent to December 31, 2000.

Rental income from the sublease of laboratory
space to third parties under leases that have variable monthly
rent amounts over the term of the lease is recognized on a
straight-line basis over the term of the lease. Any cash
payments received in excess of rental income recognized is
recorded as deferred revenue. Rental income is included in other
income in the accompanying consolidated statement of operations.

Research
and Development Costs

Research and development costs include the costs
of conducting basic research, developing product applications,
conducting pre-clinical investigations and performing clinical
trials to obtain data for regulatory filings for product
approvals. Research and development costs are expensed as
incurred.

Net
Loss Per Share

Net loss per share is computed using the weighted
average number of shares of common stock outstanding. Due to
losses incurred in all periods presented, the shares associated
with stock options, warrants and non-voting convertible
preferred stock are not included because they are anti-dilutive.

Stock-Based
Compensation

Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation, allows companies to adopt one of two methods
for accounting for stock options. We have elected the method
that requires disclosure only of stock-based compensation.
Because of this election, we continue to account for our
employee stock-based compensation plans, using the intrinsic
value method, under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, as clarified by Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation. Accordingly,

F-10



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

deferred compensation is recorded for stock-based
compensation grants based on the excess of the fair market value
of the common stock on the measurement date over the exercise
price. The deferred compensation is amortized over the vesting
period of each unit of stock-based compensation grant, generally
four years. If the exercise price of the stock-based
compensation grants is equal to the estimated fair value of our
stock on the date of grant, no compensation expense is recorded.

The fair value of options granted for all periods
presented was estimated on the applicable grant dates using the
Black-Scholes option pricing model. Significant weighted average
assumptions used to estimate fair value for all years include:
risk-free interest rates ranging from 4.8 percent to
6.7 percent; expected lives of seven to ten years; no
expected dividends; and volatility factors ranging from
58.0 percent to 110.8 percent. Had compensation
expense been determined consistent with the provisions of SFAS
No. 123, our net loss would have been increased to the
following pro forma amounts (in thousands, except per share
information):

|                                                                                                                    |                                 |                     |        |                  |   |              |         |       |   |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------- | ------ | ---------------- | - | ------------ | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                    |                                 |                     |        | Six Months Ended |   | Year Ended  
|                                                                                                                    |                                 | Year Ended June 30, |        | December 31,     |   | December 31,
|                                                                                                                    |                                 |                     |        |                  |   |             
|                                                                                                                    |                                 | 2000                |        | 2001             |   | 2001         |         | 2002 
|                                                                                                                    |                                 |                     |        |                  |   |              |         |      
|Net loss, as reported                                                                                               |                                 | $                   | (7,724 | )                |   | $            | (16,442 | )     |   | $ | (12,328 | )     |   | $ | (26,128 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                                    |                                 | $                   | 1,497  |                  |   | $            | 1,589   |       |   | $ | 799     |       |   | $ | 1,377   |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards |                                 | $                   | (1,555 | )                |   | $            | (1,883  | )     |   | $ | (1,693  | )     |   | $ | (1,902  | )    
|                                                                                                                    |                                 |                     |        |                  |   |              |         |       |   |   |         |       |   |   |         |      
|Pro forma net income                                                                                                |                                 | $                   | (7,782 | )                |   | $            | (16,736 | )     |   | $ | (13,222 | )     |   | $ | (26,653 | )    
|                                                                                                                    |                                 |                     |        |                  |   |              |         |       |   |   |         |       |   |   |         |      
|Earnings per share:                                                                                                 |                                 |                     |        |                  |   |              |         |       |   |   |         |       |   |   |         |      
|                                                                                                                    | Basic and Diluted  as reported |                     | $      | (1.89            | ) |              | $       | (1.02 | ) |   | $       | (0.58 | ) |   | $       | (1.22 | )
|                                                                                                                    |                                 |                     |        |                  |   |              |         |       |   |   |         |       |   |   |         |      
|                                                                                                                    | Basic and Diluted  pro forma   |                     | $      | (1.90            | ) |              | $       | (1.04 | ) |   | $       | (0.62 | ) |   | $       | (1.24 | )
|                                                                                                                    |                                 |                     |        |                  |   |              |         |       |   |   |         |       |   |   |         |      

Because SFAS No. 123 does not apply to
options granted prior to July 1, 1995, the resulting pro
forma compensation costs may not be representative of the costs
to be expected in future years.

