UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-K

|ý                                                                                    | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.    
|------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------
|For the year ended December 31, 2004                                                
|o                                                                                    | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|TRANSITION PERIOD
FROM                             TO           
                  .

Commission File Number 0-31275

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

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

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 ý 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 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. ý

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of
1934). Yes o No ý

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2004 was approximately $33.8 million
(based on the last reported sales price of $1.38 on June 30, 2004 on the NASDAQ National Market).

The
number of shares outstanding of the Registrant's common stock as of April 8, 2005 was 31,486,299.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement, which is expected to be filed not later than 120 days after the Registrant's year ended December 31,
2004, to be delivered in connection with the Registrant's 2005 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.



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Large Scale Biology Corporation  Form 10-K  For the Year Ended December 31, 2004    Table of Contents

|         |  |                                                                                                |  | Page
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                                |  |     
|Item 1   |  | Business                                                                                       |  | 1   
|Item 2   |  | Properties                                                                                     |  | 11  
|Item 3   |  | Legal Proceedings                                                                              |  | 11  
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                            |  | 11  
|PART II  |  |                                                                                                |  |     
|Item 5   |  | Market for Registrant's Common Equity and Related Stockholder Matters                          |  | 12  
|Item 6   |  | Selected Financial Data                                                                        |  | 13  
|Item 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 14  
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 30  
|Item 8   |  | Financial Statements and Supplementary Data                                                    |  | 30  
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 30  
|Item 9A  |  | Controls and Procedures                                                                        |  | 30  
|Item 9B  |  | Other Information                                                                              |  | 30  
|PART III |  |                                                                                                |  |     
|Item 10  |  | Directors and Executive Officers of the Registrant                                             |  | 31  
|Item 11  |  | Executive Compensation                                                                         |  | 31  
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 31  
|Item 13  |  | Certain Relationships and Related Transactions                                                 |  | 32  
|Item 14  |  | Principal Accountant Fees and Services                                                         |  | 32  
|PART IV  |  |                                                                                                |  |     
|Item 15  |  | Exhibits and Financial Statement Schedules                                                     |  | 33  
|         |  | Signatures                                                                                     |  | 59  

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

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

Large Scale Biology Corporation, LSBC, our logo, GENEWARE®,
BAMF, GRAMMRand other product and trade names are trademarks of or registered
trademarks of Large Scale Biology Corporation in the United States and/or other countries. Other product and trade names mentioned herein may be trademarks and/or registered trademarks of their
respective companies. References in this report to "the Company," "our," "we" and "us" refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and
subsidiaries.

PART I

Item 1. Business

Overview

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



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

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

Our
history of negative cash flows and our cash balance of $1,112,000 at December 31, 2004, raise substantial doubt about the Company's ability to continue as a going concern,
absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, we are seeking debt or equity financing, sale of stock of our subsidiary, PDI, and joint
development and commercialization of products with other companies. However, we cannot assure you that we will successfully obtain equity or debt financing or product related revenues as such events
are subject to factors beyond our control. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of
recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

We
were incorporated in California in 1987 and reincorporated in Delaware in 2000. From our inception until the end of 2000, our main focus was to develop our GENEWARE, genomics,
proteomics and bioinformatics platforms, and to provide research and development services to customers. In 2001, our focus shifted to developing products and bringing our manufacturing operations up
to regulatory standards for current good manufacturing practices, or cGMP.

The
Company is headquartered in Vacaville, California, and its mailing address is 3333 Vaca Valley Parkway, Vacaville, California, 95688, and our telephone number is
(707) 446-5501. Our corporate web site address is www.lsbc.com. We have made all reports and amendments to reports available on our website. We make available free of charge through
our web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and
Exchange Commission.

Developments in 2004



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Closed and Subleased our Germantown, Maryland FacilityThe Germantown, Maryland facility was closed and the machinery and
equipment was re-deployed, sold or scrapped during 2004. Net proceeds of $0.2 million were received when assets with a net book value of $0.2 million and a gross book value
of $2.9 million were sold or scrapped. We entered into a sublease of our entire Germantown, Maryland, facility to the end of the lease term in 2010.

Issued Common StockOn March 8, 2004, we completed an $8.2 million private placement of 5.2 million
shares of newly issued common stock and warrants to purchase an additional 1.5 million shares that resulted in net proceeds after expenses of approximately $7.5 million.

Issued Long-term DebtWe entered into a $2.9 million loan agreement with Kentucky Technology, Inc.,
a for-profit economic development company formed by the University of Kentucky. During 2004 we received $1.0 million under this arrangement.

Further Established Our Intellectual PropertyWe obtained 22 new patents worldwide, including 13 patents in the U.S. and 9
foreign counterpart patents, impacting each key component of our technology base, bringing our total patents issued worldwide to 131. These new patents cover anti-cancer molecules, plant
and animal viral vectors, and biomanufacturing. We also filed 38 new patent applications, including 24 patents in the U.S. and 14 foreign counterpart patents covering various aspects of our technology
base, which increases the total number of pending patents to 190 worldwide.

Recent Developments

On January 14, 2005, we received an additional $1.9 million under the aforementioned $2.9 million loan agreement with Kentucky
Technology, Inc.

On
January 31, 2005, we extended our research collaboration agreement with Schering-Plough Animal Health Corporation, or Schering-Plough, that will fund additional product
development of animal health vaccines. Vaccines for three animal health targets were successfully delivered by us to Schering-Plough for animal clinical evaluation. We developed and produced trial
quantities of the vaccines using our patented GENEWARE biomanufacturing platform. Our GENEWARE biomanufacturing technology provides a method for producing animal health vaccines using
non-transgenic, non-food/fodder plants as production hosts.

On
March 3, 2005, we borrowed $0.6 million from Kevin J. Ryan, our President and Chief Executive Officer and a member of the our Board of Directors and issued him a
convertible promissory note. The note is due on July 1, 2005, and is convertible into our common stock.

On
April 15, 2005, we borrowed an additional $3.0 million from Kevin J. Ryan and issued him a promissory note due on April 17, 2006.

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Science and Industry Background

All living things are made up of one or more cells. Although science still has much to learn about how cells actually function, it is commonly accepted that all
cells have several basic components. Inside each plant and animal cell is a nucleus containing deoxyribonucleic acid, or DNA, that makes up its genetic code. Different sections of the DNA are called
genes. A gene or a combination of genes encodes the information needed for conducting the various essential life functions. Each gene is composed of a specific, unique sequence of DNA. When a gene is
turned on, or "expressed," the genetically coded information is copied into a related molecule called messenger ribonucleic acid, or mRNA. This messenger travels to a location outside the nucleus
where proteins are then made according to the genetic information contained in the mRNA.

Private
industry and the federal government have each announced the completion of the sequencing of the human genome. Utilizing the genetic information of the human genome, numerous
laboratories are rapidly identifying gene sequences that are involved in the causes of diseases. An increasing number of new biological drugs are being tested and are being used to treat diseases. The
production of biological drugs requires complicated, and usually, very expensive cellular production systems.

Our
plant-based GENEWARE system offers several advantages for the production of biological compounds. A gene sequence, or mRNA, of a target protein is inserted into a plant virus, or
vector. Non-recombinant non-food/feed plants are then inoculated with the
vector. The virus penetrates cells of the plant and uses the cell's mechanism to replicate and to express the mRNA carried by the virus to produce the target protein. The virus spreads from cell to
cell within the plant but does not get incorporated within the DNA of the plant cells. Consequently, the mRNA is not passed on to the next generation of the plant. This system provides a large-scale
manufacturing capability to produce commercially valuable proteins rapidly and cost effectively, without the environmental concerns that afflict the cultivation of transgenic food/feed crops used by
other companies.

Our Strategy

Our corporate strategy is to focus our platform technologies on developing and commercializing our products and those of our partners. While our GENEWARE platform
is broadly applicable, our current emphasis is to primarily use it for biomanufacturing health care products. Our strategic business focus consists of developing the following business opportunities:



We
have successfully achieved proof of principle with our own human and animal-health-care therapeutics. While biomanufacturing and some early stages of regulatory and
clinical development have been internally financed, we plan to achieve advanced clinical trials, final regulatory approvals and commercialization in collaboration with pharmaceutical and biotechnology
companies. Our cat parvovirus vaccine has successfully completed early-stage pre-clinical trials, demonstrating safety and initial efficacy and is moving forward into advanced development.
We have completed manufacturing process development of Aprotinin and Alpha-galactosidase A. We have received Orphan Drug designation from the FDA for Alpha-galactosidase A. We are improving our
manufacturing process for human lysosomal acid lipase and are conducting research on its potential use as a therapeutic to treat Wolman disease and cholesterol ester storage disorder and to reduce
atherosclerotic plaque. We have been developing biomanufacturing capability for proteins and peptides to capitalize on the capacity constraints of the biotechnology industry. We have built a
manufacturing facility in Owensboro,

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Kentucky,
that is ready for FDA-compliant manufacturing of human therapeutics and vaccines developed by our partners and us.

We
have created a wholly owned subsidiary, Predictive Diagnostics, Inc., or PDI, to apply our proprietary BAMF technology for diagnostic tests of cancer and other diseases.
Predictive Diagnostics expects to perform diagnostic tests for specific diseases as an operating laboratory and in collaboration with major clinical reference labs, hospitals, and managed care
laboratories. The reference lab partners would analyze serum samples, or perform mass spectrometry analysis where needed, prior to Predictive's BAMF diagnostic analysis. Upon successful completion of
our first phase of our business plan, we expect to implement a fully vertical BAMF test with all laboratory steps performed directly or through outsourcing by PDI. PDI may also license BAMF technology
to other organizations to enable them to perform such tests.

We
have developed a novel gene shuffling technology called GRAMMR, which can generate large libraries of extensively shuffled gene sequences, and which we believe is faster and more
efficient than competing gene shuffling technologies. Our contract with the US Army Medical Research Institute of Infectious Diseases, or USAMRIID, applies our proprietary GRAMMR technology for DNA
shuffling and molecular evolution to improve biodefense therapy candidate products. In parallel with our program with the federal government, we plan to market GRAMMR gene shuffling technology to
companies seeking to improve their biological drugs.

Commercial Opportunities

AprotininAprotinin is a natural protein that acts to prevent protein breakdown, and is used in
medical procedures to reduce the systemic inflammatory response, or SIR, associated with
cardiopulmonary bypass surgery, or CPB. Once triggered, SIR can lead to a cascade of subsequent inflammatory events that can collectively retard patient recovery. When administered intravenously in
CPB procedures, aprotinin helps decrease the need for blood transfusions, reduces post-operative bleeding, and thus reduces re-exploration for bleeding.

The
only aprotinin product in the United States market for use in CPB is currently obtained by extraction from cow lungs. We have successfully produced pilot-scale quantities of
Aprotinin that is identical to this product using our proprietary GENEWARE plant-based biomanufacturing system. Our Aprotinin active pharmaceutical ingredient, or API, has the same biological activity
as the animal-derived counterpart. When scaled to commercial-level production, we believe that our Aprotinin can be produced cost effectively and in sufficient quantities to meet worldwide demand,
without the safety concerns associated with animal derived products. We are in discussions with potential partners for supplying our Aprotinin to the medical markets.

We
entered into a multi-year, non-exclusive agreement with Sigma-Aldrich Fine Chemicals to distribute non-pharmaceutical Aprotinin. Aprotinin sales
were 1% of total revenues during 2004.

Alpha-Galactosidase AAlpha-galactosidase A is an enzyme used for replacement therapy to treat Fabry disease. Fabry disease is
a genetic disorder that results in the inability of tissues within organs, primarily the liver, kidney and spleen, to recycle various structural lipid components resulting in the accumulation of these
lipids in those organs and the heart. Fabry is a gender-based genetic degenerative disease that shortens a patient's lifespan.

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Our
Alpha-galactosidase A is produced in plants at our biomanufacturing facility in Owensboro, Kentucky with our proprietary GENEWARE system. The enzyme is recovered and purified to
clinical standards in a proprietary process that is validated and compliant with current good manufacturing practices, or cGMP. The preclinical testing was performed in a Fabry mouse model system with
Dr. Roscoe Brady at the National Institute of Neurological Disease and Stroke under a collaborative research and development agreement. The preclinical data showed good efficacy and safety in
the animals. We received an Orphan Drug designation from the FDA for Alpha-galactosidase A and plan to file an IND with the FDA and begin clinical trials to evaluate its safety and efficacy in humans.

Follow-on Off-patent BiologicsWhen patent protection for proprietary pharmaceuticals ends, the
product becomes eligible for sale as a "generic" version. Often new competition arises, resulting in lower costs and wider availability for the generic product relative to the original patented drug.
A number of biological protein and peptide biopharmaceutical products are, or soon will be, off-patent. However, while the composition of a
pharmaceutical product may be off patent, the manufacturing method may be further protected by exclusive patents of the innovator company. Consequently, suppliers are blocked from producing the
generic product. Our freedom to operate with our proprietary GENEWARE biomanufacturing technology could provide our alliance partners the ability to enter markets otherwise blocked by process patents.

Our
GENEWARE technology can produce molecules that are, or will be, off-patent including recombinant versions of aprotinin and interferon alpha 2a and 2b. We are in
partnering discussions with several companies for the co-development, marketing and distribution of these types of off-patent molecules for research, manufacturing and medical
applications.

VaccinesVaccines can represent a cost-efficient form of healthcare. Vaccines recruit the immune system to
recognize and combat a wide range of diseases, including viral and microbial infectious diseases and some cancers. We are developing several vaccines for the human and animal care markets. We have
conducted early clinical research with our personalized vaccine against the lymphatic cancer non-Hodgkin's lymphoma with successful initial results. With financial support from several US
Government agencies, we are in early stage development of vaccines to treat human pappilloma virus and HIV infections. We are also developing vaccines to treat a variety of infectious diseases for
animal health and veterinary care. Our GENEWARE biomanufacturing system helps enable the efficient improvement and production of vaccines that are either difficult to produce by using conventional
technologies or where high costs of production preclude market expansion.

Human Lysosomal Acid LipaseLysosomal acid lipase, or LAL, deficiencies cause lipid metabolism and storage conditions
including Wolman disease and cholesterol ester storage disorder, or CESD. Wolman disease is a rare genetic disorder afflicting newborns and infants and has nearly complete mortality. CESD is less
lethal but is characterized by progressive morbidity. We would introduce LAL for these two Orphan Drug indications. In addition, cardiovascular disease, especially atherosclerosis, is a major cause of
mortality in the US and many other industrialized countries. Several drugs are currently marketed to slow progression of atherosclerotic disease or treat its symptoms. Excessive build-up
of plaque, which is a leading cause of heart disease, is often treated surgically and involves invasive procedures and long periods of convalescence. We believe our research on LAL could some day lead
to this product's use in the clinical management of atherosclerotic disease without surgery. Discovered by University of Cincinnati scientists, LAL could represent a new approach in the treatment of
cardiovascular disease. We have obtained an exclusive, worldwide license for use of LAL in this field and are developing and evaluating the enzyme in collaboration with the discovery team at
University of Cincinnati.

