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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

          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.

          The number of shares outstanding of registrant’s common stock, $0.001 par value, as of November 8, 2002:  25,075,150

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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”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate” 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 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 names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United States and/or other countries.  References in this report to “the Company,” “our,” “we” and “us” refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and subsidiaries.

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Large Scale Biology Corporation
Form 10-Q
For the Quarter Ended September 30, 2002
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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Large Scale Biology Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.  The Company and Summary of Significant Accounting Policies

          Large Scale Biology Corporation and its subsidiaries, collectively, the “Company”, applies its proprietary proteomics, functional genomics and biomanufacturing technologies to develop and manufacture personalized drugs and vaccines for effective treatment of diseases.  The Company’s corporate office and genomics research facility are located in Vacaville, California.  The Company’s biomanufacturing plant is located in Owensboro, Kentucky, and the Company’s proteomics research facility is located in Germantown, Maryland.

          Basis of Presentation — The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial information.  Accordingly, these financial statements and notes thereto do not include certain disclosures normally associated with financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  This interim financial information should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K.

          The unaudited condensed consolidated financial statements include the accounts of Large Scale Biology Corporation and its subsidiaries.  All intercompany balances and transactions have been eliminated.  In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) and disclosures considered necessary for a fair presentation of the results of the interim periods presented.  This interim financial information is not necessarily indicative of the results of any future interim periods or for the Company’s full year ending December 31, 2002.

          Marketable Securities — Marketable securities at September 30, 2002 and 2001 consist of commercial paper, corporate and U.S. government agency notes, and bank certificates of deposit all maturing within one year and are classified as held-to-maturity.  The amortized cost of marketable securities at September 30, 2002 and 2001 approximates fair value. There were no significant holding gains or losses for any of the periods shown.

          Goodwill and Other Intangible Assets — Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets.”  The adoption of these new accounting standards resulted in the following changes in accounting:

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          The following pro-forma presentation adjusts the net loss reported in the prior year periods for the exclusion of goodwill amortization:

          All other intangible assets continue to be amortized over their useful lives and are evaluated for potential impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

          Segment Reporting — The Company operates in one reportable segment.

          Net Loss Per Share — Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period.  Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period.  The weighted average number of potentially dilutive common shares are 318,431 and 327,689 for the three months ended September 30, 2002 and 2001, respectively, and 697,421 and 523,972 for the nine months ended September 30, 2002 and 2001, respectively.  These shares were excluded from diluted net loss per share because of their anti-dilutive effect.

          Reclassifications — Certain 2001 amounts have been reclassified in order to conform to the 2002 presentation.

2.  Dow Contract

          The Company entered into a Collaboration and License Agreement with The Dow Chemical Company and its subsidiary, Dow AgroSciences LLC (collectively, “Dow”) on September 1, 1998.  The research collaboration portion of the agreement had a three-year term ending in August 2001.  Under the research collaboration, the Company received funding for sponsored genomics research and payments for technology access fees and milestone achievements.  Revenues from the research collaboration represented 90% and 89% of total revenues for the three and nine months ended September 30, 2001, respectively.  The research collaboration ended in August 2001. The Company retains royalty rights related to future sales of products by Dow that were developed in connection with the research collaboration. The Company does not expect to realize significant revenues from these royalty rights in the foreseeable future.

3.  Stock Compensation

          Effective July 1, 2002, 24% of the Company’s employees (after a headcount reduction in June 2002) realized a 10% annual reduction in future cash compensation.  Three executive officers previously reduced their annual cash compensation between 8% - 10% effective December 1, 2001. These officers now realize reductions of approximately17% - 20% of their annual cash compensation.  The reductions in cash compensation will be replaced in equal amounts by compensation in the form of the Company’s common stock per the terms of a Stock Issuance Program (“Program”) under the Company’s 2000 Stock Incentive Plan.  Beginning September 30, 2002 and at the end of each of the following three quarterly periods, each participant will receive an award of common stock equal to 25% of their respective annual reduction in cash compensation.  The number of shares awarded to each participant will equal each participant’s award amount divided by the closing price of the Company’s common stock as reported on NASDAQ on the last trading day of each quarterly period.  The awarded shares are subject to both a vesting requirement and a repurchase right granted to the Company.  The Company will hold the awarded shares in escrow until the repurchase right expires.  Participants will “cliff vest” in their respective shares on July 1, 2003.  The

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Company’s repurchase right is exercisable if and only if the Company does not realize positive cash flows (as defined in the terms of the Program) during the six month period ended June 30, 2005.  The repurchase price is equal to the original issuance price of each of the quarterly stock awards.  Upon the expiration or exercise of the Company’s repurchase right in July 2005, participants will receive either their awarded shares or an amount of cash equal to the cumulative repurchase price.  These stock awards will result in the recognition of compensation expense.  At September 30, 2002, the Company issued 77,400 shares of common stock under the Program.

