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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the year ended December 31, 2002

TRANSITION PERIOD FROM                      TO                     .

Commission File Number 0-31275

LARGE SCALE BIOLOGY CORPORATION

(Exact name of registrant as specified in its charter)

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  x  No  ¨

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.  x

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  ¨  No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2002 was approximately $36.4 million (based on the last reported sale price of $2.18 on June 28, 2002 on the NASDAQ National Market).

The number of shares outstanding of the Registrant’s common stock as of March 20, 2003 was 25,257,891.

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, 2002, to be delivered in connection with the Registrant’s 2003 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, 2002

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

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

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

PART I

Item 1.    Business

Overview

LSBC’s goal is to develop therapeutic products using our proprietary technologies and expertise. The product categories in which LSBC has made the most progress using our proprietary biomanufacturing technology are: (1) vaccines for the treatment of cancer and the treatment and prevention of infectious diseases, including disease agents of potential concern in biological warfare and, (2) the low-cost production of complex proteins for therapeutic product applications. Examples of specific products on which we are working include:

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We successfully completed a Phase I human clinical trial of our NHL vaccine and are designing a Phase III clinical trial and manufacturing protocol for this product to facilitate a potential collaboration for further development. We produced human alpha-galactosidase A as part of a collaborative research agreement with the National Institutes of Health, or NIH. We have received Orphan Drug designation for this potential product from the Food and Drug Administration (FDA), and we are preparing an IND, or Investigational New Drug Application. Using our proprietary proteomics and genomics technologies, LSBC has developed potential products and processes for treatment of a variety of diseases in the medical field of hematology based on our approach to the stimulation and expansion of stem cell precursors. We have initiated preclinical research on our approach for the expansion of bone marrow and cord blood stem cells.

LSBC’s proprietary technologies include methodologies for the analysis of both genes and proteins and for the completion of that analysis in an automated, high-throughput fashion. We also own unique systems for manufacturing proteins in both research quantities and commercial quantities to pharmaceutical-grade purity standards. These systems use proprietary plant-based gene delivery vehicles in green plants for the production of vaccines and therapeutic proteins without genetic modifications of the plant host. We believe that these manufacturing technologies will provide us and our partners with significant competitive advantages in speed and ease of production, safety, production capacity and cost of goods in the future.

In addition to using our technologies to develop our own proprietary therapeutic product candidates, we are marketing them to collaborators and commercial customers. We believe opportunities exist to market our technologies to potential customers for the discovery of proteins that act as markers for diagnostic purposes and/or as therapeutic targets, and for custom manufacturing of client’s protein therapeutics and vaccines.

LSBC was incorporated in California in 1987 and reincorporated in Delaware in 2000. From our inception until the end of 2000, LSBC’s main focus was on internally developing and integrating proprietary technologies, and on providing research and development services to customers. In 2001, our focus shifted to the development of products throughout the early stages of clinical testing.

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 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 the Year 2002

LSBC accomplished the following during 2002:

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Recent Development

In January 2003, the FDA granted the Company Orphan Drug designation for its proprietary plant-produced human enzyme, alpha-galactosidase A, for the treatment of Fabry disease. The Company is now accelerating its planned filing of an IND with the FDA for clinical trials of this product. LSBC has established a relationship with a clinical research center specializing in genetic diseases to undertake a Phase I clinical trial later this year.

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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 encode the information needed for carrying 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.

All diseases involve changes affecting one or more proteins in a cell. These changes may result in an increase, decrease or elimination of the relevant protein(s) or in the structure of the protein. Many diseases are directly caused by genetic defects that affect the way proteins are made or regulated within cells. In order to identify the nature of disease and to design effective drugs to treat diseases, it is necessary to understand these changes in the composition of the cellular proteins, or “proteome.” Therefore, we believe that the field of proteomics is becoming crucial in the biotechnology and pharmaceutical industries’ efforts to discover and develop drugs that treat disease, and to make products which enable researchers and doctors to predict, diagnose and monitor diseases. LSBC has developed over the past 15 years a comprehensive, proprietary proteomics technology that is capable of rapid analysis of the proteomes of normal and diseased human tissues for the identification of proteins that are associated with diseases. The study of these disease-related proteins is an important tool for diagnostic and therapeutic research and product development.

Private industry and the federal government have each announced the completion of the sequencing of the human genome. The Human Genome Project has resulted in large databases that contain genetic sequences of sections of the chromosomes but which provide little or no information about the function of these gene sequences. Scientists cannot infer, necessarily or reliably, gene function from gene sequence or mRNA levels alone, nor from comparison to other genes of known function. Without understanding the function of genes, the sequences are of little practical use. Determining gene function involves the discovery of the role or relationship that a gene, or the protein it encodes, has with a particular biological process and understanding the consequences of modulating its activity. Discovering gene function requires the matching of gene sequence to specific protein function. We believe our key technologies, including our core proteomics and GENEWARE technologies, address these needs. In addition, we believe that our manufacturing capability will enable us to produce commercially valuable proteins rapidly and cost effectively.

Much of the work being done in the biotechnology industry today is on drug development. Quite often, for a company to discover and develop a new drug requires analysis of “diseased” versus “normal” tissue to find what is known as a drug “target” within the tissue. A drug “target” may be a protein that is directly correlated to the disease or a biochemical pathway involved with the disease. The scientist’s next step is to determine which chemicals, proteins or compounds impact the drug “target” in a positive way, i.e., provides a cure or reduces the effect of the disease on the particular tissue without causing unacceptable side effects. If such research is successful at that stage, then a potential drug product has been discovered. We believe that the final, and perhaps most important step for drug development, is a speedy and cost-effective means of producing a protein drug in commercial quantities, which is one of our core capabilities.