Other
Comprehensive Loss

Our other comprehensive loss consists of net
loss, as there are no other comprehensive loss items.

Recent
Accounting Pronouncements

In June 2002 the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an
exit or disposal plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002. We
do not believe that the adoption of SFAS No. 146 will have
a material impact on our financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment
of FASB Statement No. 123. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It
also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net
income of an entitys accounting policy decisions with
respect to stock-based employee compensation. Finally, this
Statement amends APB Opinion No. 28, Interim
Financial Report-

F-11



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ing, to require disclosure about those
effects in interim financial information. Since we are
continuing to account for stock-based compensation according to
APB 25, adoption of SFAS No. 148 requires us to provide
prominent disclosures about the affects of FAS 123 on reported
income (loss) and will require us to disclose these affects
in the interim financial statements as well.

3.      Stockholders
Equity

Stock
Split

In August 2000, our Board of Directors approved a
stock dividend to effect a stock split of 1.6 shares for every
one share of common stock outstanding. An amount equal to the
increased par value of the common shares has been reflected as a
transfer from additional paid-in capital to common stock.
Retroactive effect has been given to the stock split in
stockholders equity and in all share and per share data as
of the earliest date presented in the accompanying consolidated
financial statements.

Initial
Public Offering

In October 2000, we completed an initial public
offering of 4,600,000 newly-issued shares of our common stock at
a price of $8.00 per share. We received $32.2 million in
cash proceeds from the initial public offering, net of
underwriting discounts, commissions and other offering costs.

Convertible
Preferred Stock

Simultaneous with the closing of the initial
public offering, our convertible preferred stock then
outstanding, consisting of 3,011,423 shares of Series A
Convertible Preferred Stock, 1,757,063 shares of Series B
Convertible Preferred Stock, 551,410 shares of Series C
Convertible Preferred Stock and 1,100,000 shares of
Series D Convertible Preferred Stock, was automatically
converted into 12,326,173 shares of common stock.

Series A
Non-Voting Convertible Preferred Stock

In connection with the restructuring of the
Aventis collaboration and pursuant to a stock purchase agreement
with Aventis executed on June 30, 2001, we issued and sold
to Aventis 100,000 unregistered shares of a new class of $0.001
par value, Series A Non-Voting Convertible Preferred Stock
in exchange for $25.0 million. At June 30, 2001, we
had a receivable of $25.0 million from Aventis for this
sale, for which we received payment in July 2001. These shares
are convertible at any time, at our option or the option of
Aventis, into 2,343,721 shares of our common stock. Under a
voting agreement, Aventis must vote these shares in the same
manner as the shares voted by a majority of the other
stockholders on any corporate action put to a vote of our
stockholders. This voting requirement terminates at the earliest
of the tenth anniversary of the voting agreement, registration
of these shares with the Securities and Exchange Commission or
the sale of these shares to an Aventis non-affiliate, as defined
in the voting agreement. A registration rights agreement grants
the holder of a majority of the common stock issuable upon
conversion of the Series A Non-Voting Convertible Preferred
Stock three demand registrations and three piggyback
registrations.

Employee
Stock Purchase Plan

Under our 2000 Employee Stock Purchase Plan (the
Stock Purchase Plan), 780,000 shares of common stock are
reserved for purchase by eligible employees, at 85 percent
of the appropriate market price. The Stock Purchase Plan
provides for an increase on each January 1 in the number of
shares available for issuance, in an amount equal to the lesser
of 480,000 shares, 1.5 percent of the outstanding shares of
common stock on the date of the annual increase or such lesser
amount as may be determined by the Board of Directors. The Stock
Purchase Plan provides that eligible employees may authorize
payroll deductions of up to 10 percent of their