          The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Report and our audited consolidated financial statements and related notes for the year ended December 31, 2001 included in our Annual Report on Form 10-K.  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.

Description of Business

          We are a biotechnology company founded in 1987.  Our primary goal is to develop and manufacture personalized drugs and vaccines for effective treatment of diseases.  In addition, we are marketing our technologies to collaborators and commercial customers.  We have technological expertise in three areas: (1) proteomics, which is the study of proteins and how they change in disease and in response to drugs, (2) functional genomics, which is the study of genes and their relationship to each protein’s function, and (3) the production of proteins for commercial applications.  The Company’s corporate office and genomics research facility are located in Vacaville, California.  The Company’s proteomics research facility is located in Germantown, Maryland, and the Company’s biomanufacturing plant is located in Owensboro, Kentucky.

          Our strategy is threefold: (1) commercialize products and technologies in the field of human and animal healthcare, using proprietary methods to identify and analyze genes and proteins associated with disease (hereafter, “biopharmaceutical development”), (2) provide quick and cost-effective manufacturing of therapeutic proteins (hereafter, “biomanufacturing”), and (3) capitalize on our leadership position in proteomics technology for protein discovery and analysis applications (hereafter, “proteomics”).  Each of these areas of our business is further discussed below.

Biopharmaceutical Development

          Our strategy in this area is the development of the Company’s drug pipeline including our non-Hodgkin’s lymphoma (“NHL”) vaccine, our alpha-Galactosidase product, and our stem cell growth factor program.  In addition, we are developing other potential drugs or technologies using the Company’s proprietary GENEWARE technology.  The development of our NHL vaccine, alpha-Galactosidase product, and stem cell growth factor program is discussed below: 

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Biomanufacturing

          Our biomanufacturing plant in Kentucky is operational and is capable of producing proteins in conjunction with our proprietary GENEWARE technology or by using our customer's technology.  We believe our biomanufacturing plant can provide contract biomanufacturing services to other biotechnology or pharmaceutical companies to support their clinical trials or distribution businesses.  We have already entered into supply agreements or feasibility studies with third parties for the future production of proteins and we have recognized revenues from certain of these collaborations in 2002. If we are successful in securing funding for the future clinical trials of our NHL vaccine and alpha-Galactosidase product, we intend to produce those products using our biomanufacturing plant. The simultaneous production of proteins for third parties and our internal product development will eventually require an increase in the production capacity of our plant.

Proteomics

          We are currently pursuing fee-based contract research with commercial, academic and government entities for the discovery of pharmaceutically useful proteins using our proprietary ProGex technology.  We expect to generate fee-for-service revenue from this contract research as well as revenue from licensing agreements involving our proteomics technologies.  Our $12.3 million award from the National Institute of Environmental Health Sciences in July 2002 to analyze protein reactions to various environmental exposures is an example of our business development opportunity in this area. In addition, we remain optimistic about realizing value from products which may be discovered using our proteomics technology.

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Financial Summary

The Company’s recent operating results and financial position are summarized as follows:

          For the Company to begin generating positive earnings and operating cash flows, we must generate significant revenues and cash receipts from new research collaborations, product sales, license fees, or contract biomanufacturing.  We have taken several steps in 2002 to reduce our operating costs including headcount reductions, cancellation of certain consulting and outside research services, improvements in operational efficiency, and the delay or cancellation of certain capital expenditures.  However, without near-term increases in revenue or cash inflows from other potential sources of working capital including partnerships, additional equity issuances or sales of assets, we will likely need to force additional reductions in operating expenses and/or reduce the rate of investment or scope of product development activities.  We continue to evaluate each of our core technologies (proteomics, functional genomics, and biomanufacturing), our internal research projects and our product development initiatives to emphasize near-term opportunities to generate revenue and cash flows.  As a result of these evaluations, we may decide to exit or sell one or more of our lines of business or cancel or delay one or more current projects or products under development.  If the Company decides to exit or sell a line of business or cancel a project or product under development, we may realize a material financial loss on such sale or abandonment.  