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Our Strategy

LSBC’s corporate strategy is to capitalize on our platform technologies to develop and commercialize the Company’s own products as well as those of our clients and partners. While LSBC’s GENEWARE and ProGEx protein expression and analysis platforms are broadly applicable, the Company’s current focus is on developing and commercializing biomedical products and biomanufacturing services. LSBC also generates near-term revenue from custom discovery and development services.

LSBC’s strategic business focus consists of development of the following business opportunities:

The Company’s genomics and bioinformatics capabilities also can be used to discover genes of medical interest. Likewise, LSBC’s well-established protein isolation and analysis (proteomics) infrastructure can be used to discover drug targets as well as targets of toxicity for drugs and environmental chemicals. LSBC’s genomics, proteomics and informatics processes are integrated to offer the Company, its clients and partners a powerful discovery service.

LSBC has successfully achieved proof of principle with its own human and animal-health-care therapeutics. While some early stages of biomanufacturing, regulatory and clinical development can be supported by the Company, LSBC plans to achieve advanced product development and commercialization goals in collaboration with pharmaceutical and biopharmaceutical companies. In particular, two of the Company’s products, our NHL vaccine and a feline parvovirus vaccine have successfully completed early-stage clinical trials and are ready to move forward into advanced development. We have also completed manufacturing process development of a second human therapeutic product, alpha-galactosidase A to treat Fabry disease. We have received Orphan Drug designation from the FDA for this product. We are currently preparing the regulatory documents to initiate clinical trials. LSBC is in discussions with several potential partners for commercial development of our products and we expect to generate license, research and development and royalty income from these alliances. However, LSBC cannot assure you that these discussions will lead to alliances or that LSBC will realize revenue from any alliance it forms.

LSBC has been developing a unique biomanufacturing capability for proteins and peptides to capitalize on the current and anticipated capacity constraints of the biotechnology industry. We built a manufacturing facility in Owensboro, Kentucky, that is ready for FDA-compliant manufacturing of human therapeutics and vaccines developed by LSBC and our clients.

Commercial Opportunities

Products

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 an X-linked disease that usually results in death for homozygous males in the fourth or fifth decade of life.

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LSBC’s enzyme is produced in plants with our proprietary GENEWARE system. The enzyme is recovered and purified to clinical standards in a proprietary process that is validated and compliant with cGMP, or current Good Manufacturing Practices. The product has been produced at LSBC’s biomanufacturing facility in Owensboro, Kentucky.

Preclinical data, collected to support an IND filing with the FDA, was done collaboratively with Dr. Roscoe Brady and his team at the National Institutes of Health (National Institute of Neurological Disease and Stroke) under a collaborative research and development agreement. The preclinical data in a Fabry mouse model system shows good efficacy and safety in the animals. LSBC applied for and received an Orphan Drug designation from the FDA for this molecule.

LSBC has requested a pre-IND meeting at the FDA to request guidance for filing an IND for use of alpha-galactosidase A for Fabry disease.

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. There is one aprotinin-containing product on the United States market for use in CPB that is currently obtained by extraction from bovine lungs.

LSBC has successfully produced pilot-scale quantities of bovine-identical equivalent using its proprietary GENEWARE plant-based biomanufacturing system. LSBC’s aprotinin active pharmaceutical ingredient, or API, has the same biological activity as its animal-derived counterpart. When scaled to commercial-level production, the Company believes that its aprotinin could be obtained cost effectively and in sufficient quantities to meet worldwide demand, without the safety concerns associated with animal- and especially bovine-derived products.

LSBC is in discussions with potential partners for supplying the company’s aprotinin to the medical and industrial markets. However, LSBC cannot assure you that we will succeed in creating commercial arrangements with these parties.

Endothelial Cell-Derived Growth Factor.    LSBC has developed novel technology for stimulating the proliferation of human bone marrow and cord blood stem cells. Proprietary products and processes developed by LSBC may prove effective in a variety of applications, including the treatment of diseases of hematopoiesis, treatment of patients who receive chemotherapy and/or radiation therapy for cancer, as an adjunct to vaccine therapy, and in the facilitation of bone marrow-mediated gene therapy. LSBC expects to initiate clinical research as well as seek commercial partners for many of the potential applications of this technology.

Non-Hodgkin’s Lymphoma Vaccine.     During 2002, LSBC completed the clinical portion of a Phase I safety trial in humans of a patient-specific vaccine for the treatment of indolent NHL. Non-Hodgkin’s or B-cell lymphoma is the sixth leading cause of death in the United States and the Western world and the only cancer for which incidence and mortality are increasing (approximately 6% per annum incidence and 3% per annum mortality). We estimate that there are between 55,000 and 80,000 new cases of NHL per year in the United States alone.

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LSBC conducted a 16-patient safety trial at Stanford University Medical School in collaboration with Ronald Levy, M.D. There were no vaccine-associated adverse events reported, and 75% of the patients treated mounted either a cellular or humoral response to the vaccine. Although too small a number of patients was treated to derive statistical conclusions in this pilot study, the consistent method of manufacture, safety and immunogenicity were shown and further clinical trials are indicated. LSBC has met with the FDA and is designing a Phase III clinical trial protocol. LSBC is seeking partners to further develop this product.

Services

Biomanufacturing.    LSBC has a separate facility for the biomanufacture of therapeutic proteins, vaccines and industrial biomolecules for customers and for in-house proprietary products. During 2002, LSBC focused on manufacturing our NHL vaccine and on validating our Owensboro, Kentucky facility to allow cGMP manufacturing of our NHL vaccine, alpha-galactosidase A and aprotinin, in addition to the manufacture of development stage pharmaceutical products for customers. LSBC has expanded its business development staff and is marketing aggressively its biomanufacturing capabilities to potential customers.