F-12



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

qualified compensation. The maximum number of
shares that an employee may purchase in a single offering period
is 10,000 shares. The Stock Purchase Plan will terminate in 2010
and may be amended or terminated by the Board of Directors.
During the year ended June 30, 2001, 22,561 shares of
common stock were purchased by employees under this plan. There
have been no common stock purchases since that time, as we have
suspended operation of the Stock Purchase Plan until further
notice by the Board of Directors.



| |                   
| | ------------------
| | Stock Option Plans

The 2000 Stock Option Plan (the Stock Option
Plan) was initiated in October 2000 and all stock option grants
since that time have been under this plan. The Stock Option Plan
provides for the granting of options, either incentive or
non-statutory, or stock purchase rights to our employees,
directors and consultants to purchase shares of our common
stock. At December 31, 2002, there were 5,109,000 shares of
common stock reserved for option grants under this plan. This
plan provides for annual increases in the number of shares
available for issuance beginning in fiscal 2001, equal to the
lesser of 1,600,000 shares, five percent of the outstanding
shares on the date of the annual increase, or a lesser amount as
may be determined by the Board of Directors. The exercise price
for all option grants shall be no less than the fair value of
our common stock at the date of grant, with the exception of
incentive stock options granted to holders of shares
representing more than ten percent of our voting power, in which
case the exercise price shall be no less than 110 percent
of the fair value. In the event of a merger, reorganization or
change in our controlling ownership, all options outstanding
under the Stock Option Plan become fully vested and immediately
exercisable unless the successor corporation assumes or
substitutes other options in their place. The Stock Option Plan
will terminate in 2010 and may be amended or terminated by the
Board of Directors.

Prior to October 2000, stock options were granted
under our 1995 Stock Plan. We no longer issue options under this
plan. The terms of this plan are substantially the same as the
Stock Option Plan. No shares of common stock were reserved for
option grants under this plan at December 31, 2002.

We record the fair value of options issued to
non-employee consultants at the fair value of the options
issued. We have not incurred significant compensation expense
relating to non-employee consultant grants. Any expense is
recognized over the service period or at the date of issuance if
the options are fully vested and no performance obligation
exists.

Aggregate deferred compensation recorded related
to stock options was $4,177,000 and $792,000 during the years
ended June 30, 2000 and 2001, respectively, $600,000 and
zero during the six months ended December 31, 2000 and
2001, and zero during the year ended December 31, 2002.

Amortization to expense of deferred compensation
related to stock options was $1,497,000 and $1,589,000 during
the years ended June 30, 2000 and 2001, respectively,
$746,000 and $799,000 for the six months ended December 31,
2000 and 2001, respectively, and $1,377,000 during the year
ended December 31, 2002.

Reversals of deferred compensation and additional
paid-in capital for unamortized deferred compensation related to
the forfeiture of non-vested options by terminated employees was
$248,000 and $73,000 for the years ended June 30, 2000 and
2001, respectively, and $56,000 and $56,000 for the six months
ended December 31, 2000 and 2001, respectively, and
$134,000 during the year ended December 31, 2002. For each
respective year, total amortization expense was revised to the
extent amortization had previously been recorded for non-vested
options.

In December 1999, we accelerated the vesting of
options held by a member of the Board of Directors concurrent
with the individuals resignation from our Board of
Directors. We accelerated these options in recognition of the
individuals contributions to the Board of Directors and
recognized approximately $574,000 of compensation expense for
the fair value of the previously unvested options as of the
re-measurement date.

F-13



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of option activity
under these plans:

|                                     |           |             |           |                |   |   |      |      | 
|------------------------------------ | --------- | ----------- | --------- | -------------- | - | - | ---- | ---- | 
|                                     |           |             |           | Weighted      
|                                     |           |             |           | Average       
|                                     |           | Options     |           | Exercise Price
|                                     |           | Outstanding |           | Per Share     
|                                     |           |             |           |               
|Balance, June 30, 1999               |           |             | 2,431,111 |                |   | $ | 0.47 |     
|                                     | Granted   |             |           | 399,306        |   |   |      | 0.94 | 
|                                     | Exercised |             |           | (108,745       | ) |   |      | 0.46 | 
|                                     | Cancelled |             |           | (124,517       | ) |   |      | 0.51 | 
|                                     |           |             |           |                |   |   |      |     
|Balance, June 30, 2000               |           |             | 2,597,155 |                |   |   | 0.55 |     
|                                     | Granted   |             |           | 704,498        |   |   |      | 4.30 | 
|                                     | Exercised |             |           | (308,212       | ) |   |      | 0.42 | 
|                                     | Cancelled |             |           | (17,357        | ) |   |      | 0.74 | 
|                                     |           |             |           |                |   |   |      |     
|Balance, June 30, 2001               |           |             | 2,976,084 |                |   |   | 1.27 |     
|                                     | Granted   |             |           | 379,300        |   |   |      | 4.35 | 
|                                     | Exercised |             |           | (55,238        | ) |   |      | 0.44 | 
|                                     | Cancelled |             |           | (38,350        | ) |   |      | 1.21 | 
|                                     |           |             |           |                |   |   |      |     
|Balance, December 31, 2001           |           |             | 3,261,796 |                |   |   | 1.80 |     
|                                     | Granted   |             |           | 989,514        |   |   |      | 3.62 | 
|                                     | Exercised |             |           | (40,331        | ) |   |      | 0.54 | 
|                                     | Cancelled |             |           | (224,886       | ) |   |      | 3.46 | 
|                                     |           |             |           |                |   |   |      |     
|Balance, December 31, 2002           |           |             | 3,986,093 |                |   |   | 2.18 |     
|                                     |           |             |           |                |   |   |      |     
|Exercisable at December 31,
    2002 |           |             | 2,457,447 |                |   |   | 1.28 |     
|                                     |           |             |           |                |   |   |      |     

The weighted average fair value of options
granted during the years ended June 30, 2000 and 2001 was
$11.18 and $5.61, respectively, for the six months ended
December 31 2001 was $3.96, and for the year ended
December 31, 2002 was $3.07. All options granted during the
six months ended December 31, 2000 and thereafter have an
exercise price equal to the fair value of our common stock as of
date of grant.

The following table summarizes information about
stock options outstanding as of December 31, 2002:

|                    |  |                     |           |                  |  |                  |      |                   |  |                  |      |  |  |  |           |  |  |   |      | 
|------------------- |  | ------------------- | --------- | ---------------- |  | ---------------- | ---- | ----------------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  | Weighted Average    |           |                  |  |                 
|                    |  | Remaining           |           |                  |  |                 
|Range of            |  | Outstanding as of   |           | Contractual Life |  | Weighted Average |      | Exercisable as of |  | Weighted Average
|Exercise Price      |  | December 31, 2002   |           | (In Years)       |  | Exercise Price   |      | December 31, 2002 |  | Exercise Price  
|                    |  |                     |           |                  |  |                  |      |                   |  |                 
|$0.39-$1.99         |  |                     | 2,137,107 |                  |  |                  | 4.92 |                   |  | $                | 0.56 |  |  |  | 1,936,845 |  |  | $ | 0.53 | 
|2.00- 3.91          |  |                     | 575,750   |                  |  |                  | 8.95 |                   |  |                  | 2.68 |  |  |  | 205,900   |  |  |   | 2.86 | 
|4.02- 5.88          |  |                     | 1,273,236 |                  |  |                  | 8.65 |                   |  |                  | 4.64 |  |  |  | 314,702   |  |  |   | 4.86 | 
|                    |  |                     |           |                  |  |                  |      |                   |  |                  |      |  |  |  |           |  |  |   |      | 
|                    |  |                     | 3,986,093 |                  |  |                  | 6.69 |                   |  |                  | 2.18 |  |  |  | 2,457,447 |  |  |   | 1.28 | 
|                    |  |                     |           |                  |  |                  |      |                   |  |                  |      |  |  |  |           |  |  |   |      | 