Results of Operations

          Revenues — Revenues decreased $4.4 million and $15.4 million in the three and nine months ended September 30, 2002, respectively, compared to the prior year periods.  These decreases are primarily attributable to the completion of our research collaboration with Dow in August 2001.  Revenues from Dow equaled $4.6 million and $15.1 million in the three and nine months ended September 30, 2001.  No revenues from Dow were recognized subsequent to August 2001.  We expect revenues in the fourth quarter of 2002 to be higher than the current quarterly period due to the following revenue generating agreements recently entered into:

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          Development agreement costs — Development agreement costs consist mainly of personnel expenses and research materials related to activities performed under revenue generating research agreements or government grants.  Development agreement costs decreased $102,000 and $2.3 million in the three and nine months ended September 30, 2002, respectively, compared to the prior year periods.  These decreases are primarily attributable to the completion of our research collaboration with Dow in August 2001, partially offset by costs related to new agreements on the current quarterly period.  Development agreement costs related to the Dow research collaboration equaled $427,000 and $2.4 million in the three and nine months ended September 30, 2001.  We expect future development agreement costs to fluctuate consistently with increases or decreases in revenues earned from any new research agreements or government contracts we may enter into.

          Research and development expenses — Research and development expenses consist mainly of internal personnel, consulting and outside research services, and materials related to research activities.  Research and development expenses decreased $1.3 million, or 22%, and increased $382,000, or 2%, in the three and nine months ended September 30, 2002, respectively, compared to the prior year periods.   The decrease in the current quarterly period is primarily attributable to headcount reductions incurred in June 2002 as part of a company-wide restructuring intended to reduce our operating costs.  The increase for the nine months ended September 30, 2002 is 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.  We expect research and development expenses in subsequent quarters to be materially consistent with the three months ended September 30, 2002.  However, without an improvement in the Company’s operating cash flows or new sources of working capital, we may have to significantly reduce research and development expenses in order to conserve working capital.

          General and administrative expenses — General and administrative expenses largely consist of non-research personnel.  General and administrative expenses decreased $1.4 million, or 37%, and $283,000, or 3%, in the three and nine months ended September 30, 2002, respectively, compared to the prior year periods.  The decrease in the current quarterly period is primarily attributable to headcount reductions incurred in June 2002 as part of a company-wide restructuring intended to reduce our operating costs.  The decrease for the nine months ended September 30, 2002 is primarily attributable to the significant expense reduction in the current quarterly period partially offset by approximately $900,000 of restructuring related expenses recorded in the three months ended June 30, 2002.  We expect general and administrative expenses in subsequent quarters to be materially consistent with the three months ended September 30, 2002.  However, without an improvement in the Company’s operating cash flows or new sources of working capital, we may have to significantly reduce general and administrative expenses in order to conserve working capital.

          Amortization of purchased intangibles — Amortization expense relates to the Company’s purchase of Large Scale Proteomics Corporation in 1999.  Amortization expense decreased $169,000 and $507,000 in the three and nine months ended September 30, 2002, respectively, compared to the prior year periods.  These decreases are attributable to the discontinuance of amortizing goodwill effective January 1, 2002 in accordance with SFAS No. 142.  We expect amortization expense for the fourth quarter of 2002 to be consistent with the three months ended September 30, 2002.

          Interest income, net — Net interest income decreased $495,000, or 76%, and $2.1million, or 78%, in the three and nine months ended September 30, 2002, respectively, compared to the prior year periods.  These decreases are attributable to the Company’s declining cash balance available for investment and the significant reduction in interest yields throughout 2001 and 2002.  Unless the Company’s cash position improves, we expect interest income to continue declining in subsequent quarters.  