Proteomics Services.    Protein markers are proteins that, when present in body tissues, or fluids such as blood or urine, can be used to make an early diagnosis of a disease or to track its progress. Protein markers can provide an early, accurate, simple and non-invasive technique for assessing when a person has a disease or is at risk of developing it (diagnostic markers), and the progress of an existing disease and its response to treatment (clinical markers).

In addition to utilizing our proteomics technologies for our own internal discovery efforts, we market our protein marker discovery capabilities to customers under arrangements with varying levels of intellectual property participation, research funding and success fees. Depending on a customer’s preference, such arrangements may be in the form of a partnership which may include technology access fees, research funding, milestones payments and royalties or, alternatively, on a straight fee-for-service basis where we forgo downstream participation in exchange for higher research funding. In 2002, we were awarded a five-year, $12.2 million fee-for-service proteomics contract by the National Institute of Environmental Health Sciences.

Agricultural Genomics.    LSBC has substantial expertise in the field of agricultural genomics. Using our GENEWARE system, we can rapidly screen large numbers of unknown genes contained in high-quality gene “libraries” for gene function. This system was applied successfully to the discovery of useful genes for commercial crops during our multi-year alliance with the Dow Chemical Company. In addition, LSBC’s GENEWARE system may be useful for the production of protein products for agricultural applications. For example, LSBC has extended its contractual alliance with Growers Research Group for the production of bovine lysozyme with potential applications in remediation of certain important plant pathogens. LSBC is seeking new partners to expand its commercial base in agriculture.

Our Technologies

Genomics and Proteomics

GENEWARE, our core technology, is a modified plant viral vector system we use to insert genes rapidly and temporarily into host organisms, usually plants in the Nicotiana genus. We use GENEWARE for gene discovery, gene function analysis and protein production. GENEWARE viral vectors carry a gene sequence of interest into a cell of a host organism. With conventional transgenic, or GMO, technology, the gene sequence is inserted into the chromosomes of the host in the nucleus where it is converted into mRNA. The mRNA then moves outside the nucleus to the

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cytoplasm where it is translated into protein. GENEWARE is “non-GMO” in that GENEWARE does not use the traditional transgenic methods of inserting a gene into the genome of the host organism. The use of GENEWARE does not permanently alter the genetic makeup of the plant or other organism.

We can use GENEWARE in several ways to discover gene function. In one method, we insert a gene of unknown function into the GENEWARE vector (a plant virus) that is then inoculated onto a plant causing changes in the inoculated plant that can be analyzed to rapidly determine the function of that gene. In another method, we insert a gene sequence into our GENEWARE vector that reads in a backwards, or “antisense” manner to the natural gene. The antisense sequence will cause the natural gene in the plant to be turned off. We can then analyze the plant for any biochemical changes that occur which, in turn, tell us the function of the natural gene. These methods of discovering the function of previously unknown genes allow us to find genes that have commercial utility.

LSBC’s proteomics technology allows for the rapid determination of the protein composition, or proteome, of cells, tissues and body fluids. Protein composition is a listing of the specific proteins present in a given sample, and their amounts. We can rapidly identify and quantify a significant range of proteins found in normal human tissues and body fluids and the changes in proteins that are caused by diseases or by the use of particular drugs. We believe that proteomics is becoming very important in discovering and developing therapeutics, and in predicting, diagnosing and monitoring diseases. We believe that our proteomics expertise can be used to derive information that is currently unavailable using gene identification alone.

LBSC’s GENEWARE and ProGEx technologies, used in combination, can reveal comprehensive genetic information from identification of gene function through quantitative and qualitative descriptions of identified proteins resulting from turning a gene on or off. We are continuing to integrate our proteomics and genomics technology platforms. We believe that this integration effort is a significant competitive advantage in our product development strategy.

Biomanufacturing

LSBC also uses GENEWARE to manufacture therapeutic proteins, peptides and other molecules in plants. GENEWARE can achieve significant time and cost advantages over traditional, transgenic genetic-engineering systems and alternative manufacturing technologies. GENEWARE can be a very efficient and competitive protein production system due to its potential for high expression, speed of production, safety (non-mammalian cell system) and the fact that minimal capital expenditures are required compared to alternate expression systems. LSBC uses its Owensboro, Kentucky production facility for the custom production of protein products from plants, including those proteins produced using GENEWARE technology. The Company will be seeking FDA approval for a human Phase III trial of our NHL vaccine, which the Company plans to conduct after securing a partner. The Company also is seeking FDA approval for the initiation of human clinical trials of our alpha-galactosidase A as a therapy for Fabry disease. Since 1991, LSBC has conducted more than ten USDA-approved field trials, each demonstrating that GENEWARE is environmentally safe. We believe that GENEWARE 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. In addition, LSBC applies its GENEWARE system only to non-food crops. LSBC follows standard operating procedures during field and greenhouse production and testing to further ensure environmental safety.

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Bioinformatics

LSBC generates large amounts of data when working with genes and proteins. Bioinformatics is the word we use to define our gathering, storage, analysis, retrieval and manipulation of this data using computers. Our bioinformatics infrastructure comprises the entire collection of laboratory information management systems (LIMS), relational database technology, analysis tools and various other hardware and software supporting our development efforts. We use very sophisticated techniques in advanced computer programming and engineering to integrate proprietary software, relational database programming, load balancing, batch management processing, and client-side applications to integrate and manage all types of biological information.