F-14



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.      Federal
Income Taxes

The reconciliation of the statutory federal
income tax rate to our effective income tax rate is as follows:

|                                             |  |            |       |                  |  |              |       |      |  |      |       |    |  |  |       |    |  |  |       |   
|-------------------------------------------- |  | ---------- | ----- | ---------------- |  | ------------ | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | -- |  |  | ----- | --
|                                             |  |            |       |                  |  |             
|                                             |  | Year Ended |       | Six Months Ended |  | Year Ended  
|                                             |  | June 30,   |       | December 31,     |  | December 31,
|                                             |  |            |       |                  |  |             
|                                             |  | 2000       |       | 2001             |  | 2000         |       | 2001 |  | 2002
|                                             |  |            |       |                  |  |              |       |      |  |     
|Federal statutory rate                       |  |            | (34.0 | )%               |  |              | (34.0 | )%   |  |      | (34.0 | )% |  |  | (34.0 | )% |  |  | (34.0 | )%
|State taxes, net of federal benefit          |  |            |      |                  |  |              |      |      |  |      |      |    |  |  |      |    |  |  | (2.8  | ) 
|Increase in deferred tax valuation allowance |  |            | 24.8  |                  |  |              | 30.6  |      |  |      | 30.8  |    |  |  | 32.9  |    |  |  | 37.1  |   
|Stock option compensation not deductible     |  |            | 9.1   |                  |  |              | 3.3   |      |  |      | 3.1   |    |  |  | 2.2   |    |  |  | 1.8   |   
|Research and development tax credits         |  |            |      |                  |  |              |      |      |  |      |      |    |  |  | (1.4  | )  |  |  | (0.2  | ) 
|Other                                        |  |            | 0.1   |                  |  |              | 0.1   |      |  |      | 0.1   |    |  |  | 0.3   |    |  |  | (4.7  | ) 
|                                             |  |            |       |                  |  |              |       |      |  |      |       |    |  |  |       |    |  |  |       |   
|                                             |  |            |      | %                |  |              |      | %    |  |      |      | %  |  |  |      | %  |  |  |      | % 
|                                             |  |            |       |                  |  |              |       |      |  |      |       |    |  |  |       |    |  |  |       |   

The components of our deferred tax assets are as
follows:

|                                                                |                           |              |             |            |  |   |             |            | 
|--------------------------------------------------------------- | ------------------------- | ------------ | ----------- | ---------- |  | - | ----------- | ---------- | 
|                                                                |                           |             
|                                                                |                           | December 31,
|                                                                |                           |             
|                                                                |                           | 2001         |             | 2002      
|                                                                |                           |              |             |           
|Net operating loss carryforwards                                |                           | $            | 11,708,500  |            |  | $ | 21,602,000  |           
|Research and development tax credits                            |                           |              | 226,900     |            |  |   | 282,800     |           
|Technology license                                              |                           |              | 50,200      |            |  |   | 25,900      |           
|Tax basis of property and equipment in excess of
    book basis |                           |              | 1,578,400   |            |  |   | 1,849,800   |           
|Accrued liabilities                                             |                           |              | 432,500     |            |  |   | 248,900     |           
|Capital leases                                                  |                           |              | 137,900     |            |  |   |            |           
|Other                                                           |                           |              | 209,000     |            |  |   | 35,600      |           
|                                                                |                           |              |             |            |  |   |             |           
|                                                                | Total deferred tax assets |              |             | 14,343,400 |  |   |             | 24,045,000 | 
|Less  Valuation allowance                                      |                           |              | (14,343,400 | )          |  |   | (24,045,000 | )         
|                                                                |                           |              |             |            |  |   |             |           
|                                                                | Net deferred tax assets   |              | $           |           |  |   | $           |           | 
|                                                                |                           |              |             |            |  |   |             |           