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Liquidity and Capital Resources

          We have historically funded our working capital needs through payments received from research collaboration agreements and issuances of preferred and common stock, including our initial public offering of common stock in the third quarter of 2000.  In the nine months ended September 30, 2002, we received a nominal amount of cash from new research agreements and government contracts.  As a result, our cash and marketable securities balance was used during this period at a rate that is unsustainable for a long-term period.  The preservation of our cash and marketable securities in subsequent quarters depends on the Company’s ability to generate revenues and control operating costs.  As highlighted below, the organizational restructuring implemented in June 2002 reduced our cash operating expenses in the three months ended September 30, 2002 compared to both the prior year period and the second quarter of 2002, excluding restructuring related disbursements in the second quarter.  Based upon our current level of operating cash flows, in combination with ongoing steps to reduce operating costs, we expect that our cash and marketable securities balance at September 30, 2002 is sufficient to meet our working capital and capital expenditure needs through the end of 2003.  However, if the Company continues to experience significant negative operating cash flows, we may need to implement additional organizational restructurings, sell additional equity or debt securities, obtain credit financing, enter into joint venture or partnership arrangements or sell all or a portion of certain assets or technologies in order to fund our product development activities through the estimated development periods.  Given the Company’s financial position, equity or credit financing may not be available to the Company or on terms acceptable to the Company.  Also, the sale of additional equity or convertible debt securities may result in significant dilution to our current stockholders.

          Net cash used in operating activities — Provided below is a functional analysis of the Company’s operating cash flows.

          As noted above, the Company’s restructuring in June 2002 reduced our cash operating expenses in the current quarterly period on a sequential basis and compared to the prior year period.  We continue to identify opportunities to lower our operating costs in order to reduce our cash burn rate.  The reduction in cash receipts for the current quarterly period compared to the prior year is primarily attributable to payments received from Dow in the prior year period for sponsored research.  The trend of decreasing interest received is primarily attributable to the Company’s declining cash balance available for investment.  We expect that cash receipts from customers will increase in subsequent quarters as we begin to receive funding from recently awarded government contracts.  However, based upon the value of our current revenue generating agreements, we expect to continue realizing material negative operating cash flows for the foreseeable future.

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          Cash used in investing activities, excluding marketable securities activities — Capital expenditures decreased $10.6 million in the nine months ended September 30, 2002 compared to the prior year period.  In the nine months ended September 30, 2001, the Company invested $7.6 million, primarily for leasehold improvements, at our proteomics research facility in Germantown, Maryland.  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 subsequent quarters.  However, this planned amount may change based upon the requirements of any new research or biomanufacturing supply agreements we may enter into.

          Net cash provided by (used in) financing activities — The improvement in cash flow from financing activities for the nine months ended September 30, 2002 compared to the prior year period is primarily attributable to lower debt repayments.

Critical Accounting Policies

          The Company’s accounting policies are explained in Note 1 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001.  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 may 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) contract biomanufacturing, 3) license fees, and 4) 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. 

          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 may enter into biomanufacturing agreements with other biotechnology or pharmaceutical companies to supply such companies with specific proteins or drugs as part of their clinical trial processes or drug distribution businesses.  Given the customized nature and process development lead time associated with each protein or drug to be manufactured, the pricing terms of these agreements may be on a “cost plus” basis or equal a fixed amount per

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defined unit or lot of delivered product.  We recognize revenue from biomanufacturing agreements upon delivery of a specified quantity of product unless the delivery is subject to customer acceptance, in which case revenue is recognized upon such acceptance.

          We may 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 immediate access by the licensee 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 upfront 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 goodwill and other intangibles related to the Company’s acquisition of Large Scale Proteomics Corporation, capitalized costs of filing patent applications that relate to commercially viable technologies, capitalized license fees for rights to specified technologies, and property and equipment related to our biomanufacturing facility in Kentucky.  Except for goodwill, 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.  Effective January 1, 2002, we discontinued amortizing goodwill in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  Instead, we will evaluate goodwill for possible impairment on an annual basis or sooner if warranted.  We evaluate our other 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, including goodwill, and long lived assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds 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 using the intrinsic value method of accounting.  As such, we recognize compensation expense only if the quoted market value of the Company’s common stock exceeds the exercise price of the stock 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.

Factors That May Affect Our Business

          We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks, and other risks are discussed elsewhere in this Report.

Risks Related To Our Business

     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.

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          Our anticipated products, including our novel vaccines for the treatment of non-Hodgkin’s lymphoma, or 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 may not be able to timely mine or integrate this data, 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.

     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 internally funding virtually all of our product development initiatives. 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 will likely 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 may not be favorable to us.

     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 $6.8 million in the three months ended September 30, 2002, and had an accumulated deficit of $141.6 million as of September 30, 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 the 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.