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BAMF DiagnosticsWe plan to commercialize through a wholly owned subsidiary, Predictive Diagnostics, Inc., a diagnostic
test for cancer and other serious diseases using our proprietary platform called BAMF technology. BAMF technology is a proprietary pattern recognition discovery platform that identifies protein
biomarkers in the blood that can be used to detect cancer and other diseases. We believe that development of commercial diagnostic tests based on our BAMF technology could improve patient outcome
through earlier diagnosis of disease and reduce associated medical treatment costs.

GRAMMR Gene ShufflingOur GRAMMR technology is a new shuffling, or genetic reassortment research tool used to more efficiently
develop a wide variety of improved product attributes. Traditional shuffling methods are typically complex, slow, labor-intensive, and have not always yielded the desired results. GRAMMR technology
provides a number of significant advantages over traditional gene shuffling procedures, including higher efficiency, more rapid turnaround, greater adaptability and higher cost-efficiency.
Our GRAMMR technology can reduce the complications of gene shuffling and empowers the user with greater control over the molecular evolution process. We can offer our partners and clients a complete
range of GRAMMR-associated services, from gene shuffling and gene expression to protein manufacturing.

Our Technologies

GENEWAREOur proprietary and patented GENEWARE system makes use of natural genetic systems for
encoding genetic information in plants to rapidly produce biologically-active proteins. A gene sequence of a target protein is cloned into a modified plant virus, or vector that is not harmful to
humans. Growing plants are inoculated with the vector to temporarily introduce the genetic information into the plants. The target proteins encoded by the gene sequences are produced in the host plant
and after approximately two weeks the plants are harvested. Utilizing proprietary and patented processes we extract and purify the target protein from the plants. These GENEWARE vectors have been used
to produce numerous therapeutic proteins and vaccine antigens in large quantities.

The
GENEWARE production system is environmentally safe because the viral vector and the genes we insert cannot be incorporated into the plant genome and, thus, cannot be transmitted to
the next generation of the plant in the seed or pollen; it has a limited host range; and the modified virus does not persist in the soil to the next planting season. Since 1991, we have conducted more
than ten USDA-approved field trials, each demonstrating that GENEWARE is environmentally safe. In addition, we apply our GENEWARE system only to non-food crops and follow
standard operating procedures during field and greenhouse production to further ensure environmental safety.

While
our GENEWARE technology can be used to identify and alter gene-product functions, we are primarily using the GENEWARE system to manufacture therapeutic proteins,
peptides and other molecules in plants. GENEWARE technology can achieve significant time and cost advantages over traditional, transgenic genetic-engineering systems and alternative manufacturing
technologies. The GENEWARE protein production system can be efficient and competitive as a result of its potential for high expression, speed of production, safety and minimal capital requirements
compared to alternate expression systems. We have used our Owensboro, Kentucky, production facility to extract proteins from hundreds of tons of field-produced plants and have validated this facility
for cGMP manufacturing of our Aprotinin and Alpha-galactosidase A.

BAMF DiagnosticsOur proprietary BAMF technology combines our bioinformatics and proteomics technologies. Our proteomics
technology allows for the rapid determination of the protein composition, or proteome, of cells, tissues and body fluids that are associated with disease or abnormal conditions. Protein composition is
a listing of the specific proteins present in a given sample and their amounts. By assembling and monitoring changes in this data, we are able to identify the presence of proteins that are caused by
diseases.

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Bioinformatics
is the gathering and analysis of the data generated when working with genes and proteins. We use proprietary technologies to integrate and manage biological information,
which increases our ability to assess the importance of biological data in the discovery of disease.

Our
proprietary BAMF technology was derived from our bioinformatics capability. It utilizes multiple proteins called biomarkers that are derived from profiling thousands of proteins to
diagnose disease. We are using our BAMF technology to identify protein biomarkers in the blood as a diagnostic to detect cancer and other diseases. Our ongoing research collaboration on BAMF
technology is with Lance Liotta, M.D., Ph.D. and Emanuel Petricoin, Ph.D., who were formerly co-directors of the Clinical Proteomics Program at the National Cancer Institute and Food and
Drug Administration.

GRAMMR Gene ShufflingWe invented a gene shuffling and molecular evolution technology that is easier to use, more efficient,
and more cost-effective than other gene shuffling methods. Directed molecular evolution is an approach to enhancing the functionality of candidate genes and accelerating the development of
improved products. We believe that gene shuffling, or reassortment, is the key to unlocking the potential of genetic diversity and developing biological molecules with novel or improved traits.
Various gene-shuffling methods have been applied to improve a variety of commercially important products such as pharmaceutical proteins, vaccines, antibodies, viral vectors, and
industrial enzymes. GRAMMR technology enables researchers to improve genes and the protein products derived from those genes which we believe have a number of inherent advantages over other gene
shuffling methods, including: yield of a greater variety of chimeric products from fewer rounds of shuffling; rapid generation of thousands of shuffled gene sequences in a single day; adaptability to
large genes, divergent genes, and complete gene clones; reliable conservation of the integrity of genes, resulting in improved screening efficiencies; and cost effectiveness.

Intellectual Property

We continually seek patent protection for our proteomics, genomics, biomanufacturing, and plant and animal viral gene expression technologies and for diagnostics.
As of December 31, 2004, we had 80 issued and 94 pending U.S. patents. Our issued U.S. patents expire between 2008 and 2022. Foreign patents corresponding to many of the U.S. patents and patent
applications have been filed and/or issued in one or more other countries, resulting in a total of 51 issued and 96 pending foreign patents as of December 31, 2004. In the plant and animal
viral systems field, we have 22 issued U.S. patents and 38 issued foreign patents with durations ranging from 2011 to 2021. In the bioprocessing field, we have 9 issued U.S. patents and 4 issued
foreign patents with durations ranging from 2019 to 2022. In the proteomics field we have 45 issued U.S. patents and 1 issued foreign patent with durations ranging from 2006 to 2020. In the vaccine
field we have 1 issued U.S. patent and 6 issued foreign patents with durations ranging from 2020 to 2021. In the genomics field, we have 3 issued U.S. patents and 2 issued foreign patents with
durations to 2019. In the diagnostic field, we have 8 pending U.S. patents. While we believe that our patents in various technological areas are valuable to our business, our business as a whole is
not materially dependent on any one patent.

We
and other companies in the biotechnology field typically apply for and receive, in the aggregate, thousands of patents annually in the U.S. and other countries. These patents give us
the right to exclude others from practicing or selling products, technologies or services covered by the methods claimed, and from making, using or selling the products which are the subject of the
claims of these patents.

A
registered trademark gives the owner the right to exclude others from using identical or confusingly similar marks within the same channels of commerce. We own the GENEWARE registered
trademark and the Large Scale Biology Corporation, LSBC, BAMF, GRAMMR and other trademarks in the U.S. and many other countries.

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We
also rely upon copyright protection, trade secrets, continuing technological innovation and licensing from others to protect our intellectual property. Our success will depend, in
part, on our ability to obtain patent protection for our products and processes, to preserve our copyrights and trade secrets, to operate without infringing the proprietary rights of third parties and
to acquire licenses, if needed, to support or enhance our intellectual property portfolio.

Collaborations

Our revenues have been derived principally from collaborations with others. The business structure varies depending on the specific product or research objectives
of the collaborations. Research agreements may include payments for technology access, costs of research, certain rights to intellectual property developed and participation in sales of products
resulting from the agreements. We may also seek to share in the long-term value of the products that we assist our collaborators in developing through the retention of certain product
rights. Current agreements include those with Schering-Plough for animal healthcare vaccine products and Sigma-Aldrich Fine Chemicals for the non-exclusive distribution of our
research-grade Aprotinin, and Growers Research Group, LLC, for development of a biological pest control product. Other collaborations may take the form of alliances to jointly commercialize product
applications evolved from combining specific technologies of each company.

We
actively seek revenue from government funding sources that promote the development of products having strategic importance to us. For instance, we have performed research activities
under multi-year grants from the National Institute of Standards and Technology and National Institute of Allergy and Infectious Diseases to develop vaccines and new vaccine production
technology. In addition, we have performed research activities for the United States Army Medical Research Institute of Infectious Disease to develop more effective candidate products for prevention
and treatment of biowarfare related illnesses.

We
enter into joint research collaborations to develop products for commercialization. Such collaborations are often accompanied by licenses for exclusive or non-exclusive
rights for specific processes, technology or molecules. For example, we acquired an exclusive license for use of human lysosomal acid lipase, or LAL, with the Cincinnati Children's Hospital Medical
Center, Cincinnati, Ohio and entered into a research collaboration with them to develop LAL for treating Wolman's disease, a rare genetic disorder afflicting newborns and infants and atherosclerosis,
a leading cause of death in the United States and other developed countries. Also, we entered into a collaboration with the University of Louisville to advance our vaccine immunotherapeutics program
applicable to the Human Papilloma Virus.

Employees

As of March 31, 2005, we have 78 full-time employees, of which 53 are engaged in research and development and biomanufacturing activities.
Seven employees work in our Predictive Diagnostics, Inc. subsidiary. The remainder work in general and administrative areas. Sixteen employees hold Ph.D. degrees.

Research and Development

Our internally funded research and development expenses were $9.3 million, $11.5 million, and $21.2 million in 2004, 2003, and 2002,
respectively. Our customer-sponsored research and development expenditures were $2.3 million, $4.7 million, and $1.2 million in 2004, 2003, and 2002, respectively.

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Competition

The markets for protein development and production, including human vaccines and therapeutics such as the ones we are developing, are highly competitive.
Competitors with substantially greater resources are actively developing products similar to, or competitive with, our products. Several pharmaceutical, biotechnology, chemical and other life sciences
companies engage in research and development in the use of novel gene expression systems to produce therapeutic proteins. Two other companies are marketing products that would be competitive with our
Alpha-galactosidase A product.

Our
recombinant Aprotinin product and follow-on off-patent therapeutics such as interferons are, or will be, off patent protection by the time they are ready for
marketing. While we expect to enter pre-existing markets with the same or similar products, our efficient GENEWARE manufacturing and the anticipated favorable cost of production through
use of our GENEWARE system, should give us a competitive edge. One of our potential products, Lysosomal acid lipase, has no functional equivalent and thus, no direct competing product.

Technologies
competitive with our BAMF technology are under development and being marketed by other companies and academic institutions. The field of bioinformatic analysis of blood
serum to diagnose diseases such as cancer is in an early stage. We are not aware of commercially available competitive technology that has been demonstrated to be superior to ours.

Segment Reporting and Information about Geographical Areas

The Company operates in one reportable segment. Revenues from various federal government agencies and the Grower's Research Group were 50% and 19% of our total
revenues in 2004, respectively. All revenues are attributed to customers residing within the United States and all long-lived assets are located within the United States. Additional
information regarding revenues, loss from operations and total assets may be found in our audited consolidated financial statements and related notes included in Part IV of this Report.

10

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Item 2. Properties

Our principal research and development facility and corporate headquarters are located in Vacaville, California, at a facility of approximately 45,000 square feet
that includes administrative offices, a genetic engineering laboratory, a plant discovery and function laboratory and a bioinformatics software laboratory, under a lease that expires on
February 28, 2009. We are currently marketing approximately 3,400 square feet of underutilized space for sublease. We own a manufacturing facility of approximately 30,000 square feet, a
greenhouse complex of approximately 22,000 square feet containing 13,000 square feet of growing space and land of approximately 23 acres in Owensboro, Kentucky, for pilot and large-scale protein
extraction and downstream biomanufacturing of products. This land, facility, equipment contained within and certain related intellectual property and know-how are security for a first
priority lien under a $2.9 million loan agreement. This facility is adequate for our current production requirements and the land is sufficient in size for additional buildings or greenhouses
if needed for increased manufacturing capacity. We have a facility in Germantown, Maryland, of approximately 53,000 square feet under a lease that expires on December 31, 2010. This facility is
currently under sublease and was previously occupied by our proteomics operations, which was wound down on December 31, 2003.

Item 3. Legal Proceedings

From time to time we become a party to legal proceedings that are incident to our normal business operations such as employment litigation or have been initiated
by us to protect our intellectual property. In the opinion of management, these lawsuits will not result in any material adverse effects on the Company's financial condition.

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

None.

11

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Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information.Our common stock is traded on the NASDAQ National Market under the symbol "LSBC." Public trading of our
common stock commenced on August 10, 2000. The following table sets forth the high and low sale price per share of the Company's common stock during each quarter of 2004 and 2003.

High

LowYear Ended December 31, 2004:Fourth Quarter

$
1.44

$
0.90Third Quarter


1.58


0.72Second Quarter


2.76


1.12First Quarter


2.50


1.54Year Ended December 31, 2003:Fourth Quarter


2.90


1.15Third Quarter


1.51


0.71Second Quarter


1.60


0.39First Quarter


0.83


0.34


Holders.Based upon data provided by our transfer agent, we have approximately 5,340 beneficial holders of our common stock
as of March 23, 2005. This total includes persons whose stock is in nominee or "street name" accounts through brokers.

Dividends.We have never declared or paid any cash dividends on our common stock and we do not anticipate declaring any
dividends in the foreseeable future. We currently intend to reinvest future earnings, if any, for use in research and development or other business needs.

Recent Sales of Unregistered Securities.On March 8, 2004, we sold 5,169,682 shares of common stock at $1.58 a share
in a private placement with gross proceeds of approximately $8.2 million and after expenses, net proceeds of approximately $7.5 million. In addition, warrants were granted in connection
with this sale of stock. The warrants are currently exercisable to purchase 1,492,044 shares of common stock at an exercise price of $2.18 per share. Information with respect to persons whom the
securities were sold may be found in the section captioned "Selling Stockholders" appearing in the Prospectus filed pursuant to Rule 424(b)(3) on May 5, 2004. Such information is
incorporated herein by reference.

Repurchase of Securities.We have not repurchased any of the Company's securities during 2004.