As of December 31, 2002, we have generated
net operating loss (NOL) carryforwards of approximately
$58.4 million and research and development credits of
approximately $283,000 available to reduce future income taxes.
These carryforwards begin to expire in 2007. A change in
ownership, as defined by federal income tax regulations, could
significantly limit our ability to utilize these carryforwards.
Our ability to utilize current and future NOLs to reduce future
taxable income and tax liabilities may be limited. Additionally,
because United States tax laws limit the time during which these
carryforwards may be applied against future taxes, we may not be
able to take full advantage of these attributes for federal
income tax purposes. As we have had cumulative losses and there
is no assurance of future taxable income, a valuation allowance
has been established to fully offset the deferred tax asset. The
valuation allowance increased $1.9 million and
$5.0 million for the years ended June 30, 2000 and
2001, respectively, and $2.8 million and $4.1 million
for the six months ended December 31, 2000 and 2001,
respectively, and $9.7 million during the year ended
December 31, 2002. These valuation allowance increases were
primarily due to losses from operations.

F-15



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.      Notes
Payable

We have notes payable with banks to finance our
facilities, which are pledged as security for these notes. There
are two notes with the following terms:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Note payable with an original principal balance
    of $6,000,000 and an outstanding balance of $5,826,000 and
    $5,732,000 at December 31, 2001 and 2002, respectively.
    Interest is fixed at 7.5 percent until November 2004, at
    which time it is subject to a one-time adjustment to a rate
    equal to the then-current rate of the five-year United States
    Treasury bond note plus 2 percent, with such adjusted
    interest rate not to exceed 8.5 percent. Interest plus
    principal based on a 25-year amortization period are payable
    monthly until November 2009, at which time the remaining
    outstanding principal is due and payable.
|
| |  | Note payable with an original principal balance
    of $3,263,000 and an outstanding balance of $2,938,000 and
    $2,332,000 at December 31, 2001 and 2002, respectively.
    Interest is at prime, adjustable annually. Principal and
    interest, fully amortized over a five-year period, is payable
    monthly through June 2006.                                                                                                                                                                                                                                                                                                                                  

Interest was capitalized as a cost of facilities
during the time those facilities to which those notes relate
were under construction. Interest capitalized was $103,000 and
$84,000 during the years ended June 30, 2000 and 2001,
respectively, $60,000 and zero during the six months ended
December 31, 2000 and 2001, respectively, and zero during
the year ended December 31, 2002.

Aggregate annual maturities on notes payable as
of December 31, 2002, are as follows (in thousands):

|                         |            |       |   |       |       | 
|------------------------ | ---------- | ----- | - | ----- | ----- | 
|Year ending December 31, |            |       |   |      
|                         | 2003       |       | $ | 755   |      
|                         | 2004       |       |   | 789   |      
|                         | 2005       |       |   | 825   |      
|                         | 2006       |       |   | 434   |      
|                         | 2007       |       |   | 142   |      
|                         | Thereafter |       |   | 5,119 |      
|                         |            |       |   |      
|                         |            | Total |   | $     | 8,064 | 
|                         |            |       |   |      

We believe the fair market value of our debt
approximates its carrying value as of all balance sheet dates
presented herein.

6.      License
and Research Agreements



| |                                                                                
| | -------------------------------------------------------------------------------
| | Patent and Technology License Agreement With
    The University of Texas System

We have a license agreement with the Board of
Regents of The University of Texas System (the System) and
M. D. Anderson Cancer Center, a component institution
of the System, whereby we have an exclusive, worldwide license
to use certain technology. Beginning with the first commercial
sale of a product incorporating the licensed technologies, we
will pay M. D. Anderson Cancer Center, for the longer
of fifteen years or the life of the patent, a royalty based on
net sales by us or our affiliates or by sublicense agreement of
products incorporating any of such technologies. We are
obligated by the agreement to reimburse any of M.
D. Anderson Cancer Centers costs that may be incurred
in connection with obtaining patents related to the licensed
technologies.

F-16



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

VirRx,
Inc.