     We will likely 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

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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. While we cannot predict our need for additional capital in the future, we expect that the amount required 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.

     General economic conditions result in 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. economy and economies overseas has caused, and may continue to cause such 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 fields that are intensely competitive. They are characterized by extensive research efforts, which result in rapid technological progress which 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, we recently changed our strategy concerning NHL vaccine and are seeking to proceed with a partner to complete the development of this product. We cannot guarantee that such collaborative arrangements will be available to us on acceptable terms, or at all. 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

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proteins in plants and to identify marker proteins for drug development and diagnostics. Our existing agreements generally 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 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.

     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. There is currently a shortage of skilled senior management in the biotechnology industry, which is likely to continue and intensify. In addition, we face competition for research scientists and technical staff from other companies, academic institutions, government entities, nonprofit laboratories and other organizations.  We have implemented significant salary reductions for over twenty of our highest paid employees to conserve cash, and we may not be able to otherwise incentivize key personnel adequately to retain them.  Failure to recruit and retain senior management and scientific personnel on acceptable terms would prevent us from achieving our business objectives.

     Concentration of ownership among our existing executive officers, directors and principal stockholders may enable them to collectively control all significant corporate decisions

          Our directors, our executive officers and entities affiliated with our directors and our executive officers beneficially own, in the aggregate, approximately 32% of our outstanding common stock as of October 31, 2002. These stockholders as a group may be able to control our management and affairs and be able to control most matters requiring the approval of our stockholders, including any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The concentration of ownership will also prevent a change of control of our Company if these stockholders oppose it, and may discourage third parties from making a proposal to cause a change of control in the first instance.

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          Our stock could be delisted from the Nasdaq National Market if it does not meet NASDAQ’s minimum bid price

          Under the NASDAQ National Market ’s listing maintenance standards, our stock must maintain a minimum bid price of $1.00. The bid price for our stock has recently closed at $1.15 per share. If the bid price for our stock declines and remains below $1.00 for 30 trading days, NASDAQ may choose to notify us that it may delist our stock from the NASDAQ National Market. After the initial 30-day trading period, we would have a 90-day probationary period during which our stock must meet the $1.00 minimum bid price requirement. If our stock price does not trade above $1.00 for at least ten consecutive days during the 90-day probationary period, we would be entitled to a hearing before the NASDAQ National Market. However, we can provide no assurance regarding the outcome of that hearing and our stock could be delisted from the NASDAQ National Market following such hearing. Delisting from the NASDAQ National Market may, among other things, limit the liquidity and adversely affect the trading price of our stock.  If our common stock ceases to be listed on the NASDAQ National Market, we expect that our common stock would then be traded on the NASDAQ SmallCap Market. If our stock is potentially subject to delisting from the NASDAQ National Market, we may have the ability to increase our stock price through certain capital transactions including a reverse stock split or share repurchases.

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

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

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

Risks Related to Our Industry

     If companies in the pharmaceutical, biotechnology, 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:

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     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 like 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.

     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 on our own, such as our vaccines for the treatment of non-Hodgkin’s lymphoma. 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

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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 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.

     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

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arising from pollution from chemical, radioactive or biological materials. Our collaborators may also be working with various types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials.

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

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

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. No clear policy has emerged regarding the breadth of claims covered in biotechnology patents in general and those relating to gene sequences in particular. In addition, recently there has been public debate questioning the patentable scope of genomic sequence data. The biotechnology patent situation outside the United States is even more uncertain and is currently undergoing review and revision in many countries. 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.

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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 3.    Quantitative and Qualitative Disclosures About Market Risk

               The Company’s exposures to market risks are fully explained in our Annual Report on Form 10-K for the year ended December 31, 2001.  No material changes to the information provided in our Annual Report have occurred subsequent to December 31, 2001 through September 30, 2002.

Item 4.    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 II – OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

              (d) Use of Proceeds. During the third quarter of 2000, the Company received net proceeds of approximately $89 million from an initial public offering of the Company’s common stock.  Provided below is a reasonable estimate of the amount of IPO net proceeds used in each of the following categories, through September 30, 2002: 

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

              None of the IPO net proceeds were paid directly or indirectly to directors, officers, or their associates, persons owning 10 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.

Item 6.    Exhibits and Reports on Form 8-K

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SIGNATURE

                Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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CERTIFICATIONS

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Exhibit Index