In addition, to increase our understanding of the biological importance of our data, our proprietary data are joined with publicly available biological data and stored in a relational database for data mining and discovery purposes. These combined data sets are used by LSBC scientists for product and discovery applications.

We believe our bioinformatics resources are important components of the Company’s competitiveness and of great value to our product development initiatives.

Intellectual Property

LSBC continually seeks patent protection for our proteomics, genomics, biomanufacturing, and plant and animal viral gene expression technologies. As of December 31, 2002, we had 57 issued and 109 pending U.S. patents. Our issued U.S. patents expire between 2006 and 2020. 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 50 issued and 142 pending foreign patents as of December 31, 2002. We believe that these issued patents in various technological areas are valuable to our business. In the plant and animal viral systems field, we have 19 issued U.S. patents and 47 issued foreign patents with durations ranging from 2011 to 2018. In the proteomics field we have 29 issued U.S. patents and 1 issued foreign patent with durations ranging from 2006 to 2020. In the genomics field, we have 3 issued U.S. patents with durations to 2018. In the bioprocessing field, we have 6 issued U.S. patents and 2 issued foreign patents with durations through 2018. While our patents are an important element of our success, our business as a whole is not materially dependent on any one patent.

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 or own rights to many registered trademarks and unregistered marks in the United States and in many other countries.

LSBC also relies 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.

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Collaborations

LSBC’s revenue has been derived principally from collaborations with others. The business structure varies depending on the specific product or research objectives of the collaborations and whether the client is a business, a government agency, or an academic institution. In general, LSBC receives immediate funding for license and technology access fees and for reimbursement of costs to LSBC. We 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 and from royalty fees from the future sale of products developed using our technologies. Other collaborations take the form of alliances to jointly commercialize product applications evolved from combining specific technologies of each company.

LSBC also provides, or has provided, research and development stage biomanufacturing services to other companies and entities including Novozymes Biotech, Inc., ApoImmune, Inc., Growers Research Group LLC, Weyerhauser Company and the University of Arkansas for Medical Sciences. Manufacturing agreements may include payment to LSBC for costs associated with scale-up of manufacturing processes, payments for supply of product and royalties on product sold. 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.

LSBC also actively seeks revenue from government funding sources that promote the development of products having strategic importance to us. For example, LSBC has worked with the U.S. Navy under a Collaborative Research and Development Agreement for the development of a protein-based product that increases stem cell proliferation. The Company also received a multi-year contract with the National Institute of Environmental Health Sciences to provide proteomics services for application in toxicogenomics and we have also received a multi-year grant from the National Institute of Standards and Technology to develop new vaccine production technologies.

Employees

As of March 21, 2003, LSBC has 114 full-time employees, of which 86 are engaged in research and development or biomanufacturing activities and the remainder work in general and administrative areas. Twenty of our employees hold Ph.D. degrees.

Research and Development

LSBC’s internally funded research and development expenses totaled $21.2 million, $22.4 million and $16.4 million in 2002, 2001 and 2000, respectively. Our customer-sponsored research and development expenditures totaled $1.2 million, $3.5 million and $8.1 million in 2002, 2001 and 2000, respectively.

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. Other companies are developing and marketing therapeutics for NHL. Two other companies are marketing products overseas that would or might be competitive with our alpha-galactosidase A product.

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We and others compete in the emerging fields of functional genomics and proteomics on the basis of technological innovations that offer time and cost advantages for the accomplishment of specific tasks, many of which were not previously practical. We believe our proprietary technology, and our significant patent portfolio, will allow us to compete effectively in these fields. However, we expect new developments to continue and discoveries by others may render our potential products and technologies non-competitive.

Item 2.    Properties

LSBC’s 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, 2004. We also own a facility of approximately 22,000 square feet and approximately 20 acres of land in Owensboro, Kentucky for pilot and large-scale extraction and downstream biomanufacturing of protein products produced in plants. Our proteomics division presently occupies a laboratory and office facility in Germantown, Maryland of approximately 53,000 square feet, under a lease that expires on December 31, 2010.

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. 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

Not applicable.

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Part II

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

Market Information.    The Company’s 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 2002 and 2001.

Holders.    Based upon data provided by our transfer agent, the Company had approximately 6,020 beneficial holders of our common stock as of March 20, 2003. This total includes persons whose stock is in nominee or “street name” accounts through brokers.

Dividends.    The Company has never declared or paid any cash dividends on its 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.

Use of Proceeds.    During the third quarter of 2000, the Company received net proceeds of approximately $89 million from an initial public offering, or IPO, of common stock. Provided below is a reasonable estimate of the amount of IPO net proceeds used in each of the following categories, through December 31, 2002:

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

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

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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, 2002, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002 and 2001 from our audited consolidated financial statements included in this Report. We derived the consolidated statement of operations data for the years ended December 31, 1999 and 1998 and the consolidated balance sheet data as of December 31, 2000, 1999 and 1998 from our audited consolidated financial statements not included in this Report.

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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.

Overview

The Company’s financial position and results of operations are summarized as follows:

Results of Operations

Revenues—Revenues decreased $15.1 million, or 85%, in 2002 and $5.6 million, or 24%, in 2001. These decreases are primarily attributable to the completion of our research collaboration with Dow in August 2001 and the lack of significant revenues from other collaborators or

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customers since that time. Revenues from Dow equaled $15.1 million and $20.0 million in 2001 and 2000, respectively.

One of our material revenue generating contracts as of December 31, 2002 was terminated by us in the first quarter of 2003. While we expect to generate new revenue sources in 2003, based solely upon our other revenue generating contracts as of December 31, 2002, we expect revenues in 2003 to be slightly higher than 2002.