We are working with VirRx, Inc. (VirRx) to
investigate other vector technologies for delivering gene-based
products into targeted cells. We have an agreement with VirRx,
which began in 2002, to purchase shares of VirRxs
Series A Preferred Stock. We purchased $525,000 of this
stock for cash during 2002, which we recorded as research and
development expense. We have agreed to purchase an additional
$150,000 of this stock for cash on the first day of each quarter
through January 1, 2006. VirRx is required to use the
proceeds from these stock sales in accordance with the terms of
a collaboration and license agreement between us and VirRx for
the development of VirRxs technologies. We may
unilaterally terminate this collaboration and license agreement
with 90 days prior notice at any time after March 7,
2003, which would also terminate the requirement for us to make
any additional stock purchases. Provided the collaboration and
license agreement remains in place, we will make additional
milestone stock purchases, either for cash or through the
issuance of our common stock, upon the completion of
Phase 1, Phase 2 and Phase 3 clinical trials
involving technologies licensed under this agreement and we will
make a $5.0 million cash milestone payment to VirRx, for
which we receive no VirRx stock, upon approval by the United
States Food and Drug Administration of a biologics license
application involving these technologies. To the extent we have
already made cash milestone payments, we may receive a credit of
50% of the Phase 2 clinical trial milestone payments and
25% of the Phase 3 clinical trial milestone payments
against this $5.0 million cash milestone payment. The
additional milestone stock purchases and cash payment are not
anticipated to be required in the near future. We have an option
to purchase all outstanding shares of VirRx at any time until
March 2007.

Other
Technology Option and License Agreements

We have technology option and license agreements
with various other third parties and, in particular, agreements
related to the mda-7 and PTEN genes. These agreements require us
to make milestone and license payments to these parties if and
when we achieve certain prescribed clinical trial and product
development milestones. We have technology option and license
agreements with two additional third parties covering certain
enabling technologies, both of which require annual payments of
$20,000 until cancelled at our option.

Sponsored
Research

We fund certain research performed by M.
D. Anderson Cancer Center to further the development of
technologies that could have potential commercial viability. By
sponsoring and funding this research, we have the right to
include certain patentable inventions arising therefrom under
its patent and technology license agreement with The University
of Texas System. The expense for this research was approximately
$816,000 and $634,000 during the years ended June 30, 2000
and 2001, respectively, $230,000 and $632,000 during the six
months ended December 31, 2000 and 2001, respectively, and
$809,000 for the year ended December 31, 2002.

7.      Commitments
and Contingencies

Lease
Commitments

We are obligated under various capital and
operating leases for land, office and laboratory space and
equipment that expire at various dates through September 2026.
The amounts payable under capital leases were drawn under two
lease lines of credit with commercial leasing companies which
were used to finance equipment acquisitions. Amounts drawn under
both lines are payable monthly over 48 months from the time
of the draw. The lines of credit bear interest at fixed interest
rates ranging from 11.3% to 13.25% at December 31, 2002.
The lease lines of credit are secured by the equipment being
financed.

F-17



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Operating leases consist primarily of a ground
lease for the land on which our new facility is located. The
annual rent due under this lease is $144,000. The primary term
of this lease continues through September 2026.

Lease expense was $380,000 and $315,000 for the
years ended June 30, 2000 and 2001, respectively, and
$157,000 and $155,000 for the six months ended December 31,
2000 and 2001, respectively, and $303,000 for the year ended
December 31, 2002. Future minimum lease payments under
non-cancelable operating leases and the present value of future
minimum capital lease payments as of December 31, 2002, are
as follows (in thousands):

|                                    |            |                              |   |         |       |  |     |     |       | 
|----------------------------------- | ---------- | ---------------------------- | - | ------- | ----- |  | --- | --- | ----- | 
|                                    |            | Operating                    |   | Capital
|                                    |            | Leases                       |   | Leases 
|                                    |            |                              |   |        
|Year ending December 31,            |            |                              |   |         |       |  |     |    
|                                    | 2003       |                              | $ | 279     |       |  | $   | 905 |      
|                                    | 2004       |                              |   | 281     |       |  |     | 128 |      
|                                    | 2005       |                              |   | 202     |       |  |     |    |      
|                                    | 2006       |                              |   | 144     |       |  |     |    |      
|                                    | 2007       |                              |   | 144     |       |  |     |    |      
|                                    | Thereafter |                              |   | 2,707   |       |  |     |    |      
|                                    |            |                              |   |         |       |  |     |    
|                                    |            | Total minimum lease payments |   | $       | 3,757 |  |     |     | 1,033 | 
|                                    |            |                              |   |         |       |  |     |    
|Less  amount representing interest |            |                              |   |         |       |  | (76 | )  
|                                    |            |                              |   |         |       |  |     |    
|                                    |            | Capital lease obligations    |   |         |       |  |     | $   | 957   | 
|                                    |            |                              |   |         |       |  |     |    