12

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Item 6. Selected Financial Data

You should read the following selected financial data in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our audited consolidated financial statements and related notes included in Part IV of this Report. We derived the consolidated statement of operations data for the years
ended December 31, 2004, 2003, and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 from our audited consolidated financial statements included in this
Report. We derived the consolidated statement of operations data for the year ended December 31, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002, 2001 and
2000 from our audited consolidated financial statements not included in this Report.

|                                                      |                                                    | Year ended December 31,  |           
|----------------------------------------------------- | -------------------------------------------------- | ------------------------ | ----------
|
|
|Consolidated Statement of Operations Data             |                                                    |                          |           
|Revenues                                              |                                                    | $                        | 1,767     
|                                                      |                                                    |                          |           
|Costs and expenses:                                   |                                                    |                          |           
|                                                      | Development agreements                             |                          |           
|                                                      | Research and development                           |                          |           
|                                                      | General and administrative                         |                          |           
|                                                      | Impairment of property                             |                          |           
|                                                      | Impairment of goodwill                             |                          |           
|                                                      | Stock compensation bonus                           |                          |           
|                                                      | Amortization of goodwill and purchased intangibles |                          |           
|                                                      |                                                    |                          |           
|                                                      |                                                    | Total costs and expenses |           
|                                                      |                                                    |                          |           
|Loss from operations                                  |                                                    |                          | (17,474   
|Total other income (expense)                          |                                                    |                          | 49        
|                                                      |                                                    |                          |           
|Net loss                                              |                                                    | $                        | (17,425   
|                                                      |                                                    |                          |           
|Net loss per sharebasic and diluted                  |                                                    | $                        | (.58      
|                                                      |                                                    |                          |           
|Weighted average shares outstandingbasic and diluted |                                                    |                          | 30,276,718
|                                                      |                                                    |                          |           

|                                |  | December 31, |         
|------------------------------- |  | ------------ | --------
|
|
|Consolidated Balance Sheet Data |  |              |         
|Cash and cash equivalents       |  | $            | 1,112   
|Marketable securities           |  |              |        
|Working capital                 |  |              | 636     
|Total assets                    |  |              | 12,795  
|Long-term debt                  |  |              | 1,000   
|Accrued stock compensation      |  |              | 898     
|Deferred rent                   |  |              | 336     
|Accumulated deficit             |  |              | (191,623
|Total stockholders' equity      |  |              | 9,431   

Certain 2002 and 2001 amounts have been reclassified to conform to the 2004 presentation.

13

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with Item 6, "Selected Financial Data" and our audited
consolidated financial statements and related notes included in Part IV of this Report. This discussion includes forward-looking statements, such as our projections about future results of
operations that are inherently uncertain. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors including, but not limited to,
those discussed in "Factors That May Affect Our Business" in this item.

Introduction

Our current efforts are focused on improving cash flows, developing and manufacturing products and entering into relationships to market and sell our products.
Management's objective is to manufacture and sell products in order to generate sufficient cash flows to sustain our operations.

Our
cash balance was $1,112,000 at December 31, 2004, and we have incurred negative operating cash flows of $14,566,000 during 2004. The current rate of cash usage raises
substantial doubt about the Company's ability to continue as a going concern, absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, we are
seeking to obtain debt financing or equity financing through the private placement of our common or preferred stock. In addition, we are seeking to secure funds for our subsidiary, Predictive
Diagnostics, Inc., or PDI, and the Company through a sale of PDI stock held by the Company. A successful PDI related financing may not only improve our balance sheet, but also reduce ongoing
expenses, as PDI becomes a separate operation. We are also pursuing opportunities for revenue growth with other companies for the joint development and commercialization of recombinant Aprotinin,
Interferon alpha 2a and 2b and Lysosomal acid lipase products. We are currently in discussions with pharmaceutical companies capable of marketing these products. Such arrangements may provide revenues
to us through license fees, the reimbursement of research and development costs, milestone payments and product sales. The commercialization of these products for therapeutic applications will require
approval by the FDA and product scale-up at our biomanufacturing facility under FDA regulations. However, we cannot assure you that we will successfully obtain equity or debt financing or
product related revenues as such events are subject to factors beyond our control. The financial statements do not include any adjustments relating to the recoverability and classification of assets
or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

Overview

Current significant financial and operating events and strategies are summarized as follows:



14

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Results of Operations

RevenuesThe following table presents the changes in revenues from 2002 through 2004:

|         |  |   |           | (Decrease) from 2003 |   |            |   | Increase from 2002 |   |  
|-------- |  | - | --------- | -------------------- | - | ---------- | - | ------------------ | - | -
|
|Revenues |  | $ | 1,767,000 |                      | $ | (1,803,000 | ) | (51%               | ) | $

Revenues, primarily attributed to research contracts and grants, have partially offset costs, but have not been sufficient to sustain our
operations. The decrease in revenues from 2003 to 2004 is attributable to exiting the fee-for-service proteomics business and the associated winding down our contract with The
National Institute of Environmental Health Services, or NIEHS, that was completed on December 31, 2003. The increase in revenues from 2002 to 2003 is attributable to the NIEHS contract. The
NIEHS contract revenues were $2.1 million and $0.8 million in 2003 and 2002, respectively. No revenues from NIEHS were recorded in 2004. The loss of revenues from the termination of the
NIEHS contract will have no effect on our loss from operations in 2005, since the costs associated with this contract have been eliminated with the closure and sublease of the Germantown, Maryland,
facility. We expect revenues into 2005 to be substantially the same as 2004 unless we enter into new revenue generating agreements.

15

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Cost and expensesThe cost reduction programs and reorganizations during 2003 and 2002 and the closure of the Germantown,
Maryland, facility have significantly reduced costs and cash expenditures throughout the Company. From 2003 to 2004 expenses decreased $2.3 million for employee compensation and benefits,
$0.5 million for rent and building services and $0.3 million for materials purchases. In addition, non-cash expenses decreased $1.2 million for depreciation,
$0.6 million for amortization of intangible assets and $0.4 million for stock-based compensation. Also, costs decreased from 2003 because of certain charges only being incurred during
2003 including $3.6 million for impairment charges, $1.4 million for severance benefits related to headcount reductions and $0.2 million for a provision for doubtful accounts
receivable. These decreases in expenses were partially offset by $0.8 million of increased legal costs related to the filing and prosecuting intellectual property patents.

From
2002 to 2003 expenses decreased $3.7 million for employee compensation and benefits, $1.0 million for outside consulting and research services, $1.0 million for
patent application legal services and $0.6 million for materials purchases. In addition, non-cash expenses decreased $1.4 million for depreciation, $1.1 million for
stock-based compensation and $0.6 million for amortization of purchased intangibles. These decreases in expenses were partially offset by $2.3 million of increased non-cash
impairment charges.

Development agreementsandresearch and development costsThe following table
presents the changes in total research activities from 2002 through 2004:

|                          |  |   |            | (Decrease) from 2003 |   |            |   | Increase
(Decrease) from 2002 |   |  
|------------------------- |  | - | ---------- | -------------------- | - | ---------- | - | ----------------------------- | - | -
|
|Development agreements    |  | $ | 2,263,000  |                      | $ | (2,457,000 | ) | (52%                          | ) | $
|Research & development    |  |   | 9,288,000  |                      |   | (2,223,000 | ) | (19%                          | ) |  
|                          |  |   |            |                      |   |            |   |                               |   |  
|Total research activities |  | $ | 11,551,000 |                      | $ | (4,680,000 | ) | (29%                          | ) | $
|                          |  |   |            |                      |   |            |   |                               |   |  

Development agreements and research and development costs consist mainly of personnel expenses, outside research services, research materials and
laboratory overhead costs. Costs oftotal research activitieshave decreased significantly because of our cost reduction efforts and the closure of the
Germantown, Maryland, facility.Development agreement costs, as they related to activities performed under revenue generating research agreements and
grants, have and are expected to fluctuate consistently with increases or decreases in revenues earned from research agreements and grants. The decrease in development agreement expense from 2003 to
2004 is attributed to a $3.0 million decrease in development agreement activities related to the wind down of the NIEHS contract that was completed on December 31, 2003, partially offset
by increased efforts performed under other commercial contracts and grants. In 2003, the increased development agreement costs are attributed to increased research activities for the NIEHS contract
and NIST grant.Development agreement costsinclude the costs of product sold as we manufacture and sell our research-grade Aprotinin product. These
costs will increase as sales increase upon the expansion of the market for non-pharmaceutical applications of recombinant aprotinin.

The
decrease inresearch and developmentexpense from 2003 to 2004 is primarily attributable to our cost reduction efforts that were
implemented in June and December 2003. Cost reduction efforts resulted in decreases of employee compensation and benefit expense by $0.9 million and material purchases by
$0.2 million. In addition, non-cash expenses decreased $0.6 million for depreciation and $0.2 million for amortization of intangible assets.

16

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The
decrease inresearch and developmentexpense from 2002 to 2003 is attributed to the allocation of resources to customer projects and
the cost reductions efforts including $1.1 million for employee compensation and benefits from headcount and salary reductions, $0.8 million for outside consulting and research services,
and $0.6 million for materials purchases. In addition, non-cash expenses decreased $1.1 million for depreciation and $1.3 million for stock-based compensation. We
expect research and development expense in 2005 to be materially consistent with 2004.

General and administrativeThe following table presents the changes in general and administrative expenses from 2002 through
2004:

|                         |  |   |           | (Decrease) from 2003 |   |            |   | (Decrease) from 2002 |   |  
|------------------------ |  | - | --------- | -------------------- | - | ---------- | - | -------------------- | - | -
|
|General & administrative |  | $ | 7,690,000 |                      | $ | (1,469,000 | ) | (16%                 | ) | $

From 2003 to 2004 general and administrative expenses decreased $0.4 million for employee compensation and benefits, $0.2 million
for depreciation and $0.4 million for stock-based compensation. In addition, costs decreased from 2003 because of certain charges only being incurred during 2003 including $1.4 million
for severance benefits related to headcount reductions and $0.2 million for a provision for doubtful accounts receivable. These decreases in expenses were partially offset by
$0.8 million of increased legal costs related to the filing and prosecuting intellectual property patents and $0.8 million of costs related to our Germantown, Maryland, facility being
recorded as general and administrative expense in 2004, rather than cost of development agreements as in 2003. This was the result of exiting the fee-for-service proteomics
business at the end of 2003 and closing the Germantown, Maryland, facility.

General
and administrative expenses have decreased from 2002 to 2003 because of our cost reduction efforts including $2.6 million for employee compensation and benefits from
headcount and salary reductions and $1.0 million for patent application legal service, partially offset by increases in other costs. We expect general and administrative expenses in 2005 to be
similar to 2004.

Impairment of propertyThe wind down of our Germantown, Maryland, operations resulted in impairment charges of
$3.6 million in 2003 that reduced the carrying value of property, plant and equipment. In 2002, we determined that certain machinery and equipment related to our Germantown, Maryland, operation
was permanently idle and as a result, we recognized an impairment charge of $0.4 million.

Impairment of goodwillGoodwill of $0.8 million relating to our purchase of the Germantown, Maryland, operations in
1999 was determined to be impaired and was expensed during 2002.

Amortization of purchased intangiblesThe costs of intangible assets relating to the purchase of our Germantown, Maryland,
operations in 1999 were amortized until those assets became fully amortized in 2003, resulting in decreased amortization expense of $0.6 million from 2002 to 2003.

Interest income and expenseThe decreased interest income of $0.1 million in 2004 and of $0.5 million in 2003 is
attributable to our declining cash and marketable securities balances available for investment and significant reductions in interest yields. We expect interest income in 2005 to be less than 2004
unless we receive a substantial cash infusion. Interest expense has not been significant because of the small amount of our long-term debt throughout most of 2004. With the addition of
$2.9 million of long-term debt in December 2004 and January 2005, we expect interest expense to be approximately $0.7 million in 2005 which includes a charge
for the vesting of the warrant issued with the long-term debt. If additional debt is incurred or existing debt repaid, we expect interest expense to increase or decrease accordingly.

17

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Liquidity and Capital Resources

Net cash used in operating activitiesThe following table presents annual cash flows from operating
activities from 2002 through 2004:

|                                           |  | Year Ended December 31, |            
|------------------------------------------ |  | ----------------------- | -----------
|
|Cash paid to employees                     |  | $                       | (6,807,000 
|Cash paid to suppliers                     |  |                         | (9,593,000 
|                                           |  |                         |            
|Total cash paid to employees and suppliers |  |                         | (16,400,000
|Cash received from customers               |  |                         | 1,780,000  
|Interest received                          |  |                         | 68,000     
|Interest paid                              |  |                         | (14,000    
|                                           |  |                         |            
|Net cash used in operating activities      |  | $                       | (14,566,000
|                                           |  |                         |            

Due
to our cost reductions programs and reorganizations during 2003 and 2002 and closure of the Germantown, Maryland, facility, we progressively decreased the amount of total cash paid to employees and suppliersfrom 2002 through 2004. Thenet cash used in operating
activitiesdecreased from 2003 to 2004 as the decrease in expenditures from the closure of the Germantown, Maryland, facility offset the decrease in cash receipts related to
NIEHS. We expect a further decrease as sublease income begins to offset rental expense for the Germantown, Maryland, facility starting on March 11, 2005. We expect the negative operating cash
flows to continue throughout 2005 at a similar rate as 2004. However, this rate of cash usage is not sustainable for a long-term period. Our ability to develop our products and sustain
operations will require subsequent funding through collaborations, or debt or equity financing in the short term and product sales in the long term. Although product sales would increase our
short-term usage of cash for inventory and cost of product sold, it is expected that they would eventually generate positive cash flows.

Cash used in investing activitiesCapital expenditures were $0.8 million, $0.1 million, and $1.0 million
in 2004, 2003, and 2002 respectively. Our commitment for capital expenditure at December 31, 2004 was $0.1 million. We anticipate that in 2005 our biomanufacturing facility in Owensboro,
Kentucky, will require expenditures to support our business objectives upon signing revenue generating contracts.

Net cash provided by financing activitiesIn 2000 we received net proceeds of $88.8 million from our initial public
offering, which has sustained our operations through 2003. Financing activities have not provided significant cash flows from 2001 through 2003. On March 8, 2004, we received net proceeds of
approximately $7.5 million in a private placement of common stock. We received $1.0 million on December 20, 2004 under a promissory note that was partially used to pay off
$0.2 million of existing long-term debt with the Kentucky Economic Development Finance Authority. An additional $1.9 million was received under this note on
January 14, 2005. On March 3, 2005, we borrowed $0.6 million from Kevin J. Ryan, our President and Chief Executive Officer and a member of the our Board of Directors and issued
him a convertible promissory note due on July 1, 2005. On April 15, 2005, we borrowed an additional $3.0 million from Kevin J. Ryan and issued him a promissory note due on
April 17, 2006.

Our
history of negative cash flows and our cash balance of $1,112,000 at December 31, 2004, raise substantial doubt about the Company's ability to continue as a going concern,
absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, we are seeking debt or equity financing, sale of stock of our subsidiary, PDI, and joint
development and commercialization of products with other companies. However, we cannot assure you that we will successfully obtain equity or debt financing or product related revenues as such events
are subject to factors beyond our control.

18

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Commitments

The following commitments table presents our non-cancelable minimum payments under contractual obligations as of December 31, 2004:

|                           |  | Payments Due |          
|-------------------------- |  | ------------ | ---------
|
|Long-term debt             |  | $            |         
|Interest on long-term debt |  |              | 220,000  
|Accrued stock compensation |  |              | 606,000  
|Operating leases           |  |              | 1,525,000
|Operating sublease rental  |  |              | (649,000 
|Research agreements        |  |              | 177,000  
|License agreements         |  |              | 58,000   
|                           |  |              |          
|Total commitments          |  | $            | 1,937,000
|                           |  |              |          

We
lease facilities in Vacaville, California, and Germantown, Maryland, under operating leases. During August 2004 we entered into a sublease of our Germantown,
Maryland, facility. Expected sublease receipts starting on March 11, 2005 are reflected in the table above to the extent that they offset the Germantown, Maryland, minimum rental payments. We
have research sponsorship agreements with major universities, government institutions or other companies whereby we fund specific projects of interest to us. In addition to the future
non-cancelable minimum payments above, certain of the research agreements require future aggregate payments of $480,000 if the agreements are not cancelled. Our long-term
accrued stock compensation relates to employee restricted stock awards that can be settled by us in stock or cash, unless certain cash flow objectives are met, and then, only in stock. We do not have
any capital lease obligations, long-term purchase obligations, off-balance sheet arrangements or any other long-term liabilities besides those listed above.

Critical Accounting Policies

Our accounting policies are explained in Note 1 to the audited consolidated financial statements included in Part IV of this Report. We consider the
following accounting policies to be critical given they involve estimates and judgments made by management and are important for our investors' understanding of our operating results and financial
condition.

Long-Lived AssetsOur long-lived assets include capitalized costs of filing patent applications,
capitalized licenses and property and equipment. See Notes 1, 3 and 4 to the audited consolidated financial statements included in Part IV of this Report for more detail
regarding our long-lived assets. We evaluate our long-lived assets for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Estimates of future cash flows and timing of events
for evaluating long-lived assets for impairment are based upon management's judgment. If any of our intangible or long-lived assets are considered to be impaired, the amount of
impairment to be recognized is the excess of the carrying amount of the assets over its fair value. The net carrying value of long-lived assets at December 31, 2004, subject to
possible impairment charges in the future, are presented by location in the following table below:

|                                          |  | Vacaville
California |           | Owensboro
Kentucky |   | Germantown
Maryland |  | Total
|----------------------------------------- |  | -------------------- | --------- | ------------------ | - | ------------------- |  | -----
|Machinery and equipment                   |  | $                    | 1,289,000 |                    | $ | 1,297,000           |  | $    
|Land, building and leasehold improvements |  |                      | 6,000     |                    |   | 4,240,000           |  |      
|Patents                                   |  |                      | 1,442,000 | *                  |   |                    |  |      
|Licensees                                 |  |                      | 752,000   |                    |   |                    |  |      
|                                          |  |                      |           |                    |   |                     |  |      
|                                          |  | $                    | 3,489,000 |                    | $ | 5,537,000           |  | $    
|                                          |  |                      |           |                    |   |                     |  |      

---

19

---



All
long-lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents and intellectual property licenses. Estimates of useful lives and periods of expected revenue generation are reviewed periodically
for appropriateness and are based upon management's judgment.

Stock-Based CompensationDuring 2003, we adopted Statement of Financial Accounting Standards No. 123, or
SFAS 123, "Accounting for Stock-Based Compensation" effective as of January 1, 2003 for its stock-based employee compensation plans using the prospective recognition method under
Statement of Financial Accounting Standards No. 148, or SFAS 148,"Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123." This method applies
the recognition provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, recognized compensation expense for those
issuances under our stock-based employee compensation plans. Methodologies used for calculations such as the Black-Scholes option-pricing model and variables such as volatility and expected life are
based upon management's judgment. Such methodologies and variables are reviewed and updated periodically for appropriateness and affect the amount of recorded charges. See Notes 1 and 8 to the audited
consolidated financial statements included in Part IV of this Report for more information on the amounts, methodologies and variables related to non-cash stock-based compensation
charges.

Inflation

We believe that inflation has not had a material adverse impact on our business or operating results during the periods presented.

Off-balance Sheet Arrangements

We have no off-balance sheet arrangements.

Factors That May Affect Our Business

Risks Related To Our Business



Our
cash balance was $1,112,000 at December 31, 2004, and we have incurred negative operating cash flows of $14,566,000 during 2004. We have realized significant net losses and
negative operating cash flows in recent years and in the year ended December 31, 2004. Based upon our current cash balance, our current rate of negative operating cash flows and the expected
cost to complete the development of our products, we cannot assure you that the Company will be able to continue as a going concern. The financial statements do not include any adjustments relating to
the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

Our
revenues for the years ended December 31, 2004 and 2003 were $1,767,000 and $3,570,000, respectively. We do not expect our revenues to change in 2005. We may be required to
further reduce our operating costs by further restructuring our operations or reducing the scope of our development programs. These actions would adversely affect our ability to generate new sources
of revenue. If we are unable to significantly increase our revenues and cash received from customers, we will not be able to achieve profitability or positive operating cash flows, our working capital
will continue to erode, and our business will suffer.

20

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We
need to continue funding our product development programs. Our recombinant Aprotinin, Alpha-galactosidase A, and Interferon alpha 2a and 2b require clinical trials to prove their
efficacy and safety for pharmaceutical applications. We do not have sufficient working capital to complete all phases of clinical trials. Our PDI subsidiary requires funding for its
start-up activities. If we are unable to raise sufficient financing or collaborative funding, we may delay or abandon some of our product development initiatives, which would likely harm
our business.



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



We are independently pursuing some therapeutic product applications into the development stage. However, we expect to develop and commercialize most of our future
products in collaboration with pharmaceutical, biotechnology and other companies. For example, our strategy concerning our recombinant Aprotinin, Alpha-galactosidase A, Interferon alpha 2a and 2b,
Lysosomal acid lipase and BAMF technology diagnostic tests involves seeking partners to complete the development and commercialization of these products. We cannot assure you that such collaborative
arrangements will be available to us on acceptable terms, or at all. If our cash flows continue to deteriorate or we take significant steps to reduce our expenses, potential partners may question our
ability to perform and choose not to do business with us, which would make it harder for us to find a partner and would harm our ability to commercialize our products. Our success will depend in large
part on our ability to enter into future collaborations with other companies for the financing of development and/or regulatory approval and commercialization of our products. Our reliance upon these
companies for these capabilities will reduce our control over such activities and could make us dependent upon them. Furthermore, obtaining funds through arrangements with collaborative partners or
others may require us to relinquish our rights to certain technologies, product candidates or products that we would otherwise seek to develop or commercialize on our own, or to sell or license our
rights to certain products or technologies on terms that are worse than we might have been able to obtain in a different environment. To date, we have entered into only a limited number of
collaborations. Some of our existing agreements provide us with rights to participate financially in the commercial development of

21

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products
resulting from the use of our technologies. We may be unable to obtain such rights in future collaborations. In addition, unforeseen delays or complications could arise and result in the
breach of our contractual obligations with our collaborators and others, or us not being able to perform at the quality and capacity levels required for success.



The loss of a number of our senior management or other key scientific personnel could significantly harm our business, cause collaborators to cease doing business
with us, cause potential collaborators to decline to do business with us, or inhibit our research and development and commercialization efforts. None of our key personnel are subject to employment
agreements that prevent them from leaving our employment. We face competition for research scientists and technical staff from other companies, academic institutions, government entities, nonprofit
laboratories and other organizations. We have implemented 10% cash salary reductions substituting non-cash stock compensation for our highest paid employees to conserve cash. In addition,
we adhere to an eighteen-month salary
review process for senior personnel. Our compensation practices may be less attractive compared to our competition. Failure to recruit and retain senior management and scientific personnel on
acceptable terms may prevent us from achieving our business objectives.



We are in an early or middle stage of commercialization, and we are subject to all of the risks inherent in the development of a business enterprise, including
the need for substantial capital to support the development of our products and technologies. Our anticipated products most likely will require that we enter into new collaborations before we can
manufacture and/or market them. For instance, we believe that our NHL vaccine, which is ready for Phase II trials, cannot be further developed without collaboration. The prospects for development of
our Alpha-galactosidase A, recombinant Aprotinin, Interferon alpha 2a and 2b, and Lysosomal acid lipase products are limited without collaboration or partnering support. Because we are in new and
developing fields such as diagnostic tests for disease, and our research focuses on new and unproven products, our therapeutic vaccines, proteins and other therapeutics under development may not be
effective for their intended purpose, or may not meet regulatory requirements for safety and efficacy. In addition, even if we successfully develop a product, there may not be a substantial commercial
market for that product at commercially viable prices.



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

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Genomics, proteomics, biomanufacturing and bioinformatics are intensely competitive fields. They are characterized by extensive research efforts, which result in
rapid technological progress that can render existing technologies obsolete or economically noncompetitive. If our competitors succeed in developing more effective technologies or render our
technologies obsolete or noncompetitive, our business will suffer. Many universities, public agencies and established pharmaceutical, biotechnology, health care, chemical and other life sciences
companies with substantially greater resources than we have are developing and using technologies and are actively engaging in the development of products similar to or competitive with our products
and technologies. Like us, our competitors are using proteomics and genomics technologies to identify potential drug targets, therapeutic proteins and diagnostic marker proteins. To remain
competitive, we must continue to invest in new technologies and improve existing technologies. If our revenues and cash flows do not improve significantly, we will not have the resources to continue
such investment.

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



To a large extent, decisions by businesses and other entities to collaborate or otherwise do business with us are discretionary, and the decision making process
typically takes many months to complete. We believe that the previous slowdown in the U.S. and global economies, and the biotechnology and pharmaceutical industries in particular, has caused potential
collaborators and customers to defer decisions to work with us or to access our technologies. As a result, revenues and cash flows have been uncertain. Future results are difficult to predict, as it
is difficult to accurately assess and predict the future demand for our products, technologies and services. General economic conditions are expected to improve as the economy grows. However, we
cannot assure you that any such improvement will cause our results of operations to improve. If economic conditions decline or stagnate, our revenues and operating results could be adversely affected.



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

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



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



Our directors, our executive officers and principal stockholders affiliated with our directors and executive officers beneficially own, in the aggregate,
approximately 21% of our outstanding common stock as of April 8, 2005. The concentration of ownership in combination with other common stockholders may collectively influence significant
corporate transactions such as mergers, changes in control, consolidation or sale of some or all of our assets, and other significant corporate transactions requiring shareholder approval.



We have adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record
as of May 4, 2001. Subject to certain specified exceptions and limitations under the rights plan, we will continue to issue one right for each share of common stock that becomes outstanding
after May 4, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of our Series A Junior Participating Preferred Stock for $45
per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding shares of common stock, holders of the rights (other than the person or group causing their
exercisability) will be able to purchase, in exchange for the $45 exercise price, shares of our common stock or of any company into which we are merged having a value of $90. In addition, the board of
directors has the option, under certain circumstances, to exchange each right (other than rights held by the person or group triggering the board of directors' option) for a share of common stock for
no additional consideration on the part of the holder of the right. The rights expire on April 27, 2011. Our rights plan could make it more difficult for a third party to acquire us (or a
significant percentage of our outstanding capital stock) by causing substantial dilution of the stock ownership of a person or group attempting to acquire control of us. Our rights plan may have the
effect of discouraging takeover attempts because a potential acquirer would have to negotiate with our board of directors to avoid suffering dilution.

Provisions
in our charter and bylaws and applicable provisions of the Delaware General Corporation Law may also make it more difficult for a third party to acquire control of us without
the approval of our board of directors. These provisions may make it more difficult or expensive for a third

24

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party
to acquire a majority of our common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may adversely affect our stock price.

Risks Related to Our Industry



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





Our human and veterinary therapeutics and vaccines are included in the highly competitive markets for protein development and production. We face significant
competition in our protein product development and production efforts from entities using alternative, and in some cases, higher volume and larger scale, approaches for the same purpose. Competitors
with substantially greater resources are actively developing products similar to or competitive with our products and potential products. Our competitors may succeed in developing products or
obtaining regulatory approval before we do or in developing products that are more effective than those we develop or propose to develop. A large number of universities and other
not-for-profit institutions, many of which are funded by the U.S. and foreign governments, are also conducting research to discover genes and their functions. Any one or more
of these entities may discover and establish a patent position in one or more of the genes or proteins that we wish to commercialize.

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

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



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



We must comply with USDA regulations for outdoor releases of genetically engineered organisms as well as other products designed for use on or with agricultural
products. In addition, the USDA prohibits growing and transporting genetically modified plants except pursuant to an exemption or under special permits. We may use genetically modified plants as
screening or production hosts. Changes in USDA policy regarding the movement or field release of genetically modified plant hosts could adversely affect our business by increasing the cost of our
products and technologies or decreasing consumer demand for those products and technologies or causing the government to prohibit their sale or use. If we fail to comply with such rules or policies,
we may be subject to financial loss or be liable for costs incurred as a result of non-compliance.



Future commercial success of some of our products and of the products of some of our collaborators will depend in part on public acceptance of the use of
genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence
public attitudes. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter
labeling requirements, and could cause a decrease in the demand for our products, even if such products do not result from GMO organisms.

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



Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also
produce hazardous waste products. The chemicals we use include, but are not limited to, flammable solvents such as methanol and ethanol; ethidium dye, which is a commonly used fluorescent dye for
visualizing DNA; buffer solutions used in the purification of DNA; and various organic solvents, acids and bases. We also use several radioisotopes including phosphorous-32,
carbon-14, sulfur-35, phosphorous-33, iodine-125 and hydrogen-3. We cannot eliminate the risk of accidental contamination or discharge and
any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil
damages and criminal penalties in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. Further, it is possible that the materials we use could
contaminate another party's property. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may
exceed our total assets and our ability to pay the liability. In addition, compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair
our research and development and production efforts. Although we have general liability insurance, these policies do not cover claims arising from pollution from chemical, radioactive or biological
materials. Our collaborators may also be working with various types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held
responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials.



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

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Risks Related to Our Intellectual Property



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

The
patent positions of biotechnology firms generally are highly uncertain and involve complex legal and factual questions that will determine who has the right to develop a particular
product. Changes in,
or different interpretations of, patent laws in the United States and other countries might allow others to use our discoveries or to develop and commercialize products and technologies similar to our
products and technologies without any compensation to us. Our potential collaborators or customers may conclude that uncertainties about patent protection decrease the value of our databases, products
and services.

Throughout
the world there are numerous issued patents, as well as published foreign patent applications which may be issued as patents, many of which relate to our current operations,
our anticipated future operations and the products we are likely to develop. The scope of these patents is a matter of legal interpretation and is subject to uncertainty. We have not obtained, but we
may in the future obtain, opinions from our patent counsel that we have freedom to conduct our commercial activities free of claims of patent infringement from third parties. From time to time, we
receive letters from third parties offering to negotiate a license to LSBC based on a perception that our processes or products might infringe a patent owned by the third party. Disagreements could
arise from these letters, and could result in costly and time-consuming litigation and divert our financial and managerial resources. In addition, if we are ever determined to infringe the
patent of any third party, we may be required to obtain a license to use this patent, which would increase our cost of doing business.



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



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

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

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



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



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. Our investments consist of money market funds and bank
certificates of deposit. The Company does not invest in derivative instruments. The Company mitigates its risk of principle loss by investing only in securities of high quality issuers with maturities
of less than one year and limiting the amount of credit exposure to any one issuer.

The
table below presents the amortized principal amount and weighted average interest rates at December 31, 2004. The amortized principal amount matures within 90 days and
approximates fair value at December 31, 2004. If market interest rates were to change immediately and uniformly by 10% from levels at December 31, 2004, the fair value of our investments
would change by an immaterial amount.

Amortized
Principal
Amount

Weighted
Average
Interest RateCash and cash equivalents

$
1,112,000

1.78
%


Foreign currency

The Company has minimal transactions in foreign currencies and has not had any material exposure to foreign currency rate fluctuations relating to assets or
liabilities.

Item 8. Financial Statements and Supplementary Data

The financial statements and supplementary data required by this Item 8 are included in Part IV of this Report.

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

None.

Item 9A. Controls and Procedures

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

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

Item 9B. Other Information

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Directors.

Information with respect to directors may be found in the section captioned "Proposal No. 1: Election of Directors" appearing
in the definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Executive Officers.

Information with respect to executive officers may be found in the section captioned "Executive Officers" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Section 16(a) Compliance.

Information about compliance with Section 16(a) of the Securities and Exchange Act of 1934 that is required by this Item may be found in the section
captioned "Compliance Under Section 16(a) of the Securities Exchange Act of 1934" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual
Meeting of Stockholders. Such information is incorporated herein by reference.

Code of Ethics.

The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer, principal financial officer, principal accounting
officer, controller and person performing similar functions. The text of such code of ethics is posted on the Registrants website at www.lsbc.com/policies.html.

Item 11. Executive Compensation

Information with respect to executive compensation may be found in the section captioned "Executive Compensation and Related Information" appearing in the
definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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

Information with respect to security ownership of certain beneficial owners and management may be found in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.

Information
with respect to compensation plans under which shares of our common stock may be issued may be found in the section captioned "Equity Compensation Plans Information"
appearing in the definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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Item 13. Certain Relationships and Related Transactions

Information with respect to certain relationships and related transactions may be found in the section captioned "Certain Relationships and Related Transactions"
appearing in the definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information with respect to principal accountant fees and services may be found in the section captioned "Proposal No. 2: Ratification of Appointment of
Auditors" appearing in the definitive proxy statement to be delivered to stockholders in connection with the 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements

The following financial statements are included herein:

PageIndependent Auditors' Report

37Consolidated Balance Sheets as of December 31, 2004 and 2003

38Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003, and 2002

39Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002

40Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

41Notes to Consolidated Financial Statements

42


Financial Statement Schedules

See index above

Exhibits

|    |  |                                                                                                                                                                                                    |  | Incorporated by Reference |  |         
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------
|
|
|3.1 |  | Amended and Restated Certificate of Incorporation.                                                                                                                                                 |  | S-1                       |  | 08/09/00
|3.2 |  | Amended and Restated Bylaws, as amended on July 20, 2001.                                                                                                                                          |  | 10-Q                      |  | 11/13/01
|3.3 |  | Certificate of Designations specifying the terms of the Series A Junior Participating Preferred Stock of Registrant, as filed with the Secretary of State of the State of Delaware on May 4, 2001. |  | 8-A                       |  | 05/04/01
|4.1 |  | Form of registrant's Specimen Common Stock Certificate.                                                                                                                                            |  | S-1                       |  | 08/09/00
|4.2 |  | Information and Registration Rights Agreement dated October 11, 1990 by and among the registrant and the parties who are signatories thereto.                                                      |  | S-1                       |  | 08/09/00
|4.3 |  | Amendment to the Information and Registration Rights Agreement dated October 10, 1991 by and among the registrant and the parties who are signatories thereto.                                     |  | S-1                       |  | 08/09/00

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|4.4  |  | Second amendment to the Information and Registration Rights Agreement dated October 10, 1991 by and among the registrant and the parties who are signatories thereto.                                                                                                                                                                         |  | S-1  |  | 08/09/00 |  | 4.4  |  | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------- |  | ---- |  | 
|4.5  |  | Third Amendment to the Information and Registration Rights Agreement dated March 20, 1998 by and among the registrant and the parties who are signatories thereto.                                                                                                                                                                            |  | S-1  |  | 08/09/00 |  | 4.5  |  | 
|4.6  |  | Fourth Amendment to the Information and Registration Rights Agreement dated September 1, 1998 by and among the registrant and the parties who are signatories thereto.                                                                                                                                                                        |  | S-1  |  | 08/09/00 |  | 4.6  |  | 
|4.7  |  | Warrant to purchase 21,991 shares of common stock dated January 29, 1988, assigned by the registrant on January 14, 2000 to Arnold Zimmerman.                                                                                                                                                                                                 |  | S-1  |  | 08/09/00 |  | 4.12 |  | 
|4.8  |  | Warrant to purchase 21,991 shares of common stock dated January 29, 1988 assigned by the registrant on January 29, 2000 to Sebastian J. Trusso.                                                                                                                                                                                               |  | S-1  |  | 08/09/00 |  | 4.13 |  | 
|4.9  |  | Warrant Agreement to purchase 21,991 shares of common stock assigned by the registrant to Arnold Zimmerman.                                                                                                                                                                                                                                   |  | S-1  |  | 08/09/00 |  | 4.14 |  | 
|4.10 |  | Warrant Agreement to purchase 21,991 shares of common stock assigned by the registrant to Sebastian J. Trusso.                                                                                                                                                                                                                                |  | S-1  |  | 08/09/00 |  | 4.15 |  | 
|4.11 |  | Rights Agreement dated April 27, 2001 between registrant and Equiserve Trust Company, as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock, as
Exhibit B the Form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Shares. |  | 8-A  |  | 05/04/01 |  | 4.1  |  | 
|4.12 |  | Securities Purchase Agreement dated March 8, 2004, by the registrant and investors.                                                                                                                                                                                                                                                           |  | 10-K |  | 03/29/04 |  | 4.1  |  | 
|4.13 |  | Registration Rights Agreement dated March 8, 2004, by the registrant and investors.                                                                                                                                                                                                                                                           |  | 10-K |  | 03/29/04 |  | 4.2  |  | 
|4.14 |  | Common Stock Purchase Warrant agreements to purchase 1,492,044 shares of common stock dated March 8, 2004, by the registrant to investors.                                                                                                                                                                                                    |  | 10-K |  | 03/29/04 |  | 4.3  |  | 
|4.15 |  | Amendment to warrant as of March 8, 2004, by the registrant and investors.                                                                                                                                                                                                                                                                    |  | 10-K |  | 03/29/04 |  | 4.4  |  | 
|4.16 |  | Common Stock Purchase Warrant dated December 17, 2004, issued by the Registrant to Kentucky Technology, Inc.                                                                                                                                                                                                                                  |  | 8-K  |  | 12/23/04 |  | 4.1  |  | 

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|4.17   |  | Registration Rights Agreement dated December 17, 2004, between the Registrant and Kentucky Technology, Inc.                                                      |  | 8-K  |  | 12/23/04 |  | 4.2   |  | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------- |  | ----- |  | 
|10.1*  |  | Registrant's 2000 Stock Incentive Plan.                                                                                                                          |  | S-1  |  | 08/09/00 |  | 10.2  |  | 
|10.2*  |  | Registrant's 2000 Employee Stock Purchase Plan.                                                                                                                  |  | S-1  |  | 08/09/00 |  | 10.3  |  | 
|10.3*  |  | Form of registrant's Directors' and Officers' Indemnification Agreement.                                                                                         |  | S-1  |  | 08/09/00 |  | 10.4  |  | 
|10.4   |  | Dow Collaboration and License Agreement dated August 24, 1998, by and among the registrant and The Dow Chemical Company and its subsidiary Dow AgroSciences LLC. |  | S-1  |  | 08/09/00 |  | 10.5  |  | 
|10.5   |  | Lease Agreement dated October 15, 1987, and amendments 1 through 8 thereto between the registrant and Mission Vacaville Limited partnership.                     |  | S-1  |  | 08/09/00 |  | 10.9  |  | 
|10.6   |  | Ninth Amendment to Lease Agreement between registrant and Mission Vacaville Limited partnership, dated July 31, 2000.                                            |  | 10-K |  | 04/02/01 |  | 10.11 |  | 
|10.7   |  | Tenth Amendment to Lease Agreement between registrant and Woodlawn Foundation (successor-in-interest to Mission Vacaville Limited partnership), March 1, 2001.   |  | 10-K |  | 04/02/01 |  | 10.12 |  | 
|10.8   |  | Lease Agreement dated July 26, 2000 between Large Scale Proteomics Corporation and Westphalia Center II Limited partnership.                                     |  | 10-K |  | 04/02/01 |  | 10.13 |  | 
|10.9*  |  | Letter Agreement between registrant and John D. Fowler, Jr.                                                                                                      |  | 10-K |  | 04/01/02 |  | 10.14 |  | 
|10.10* |  | Stock Purchase Subscription Agreement between registrant and John D. Fowler, Jr.                                                                                 |  | 10-K |  | 04/01/02 |  | 10.15 |  | 
|10.11* |  | Warrant to Purchase Common Stock between registrant and John D. Fowler, Jr.                                                                                      |  | 10-K |  | 04/01/02 |  | 10.16 |  | 
|10.13* |  | Stock Issuance Agreement between registrant and John D. Fowler, Jr.                                                                                              |  | 10-K |  | 04/01/02 |  | 10.17 |  | 
|10.14* |  | Letter Agreement between registrant and Ronald J. Artale.                                                                                                        |  | 10-K |  | 04/01/02 |  | 10.18 |  | 
|10.15  |  | Form of Stock Issuance Agreement Under the 2000 Stock Incentive Plan                                                                                             |  | 10-Q |  | 11/14/02 |  | 10.01 |  | 
|10.16* |  | Separation of Employment Agreement between registrant and Robert L. Erwin                                                                                        |  | 10-Q |  | 8/14/03  |  | 10.01 |  | 
|10.17* |  | Separation of Employment Agreement between registrant and David R McGee.                                                                                         |  | 10-Q |  | 8/14/03  |  | 10.02 |  | 

35

---



|10.18 |  | Eleventh Amendment to Lease Agreement between registrant and Woodlawn Foundation, dated December 23, 2003.                                                          |  | 10-Q |  | 5/14/04  |  | 10.1 |  |  
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------- |  | ---- |  | -
|10.19 |  | Agreement of Sublease between Registrant and Advancis Pharmaceutical Corporation, dated August 4, 2004 and related agreements.                                      |  | 10-Q |  | 11/15/04 |  | 10.1 |  |  
|10.20 |  | Loan Agreement and related exhibits, Promissory Note, Security Agreement and Mortgage dated December 17, 2004, between the Registrant and Kentucky Technology, Inc. |  | 8-K  |  | 12/23/04 |  | 10.1 |  |  
|10.21 |  | Convertible Promissory Note, dated March 3, 2005, between the Registrant and Kevin J. Ryan                                                                          |  | 8-K  |  | 3/4/05   |  | 10.1 |  |  
|21.1  |  | Large Scale Biology Corporation Subsidiaries.                                                                                                                       |  |      |  |          |  |      |  | X
|23.1  |  | Independent Auditors' Consent.                                                                                                                                      |  |      |  |          |  |      |  | X
|31.1  |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                             |  |      |  |          |  |      |  | X
|31.2  |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                             |  |      |  |          |  |      |  | X
|32.1  |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              |  |      |  |          |  |      |  | X
|32.2  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              |  |      |  |          |  |      |  | X

---

36

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders
of Large Scale Biology Corporation

We
have audited the accompanying consolidated balance sheets of Large Scale Biology Corporation and its subsidiaries (collectively the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of Large Scale Biology Corporation and its subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company's recurring losses from operations and current cash and cash equivalent balance raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/
DELOITTE & TOUCHE LLP

San
Francisco, California
April 15, 2005

37

---





LARGE SCALE BIOLOGY CORPORATION        CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                            | December 31,               |           
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------
|
|ASSETS                               |                                                                                                                                                                            |                            |           
|Current assets:                      |                                                                                                                                                                            |                            |           
|                                     | Cash and cash equivalents                                                                                                                                                  |                            | $         
|                                     | Accounts receivable, net of allowance of $154,000                                                                                                                          |                            |           
|                                     | Prepaid expenses                                                                                                                                                           |                            |           
|                                     |                                                                                                                                                                            |                            |           
|                                     |                                                                                                                                                                            | Total current assets       |           
|Property, plant and equipment, net   |                                                                                                                                                                            |                            | 7,798,000 
|Intangible assets, net               |                                                                                                                                                                            |                            | 2,194,000 
|Other assets                         |                                                                                                                                                                            |                            | 1,037,000 
|                                     |                                                                                                                                                                            |                            |           
|                                     |                                                                                                                                                                            | $                          | 12,795,000
|                                     |                                                                                                                                                                            |                            |           
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                            |                            |           
|Current liabilities:                 |                                                                                                                                                                            |                            |           
|                                     | Accounts payable                                                                                                                                                           |                            | $         
|                                     | Accrued employee compensation                                                                                                                                              |                            |           
|                                     | Accrued expenses                                                                                                                                                           |                            |           
|                                     | Current portion of long-term debt                                                                                                                                          |                            |           
|                                     | Deferred revenue and customer advances                                                                                                                                     |                            |           
|                                     |                                                                                                                                                                            |                            |           
|                                     |                                                                                                                                                                            | Total current liabilities  |           
|Long-term debt                       |                                                                                                                                                                            |                            | 1,000,000 
|Accrued stock compensation           |                                                                                                                                                                            |                            | 898,000   
|Deferred rent                        |                                                                                                                                                                            |                            | 336,000   
|                                     |                                                                                                                                                                            |                            |           
|                                     |                                                                                                                                                                            | Total liabilities          |           
|                                     |                                                                                                                                                                            |                            |           
|Commitments (Note 7)                 |                                                                                                                                                                            |                            |           
|Stockholders' equity:                |                                                                                                                                                                            |                            |           
|                                     | Common stock, par value $.001 per share; 60,000,000 shares authorized; 31,382,813 and 25,901,273 shares issued and outstanding at December 31, 2004 and 2003, respectively |                            |           
|                                     | Stockholders' notes receivable                                                                                                                                             |                            |           
|                                     | Accumulated deficit                                                                                                                                                        |                            |           
|                                     |                                                                                                                                                                            |                            |           
|                                     |                                                                                                                                                                            | Total stockholders' equity |           
|                                     |                                                                                                                                                                            |                            |           
|                                     |                                                                                                                                                                            | $                          | 12,795,000
|                                     |                                                                                                                                                                            |                            |           

See
accompanying notes to consolidated financial statements.

38

---





LARGE SCALE BIOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      |                                       | Year Ended December 31,  |            
|----------------------------------------------------- | ------------------------------------- | ------------------------ | -----------
|
|Revenues                                              |                                       | $                        | 1,767,000  
|                                                      |                                       |                          |            
|Costs and expenses:                                   |                                       |                          |            
|                                                      | Development agreements                |                          |            
|                                                      | Research and development              |                          |            
|                                                      | General and administrative            |                          |            
|                                                      | Impairment of property                |                          |            
|                                                      | Impairment of goodwill                |                          |            
|                                                      | Amortization of purchased intangibles |                          |            
|                                                      |                                       |                          |            
|                                                      |                                       | Total costs and expenses |            
|                                                      |                                       |                          |            
|Loss from operations                                  |                                       |                          | (17,474,000
|                                                      |                                       |                          |            
|Other income (expense):                               |                                       |                          |            
|                                                      | Interest income                       |                          |            
|                                                      | Interest expense                      |                          |            
|                                                      |                                       |                          |            
|                                                      |                                       | Total other income, net  |            
|                                                      |                                       |                          |            
|Loss before provision for income taxes                |                                       |                          | (17,425,000
|Provision for income taxes                            |                                       |                          |           
|                                                      |                                       |                          |            
|Net loss                                              |                                       | $                        | (17,425,000
|                                                      |                                       |                          |            
|Net loss per sharebasic and diluted                  |                                       | $                        | (.58       
|                                                      |                                       |                          |            
|Weighted average shares outstandingbasic and diluted |                                       |                          | 30,276,718 
|                                                      |                                       |                          |            

See
accompanying notes to consolidated financial statements.

39

---





LARGE SCALE BIOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                            |                                                                |            |           | Amount |            
|--------------------------- | -------------------------------------------------------------- | ---------- | --------- | ------ | -----------
|
|
|Balances, December 31, 2001 |                                                                | 24,892,989 |           | $      | 191,901,000
|                            | Issuance of common stock by Employee Stock Purchase Plan       |            | 61,756    |        |            
|                            | Issuance of common stock for services.                         |            | 17,162    |        |            
|                            | Exercise of stock options                                      |            | 67,969    |        |            
|                            | Common stock awarded to employees                              |            | 226,003   |        |            
|                            | Common stock reverted to the company                           |            | (42,126   | )      |            
|                            | Credit for common stock options issued to non-employees        |            |           |        |            
|                            | Payments on notes receivable                                   |            |           |        |            
|                            | Amortization of deferred compensation                          |            |           |        |            
|                            | Net loss                                                       |            |           |        |            
|                            |                                                                |            |           |        |            
|Balances, December 31, 2002 |                                                                | 25,223,753 |           |        | 192,160,000
|                            | Issuance of common stock by Employee Stock Purchase Plan       |            | 56,482    |        |            
|                            | Exercise of stock options                                      |            | 57,167    |        |            
|                            | Common stock awarded to employees                              |            | 607,052   |        |            
|                            | Common stock reverted to the company                           |            | (43,181   | )      |            
|                            | Stock compensation expense for options issued to employees     |            |           |        |            
|                            | Stock compensation expense for options issued to non-employees |            |           |        |            
|                            | Payments on notes receivable                                   |            |           |        |            
|                            | Amortization of deferred compensation                          |            |           |        |            
|                            | Net loss                                                       |            |           |        |            
|                            |                                                                |            |           |        |            
|Balances, December 31, 2003 |                                                                | 25,901,273 |           |        | 192,541,000
|                            | Issuance of common stock by Employee Stock Purchase Plan       |            | 50,794    |        |            
|                            | Exercise of stock options                                      |            | 58,080    |        |            
|                            | Common stock awarded to employees                              |            | 146,858   |        |            
|                            | Issuance of common stock                                       |            | 5,220,208 |        |            
|                            | Issuance of common stock for services.                         |            | 5,600     |        |            
|                            | Vesting of warrant issued with long-term debt                  |            |           |        |            
|                            | Stock compensation expense for options issued to employees     |            |           |        |            
|                            | Stock compensation expense for options issued to non-employees |            |           |        |            
|                            | Payments on notes receivable                                   |            |           |        |            
|                            | Net loss                                                       |            |           |        |            
|                            |                                                                |            |           |        |            
|Balances, December 31, 2004 |                                                                | 31,382,813 |           | $      | 201,074,000
|                            |                                                                |            |           |        |            

See accompanying notes to consolidated financial statements.

40

---





LARGE SCALE BIOLOGY CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                               |                                                                      | Year Ended December 31,                         |                                       
|---------------------------------------------- | -------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------
|
|Cash flows from operating activities:          |                                                                      |                                                 |                                       
|                                               | Net loss                                                             |                                                 | $                                     
|                                               |                                                                      |                                                 |                                       
|                                               | Reconciliation of net loss to net cash used in operating activities: |                                                 |                                       
|                                               |                                                                      | Depreciation of property, plant and equipment   |                                       
|                                               |                                                                      | Amortization of intangible assets               |                                       
|                                               |                                                                      | Stock compensation expense                      |                                       
|                                               |                                                                      | Vesting of warrant issued with long-term debt   |                                       
|                                               |                                                                      | Impairment of goodwill                          |                                       
|                                               |                                                                      | Impairment of property                          |                                       
|                                               |                                                                      | Write-off of capitalized patent costs           |                                       
|                                               |                                                                      | Loss on sale of equipment                       |                                       
|                                               |                                                                      | Provision for doubtful accounts receivable      |                                       
|                                               |                                                                      | Interest received in excess of interest accrued |                                       
|                                               |                                                                      | Changes in assets and liabilities:              |                                       
|                                               |                                                                      |                                                 | Accounts receivable                   
|                                               |                                                                      |                                                 | Prepaid expenses                      
|                                               |                                                                      |                                                 | Other assets                          
|                                               |                                                                      |                                                 | Accounts payable                      
|                                               |                                                                      |                                                 | Accrued employee compensation         
|                                               |                                                                      |                                                 | Accrued expenses                      
|                                               |                                                                      |                                                 | Deferred revenue and customer advances
|                                               |                                                                      |                                                 | Deferred rent                         
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|Cash flows from investing activities:          |                                                                      |                                                 |                                       
|                                               | Purchases of marketable securities                                   |                                                 |                                       
|                                               | Proceeds from matured marketable securities                          |                                                 |                                       
|                                               | Proceeds from sale of assets                                         |                                                 |                                       
|                                               | Capital expenditures                                                 |                                                 |                                       
|                                               | Increase in patents and intellectual property licenses               |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|Cash flows from financing activities:          |                                                                      |                                                 |                                       
|                                               | Proceeds from issuance of common stock                               |                                                 |                                       
|                                               | Proceeds from issuance of long-term debt                             |                                                 |                                       
|                                               | Proceeds from stockholder loan payments                              |                                                 |                                       
|                                               | Change in restricted cash                                            |                                                 |                                       
|                                               | Principal payments on long-term debt                                 |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|                                               |                                                                      |                                                 |                                       
|Net decrease in cash and cash equivalents      |                                                                      |                                                 | (6,625,000                            
|Cash and cash equivalents at beginning of year |                                                                      |                                                 | 7,737,000                             
|                                               |                                                                      |                                                 |                                       
|Cash and cash equivalents at end of year       |                                                                      | $                                               | 1,112,000                             
|                                               |                                                                      |                                                 |                                       

See accompanying notes to consolidated financial statements.

41

---





LARGE SCALE BIOLOGY CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Summary of Significant Accounting Policies

Large Scale Biology Corporation and its subsidiaries (collectively, the "Company," "we" or "our") is a product-focused biotechnology company using proprietary
technologies to develop and manufacture recombinant biologics. Our biomanufacturing opportunities include vaccines, complex proteins and follow-on off-patent therapeutics. The
Company's proprietary systems are supported by patents and patent applications. The Company's corporate offices, research and development and its subsidiary company, Predictive
Diagnostics, Inc. ("PDI") are headquartered in Vacaville, California. The Company's biomanufacturing operation is located in Owensboro, Kentucky.

The
Company incurred net losses of $17,425,000, $25,293,000 and $33,184,000 and negative operating cash flows of $14,566,000, $15,207,000 and $23,932,000 in the years ended
December 31, 2004, 2003 and 2002, respectively. These negative cash flows were financed primarily by proceeds from the Company's IPO in 2000 and a private placement of our common stock during
the first quarter of 2004. The Company's history of negative cash flows and its cash and cash equivalent balance of $1,112,000 at December 31, 2004, raise substantial doubt about the Company's
ability to continue as a going concern, absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, the Company is seeking to obtain debt or equity
financing. In addition, the Company is seeking to secure funds for our subsidiary, PDI, and the Company through a sale of PDI stock held by the Company. The Company is also pursuing opportunities for
significant revenue growth and concurrent sources of working capital with other companies for the joint development and commercialization of recombinant Aprotinin, Lysosomal acid lipase and Interferon
alpha 2a and 2b products. The Company is currently in discussions with pharmaceutical companies capable of marketing these products. The commercialization of these products for therapeutic
applications will require approval by the FDA and product scale-up at our biomanufacturing facility under FDA regulations. However, we cannot assure you that we will successfully obtain
equity or debt financing or product related revenues as such events are subject to factors beyond the Company's control. The financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.

Basis of ConsolidationThe accompanying consolidated financial statements include the accounts of Large Scale Biology
Corporation and its subsidiaries. All intercompany balances and transactions have been eliminated.

Segment ReportingThe Company operates in one reportable segment.

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

Cash and Cash EquivalentsWe consider all highly liquid investments with original maturities of three months or less to be
cash equivalents.

42

---



Concentrations of Credit RiskDuring 2004 revenues from various federal government agencies and a commercial customer were 50%
and 19% of our total revenues, respectively. During 2003 revenues from The National Institute of Environmental Health Sciences ("NIEHS"), various other federal government agencies and this same
commercial customer were 59%, 16% and 11% of our total revenues, respectively. NIEHS terminated its contract with the Company as of December 31, 2003 (see Note 2). During 2002 revenues
from various federal government agencies including NIEHS and a different commercial customer were 55% and 17% of our total revenues, respectively.

The
Company's cash and cash equivalents, marketable securities and accounts receivable are monitored for exposure to concentrations of credit risk. Cash equivalents and marketable
securities consist of high quality credit instruments and management regularly monitors their composition and maturities. Substantially all of the Company's accounts receivable are derived from
revenue earned from customers located within the United States. Management monitors the amount of credit exposure related to accounts receivable on an ongoing basis and generally requires no
collateral from customers. We maintain allowances for estimated probable losses, when applicable.

The
following table summarizes the activity for the Company's allowance for accounts receivable:

|                             |  | Balance at
Beginning of
Period |         | Additions |   | Deductions |  | Balance at
End of
Period
|---------------------------- |  | ------------------------------ | ------- | --------- | - | ---------- |  | ------------------------
|Year ended December 31, 2002 |  |                                |        |           |   |           |  |                        
|Year ended December 31, 2003 |  |                                |        |           | $ | 154,000    |  |                        
|Year ended December 31, 2004 |  | $                              | 154,000 |           |   |           |  |                        

Fair value of Financial InstrumentsThe carrying amount of cash and cash equivalents, accounts receivable and accounts payable
approximate fair value because of the short-term nature of these instruments. The fair value of debt is based upon current interest rates for debt instruments with comparable maturities
and characteristics and approximates the carrying amount.

Property, Plant and EquipmentProperty, plant and equipment is stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, which are 3 to 10 years for machinery and equipment, the shorter of the lease term or estimated economic life for
leasehold improvements and 30 years for buildings.

Computer SoftwareSoftware developed for internal research and development activities is expensed as incurred.

Intangible AssetsOur policies with respect to intangible assets are as follows:



43

---





Impairment of Long Lived AssetsThe Company's long-lived assets include capitalized patents, intellectual property
licenses, property and equipment related to our research facilities in California and our biomanufacturing plant in Kentucky and leasehold improvements in Maryland (See Note 3). We evaluate our
long-lived assets for impairment in accordance with Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If any of our long-lived assets are considered to be impaired,
the amount of impairment to be recognized is equal to the excess of the carrying amount of the assets over the fair value of the assets (see Notes 3, 4, and 5).

Revenue RecognitionWe currently receive revenues for sponsored research from commercial companies and government agencies.
Funds received for sponsored research is typically non-refundable and not based upon performance objectives or customer acceptance. Revenues for the reimbursement of research activities
are recognized as the costs are incurred.

Research and DevelopmentResearch and development costs that are related to customer funded agreements are expensed as
incurred and reported as costs of development agreements. Research and development costs not related to customer-funded agreements are expensed as incurred and reported as research and development
expense.

Stock-Based CompensationThe Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" effective January 1, 2003 for its stock-based employee compensation plans using the prospective recognition method under Statement of Financial
Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123." This method applies the recognition
provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, recognized compensation expense for those issuances under our
stock-based employee compensation plans. The fair values of stock options were estimated at the date of grant using the Black-Scholes option-pricing model and are being amortized over the vesting
period of generally 3 years. For stock awards granted prior to January 1, 2003, compensation expense has not been recognized under SFAS 123, unless those stock awards were
modified after January 1, 2003. During December 2004 Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS 123R"), "Share Based Payment," was issued
requiring the expensing of all stock-based compensation. The Company is evaluating the effects of SFAS 123R but believes its implementation will not have a material effect on the Company's
financial statements since the Company had already adopted FASB 123 for its stock-based employee compensation plans as described above.

44

---



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

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

Year Ended December 31,2004

2003

2002Net loss as reported

$
(17,425,000
)
$
(25,293,000
)
$
(33,184,000
)Stock-based employee compensation expense included in reported net loss


980,000


1,296,000


Stock-based employee compensation expense determined using the fair value method for all awards


(2,367,000
)

(5,042,000
)

(4,428,000
)Pro forma net loss

$
(18,812,000
)
$
(29,039,000
)
$
(37,612,000
)Net loss per share:Basic and dilutedas reported


$(0.58
)

$(0.99
)

$(1.33
)Basic and dilutedpro forma


$(0.62
)

$(1.13
)

$(1.51
)


The
fair values of employee stock options are estimated for the calculation of 2004 stock compensation expense and for the pro forma adjustments in the above table at the date of grant
using the Black-Scholes option-pricing model with the following weighted-average assumptions during 2004, 2003 and 2002: expected volatility of 118%, 93% and 109%, respectively; average
risk-free interest rate of 3.4%, 2.8% and 4.3%, respectively; initial expected life of six years; and no expected dividend yield and amortized over the vesting period of typically 3 to
4 years.

Stock
options issued to non-employees as consideration for services provided to the Company have been and continue to be accounted for under the fair value method in
accordance with SFAS 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services," which requires that compensation expense be recognized for all such options.

Income TaxesThe Company accounts for income taxes using the asset and liability approach whereby deferred income tax assets
and liabilities are recognized for the estimated future tax effects, based on current enacted tax laws, of temporary differences between financial and tax reporting for current and prior periods.
Deferred tax assets are reduced, if necessary, by a valuation allowance if the corresponding future tax benefits may not be realized.

Comprehensive IncomeThere were no items of other comprehensive income or loss in any period presented and, therefore,
comprehensive loss is the same as net loss for all periods presented.

45

---



Net Loss Per ShareBasic net loss per share is computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the
period, plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period. The weighted average number of potentially
dilutive common shares are 366,163 in 2004, 7,064 in 2003 and 688,545 in 2002. These shares were excluded from diluted loss per share because of their anti-dilutive effect.

ReclassificationsCertain 2003 and 2002 amounts have been reclassified to conform to the 2004 presentation.

2. Wind Down of the Germantown Proteomics Business and Severance Benefits

The National Institute of Environmental Health Services ("NIEHS") contract with the Company was terminated for the Government's convenience after an agreed upon
wind-down period ending on December 31, 2003. Revenues attributable to NIEHS were $2,117,000 and $809,000 in 2003 and 2002, respectively. No revenues attributable to NIEHS were
recorded during 2004

The
NIEHS contract with the Company includes Federal Acquisition Regulation ("FAR") clause 52.249-6, "Termination (Cost-Reimbursement)" that provides for
claims for termination costs under the cost principles and procedures in FAR Part 31. During 2004 the Company submitted its claim for reimbursement of termination costs to NIEHS. The amount of
the settlement has not yet been determined. No amounts have been recorded for our claim of termination costs or any other costs under the contract except for the normal reimbursement of research
activities recognized as revenues when these costs were incurred. We expect that the Company's claim will be recognized as income when the government has agreed to the settlement amount and the
collection of the settlement is reasonably assured.

The
wind down of the Company's Germantown, Maryland 2-dimensional gel fee-for-service proteomics business resulted in impairment charges of $3,598,000
in 2003 that reduced the carrying value of property, plant and equipment (see Note 3). In connection with our 2003 restructuring plans and staff reductions, we accrued $1,401,000 for severance
payments and other related termination benefits provided to employees. Of this amount, $860,000 was paid during 2003, resulting in $541,000 in accrued expenses at December 31, 2003 that was
paid during 2004. We accrue for these benefits in the period when benefits are communicated to the terminated employees. Typically, terminated employees are not required to provide continued service
to receive termination benefits. In general, we use a formula based on the number of years of service to calculate the termination benefits to be provided to affected employees.

46

---



3. Property, Plant and Equipment

December 31,2004

2003Machinery and equipment

$
15,300,000

$
17,326,000Leasehold improvements


4,539,000


4,539,000Building


4,643,000


4,616,000Land


373,000


373,00024,855,000


26,854,000Accumulated depreciation


(17,057,000
)

(18,226,000
)$
7,798,000

$
8,628,000


In
2003 we determined that certain machinery and equipment and leasehold improvements were impaired, due to the wind down of the Company's Germantown, Maryland 2-dimensional
gel fee-for-service proteomics business (see Note 2). The impairment charges of $3,598,000 represents the excess of the net book value of leasehold improvements, and
machinery and equipment over an estimate of recoverable NIEHS contract termination costs, expected cash received from asset disposition, net book value of re-deployed assets and the
discounted net expected cash flows of a property sublease. Impairment charges of $3,105,000 reduced the net carrying value of certain leasehold improvements to a fair value of $1,128,000 and an
impairment charge of $493,000 reduced the net carrying value of certain machinery and equipment to a fair value of $750,000. The remaining cost of leasehold improvements will be expensed matching
future income from a property sublease and recoverable amounts related to the NIEHS contract. The costs of machinery and equipment are included in property, plant and equipment at December 31,
2003 as the specific assets to be re-deployed or deemed held for sale had not yet been determined and the program to dispose of the assets had not yet been initiated at December 31,
2003. Subsequently, net proceeds of $180,000 were received and a loss on sale of equipment of $18,000 was recorded as the machinery and equipment with gross and net book values of $2,886,000 and
$198,000, respectively, was sold or scrapped during 2004.

In
2002 we determined that certain machinery and equipment, related to the Company's Germantown, Maryland operation, was permanently idle. As a result, we recognized an impairment charge
of $433,000 to reduce these assets to an estimated net book salvage value of $350,000. These assets were deemed held for sale and included in prepaid and other current assets in the consolidated
balance sheet at December 31, 2002. Subsequently, a loss on sale of equipment of $156,000 was recorded during 2003.

4. Intangible Assets

December 31,2004

2003Capitalized patent costs

$
1,852,000

$
2,183,000Intellectual property licenses


3,264,000


3,264,0005,116,000


5,447,000Accumulated amortization


(2,922,000
)

(2,373,000
)$
2,194,000

$
3,074,000


47

---



Capitalized
patent costs at December 31, 2004 include $1,483,000 relating to issued or allowed patents for which amortization has begun. The remaining amounts relate to pending
patents for which amortization will begin when the patents are issued or allowed. Periodically, we review our patent portfolio and have determined that certain patent applications, no longer possessed
commercial viability or were abandoned since they were inconsistent with the Company's business development strategy. As a result, general and administrative expense included charges of $362,000,
$389,000 and $396,000 for the write-off of capitalized patent costs in 2004, 2003 and 2002, respectively. General and administrative expense included patent amortization charges of
$119,000, $99,000 and $42,000 in 2004, 2003 and 2002, respectively.

Intellectual
property licenses at December 31, 2004 are comprised of $2,150,000 paid to The Dow Chemical Company for worldwide rights to certain plant gene technologies, $614,000
paid to Plant Biosciences Limited for worldwide exclusive rights to specified technologies and $500,000 paid to Icon Genetics AG for the right to utilize specified technologies (see Note 12).
Research and development expense included amortization of intellectual property licenses of $430,000, $948,000 and $1,003,000 in 2004, 2003 and 2002, respectively.

Excluding
the $369,000 of patent cost of which amortization has not yet commenced, the following table presents future amortization of intangible assets:

2005

$
583,0002006


473,0002007


141,0002008


118,0002009


71,000Thereafter


439,000Total amortization

$
1,825,000


Goodwill

In connection with the acquisition of the Germantown proteomics business, the Company recorded goodwill equal to the excess of the fair value of the consideration
given over the estimated fair value of the assets and liabilities received. Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" that
resulted in discontinuing the amortization of goodwill effective January 1, 2002. Instead, the unamortized balance of goodwill must be tested for impairment annually, or sooner if indicators of
potential impairment exist, based upon a fair value approach.

In
accordance with SFAS No. 142, we performed an initial impairment test of goodwill as of January 1, 2002 and found no evidence of impairment. However, our annual
impairment test of goodwill on December 31, 2002 indicated the goodwill balance was impaired as the fair value of the Germantown proteomics business was determined to be less than its carrying
value. As a result, we recognized an impairment charge of $839,000, equal to the remaining balance of goodwill. We evaluated several factors to determine the fair value of the proteomics business
including projected cash flows from the proteomics business and the significant decrease in the Company's market capitalization during 2003.

48

---



5. Other Assets

December 31,2004

2003Restricted cash

$
587,000

$
430,000Accrued sublease income


378,000


Employee notes receivable


47,000


114,000Deposits


25,000


26,000$
1,037,000

$
570,000


Restricted
cash represent certificate of deposits held as security for facility leases. During August 2004 the Company entered into a sublease of its entire Germantown, Maryland
facility to the end of the lease term in 2010. Sublease receipts are recorded as a reduction in rental expense. The sublease provided for free rent starting on August 23, 2004. Accrued sublease
income represents total sublease rental income recognized on a straight-line monthly basis in excess of actual rental receipts which will begin on March 11, 2005. The related rental
expense recognized on a straight-line monthly basis in excess of actual rental payments is presented as deferred rent on the consolidated balance sheets.

6. Long-term Debt

December 31,2004

2003Note payable in the amount of $2,900,000

$
1,000,000


Note payable in the amount of $500,000, repaid on December 20, 2004




$
261,000Less current portion





(52,000
)Long-term debt

$
1,000,000

$
209,000


The
following table presents future principal debt payments:

2005


2006

$
1,000,000Total principle payments

$
1,000,000


49

---



On
December 17, 2004, the Company entered into a $2.9 million loan agreement, with an initial advance of $1.0 million received on December 20, 2004, and a
second advance of $1.9 million received on January 14, 2005. In connection with this loan agreement, the Company issued a common stock purchase warrant to purchase a maximum of 700,000
shares of common stock at $1.42 per share (see Note 8). Borrowings under the loan bear interest at 8% and are secured by a first priority lien on the Company's assets located at its Owensboro,
Kentucky facility including land, building and improvements; fixtures, machinery and equipment; and certain patented intellectual property and related know-how used at the Owensboro
facility. The borrowed funds were partially used to repay existing long-term debt and the use of such funds is restricted to working capital and acquisition of machinery and equipment to
be installed at the Owensboro facility. The loan contains certain representations and warranties and financial and other covenants. In addition, the Company is subject to covenants limiting
transactions with affiliates, additional indebtedness and leases, asset sales, and liens on properties. The Company believes that it is in full compliance with these covenants. The principal balance
under the loan is due on June 17, 2006 and interest is due quarterly commencing on March 17, 2005.

7. Commitments

The following table presents future non-cancelable minimum payments under all of the Company's operating leases and research agreements:

|           |  | Operating Leases |           | 
|---------- |  | ---------------- | --------- | 
|
|2005       |  | $                | 1,525,000 | 
|2006       |  |                  | 1,578,000 | 
|2007       |  |                  | 1,633,000 | 
|2008       |  |                  | 1,690,000 | 
|2009       |  |                  | 1,050,000 | 
|Thereafter |  |                  | 935,000   | 
|           |  |                  |           | 
|           |  | $                | 8,411,000 | 
|           |  |                  |           | 

In
addition to the future non-cancelable minimum payments above, certain of the research agreements require future aggregate payments of $480,000 if the agreements are not
cancelled. During August 2004 the Company entered into a sublease of its entire Germantown, Maryland facility to the end of the lease term in 2010 that will reduce the Company's operating lease
commitments. Associated facility operating expenses were reduced by approximately $16,000 per month starting
during August 2004. In addition, the sublease receipts will be greater than the lease payments by $9,000 per month starting on March 12, 2005. These expected sublease receipts are
reflected in the table above to the extent that they offset the Germantown, Maryland minimum rental payments.

The
Company leases facilities under operating leases and incurred facility rental expenses of $1,662,000, $1,877,000 and $1,790,000 during 2004, 2003 and 2002, respectively.
Additionally, the Company has research sponsorship agreements with major universities, government institutions or other companies whereby the Company funds specific projects of interest to the
Company. Expenses under these agreements totaled $884,000, $446,000 and $1,434,000 during 2004, 2003 and 2002, respectively.

50

---



The
Company has patent license agreements with major universities that require the Company to pay royalties based on product sales, subject to minimum annual royalty amounts. These
arrangements remain in effect until the expiration of all related patents or upon termination of the agreements by the Company. Generally, these arrangements are cancelable by the Company upon ninety
days notice without significant liability to the Company. Royalty payments were $168,000, $125,000 and $100,000 in 2004, 2003 and 2002, respectively. The Company's non-cancelable
obligation related to royalty agreements at December 31, 2004 was $58,000.

8. Stockholders' Equity

Stock Issued

On March 8, 2004, the Company sold 5,169,682 shares of common stock at $1.58 a share in a private placement with gross proceeds of approximately
$8.2 million and after expenses, net proceeds of approximately $7.5 million.

In
2004 the Company issued at its fair value 50,526 shares of common stock in exchange for $48,000 of cash severance benefits paid to a terminated employee.

In
2004 the Company issued 5,600 shares of common stock valued at fair value of $9,000 to a non-employee in exchange for scientific advisor services.

Warrants

The Company reserved 700,000 shares of common stock for issuance upon the exercise of a warrants granted on December 17, 2004, in connection with the
Company's issuance of a promissory note (see Note 6). The warrant is exercisable starting the earlier of July 31, 2006 or 45 days following the prepayment of the promissory note,
and have an exercise price of $1.42 per share, subject to adjustments for stock splits, combinations, reclassifications and similar events, and expire on December 17, 2011. These warrants
contain priced-based anti-dilution protective provisions providing for adjustments of the exercise price of the warrants upon the occurrence of any sale of shares below the exercise price
of the warrants. The number of shares issuable under the warrant is to be determined according to a formula based on the aggregate daily principal loan balance up to a maximum of 700,000 shares of the
Company's common stock. Issuable under the warrant are 5,479 shares of common stock as of December 31, 2004. The Company has granted the warrant holder certain registration rights with respect
to the shares issuable upon exercise of the warrant. The fair value of the shares issuable under this warrant was estimated with the initial advance of $1.0 million received on
December 20, 2004, using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected volatility of 118%, risk-free interest rate of 4.0%,
initial expected life of seven years and no expected dividend yield. The resulting fair value is being amortized over the loan period and resulted in $5,000 of interest expense being recorded during
2004 in the consolidated statements of operations. The final advance of $1.9 million received on January 14, 2005 resulted in an additional fair value calculated on that date, which will
be amortized over the remaining loan period.

51

---



The
Company reserved 1,492,044 shares of common stock for issuance upon the exercise of a warrants granted on March 8, 2004 in connection with the Company's private placement of
common stock. The warrants are currently exercisable and have an exercise price of $2.18 per share, subject to adjustments for stock splits, combinations, reclassifications and similar events, and
expire on September 8, 2009. These warrants contain priced-based anti-dilution protective provisions providing for adjustments of the exercise price of the warrants upon the
occurrence of certain sales of shares below the exercise price of the warrants. In particular, if we issue shares of our common stock at an effective price per share less than $2.18 on or before
May 5, 2005, the exercise price of these warrants will adjust downward to the lower price per share (but in no event less than $1.984 per share). Following May 5, 2005, the exercise
price of these warrants will adjust downward based on a weighted formula (but in no event to a price less than $1.984 per share) if we issue shares of our common stock at an effective price per share
less than $2.18. As of December 31, 2004, no such adjustments have occurred. Under the terms of the warrants, a holder may not exercise the warrant for a number of shares that would cause it to
own more than 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares under the warrant.

In
2001 an employee was granted a warrant to purchase 250,000 shares of common stock. The warrant becomes exercisable in full if the quoted value of the Company's common stock, as
reported on the NASDAQ National Market, is at least an average of $6.84 for any consecutive 20-business-day period prior to February 15, 2006. The exercise price of the
warrant is $5.13 per share and the warrant expires on February 14, 2012. We will recognize compensation expense of approximately $428,000 if and when the warrant becomes exercisable.

The
Company has reserved 43,983 shares of common stock for issuance upon the exercise of warrants granted during 1988. These warrants are exercisable at $1.59 per share and expire on
August 9, 2005.

Employee Stock Awards

Effective July 1, 2002, cash compensation of certain employees of the Company was reduced and replaced by restricted common stock issued under the
Company's 2000 Stock Incentive Plan. Those employees received quarterly awards of common stock equal to the reduction in cash compensation divided by the closing price of the Company's common stock on
the last trading day of each quarterly period. The awarded shares are vested on July 1 of each year for awards issued during the previous four quarters. The Company maintains the right to
repurchase the stock at the original issuance price. The Company's repurchase right lapses if the Company realizes certain positive operating cash flows during the six-months ending
June 30, two years after vesting. On the following July 31, the Company either releases the awarded shares from escrow upon the expiration of the repurchase right or pays the original
issuance price in cash upon the Company's exercise of the repurchase right.

In
2002 the Company issued 226,003 shares of common stock as stock awards and recorded deferred compensation of $245,000 and compensation expense of $41,000 following the provisions of
APB 25. Of the $204,000 deferred compensation balance at December 31, 2002 related to stock awards, $162,000 was expensed during 2003 and the remaining $42,000 was reversed resulting in no
deferred compensation balance at December 31, 2003 upon the Company's adoption of SFAS 123. In 2003 the Company issued 607,052 shares of common stock as stock awards and recorded total
stock compensation expense for stock awards of $892,000 including the $162,000 mentioned above. In 2004 the Company issued 146,858 shares of common stock as stock awards and recorded total stock
compensation expense for stock awards of $338,000. The accrued stock compensation liability was $898,000 and $708,000 at December 31, 2004 and 2003, respectively.

52

---





Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan ("ESPP") allows employees to purchase shares of the Company's common stock through payroll deductions. The ESPP issued
50,794, 56,482 and 61,756 shares in 2004, 2003 and 2002, respectively. At December 31, 2004, a total of 1,137,178 shares of common stock were reserved and available for issuance by the ESPP.

Employee Stock Options

Under the Company's 2000 Stock Incentive Plan (the "Plan"), the Company's employees, officers, directors and consultants may be granted options to purchase shares
of the Company's common stock. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options may be granted only to Company employees
(including officers and directors who are also employees). Nonqualified stock options may be granted to Company employees, directors and consultants. The vesting period and exercise price of the stock
options are determined by the Company's Board of Directors. Stock options granted under the Plan are exercisable over a ten-year period from the grant date and have vesting periods ranging
from immediate vesting to four years. Incentive and nonqualified stock options granted under the Plan may be granted at exercise prices no less than 100% and 85%, respectively, of the fair value of
the Company's common stock on the date of grant. However, an option granted to a 10% shareholder under the Plan shall be granted at an exercise price not less than 110% of the fair value of the
Company's common stock on the date of grant. The Plan includes a net exercise provision whereby shares of the Company's common stock that are owned at least one year by options holders can be
exchanged at fair market value to pay the option exercise price. Employees and consultants exchanged 70,617 shares of common stock under the net exercise provision during 2002. No shares were
exchanged in 2004 and 2003.

The
Company has reserved 10,046,394 shares of common stock for issuance under the Plan. At December 31, 2004, 2,939,823 shares of common stock were available for grant.
Outstanding stock options are summarized as follows:

Number of Options

Weighted Average
Exercise PriceOutstanding, December 31, 2001

6,409,891

$
6.14Granted

1,742,250


1.28Exercised

(138,586
)

2.05Forfeited

(1,167,901
)

6.29Outstanding, December 31, 2002

6,845,654


4.96Granted

1,259,500


1.09Exercised

(57,167
)

.68Forfeited

(988,918
)

4.11Outstanding, December 31, 2003

7,059,069


4.42Granted

539,000


1.94Exercised

(58,080
)

1.07Forfeited

(433,418
)

5.29Outstanding, December 31, 2004

7,106,571


4.20Exercisable options:December 31, 2002

3,962,343


6.20December 31, 2003

5,267,899


5.18December 31, 2004

6,011,982


4.66


53

---



The
weighted-average fair value of options granted was $1.68, $0.81 and $1.07 in 2004, 2003 and 2002, respectively. At December 31, 2004, consultants held 1,085,374 outstanding
stock options.

The
following table summarizes information about stock options outstanding and exercisable under the Plan at December 31, 2004:

|                 |  | Outstanding Options |  |      |  |  
|---------------- |  | ------------------- |  | ---- |  | -
|
|
|$1.10 to $2.33   |  | 2,885,334           |  | 8.10 |  | $
|$3.45 to $8.41   |  | 4,160,237           |  | 5.49 |  |  
|$14.31 to $22.50 |  | 61,000              |  | 5.63 |  |  
|                 |  |                     |  |      |  |  
|                 |  | 7,106,571           |  | 6.56 |  |  
|                 |  |                     |  |      |  |  

Stock Compensation

Stock compensation expense attributed to options issued to employees and directors was $527,000 and $198,000 in 2004 and 2003, respectively. During 2004 and 2003
three officers terminated their employment with the Company. The Company's Board of Directors accelerated vesting and extended the exercise date for options previously granted to purchase 141,563 and
525,000 shares of the Company's common stock in 2004 and 2003, respectively, at exercise prices ranging from $1.23 to $7.50. These modifications of the terms of their stock options resulted in a stock
compensation charge of $98,000 and $182,000 in 2004 and 2003, respectively.

The
Company granted options to consultants to purchase 15,000 shares of the Company's common stock in 2002. No options were granted to consultants in 2004 and 2003. The exercise prices
per share for options granted were $1.46 in 2002. The options have a 10-year life and vest over periods ranging from three to four years. The fair value of each option was estimated on the
date of grant and revalued during the vesting period using the Black-Scholes option-pricing model with the following weighted-average assumptions during 2004, 2003 and 2002: expected volatility of
118%, 93% and 109%, respectively; risk-free interest rate of 3.9%, 3.8% and 4.3%, respectively; initial expected life of ten years; and no expected dividend yield. Stock compensation
expense of $63,000 and $80,000 was recorded in 2004 and 2003, respectively, and a stock compensation credit of $12,000 was recorded in 2002 resulting from the decline in the price of the Company's
common stock.

On
November 1, 2001, the Company issued 200,000 shares of common stock to an employee, subject to the Company's right of reversion. In both 2003 and 2002, the Company's right of
reversion lapsed for 100,000 shares as those shares vested. The Company recorded deferred compensation of $690,000 on the grant date based upon the fair market value of the Company's common stock of
$3.45 per share.
At each vesting date, the employee elected to revert a portion of the vested shares to the Company to settle minimum statutory payroll taxes. A total of 43,181 and 42,126 shares were reverted to the
Company and deferred compensation was reduced by $149,000 and $145,000 in 2003 and 2002, respectively. Combined expenses for stock compensation and payroll taxes were $347,000 and $142,000 in 2003 and
2002, respectively.

54

---



On
December 31, 1999, the Company granted options to employees, officers and directors to purchase 1,545,000 shares of the Company's common stock. These options have exercise
prices ranging from $6.67 to $7.50 per share, have a 10-year life and were fully vested as of December 31, 2002. Deferred compensation in the amount of $7,809,000 was recorded as
the difference between the exercise price and the estimated fair value of the common stock as of December 31, 1999. The deferred compensation was amortized over the three-year
vesting period. Stock compensation expense of $2,604,000 was recorded in 2002.

Stockholders' Notes Receivable

The Company's Board of Directors authorized the issuance of notes receivable prior to 2001, to allow salaried employees, who are not Company officers, to exercise
stock options by borrowing the aggregate exercise price from the Company. These notes are recorded as a reduction of stockholders' equity.

9. Employee Benefit Plan

The Company sponsors a 401(k) defined contribution retirement plan covering all employees who meet certain eligibility requirements. The Company makes
discretionary matching contributions equal to 25% (50% through June 2002) of employee contributions up to a maximum of 1.5% of an employee's compensation, subject to statutory limits. The
Company's 2003 and 2002 reorganizations have decreased the number of employees participating in the plan resulting in a reduced contribution by the Company. The Company's contributions under this plan
were $99,000, $108,000 and $221,000 in 2004, 2003 and 2002, respectively.

10. Income Taxes

The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate as follows:

Year Ended December 31,2004

2003

2002Federal income tax benefit at statutory rate

(34.0
)%
(34.0
)%
(34.0
)%State income tax benefit, net of federal expense

(5.7
)
(5.5
)
(5.6
)Research and development credits

(3.5
)
(2.7
)
(2.0
)Change in valuation allowance for income taxes

44.8

41.6

40.9Other

(1.6
)
0.6

0.70.0
%
0.0
%
0.0
%


55

---



The
significant components of net deferred income tax assets are:

December 31,2004

2003Deferred tax assets:Net operating loss carryforwards


52,761,000


46,279,000Tax credit carryforwards


8,743,000


8,430,000Deferred compensation


4,988,000


4,527,000Capitalized project costs


889,000


557,000Other


3,361,000


3,303,000Total deferred tax assets


70,742,000


63,096,000Deferred tax liabilitiesintangible assets


(571,000
)

(743,000
)Valuation allowance


(70,171,000
)

(62,353,000
)Net deferred income tax asset

$


$



At
December 31, 2004, the Company had net operating loss carryforwards of $140,550,000 and $93,667,000 available to reduce future Federal and state taxable income, respectively.
These net operating loss carryforwards expire between 2009 and 2024 for Federal income tax purposes and expire between 2007 and 2014 for state income tax purposes. The difference between the Federal
and state net operating loss carryforwards is due to the California limitation on loss carryforwards (100%, 60% and 60% in 2004, 2003 and 2002, respectively) and the capitalization of certain research
costs for state income tax purposes. Additionally, at December 31, 2004, the Company had research and other tax credit carryforwards of $5,758,000 and $4,523,000 available to reduce future
Federal and state income taxes, respectively. These tax credits expire between 2005 and 2024 for Federal income tax purposes and have no date of expiration for state income tax purposes. A valuation
allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized

The
extent to which the net operating loss carryforwards can be used to offset future taxable income may be limited if changes in the Company's stock ownership exceed certain defined
limits.

11. Supplemental Cash Flow Disclosures

In 2004 the Company issued 5,600 shares of common stock valued at fair value of $9,000 to a non-employee in exchange for scientific advisor services.

In
2004, 2003 and 2002, the Employee Stock Purchase Plan issued 50,794, 56,482 and 61,756 shares of Company common stock, valued at $44,000, $53,000 and $135,000, respectively, to
employees.

In
2002 the Company recorded deferred compensation of $245,000 related to stock granted to employees. The Company adopted SFAS 123 in 2003, which resulted in the reversal of
$42,000 of deferred compensation during 2003.

12. Related Party Transactions

In 1999, the Company entered into a license agreement with Icon Genetics Inc., an affiliate of Icon Genetics AG ("Icon") and the International Institute of
Cell Biology, National Academy of Sciences of Ukraine (the "Institute"). The Company's Chairman of the Board of Directors serves as Chairman of the Supervisory Board of Icon. The license provides the
Company an exclusive, worldwide license to specified technology for a paid license fee of $300,000. The Company was also granted a

56

---



worldwide,
non-exclusive license to specified technology for a 2% royalty on the sale of products developed with such technology. An additional $200,000 was paid by the Company upon
achievement of milestones specified in the license agreement. In 2000, the Company entered into a one-year research services agreement with Icon that provided for cumulative payments of
$200,000 to Icon. In 2001, the Company entered into another license agreement with Icon for the worldwide, non-exclusive license to specified technology for a paid license fee of $500,000.
Under these agreements, the Company paid a combined total of $537,500 in 2001 to Icon Genetics Inc., Icon and the Institute.

In
1999 pursuant to an employment agreement with a founder of the Germantown proteomics business, the Company paid the employee $500,000 over two years for a five-year
non-compete agreement. In addition, the Company entered into a license and consulting agreement with the employee covering certain biochip technology developed by him. The license is a
worldwide, exclusive, non-royalty bearing license to the biochip technology. This agreement required monthly payments of $4,000 and $6,667 for consulting services over two years and for
license fees over five years, respectively. The balance payable of the license fee was accelerated in June 2002 in conjunction with the employee's termination from the Company. Expenses related
to these agreements were $173,000 in 2002.

13. Quarterly Results of Operations (Unaudited)

The following table presents the Company's 2004 and 2003 quarterly results of operations:

|                                     |  | Three Months Ended |           
|------------------------------------ |  | ------------------ | ----------
|
|2004                                 |  |                    |           
|Revenues                             |  | $                  | 563,000   
|Loss from operations                 |  |                    | (4,861,000
|Net loss                             |  |                    | (4,859,000
|Net loss per sharebasic and diluted |  |                    | (0.16     
|2003                                 |  |                    |           
|Revenues                             |  | $                  | 621,000   
|Loss from operations                 |  |                    | (7,171,000
|Net loss                             |  |                    | (7,145,000
|Net loss per sharebasic and diluted |  |                    | (0.28     

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14. Subsequent Events

On March 3, 2005, the Company issued a $600,000 convertible promissory note ("Note") to Kevin J. Ryan, the Company's President and Chief Executive
Officer and a member of the Company's Board of Directors. The Note bears interest at 8% and is due on July 1, 2005. The Note is convertible into Common Stock of the Company, at the option of
the holder, on or before the due date, at a conversion price equal to the greater of the closing price of the Company's Common Stock on March 3, 2005, or 90% of the average of the closing
prices of Company's common stock on the 22 trading days ending the day before the conversion of the Note. The Note may be prepaid by the Company without penalty at any time.

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

In
connection with the Promissory Note, the Company issued a common stock purchase warrant that expires on April 15, 2011. The holder of the warrant has the option either to
purchase 903,614 shares of the Company's common stock at $0.83 per share or common stock of the Company's subsidiary, Predictive Diagnostic, Inc ("PDI"). The PDI exercise price would be the lowest
price per share of the PDI stock in any PDI-financing event of no less than $1,500,000. The number of warrant shares would be determined by dividing $3,000,000 by the PDI exercise price. PDI common
stock issuable pursuant to the warrant would be subject to exchange and underwriter's holding period restrictions, or "lock-ups".

58

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 15, 2005.

| |  | LARGE SCALE BIOLOGY CORPORATION
| |  | -------------------------------
| |  | By:                            

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons, on behalf of the Registrant and in the capacities
indicated on April 15, 2005.

|Name                                          |  | Title                                                                                                   
|--------------------------------------------- |  | --------------------------------------------------------------------------------------------------------
|                                              |  |                                                                                                         
|/s/KEVIN J. RYANKevin J. Ryan.                |  | President and Chief Executive Officer
(Principal Executive Officer)                                     
|/s/RONALD J. ARTALERonald J. Artale           |  | Senior Vice President, Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
|/s/MICHAEL D. CENTRONMichael D. Centron       |  | Vice President, Finance and Administration
(Principal Accounting Officer)                               
|/s/ROBERT L. ERWINRobert L. Erwin             |  | Chairman of the Board                                                                                   
|/s/BERNARD I. GROSSERBernard I. Grosser, M.D. |  | Director                                                                                                
|/s/SOL LEVINESol Levine                       |  | Director                                                                                                

59

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Exhibit Index

|Exhibit
Number |  | Exhibit Title or Description                                                                                                                            
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|21.1           |  | Large Scale Biology Corporation Subsidiaries.                                                                                                           
|23.1           |  | Independent Auditors' Consent.                                                                                                                          
|31.1           |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-15(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2           |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-15(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1           |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 
|32.2           |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  

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