Development agreement costs—Development agreement costs consist mainly of personnel expenses and research materials related to activities performed under revenue generating research agreements. Development agreement costs decreased $2.2 million, or 64%, in 2002 and $4.6 million, or 57%, in 2001. These decreases are primarily attributable to the completion of our research collaboration with Dow in August 2001. We expect future development agreement costs to fluctuate consistently with increases or decreases in revenues earned from new research agreements.

Research and development expenses—Research and development expenses consist mainly of internal personnel, consulting and outside research services, and materials related to unreimbursed research activities. Research and development expenses decreased $1.2 million, or 5%, in 2002 and increased $6.0 million, or 37%, in 2001. The decrease in 2002 is primarily attributable to a company-wide restructuring in June 2002 that reduced the Company’s headcount by 25% as well as the cancellation of certain consulting and outside research services. The increase in 2001 was primarily attributable to the reallocation of resources from activities associated with the Dow research collaboration to internally funded research projects. For reporting purposes, this reallocation of resources resulted in increased research and development expenses and decreased development agreement costs. The increase in 2001 was also due to the hiring of additional research personnel and increased facility costs related to the Company’s proteomics division. We expect research and development expenses in 2003 to be lower than 2002 as a result of our past and continuing cost reduction efforts.

General and administrative expenses—General and administrative expenses decreased $1.8 million, or 12%, in 2002, and increased $6.3 million, or 77%, in 2001. Excluding $1.7 million of nonrecurring charges in 2002 for headcount reductions ($871,000) and write-downs of property and equipment ($433,000) and capitalized patent costs ($396,000), general and administrative expenses decreased $3.5 million, or 24%, in 2002. The decrease in 2002 is primarily attributable to a company-wide restructuring in June 2002 that reduced the Company’s headcount by 25%. The increase in 2001 was attributable to several factors including: personnel additions and consulting services related to business development and public and investor relations activities commencing in 2001; personnel additions and production costs related to regulatory and shareholder reporting requirements after the Company’s IPO in August 2000; greater outside legal costs related to an increased volume of patent applications in 2001; and increased facility costs related to the Company’s proteomics division. We expect general and administrative expenses in 2003 to be lower than 2002 as a result of our past and continuing cost reduction efforts.

Impairment of goodwill—We concluded at December 31, 2002 that our goodwill balance was fully impaired given the fair value of our proteomics division was determined to be less than its carrying value. We recognized an $839,000 charge in 2002 to write off the remaining balance of goodwill.

Stock compensation bonus—The non-cash charge of $7.3 million in 2000 related to stock options issued to certain Company officers and employees in December 1999 that vested concurrent with the Company’s IPO in August 2000.

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Amortization of goodwill and purchased intangibles—Amortization expense relates to the Company’s purchase of Large Scale Proteomics Corporation (“Proteomics”) in 1999. Amortization expense decreased $676,000 in 2002 as goodwill and certain purchased intangibles were no longer amortized effective January 1, 2002 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142. Amortization expense in 2003 of our Proteomics purchased intangibles will equal $52,000.

Interest income—Interest income decreased $2.5 million in 2002 and increased $562,000 in 2001. The decrease in 2002 is attributable to the Company’s declining cash and marketable securities balances available for investment and significant reductions in interest yields throughout 2001 and 2002. The increase in 2001 was attributable to a full year of investment of the available proceeds from the Company’s IPO in August 2000. We expect interest income in 2003 to be lower than 2002.

Change in fair value of warrant—The non-cash charge of $811,000 in 2000 related to an increase in the fair value of a warrant issued to Dow in connection with our research agreement. We reclassified the warrant from a liability to stockholders’ equity in 2000 and no subsequent charges were incurred.

Liquidity and Capital Resources

The following table summarizes the Company’s usage of cash, cash equivalents and marketable securities in 2002, 2001 and 2000.

As noted below, we progressively improved our operating cash flows in 2002. However, our current rate of cash usage is not sustainable for a long-term period compared to our balance of cash, cash equivalents and marketable securities at December 31, 2002. Given our current financial condition and recent financial performance, we believe our ability to attract additional working capital through equity or debt issuance is limited. We may have opportunities to enter into partnerships with other companies to support the development of specified products. However, such support would likely not be available to all of our research projects. Accordingly, we must fund our current liquidity needs through significant improvements in our operating cash flows. Such improvement is primarily dependent on our ability to generate significant revenue growth in 2003.

Our liquidity needs may adversely affect our product development efforts. We have delayed further clinical trials of our NHL vaccine until such time as we secure funding from a partner. If

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we are unsuccessful in partnering the cost of these clinical trials, further development of this product may be delayed indefinitely. We are also pursuing a partner to fund the clinical trials of our alpha-galactosidase A product. We may also delay other key products or technologies currently under development. Delays incurred in the development of our products may impair our ability to generate new sources of revenue.

Net cash used in operating activities, excluding marketable securities activities—The Company’s 2002 quarterly operating cash usage is set forth below:

In 2002, we reduced our operating cash usage by 47% between the first quarter and the fourth quarter. The improvement in our operating cash usage is primarily attributable to cost reductions in both research and development activities and general and administrative activities. Additionally, new sources of revenue in 2002 resulted in increased revenues each quarter in 2002 from $425,000 in the first quarter to $997,000 in the fourth quarter. We expect to realize negative operating cash flows in the year ended December 31, 2003 although lower in amount than 2002.