Insurance
and Litigation

We are subject to numerous risks and
uncertainties because of the nature and status of our
operations, and we are subject to claims and legal actions
arising in the normal course of business. We maintain insurance
coverage for events and in amounts that we deem appropriate.
Management believes that uninsured losses, if any, would not be
materially adverse to our financial position or results of
operations.

We were previously named as a defendant in a
complaint filed by Canji, Inc against Sidney Kimmel Cancer
Center (SKCC), ourselves and others. In June 2002, Canji, SKCC
and we entered into an agreement to settle all claims to the
litigation. As part of the agreement, SKCC agreed to reimburse
us for certain costs, and we granted to Canji a limited,
non-exclusive sublicense under our license of intellectual
property from SKCC. The SKCC intellectual property is not
material to our business.

Employment
Agreement

We have an employment agreement with our
President and Chief Executive Officer that provides for a base
salary and bonuses through July 31, 2003.

8.      Related
Parties

The Chairman of our Board of Directors owns, and
another member of our Board of Directors is a former employee
of, a company to which we pay consulting fees of approximately
$175,000 per year. We are obligated to continue paying this fee
until such time as we, at our option, terminate the services of
that company. As of December 31, 2002, these two
individuals held options to purchase 416,000 shares of our
common stock.

We have a consulting agreement with an individual
primarily responsible for the creation of the technology upon
which ADVEXIN gene therapy is based, who is also a stockholder.
Under this consulting

F-18



---



##### Table of Contents



INTROGEN THERAPEUTICS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

agreement, we paid this individual fees of
$150,000 and $150,000 during the years ended June 30, 2000
and 2001, respectively, $75,000 and $78,750 during the six
months ended December 31, 2000 and 2001, respectively, and
$171,000 during the year ended December 31, 2002. This
consulting agreement provides for payments of $181,500 per annum
until September 30, 2003, and $200,000 per annum thereafter
through the end of its term on September 30, 2009, with
such future payments subject to adjustment for inflation. We may
terminate this agreement at our option upon one years
advance notice.

We sublease a portion of our facilities to M.
D. Anderson Cancer Center under a lease with a
non-cancelable term that expires in 2009. M. D. Anderson
Cancer Center is obligated to pay us rent of approximately
$76,000 per month until February 2006 and $13,053 per month
thereafter. This lease began in February 2001, after which time
rental income related to this lease is included in other
revenue. Rental income was $354,000 for the year ended
June 30, 2001, $515,000 for the six months ended
December 31, 2001 and $1,104,000 for the year ended
December 31, 2002.

In 2002, we entered into an agreement with
Aventis Pharmaceuticals Products, Inc. (APP) under which APP
provides funding for a Phase 2 clinical trial for breast
cancer conducted under our supervision. APP may fund up to
$795,000 for this trial of which we received $197,000 through
December 31, 2002. Amounts received under this agreement
are recorded as deferred revenue until the related expenses are
incurred. APP is an affiliate of Aventis, one of our
stockholders.

F-19



---



##### Table of Contents



EXHIBIT INDEX

|        |      |  |  |                         |  |                                                                                                                                                                              
|------- | ---- |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |  |                        
|Number  |      |  |  | Description of Document
|        |      |  |  |                        
|        | 23.1 |  |  |                        |  | Consent of Ernst & Young LLP, independent
    auditors                                                                                                                       
|        | 23.2 |  |  |                        |  | Information Regarding Consent of Arthur Andersen
    LLP                                                                                                                     
|        | 24.1 |  |  |                        |  | Power of Attorney (See page 52)                                                                                                                                              
|        | 99.1 |  |  |                        |  | Certification of Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C. 1350, as Adopted
    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002