Cash used in investing activities, excluding marketable securities activities—Capital expenditures equaled $968,000, $12.3 million and $4.5 million in 2002, 2001 and 2000, respectively. In 2001, we invested $7.7 million in our proteomics division, primarily for leasehold improvements to a new and expanded research facility in Maryland. In addition, we invested $2.4 million in our biomanufacturing division for continued construction of our biomanufacturing plant in Kentucky. Our 2002 capital expenditures primarily related to the completion of construction of our biomanufacturing plant. The Company had no material capital expenditure commitments at December 31, 2002. We believe the infrastructure and capacity of our research facilities in California and Maryland and our biomanufacturing plant in Kentucky are sufficient to support the Company’s business objectives in the near term. Accordingly, we do not expect significant amounts of capital expenditures in 2003. However, our projection may change based upon the requirements of any new research or biomanufacturing supply agreements that we may enter.

In 2001, we paid $3.1 million in license fees for the rights to utilize specified intellectual property for future periods. The Company may enter into additional licensing agreements in the future when acquiring rights to certain technologies creates product development opportunities.

Net cash provided (used in) by financing activities—The improvement in cash flows from financing activities in 2002 compared to 2001 is primarily attributable to lower debt repayments which equaled $46,000, $2.1 million and $2.9 million in 2002, 2001 and 2000, respectively. In 2000, the Company received net proceeds of $88.8 million from our IPO.

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Commitments

Set forth below is a summary of the Company’s non-cancelable commitments to make minimum payments under contractual obligations as of December 31, 2002:

The Company leases facilities in Vacaville, California and Germantown, Maryland under operating leases. 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. In addition to the future non-cancelable minimum payments above, certain of the research agreements require future aggregate payments of $102,000 if the agreements are not cancelled. The Company does not have any capital lease obligations, purchase obligations or other long-term liabilities.

Critical Accounting Policies

The Company’s 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.

Revenue Recognition—We earn revenues from several sources including: 1) research and collaboration agreements and government grants that consist of one or more revenue sources including technology access fees, milestone payments and research funding; 2) license fees; and 3) royalties. We recognize revenues for each of these components as follows:

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

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

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We receive funding for sponsored research or feasibility studies from commercial companies, government agencies and educational institutions. Funding for sponsored research or feasibility studies is typically non-refundable and not based upon performance objectives or customer acceptance. Also, we may receive funding in the form of periodic payments or reimbursement of actual costs. Accordingly, revenue from sponsored research and feasibility studies is recognized using the percentage of completion method or recognized as expenses are incurred depending on the form of funding. Under the percentage of completion method, the total contract value is multiplied by the percentage of actual research costs incurred to date compared to the estimated total costs to complete the contract as a whole. If collection of any funding is not assured, revenue recognized is limited to the lesser of the percentage of completion calculation or actual cash received to date. Revenue received for equipment purchases is deferred and recognized as revenue over the life of the agreement.

We provide licenses to third parties for the exclusive or non-exclusive access to certain of the Company’s technologies for commercial development purposes. We may receive fees from such licenses in the form of up-front payments, additional payments upon achievement of milestones, and royalty rights upon the successful commercialization by the licensee of a product containing the licensed technology. License agreements normally provide the licensee with immediate access to the Company’s technology and do not require the Company to provide any research services or other support toward the licensee’s commercial development efforts. Accordingly, we recognize up-front license fees as revenue upon the effective date of the licensee’s first access to the Company’s technologies. Additional license fees payable upon achievement of milestones are recognized as revenue upon such achievement and royalty payments are recognized as revenue when earned by the Company.

Intangible and Long Lived Assets—The Company’s intangible and long-lived assets include capitalized costs of filing patent applications that relate to commercially viable technologies, capitalized license fees for rights to specified intellectual property, and property and equipment related to our research facilities in California and Maryland and our biomanufacturing plant in Kentucky. All intangible and long lived assets are amortized or depreciated over the shorter of (1) their estimated useful lives, (2) the estimated period that the assets will generate revenue, or (3) the statutory or contractual term in the case of patents and intellectual property licenses. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment. We evaluate our intangible assets and our long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If any of our intangible assets or long-lived assets are considered to be impaired, the amount of impairment to be recognized is equal to the excess of the carrying amount of the assets over the fair value of the assets.

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

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Inflation

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

Factors That May Affect Our Business

Risks Related To Our Business

In an environment of diminished revenue, we may not be able to preserve working capital and extend the viability of the Company

Because we are experiencing diminished revenue and cash flow, we are funding virtually all of our product development initiatives internally. At the same time, because our cash flow is substantially reduced compared to the last three years, we are experiencing increasing pressure to curtail spending and otherwise reduce costs. We implemented a major reorganization in June 2002 to reduce costs. If we cannot increase our cash flow in the very near term, we likely will be required to take one or more of the following actions: further reorganize our operations; delay, reduce the scope of, or eliminate one or more of our research and development programs; significantly reduce patent-related expenses, effectively foregoing our rights to future technologies or products; obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop or commercialize on our own; or sell or license the rights to certain of our products or technologies on terms that are worse than we might have been able to obtain in a different environment. If our cash flows continue to deteriorate or we take significant steps to reduce our expenses, potential collaborators may questions our ability to perform and choose not to do business with us, which would make it harder for us to improve our cash flows.

We have negative cash flow and may not have sufficient cash to continue operations. Or, even if we can continue operations, we may not have sufficient cash to effectively manage our working capital requirements and fund our operations for the period required to achieve profitability.

Since our inception, we have never generated enough cash to cover our expenses and we will need to continue to spend substantial funds to continue our product development programs. We do not know with certainty whether our cash reserves and any cash flows from operations or financing will be sufficient to fund our operations significantly beyond 2003. We may be unsuccessful in entering into any new collaboration that results in significant revenues or cash flow. We have limited cash and credit available, and may be unable to raise additional financing or establish additional lines of credit to meet our anticipated and unanticipated working capital requirements. Our future capital requirements depend upon many factors, including:

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In the event we raise capital via equity financing, our existing stockholders could experience significant dilution, as our stock price is less than $1.00 and we expect that the amount of additional capital we will require would be substantial. We may raise this capital through public or private financings or additional collaborations, strategic partnerships or licensing arrangements. If adequate funds are not available to satisfy either short- or long-term capital requirements, we might be required to significantly limit or cease our operations or delay or abandon some of our planned future expenditures, any of which actions could harm our business.

If our common stock ceases to be listed for trading on the NASDAQ National Market, the value and liquidity of your investment may be adversely affected.

We are in danger of being delisted from the NASDAQ National Market. On January 24, 2003, we received a notice from the NASDAQ Qualifications Department that indicated that our common stock had closed for 30 consecutive trading days below the applicable minimum bid price of $1.00. Under current NASDAQ National Market listing requirements, we have 180 calendar days from the date of the NASDAQ Qualification Department’s notice in which to demonstrate that the market price for our common stock has closed at or above a bid price of $1.00 per share for at least ten consecutive trading days. To ensure continued listing on the NASDAQ National Market, the Company must regain compliance with the minimum bid price requirement and thereafter maintain compliance with the minimum bid price requirement and the other NASDAQ National Market listing requirements. We cannot assure you that we will regain or maintain compliance with these requirements. If we do not meet these requirements, we expect that our common stock would be traded on the NASDAQ SmallCap Market or the NASD Over-The-Counter Bulletin Board. In the event of delisting from the NASDAQ National Market, we expect to pursue listing on the NASDAQ SmallCap Market. Further, if we fail to comply with the NASDAQ National Market listing requirements, the ability of stockholders to buy and sell shares of our common stock might be affected and the efficiency of the trading market for our common stock could significantly impair our ability to raise capital in the public markets should we desire to do so in the future. In addition, our stock could also potentially be subject to what are known as the “penny stock” rules, which place additional requirements on broker-dealers who sell or make a market in such securities. Consequently, if we were removed from the NASDAQ National Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline.

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

We have had net losses in each year since our inception in 1987. We sustained a net loss of $33.2 million in 2002, and had an accumulated deficit of $148.9 million as of December 31, 2002. From September 1998 through August 2001, almost all of our revenues came from our research collaboration with Dow. The research collaboration with Dow ended on August 31, 2001 and we expect no additional revenues under our contract with Dow for the foreseeable future. We have not yet entered into any new collaborations of a magnitude that could make up for the decrease in cash flow and revenues resulting from the completion of our research collaboration with Dow. We expect to continue to spend significant amounts to develop products and to fund our operations. As a result we will need to generate significant additional revenues from collaborations and the commercialization of our products and technologies to achieve profitability. We expect to incur substantial losses in the foreseeable future. If we are unable to enter into major new collaborations, control our operating expenses and successfully commercialize our products and technologies, we may never become profitable and we may fail.

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We likely will require additional capital

In order for us to develop profitable and cash-positive operations, we must generate revenue from our products under development and our technologies. Since our inception, we have never generated enough cash to cover our expenses and we expect to continue to spend substantial funds to continue our product development programs. In addition, the risks inherent in developing innovative products, such as NHL vaccines, make it difficult to forecast with certainty the capital required to commercialize our products. If our capital resources are insufficient to meet future capital requirements and expenses, we will have to raise additional funds. If we raise additional funds by issuing equity securities, our existing stockholders may be diluted. We may raise this capital through public or private financings or additional collaborations, strategic partnerships or licensing arrangements. We expect that the amount of additional capital we will require would be substantial. Our access to capital markets may be restricted by depressed stock valuations over an extended period of time. We may be unsuccessful in entering into any new collaboration that results in significant revenues or cash flow. If we are unable to raise sufficient additional capital or generate sufficient cash flows, we will have to curtail or cease operations.

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

We restructured our operations in 2002, resulting in substantial workforce reductions. These reductions were effected in all functional areas. These personnel reductions or future reductions may create concerns about job security. This may lower productivity or make it more likely that some of our key employees will seek new employment and require us to hire replacements. These reductions also may make the management of our business more difficult and make it harder for us to attract employees in the future.

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

We are in an early stage of commercialization, and we are subject to all the risks inherent in the development of a business enterprise, including the need for substantial capital to support the development of our products and technologies.

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

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

Our technologies, including our ProGEx system and GENEWARE technology, have limited commercial precedent. Much of our research is fundamentally unique and we cannot assure the acceptance of its scientific merit or the benefits of products produced by it, nor that the public will react favorably to it. The usefulness of the information and products generated by our proteomics, functional genomics and bioinformatics technologies is unproven, and our collaborators and potential collaborators may determine that they are not useful or cost-effective. We generate large amounts of data from our research with genes and proteins and we

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may not be able to mine or integrate this data in a timely manner, or turn it into commercially viable information. In addition, 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.

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

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

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

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

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

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

We are independently pursuing some therapeutic product applications into the development stage. However, we expect to develop and commercialize most of our future products in collaboration with pharmaceutical and biotechnology companies. For example, in 2002 we changed our strategy concerning our NHL vaccine and are seeking to proceed with a partner to

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complete the development of this product. 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. To date, we have entered into only a limited number of collaborations. Generally, the scope of these collaborations has been to demonstrate the function of plant genes and the feasibility of using viral vectors to create proteins in plants and to identify marker proteins for drug development and diagnostics. Our existing agreements provide us with rights to participate financially in the commercial development of products resulting from the use of our technologies. We may be unable to obtain such rights in future collaborations. In addition, unforeseen delays or complications could arise and result in the breach of our contractual obligations with our collaborators and others, or render our technologies unable to perform at the quality and capacity levels required for success.

Conflicts with collaborators or licensees could harm our business

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

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

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

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

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

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

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

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

Our directors, our executive officers and principal stockholders affiliated with our directors and our executive officers beneficially own, in the aggregate, approximately 28% of our outstanding common stock as of March 20, 2003. The concentration of ownership in combination with other common stockholders may collectively influence significant corporate transactions such as mergers, changes in control, consolidation or sale of some or all of our assets, and other significant corporate transactions requiring stockholder approval.

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

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

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

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Risks Related to Our Industry

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

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

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

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

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

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

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

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

We must comply with USDA regulations for outdoor releases of genetically engineered organisms as well as other products designed for use on or with agricultural products. The USDA has released regulations that prohibit the inclusion of genetically modified ingredients in products labeled as organic. The USDA regulations also prohibit the use of genetically modified fibers in clothing labeled as organic. These regulations ultimately could make any products that may be developed with our collaborators, including Dow, unattractive to or too expensive for consumers, or could cause the government to prohibit their sale or use. In addition, the USDA prohibits growing and transporting genetically modified plants except pursuant to an exemption or under special permits. We may use genetically modified plants as screening or production hosts. Changes in USDA policy regarding the movement or field release of genetically modified plant hosts could adversely affect our business by increasing the cost of our products and technologies or decreasing consumer demand for those products and technologies or causing the government to prohibit their sale or use.

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

Future commercial success of some of our products and of the products of some of our collaborators, will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products

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are unsafe for consumption or pose a danger to the environment may influence public attitudes. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling requirements, and could cause a decrease in the demand for our products, even if such products do not result from GMO organisms.

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

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

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

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

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

Our ability and that of our collaborators to commercialize therapeutics and diagnostic products may depend in part on the extent to which government health administration authorities, private health insurers and other organizations will pay the cost of these products. These third parties are increasingly challenging both the need for and the price of new medical

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products and services. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics, and adequate third party reimbursement may not be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.

Risks Related to Our Intellectual Property

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

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

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

Throughout the world there are numerous issued patents, as well as published foreign patent applications which may issue as patents, many of which relate to our current operations, our anticipated future operations and the products we are likely to develop. The scope of these patents is a matter of legal interpretation and is subject to uncertainty. We have not obtained, but we may in the future obtain, opinions from our patent counsel that we have freedom to conduct our commercial activities free of claims of patent infringement from third parties. For example, we are aware of one company, Enzon, Inc., that through its subsidiary, SCA Ventures, Inc., owns or has licensed a broad portfolio of patents to single-chain antigen binding proteins. Enzon, in a letter mailed to numerous companies including us, has stated that it would like to discuss providing a license under these patents. In addition, Dow owns or controls certain patent rights in the field of viral vectors covering the infection of plant cells and the expression of foreign genes in plant cells, and has informed us that it believes that some of our plant viral activities may fall within the scope of its patents. Two patents issued to us in October 2001 reference the Dow-controlled patents and conclude that they do not constitute prior art. If we are unable to resolve this matter, and are found to have infringed upon Dow’s rights, our product development and research activities related to plant viruses which fall within the scope of Dow’s patents may be delayed or terminated. These kinds of disagreements could result in costly and time-consuming litigation and divert our financial and managerial resources. Epicyte Pharmaceuticals, Inc., in a letter mailed to several companies, invited us to participate in a licensing program under their patent for marking immunoglobulins in plants. Maxygen, Inc. sent us a cautionary letter regarding our GRAMMR^™ molecular evolution technology. Maxygen owns several patents to its own proprietary methods. We are not aware of any overlap between our activities and the Maxygen patents. If it turns out that we require a license from either of these companies, it would increase the cost of doing business in these areas. If a dispute should arise between LSBC and either of these companies, it could result in delay or termination of these activities.

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

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

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

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

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

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

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

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

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

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Item 7A.    Quantitative and Qualitative Disclosure About Market Risk

Interest rate risk

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio. The Company’s investments consist of money market funds, commercial paper, corporate and U.S. government agency notes, 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, weighted average interest rates and maturities for the Company’s investment portfolio at December 31, 2002. The amortized principal amount approximates fair value at December 31, 2002. If market interest rates were to change immediately and uniformly by 10% from levels at December 31, 2002, the fair value of the Company’s investments would change by an immaterial amount.

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.

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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 2003 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 2003 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 2003 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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 2003 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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 2003 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 2003 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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 2003 Annual Meeting of Stockholders. Such information is incorporated herein by reference.

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Item 14.    Controls and procedures

(a)    Evaluation of disclosure controls and procedures.    Regulations under the Securities Exchange Act of 1934 require public companies, including our company, to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our chief executive officer and our chief financial officer, based upon their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that as of their evaluation date, our disclosure controls and procedures were effective for this purpose.

(b)    Changes in internal controls.    There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date our chief executive officer and chief financial officer carried out their evaluation as referenced in the above paragraph.

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PART IV

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

Financial Statements

The following financial statements are included herein:

Financial Statement Schedules

See index above

Exhibits

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Reports on Form 8-K

The registrant did not file any reports on Form 8-K in the fourth quarter of 2002.

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INDEPENDENT AUDITORS’ REPORT

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, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 5 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

Sacramento, California

January 23, 2003

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LARGE SCALE BIOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS