VALENTIS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

ý		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

		For the quarterly period ended March 31, 2004.

or

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

	For the transition period from to

Commission File Number 0-22987

VALENTIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		94-3156660
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

863A Mitten Rd., Burlingame, CA		94010
(Address of Principal Executive Offices)		(Zip Code)

650-697-1900

(Registrant’s Telephone Number Including Area Code)

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

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

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 10,682,465 as of May 14, 2004.

VALENTIS, INC.
INDEX

PART I: FINANCIAL INFORMATION			3
ITEM 1:	FINANCIAL STATEMENTS (Unaudited)		3
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to the Condensed Consolidated Financial Statements	6
ITEM 2:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		11
		Overview	12
		Results of Operations	13
		Liquidity and Capital Resources	15
		Subsequent Event	17
		Additional Factors That May Affect Future Results	17
ITEM 3:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		25
ITEM 4:	CONTROLS AND PROCEDURES		25
PART II: OTHER INFORMATION			25
ITEM 1:	LEGAL PROCEEDINGS		25
ITEM 2:	CHANGES IN SECURITIES AND USE OF PROCEEDS		25
ITEM 6:	EXHIBITS AND REPORTS ON FORM 8-K		25
SIGNATURES			27

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

VALENTIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

	March 31, 2004			June 30, 2003
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	7,252		$	3,290
Short-term investments	4,627			—
Interest and other receivables	86			187
Prepaid expenses and other current assets	691			642
Total current assets	12,656			4,119
Property and equipment, net	413			1,511
Goodwill	409			409
Other assets	39			39
Total assets	$	13,517		$	6,078
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	104		$	166
Accrued compensation	791			458
Accrued clinical trial costs	1,415			400
Other accrued liabilities	1,061			2,281
Deferred revenue	100			175
Current portion of long-term debt	—			9
Total current liabilities	3,471			3,489
Stockholders’ equity:
Common stock	11			6
Additional paid-in capital	220,617			210,399
Accumulated other comprehensive loss	(697		)	(746		)
Accumulated deficit	(209,885		)	(207,070		)
Total stockholders’ equity	10,046			2,589
Total liabilities and stockholders’ equity	$	13,517		$	6,078

See accompanying notes.

VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
License and other revenue	$	334		$	1,063		$	7,438		$	2,658
Total revenue	334			1,063			7,438			2,658

Operating expenses:
Research and development	2,733			2,283			7,419			7,814
General and administrative	933			1,773			2,789			7,256
Restructuring charge	—			—			—			832
Total operating expenses	3,666			4,056			10,208			15,902
Loss from operations	(3,332		)	(2,993		)	(2,770		)	(13,244		)

Interest income	28			16			55			103
Interest expense and other, net	(55		)	(49		)	(100		)	332
Net loss	(3,359		)	(3,026		)	(2,815		)	(12,809		)

Deemed dividends – Accretion of warrants, issuance costs, and beneficial conversion feature	—			(3,684		)	—			(4,972		)
Adjustment resulting from the reduction in the Series A preferred stock conversion price	—			(22,293		)	—			(22,293		)
Dividends on convertible preferred stock	—			(112		)	—			(882		)
Net loss applicable to common stockholders	$	(3,359	)	$	(29,115	)	$	(2,815	)	$	(40,956	)

Basic and diluted net loss per share applicable to common stockholders	$	(0.34	)	$	(6.61	)	$	(0.40	)	$	(17.92	)

Weighted-average shares used in computing net loss per common share	9,924			4,402			7,033			2,286

See accompanying notes.

VALENTIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Nine Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(2,815	)	$	(12,809	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation	1,103			1,432
Gain on disposal of property and equipment	(8		)	(99		)
Stock options granted to non-employees for services rendered	35			—
401(k) stock contribution matching expense	55			—
Changes in operating assets and liabilities:
Interest and other receivables	101			408
Prepaid expenses and other assets	(49		)	(114		)
Deferred revenue	(75		)	125
Accounts payable	(62		)	184
Accrued liabilities	674			(1,673		)
Foreign currency translation adjustment	53			(250		)
Net cash used in operating activities	(988		)	(12,796		)

Cash flows from investing activities:
Purchase of property and equipment	(5		)	(20		)
Proceeds from sale of property and equipment	8			126
Purchase of available-for-sale investments	(4,927		)	—
Maturities of available-for-sale investments	296			7,892
Net cash provided by (used in) investing activities	(4,628		)	7,998

Cash flows from financing activities:
Payments on long-term debt	(9		)	(75		)
Preferred stock dividends paid in cash	—			(373		)
Proceeds from issuance of common stock, net of repurchases and issuance costs	9,587			3
Net cash provided by (used in) financing activities	9,578			(445		)

Net increase (decrease) in cash and cash equivalents	3,962			(5,243		)
Cash and cash equivalents, beginning of period	3,290			11,212
Cash and cash equivalents, end of period	$	7,252		$	5,969

Supplemental disclosure of cash flow information:
Interest paid	$	—		$	10
Schedule of non-cash transactions:
Stock issued for prior year accrued lease termination fee	$	433		$	—
Stock issued for prior year accrued 401(k) matching expense	$	113		$	—
Preferred stock dividends declared	$	—		$	882
Preferred stock dividends paid in common stock	$	—		$	573
Preferred stock converted into common stock	$	—		$	30,800
Accretion of preferred stock warrants, beneficial conversion feature and issuance costs	$	—		$	4,972

See accompanying notes.

VALENTIS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Valentis, Inc. (“Valentis,” the “Company,” “we,” “us” or “our”) in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in our annual consolidated financial statements as required by accounting principles generally accepted in the United States have been condensed or omitted. The interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair statement of financial position at March 31, 2004 and the results of operations for the interim periods ended March 31, 2004 and 2003. The balance sheet at June 30, 2003 is derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The results of operations for the three and nine months ended March 31, 2004 are not necessarily indicative of the results of operations to be expected for the fiscal year, although Valentis expects to incur a substantial loss for the year ended June 30, 2004. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended June 30, 2003, which are contained in Valentis’ Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission.

The accompanying condensed consolidated financial statements include the accounts of Valentis and its wholly-owned subsidiary, PolyMASC Pharmaceuticals plc. All significant intercompany balances and transactions have been eliminated.

For the nine months ended March 31, 2004, the Company recorded net loss of approximately $2.8 million, which included the recognition of a one-time license revenue of $6.5 million in July 2003 from a license and settlement agreement resulting from the resolution of a patent infringement litigation. The Company’s accumulated deficit was approximately $209.9 million at March 31, 2004. We have incurred significant losses primarily due to the advancement of our research and development programs and because we have generated limited revenue. The Company expects to incur substantial losses for the foreseeable future as it proceeds with the research, development and commercialization of its technologies and does not expect to generate revenue from the sale of products in the foreseeable future, if at all.

2. Significant Accounting Policies

Stock-Based Compensation Pro Forma Information

Valentis has elected to follow APB 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its employee stock options. Under APB 25, if the exercise price of Valentis’ employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma net loss and loss per share information is required by SFAS 148, “Accounting for Stock-Based compensation—Transition and Disclosure an amendment of FASB Statement No. 123” which requires that the information be determined as if Valentis has accounted for its employee stock options under the fair market value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. Valentis’ pro forma information follows (in thousands except for loss per share information):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
Net loss applicable to common stockholders – as reported	$	(3,359	)	$	(29,115	)	$	(2,815	)	$	(40,956	)

Deduct:
Stock-based employee stock compensation expense determined under SFAS 123	(283		)	(108		)	(972		)	(186		)
Net loss applicable to common stockholders – Pro Forma	$	(3,642	)	$	(29,223	)	$	(3,787	)	$	(41,142	)

Net loss per share applicable to common stockholders – as reported	$	(0.34	)	$	(6.61	)	$	(0.40	)	$	(17.92	)

Net loss per share applicable to common stockholders – Pro Forma	$	(0.37	)	$	(6.64	)	$	(0.54	)	$	(18.00	)

All stock-based awards to non-employees are accounted for at fair value, as calculated using the Black-Scholes option-pricing model, in accordance with SFAS 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees.”

Revenue Recognition

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered item has value to the customer on a stand-alone basis and whether there is objective and reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units.

Non-refundable up-front payments received in connection with research and development collaboration agreements, including technology advancement funding that is intended for the development of the Company’s core technology, are deferred and recognized on a straight-line basis over the relevant periods specified in the agreement, generally the research term.

Revenue related to collaborative research with the Company’s corporate collaborators is recognized as research services are performed over the related funding periods for each contract. Under these agreements, the Company is required to perform research and development activities as specified in each respective agreement. The payments received under each respective agreement are not refundable and are generally based on a contractual cost per full-time equivalent employee working on the project. Research and development expenses under the collaborative research agreements approximate or exceed the revenue recognized under such agreements over the terms of the respective agreements. Deferred revenue may result when the Company does not incur the required level of effort during a specific period in comparison to funds received under the respective contracts. Payments received relative to substantive, at-risk incentive milestones, if any, are recognized as revenue upon achievement of the incentive milestone event because the Company has no future performance obligations related to the payment. Incentive milestone payments are triggered either by results of the Company’s research efforts or by events external to the Company, such as regulatory approval to market a product.

The Company also has licensed technology to various biotechnology and pharmaceutical companies. Under these arrangements, the Company receives nonrefundable license or royalty payments in cash. These payments are recognized as revenue when received, provided the Company has no future performance or delivery obligations under these agreements. Otherwise, revenue is deferred until performance or delivery is satisfied. Certain of these license agreements also provide the licensee an option to acquire additional licenses or technology rights for a fixed period of time. Fees received for such options are deferred and recognized at the time the option is exercised or expires unexercised. Additionally, certain of these license agreements involve technology that the Company has licensed or otherwise acquired through arrangements with third parties pursuant to which the Company is required to pay a royalty equal to a fixed percentage of amounts received by the Company as a result of licensing this technology to others. Such royalty obligations are recorded as a reduction of the related revenue.

Critical Accounting Estimates

The accrual for clinical trial costs was made based upon the Company’s best estimates of costs per patient, timing of the associated costs, and total patient enrollment. Estimated costs per patient include both costs associated with the related medical treatment, as well as costs related to tracking and monitoring enrolled patients. Patient enrollment is obtained from the Company’s contracted clinical research organization and trial administrators, and represents accurate reflections of our patient enrollment to the best of our knowledge and belief.

3. Net Loss Per Share

Basic earnings per share is computed by dividing income or loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, net of certain common shares outstanding that are held in escrow or subject to Valentis’ right of repurchase. Diluted earnings per share includes the effect of options and warrants, if dilutive. Diluted net loss per share has not been presented separately as, given our net loss position for all periods presented, the result would be anti-dilutive.

A reconciliation of shares used in the calculation of basic and diluted net loss per share follows (in thousands, except per share amounts):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
Net loss applicable to common stockholders	$	(3,359	)	$	(29,115	)	$	(2,815	)	$	(40,956	)

Basic and Diluted:
Weighted average shares of common stock outstanding	10,111			4,404			7,230			2,288

Less: Shares in escrow, subject to return	(2		)	(2		)	(2		)	(2		)
Less: Shares subject to repurchase	(185		)	—			(185		)	—
Weighted-average shares of common stock used in computing net loss per share	9,924			4,402			7,033			2,286

Basic and diluted net loss per share	$	(0.34	)	$	(6.61	)	$	(0.40	)	$	(17.92	)

The computation of basic net loss per share excludes the following shares of common stock, which are outstanding but are held in escrow or subject to Valentis’ right to repurchase:

• A total of 2,106 shares of common stock issued in December 2002 in partial consideration for a license agreement. The 2,106 shares of common stock are held in escrow and will be released when certain conditions in the license agreement are met.

• A total of 185,000 shares of common stock issued in September 2003 in partial consideration for a lease termination agreement. All of these 185,000 shares were subject to a repurchase option of the Company as of March 31, 2004.

The following options and warrants have been excluded from the calculation of diluted net loss per share because the effect of inclusion would be antidilutive

• Options to purchase 1,686,854 shares of common stock at a weighted average price of $12.84 per share and options to purchase 117,698 shares of common stock at a weighted average price of $172.02 per share for the three months ended March 31, 2004 and 2003, respectively.

• Options to purchase 1,281,143 shares of common stock at a weighted average price of $16.39 per share and options to purchase 134,844 shares of common stock at a weighted average price of $165.14 per share for the nine months ended March 31, 2004 and 2003, respectively.

• Warrants to purchase up to an aggregate of 42,226 shares of common stock at an exercise price of $307.50 per share.

• Warrants to purchase up to an aggregate of 1,951,220 shares of common stock at an exercise price of $3.00 per share.

The options, common stock purchase warrants, shares of common stock held in escrow and shares of outstanding common stock subject to our right of repurchase will be included in the calculation of income per share at such time as the effect is no longer antidilutive, as calculated using the treasury stock method for options and warrants.

4. Comprehensive Loss

Following are the components of comprehensive loss (in thousands):

	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
Net loss	$	(3,359	)	$	(3,026	)	$	(2,815	)	$	(12,809	)
Net unrealized loss on available-for-sale securities	(4		)	—			(4		)	—
Foreign currency translation adjustment	—			146			53			(250		)
Comprehensive loss	$	(3,363	)	$	(2,880	)	$	(2,766	)	$	(13,059	)

The components of accumulated other comprehensive loss are as follows (in thousands):

	March 31, 2004			June 30, 2003
Unrealized gain (loss) on available-for-sale securities	$	(4	)	$	—
Foreign currency translation adjustments	(693		)	(746		)
Accumulated other comprehensive loss	$	(697	)	$	(746	)

5. Series A Redeemable Convertible Preferred Stock and Common Stock Warrants

Redeemable Convertible Preferred Stock and Common Stock Warrants

On December 5, 2000, Valentis completed the private placement of 31,500 shares of Series A redeemable convertible preferred stock and common stock purchase warrants. On January 24, 2003, all outstanding shares of Series A preferred stock were converted into shares of common stock.

Prior to the conversion of the Series A preferred stock to common stock, the Series A preferred stockholders were entitled to cumulative dividends, which accrued at an annual rate of 5%, payable quarterly, in cash or, at the Company’s election, in shares of common stock. If the Company elected to pay dividends in shares of its common stock, those shares were valued at the average closing bid price for Valentis common stock during the twenty consecutive trading days ending on and including the trading day immediately prior to the dividend payment date. The number of shares of common stock issued for dividends during the nine months ended March 31, 2003 was 84,336 shares.

Summary of Preferred Stock and Warrant Accounting

The total cash proceeds from the sale of Series A preferred stock and common stock purchase warrants of $31.5 million were discounted by approximately $6.0 million, representing the value assigned to the warrants. The $6.0 million value of the warrants was subject to accretion over the 3.5-year redemption period of the Series A preferred stock. After reducing the proceeds by the value of the warrants, the remaining proceeds were used to compute a discounted conversion price in accordance with EITF 00-27, “Application of EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments.” The discounted conversion price was compared to the fair market value of the Valentis common stock on December 5, 2000 (the date of issuance of the Series A preferred stock) resulting in a beneficial conversion feature of approximately $1.1 million which represents the difference between the fair market value of Valentis’ common stock and the discounted conversion price, and was subject to accretion over the 3.5-years redemption period.

Upon conversion of the Series A preferred stock to common stock in January 2003, the remaining $3.5 million of unaccreted deemed dividend representing the balance of amounts attributed to common stock purchase warrants, beneficial conversion feature and issuance costs related to the Series A preferred stock was fully accreted and recorded as a deemed dividend and included in the amounts discussed in the paragraphs below related to accretion of the warrants, beneficial conversion feature and issuance costs. This deemed dividend, along with a deemed dividend of approximately $200,000 accreted during January 2003, was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003.

The accretion of warrants for the three and nine months ended March 31, 2003 was approximately $2.5 million and $3.3 million, respectively. The accretion of the beneficial conversion feature for the three and nine months ended March 31, 2003 was approximately $439,000 and $592,000, respectively. The aggregate accretion value associated with the warrants and beneficial conversion feature was included in the calculation of net loss applicable to common stockholders.

Issuance costs of approximately $1.9 million were accounted for as a discount on the Series A preferred stock and were accreted over the 3.5-year redemption period. Accretion of approximately $776,000 and $1.0 million for the three and nine months ended March 31, 2003, respectively, was included in the calculation of net loss applicable to common stockholders.

Additionally, as a result of the simultaneous conversion of the Series A preferred stock to common stock and the reduction in the Series A preferred stock conversion price (see Note 7), the excess of the fair value of the common stock issued to the Series A preferred stockholders over the fair value of the common stock issuable pursuant to the original conversion terms was approximately $22.3 million. This amount also was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003.

Dividends on the Series A preferred stock, calculated at value at the rate of 5% per annum, were approximately $111,000 and $881,000 for the three and nine months ended March 31, 2003, respectively, and were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders.

6. Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):

	March 31, 2004		June 30, 2003
Accrued research and development expenses	$	144	$	111
Accrued rent	102		174
Accrued lease exit costs	—		665
Accrued property and use taxes	476		503
Accrued legal expenses	106		339
Other	233		489
Total	$	1,061	$	2,281

7. Capital Restructuring Actions

In January 2003, we received stockholder approval for, and completed, our proposed capital restructuring. Specifically, we effected the conversion of all outstanding shares of our Series A preferred stock into common stock and, immediately thereafter, effected a reverse stock split of our common stock at a ratio of one-for-thirty.

The conversion and reverse stock split were approved by the holders of the Company’s common stock at the Company’s Annual Meeting of Stockholders held on January 23, 2003. At the Annual Meeting, the stockholders approved the Company’s Amended and Restated Certificate of Incorporation (the “Restated Certificate”), which provided for the following: (i) an increase in the authorized shares of Common Stock from 65 million to 190 million; (ii) the elimination of all redemption rights of the Series A preferred stock; (iii) an adjustment of the conversion price of the Series A preferred stock from $270.00 to $7.26 (these conversion prices reflect the impact of the reverse stock split); (iv) the automatic conversion into common stock of all outstanding shares of Series A preferred stock (plus accrued and unpaid dividends and arrearage interest on unpaid dividends) on the filing date of the Restated Certificate; and (v) a reverse stock split of the Company’s outstanding Common Stock on the filing date of the Restated Certificate, in the range of 1:5 to 1:40, as determined at the discretion of the Board of Directors of the Company. The Restated Certificate was previously approved by Company’s Board of Directors and the holders of the Company’s Series A preferred stock.

Following the Annual Meeting, the Board of Directors authorized a one-for-thirty reverse stock split whereby each outstanding share of common stock automatically converted into one-thirtieth of a share of common stock. The Company filed the Restated Certificate on January 24, 2003, and the conversion of Series A preferred stock and the reverse stock split occurred on the same day. As a result of the conversion of the Series A preferred stock (and the payment of accrued and unpaid dividends and arrearage interest on unpaid dividends), the Company issued approximately 4.3 million shares after giving effect to the Reverse Stock Split. In lieu of fractional shares of common stock, stockholders received a cash payment based on the closing price of the common stock on January 23, 2003. The par value of the common stock remains at $.001.

Upon conversion of the Series A preferred stock to common stock the remaining $3.5 million of unaccreted deemed dividend representing the balance of amounts attributed to common stock purchase warrants, beneficial conversion feature

and issuance costs related to the Series A preferred stock was fully accreted and recorded as a deemed dividend. This deemed dividend was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003. Additionally, as a result of the simultaneous conversion of the Series A preferred stock to common stock and the reduction in the Series A preferred stock conversion price, the excess of the fair value of the common stock issued to the Series A preferred stockholders over the fair value of the common stock issuable pursuant to the original conversion terms was approximately $22.3 million. This amount also was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003.

8. Corporate Restructuring Actions

On October 8, 2002, the Company announced that it had further reduced its staff and planned expenditures to allow it to continue the development of its lead product, Del-1 for the treatment of a variety of cardiovascular diseases including peripheral arterial disease (PAD) and ischemic heart disease (IHD). In addition, the Company will continue to advance its the GeneSwitch® gene regulation technology through the licensing to other companies. In connection therewith, the Company reduced staff by 34 individuals in order to reduce the Company’s cash expenditures. We recorded restructuring and related charges of approximately $832,000 in the quarter ended December 31, 2002.

9. Private Placement

In December 2003, Valentis’ stockholders approved the sale and issuance, in a private placement to certain investors, of up to 4,878,049 shares of our common stock at a purchase price of $2.05 per share along with warrants, exercisable for a five-year period, to purchase up to an additional 1,951,220 shares of our common stock at an exercise price of $3.00 per share, in exchange for aggregate gross proceeds payable to the Company of up to $10 million.

In December 2003, we sold and issued 2,651,271 shares of our common stock and warrants to purchase 1,060,508 shares of our common stock under the private placement, resulting in aggregated proceeds of approximately $4.9 million (net of issuance costs of approximately $553,000).

In January 2004, we issued an additional 2,226,778 shares of our common stock and warrants to purchase 890,724 shares of our common stock, representing the sale of the remaining shares authorized for the private placement. Proceeds to Valentis, net of issuance cost of approximately $29,000, were approximately $4.5 million.

See the “Liquidity and Capital Resources” section in Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional details.

10. Subsequent Event

On April 29, 2004 we made a tender offer to the holders of currently outstanding warrants issued in connection with the private placement of the Company’s common stock in December 2003 and January 2004. The offer provides holders the opportunity to voluntarily amend any or all of their warrants. The amended warrants differ from the outstanding warrants in two ways. First, the amended warrants are exercisable at $2.50 per share, while the outstanding warrants are exercisable at $3.00 per share. Second, the amended warrants permit us to require the holders to exercise any portion of their warrants on a cash basis under certain conditions at any time, while the outstanding warrants permit us to require the holders to exercise their warrants in whole on a cash basis under certain conditions at any time after the first anniversary of the issuance of the warrants. This offer is scheduled to expire on May 27, 2004.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words “believes,” “anticipates,” “expects,” “intends,” “projects,” and other words of similar import or the negative of those terms or expressions. Forward-looking statements include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, our expectation that Phase II clinical trial data regarding our Deltavasc™ product will be available at the end of September 2004 and our intention to seek revenue from the licensing of our proprietary manufacturing technologies. Forward-looking statements subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future

results, performance or achievements expressed or implied by such forward-looking statements. Factors that could affect our actual results include the early stage of Deltavasc™ development, uncertainties related to the timing of completing clinical trials, the need for additional capital and whether clinical trial results will validate and support the safety and efficacy of any Deltavasc™ product. Further, there can be no assurance that the necessary regulatory approvals will be obtained, that we will be able to develop commercially viable gene-based product or that any of our programs will be partnered with pharmaceutical partners. Actual results may differ materially from those projected in such forward-looking statements as a result of the “Additional Factors That May Affect Future Results” described below and other risks detailed in our reports filed with the Securities and Exchange Commission.

OVERVIEW

THE COMPANY		We are a biopharmaceutical Company that focuses on cardiovascular product development. DELTAVASC™, our lead product, is being developed for therapeutic angiogenesis (formation of new blood vessels)

DELTAVASCÔ - THE LEAD PRODUCT		DELTAVASCÔ is a novel treatment for patients suffering from poor blood flow in their legs. Specifically, Valentis’ product addresses the intermittent claudication form of peripheral arterial disease, a multi-billion dollar market. DELTAVASC™ is based on the novel Del-1 angiogenesis gene, formulated with a Valentis PINC® proprietary polymer delivery system.

MARKET OPPORTUNITY		It is estimated that 14 to 18 million people in the United States suffer from peripheral arterial disease. Symptoms of the intermittent claudication form of peripheral arterial disease include leg pain during exercise due to a lack of adequate blood flow. Current treatments for intermittent claudication are limited due to lack of efficacy and undesirable side effects. The estimated market for a safe and efficacious product to treat intermittent claudication is in excess of $1 billion.

ONGOING PHASE II TRIAL		We continue to advance our lead product, DELTAVASCÔ, through a Phase II clinical trial. The trial is a one hundred-patient, randomized, double blind, placebo-controlled trial that is being conducted at approximately 20 centers around the United States. On March 30^th, 2004, we announced the completion of patient enrollment in this Phase II clinical trial and we expect the trial data to be available at the end of September 2004.

PHASE I TRIAL RESULTS		The Phase I trial results demonstrated that DELTAVASCÔ was well tolerated at all dose levels tested. While the focus of the trial was to demonstrate safety, there was an indication of dose and dosing pattern-related product efficacy as measured by exercise tolerance.

FOLLOW-ON INDICATIONS		We are currently performing preclinical studies to evaluate additional applications of our DELTAVASCÔ product including ischemic heart disease.

RECENT FINANCING		In February 2004, Valentis completed a private placement for the sale of $10 million of common stock and warrants to purchase its common stock. The net proceeds of the private placement were approximately $9.4 million. These funds will be used primarily to complete the ongoing Phase II clinical trial of the lead product, DELTAVASCÔ, as well as for other general corporate purposes and working capital.

		The common stock was sold to certain current investors, including the Perseus-Soros Biopharmaceutical Fund, LP as well as to new investors. The Company issued a total of approximately 4.9 million shares of common stock and five-year warrants exercisable for a total of approximately 2.0 million additional shares of common stock (see Liquidity and Capital Resources in Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations).

PROPRIETARY TECHNOLOGIES		Our synthetic gene delivery systems are designed to provide efficient delivery after intramuscular, intravenous or intratumoral administration. These delivery systems are designed to enhance cellular distribution and uptake of genes in vivo and to permit the achievement of therapeutic levels of proteins.

		Our PINC™ (Polymeric Non-Condensing) polymers are designed to provide efficient delivery to a variety of tissues, including muscle and solid tumors.

		Our GeneSwitch® gene regulation technology permits therapeutic protein production that is controlled via an orally administered drug. Products incorporating our GeneSwitch® gene regulation technology can be delivered with a polymer delivery system and electroporation. This can allow for controlled production of therapeutic proteins from muscle tissue for prolonged periods. In research applications, and particularly with transgenics, the GeneSwitch® system is widely appreciated for its ability to permit the study of otherwise lethal mutations.

		Our expertise can assist in the selection of appropriate PINC™ polymers or other synthetic delivery technologies depending on the indication. We have undertaken a licensing strategy and licensing opportunities for its technologies are available.

MANUFACTURING STRENGTHS		We have devoted substantial resources for the development of scaleable, proprietary GMP manufacturing for plasmid DNA-based therapeutics. We have demonstrated that we can successfully manufacture plasmid DNA containing therapeutic genes from lab scale to commercial scale. Our methods are distinctive because they are scaleable such that we believe the same process can be used at all scales. In addition to being of direct benefit to us in our development of products, we intend to seek revenue from the licensing of our proprietary manufacturing technologies.

RESULTS OF OPERATIONS

Overview

For the quarter ended March 31, 2004, we incurred significant losses primarily due to the advancement of our research and development programs and because we generated limited revenue. This is consistent with our performance since inception. We expect that operating results will fluctuate from quarter to quarter and that such fluctuations may be substantial. At March 31, 2004, our accumulated deficit was approximately $209.9 million. We expect to incur substantial losses for the foreseeable future and do not expect to generate revenue from the sale of products in the foreseeable future, if at all.

There have been no significant changes in our critical accounting policies during the nine months ended March 31, 2004 as compared to what was previously disclosed in our Annual Report on Form 10-K and Form 10-K/A for the year ended June 30, 2003 filed with the SEC on September 29, 2003 and October 28, 2003, respectively.

Revenue

Revenue recognized in the three and nine months ended March 31, 2004 and 2003 is as follows (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2004		2003		2004		2003
License and other revenue:
ALZA Corporation	$	—	$	—	$	6,500	$	—
Milestone	250		—		250		—
Other	84		1,063		688		2,658
Total revenue	$	334	$	1,063	$	7,438	$	2,658

Changes in revenue for the three and nine months ended March 31, 2004 and 2003 are explained below:

• In July 2003, PolyMASC Pharmaceuticals, our wholly owed subsidiary, entered into a license and

settlement agreement with ALZA Corporation, a unit of Johnson & Johnson. Under the agreement, PolyMASC settled its patent infringement litigation against ALZA and granted a worldwide, irrevocable and non-exclusive license to ALZA under its PEG-liposome patents. Non-recurring license revenue of $6.5 million was recognized from this agreement in the quarter ended September 30, 2003.

• The milestone revenue for the three and nine months ended March 31, 2004 primarily reflects a milestone payment received in March 2004 under a non-exclusive license agreement related to our DNAVAX^TM delivery technology.

• Other revenue resulted primarily from several license agreements for our GeneSwitch® gene regulation technology. For the three months ended March 31, 2004, other revenue was approximately $84,000, a decrease of approximately $979,000 from the corresponding period in 2003. For the nine months ended March 31, 2004, other revenue was $688,000, a decrease of approximately $2.0 million from the corresponding period in 2003. Other revenue in 2003 primarily reflects the $1.0 million revenue recognized in December 2002 from a license agreement with GlaxoSmithKline and the approximately $989,000 revenue recognized in January 2003 from a license agreement with Schering A.G.

Operating Expenses

Research and development expenses increased approximately $400,000 to approximately $2.7 million for the quarter ended March 31, 2004, compared to approximately $2.3 million for the corresponding period in 2003. The increase was primarily attributable to increased clinical trial expenses for the Del-1 PAD Phase II clinical trial, which was initiated in July 2003. For the nine months ended March 31, 2004, research and development expenses decreased approximately $400,000 to approximately $7.4 million, compared to approximately $7.8 million for the corresponding period in 2003. The decrease was primarily attributable to staff reductions in October 2002 (see Note 8 “Corporate Restructuring Actions” in our Notes to the unaudited condensed Consolidated Financial Statements), offset in part by increased clinical trial expenses for the Del-1 PAD Phase II clinical trial, which was initiated in July 2003.

Our research and development expenses currently include costs for scientific personnel, animal studies, supplies, equipment, consultants, patent filings, overhead allocation, human trials and sponsored research at academic and research institutions. The scope and magnitude of future research and development expenses are difficult to predict at this time given the number of studies that will need to be conducted for any of our potential products. In general, biopharmaceutical development involves a series of steps—beginning with identification of a potential target and including, among others, proof of concept in animal studies and Phase I, II, and III clinical studies in humans—each of which is typically more expensive than the previous step. We expect research and development spending to remain at approximately the level incurred in the quarter ended March 31, 2004 for the foreseeable future.

General and administrative expenses decreased approximately $840,000 to approximately $933,000 for the quarter ended March 31, 2004, compared to approximately $1.8 million for the corresponding period in 2003. For the nine months ended March 31, 2004, general and administrative expenses decreased approximately $4.5 million to approximately $2.8 million, compared to approximately $7.3 million for the corresponding period in 2003. The decreases were attributable primarily to staff reductions in October 2002 (see Note 8 “Corporate Restructuring Actions” in our Notes to the unaudited condensed Consolidated Financial Statements) and the decrease of professional fees incurred due to the resolution of the patent infringement litigation against ALZA. We expect general and administrative spending to remain at approximately the level incurred in the quarter ended March 31, 2004 for the foreseeable future.

Interest Income and Expense and Other, net

Interest income and expense and other, net, increased approximately $6,000 to approximately a net interest and other expense of $27,000 for the three months ended March 31, 2004, compared to a net interest and other expense of approximately $33,000 in the corresponding period of 2003, due to foreign currency exchange adjustments. For the nine months ended March 31, 2004, interest income and expense and other, net, decreased approximately $480,000 to approximately a net interest and other expense of $45,000, compared to a net interest and other income of approximately $435,000 in the corresponding period of 2003, due to foreign currency exchange adjustments.

Deemed Dividends Related to Series A Preferred Stock

The deemed dividends related to the Series A preferred stock (see Note 5 of the Notes to the Unaudited Condensed

Consolidated Financial Statements) included the accretion of common stock purchase warrants, the accretion of a beneficial conversion feature and the accretion of related issuance costs.

Additionally, as a result of the simultaneous conversion of the Series A preferred stock to common stock and the reduction in the Series A preferred stock conversion price (see Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements), the excess of the fair value of the common stock issued to the Series A preferred stockholders over the fair value of the common stock issuable pursuant to the original conversion terms was approximately $22.3 million. This amount also was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003.

Dividends on Series A Preferred Stock

Prior to the conversion of all outstanding shares of the Series A preferred stock into common stock in January 2003, the Series A preferred stockholders were entitled to cumulative dividends on the Series A preferred stock, which were calculated at the rate of 5% per annum and were approximately $111,000 and $881,000 for the three and nine months ended March 30, 2003, respectively. These dividends were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders.

Critical Accounting Estimates

We believe the clinical trial expense accounting policy represents our most significant estimates used in the preparation of our consolidated financial statements. Our accruals for clinical trial expenses are based in part on estimates of services received and efforts expended pursuant to agreements established with clinical research organizations and clinical trial sites. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our biopharmaceutical drugs. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flows. We determine our estimates through discussion with internal clinical personnel and outside service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. The objective of our clinical trial accrual policy is to reflect the appropriate trial expenses in our financial statements by matching period expenses with period services and efforts expended. In the event of early termination of a clinical trial, we accrue expenses associated with an estimate of the remaining, non-cancelable obligations associated with the winding down of the trial. Our estimates and assumptions for clinical trial expenses have been reasonably accurate in the past. We expect our estimates and assumptions for clinical trial expenses to be reasonably accurate in the future.

LIQUIDITY AND CAPITAL RESOURCES

In December 2003 and the first calendar quarter of 2004, we completed the sale and issuance, in a private placement to certain investors, of 4,878,049 shares of our common stock at a purchase price of $2.05 per share along with warrants, exercisable for a five-year period, to purchase an additional 1,951,220 shares of our common stock at an exercise price of $3.00 per share. Aggregated proceeds to us were approximately $9.4 million, net of issuance costs of approximately $600,000.

The primary use of proceeds from the private placement is to complete the ongoing Phase II clinical trials of our lead product, DELTAVASCÔ, as well as for other general corporate purposes and working capital.

Pursuant to a purchase agreement under the private placement, in the event that we issue additional shares of common stock within one year of the closing in certain non-exempt transactions for a price less than the average of the closing bid prices per share of its common stock on the Nasdaq SmallCap Market during the 5 trading days immediately preceding such issuance (the “Threshold Price”), then we will be obligated to issue additional shares to the purchasers of our common stock and warrants in the private placement. We will not receive any proceeds from the issuance of these additional shares. The number of these additional shares which would be issuable to each purchaser under this provision would be equal to the difference between the purchase price of $2.05 per share and the Threshold Price, divided by the Threshold Price, multiplied by the number of shares of our common stock the purchaser has purchased in the private placement. In addition, in that event, the exercise price of the warrants would be proportionally reduced. The shares of our common stock issued in the private placement, warrants and shares issuable upon exercise of the warrants are restricted securities as that term is defined in the Securities Act of 1933, as amended.

In addition, we entered into a registration rights agreement with the purchasers in the private placement. Pursuant to the registration rights agreement, we filed with the Securities and Exchange Commission a registration statement related to the shares issued to the purchasers and shares issuable upon the exercise of the warrants. The registration statement was declared effective by the Securities and Exchange Commission on March 4, 2004.

In the event we must suspend use of the registration statement for greater than 20 consecutive days or a total of 40 days in the aggregate during the time we are required to keep the registration statement effective under the registration rights agreement, then we must pay to each purchaser in cash 1.0% of the purchaser’s aggregate purchase price of the shares for the first month, as well as an additional 1.5% of the purchaser’s aggregate purchase price for each additional month thereafter, while the use of the registration statement has been suspended. We currently expect to be required to maintain availability of the registration statement for at least two years following the closing. In addition, if we issue any additional shares under the antidilution provisions of the purchase agreement, we would be required to register those shares as well.

As of March 31, 2004, we had $11.9 million in cash, cash equivalents and short-term investments compared to $3.3 million of cash and cash equivalents at June 30, 2003. The increase of $8.6 million relates primarily to the $9.4 million of net proceeds received from the private placement discussed above, and the $6.5 million license fee received from ALZA Corporation/Johnson & Johnson under a license and settlement agreement, partially offset by funding of ongoing operations and capital expenditures. Our capital expenditures were approximately $5,000 and $20,000 for the nine months ended Mach 31, 2004 and 2003, respectively. We expect our quarterly research and development, general and administrative and capital expenditures to remain at approximately the same levels for the foreseeable future as the levels incurred in the quarter ended March 31, 2004.

Net cash used in operating activities decreased approximately $11.8 million to approximately $1.0 million for the nine months ended March 31, 2004, compared to approximately $12.8 million for the corresponding period in 2003.The decrease in net cash used in operating activities was primarily attributable to the $6.5 million license fee received from ALZA Corporation/Johnson & Johnson; lower cash disbursements resulting from staff reductions in October 2002; and decreased legal expenses due to the resolution of the patent infringement litigation against ALZA. These decreases were offset in part by increased clinical trial expenditures.

Net cash used in investing activities was approximately $4.6 million for the nine months ended March 31, 2004, which primarily related to the purchases of marketable securities. Net cash provided by investing activities was approximately $8.0 million for the nine months ended March 31, 2003, which primarily reflects the maturities of marketable securities.

Net cash provided by financing activities was approximately $9.6 million for the nine months ended March 31, 2004, which consisted primarily of the $9.4 million of net proceeds received from the private placement announced in December 2003. Net cash used by financing activities was approximately $445,000 for the nine months ended March 31, 2003, which related primarily to the payments of preferred stock dividends.

As discussed in our Form 10-K, as amended, filed with the Securities and Exchange Commission for the year ended June 30, 2003, we have received a report from our independent auditors covering the consolidated financial statements for the fiscal year ended June 30, 2003 that includes an explanatory paragraph stating that the financial statements have been prepared assuming Valentis will continue as a going concern. The explanatory paragraph stated the following conditions

which raise substantial doubt about our ability to continue as a going concern: we have incurred recurring operating losses since inception, including a net loss of $14.9 million for the year ended June 30, 2003, and our accumulated deficit was $207.1 million at June 30, 2003 and our cash and cash equivalents balance at June 30, 2003 was $3.3 million. Management’s plans as to these matters are described below.

Since our inception, we have financed our operations principally through public and private issuances of our common and preferred stock and funding from collaborative arrangements. We have used the net proceeds from the sale of the common and preferred stock for general corporate purposes, which may include funding research, development and product manufacturing, increasing our working capital, reducing indebtedness, acquisitions or investments in businesses, products or technologies that are complementary to our own, and capital expenditures. We expect that proceeds received from any future issuance of stock will be used for similar purposes.

Based upon our current operating plan, we anticipate that our cash, cash equivalents and short-term investments as of March 31, 2004 will enable us to maintain our current and planned operations at least through December 31, 2004, in the absence of additional financial resources. We will be required to seek additional sources of funding to complete development and commercialization of our products.

We are currently seeking additional collaborative agreements and licenses with corporate partners and may seek additional funding through public or private equity or debt financing or merger of its business.

The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed above.

SUBSEQUENT EVENT

We made this offer to enable us to require holders of the outstanding warrants to exercise their warrants on a cash basis before the first anniversary of the issuance of the warrants. We want to be able to require the holders to exercise their warrants so that we can raise additional working capital to be used, among other things, for general corporate purposes.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

The following risk factors outline certain risks and uncertainties concerning future results and should be read in conjunction with the information contained in this Quarterly Report on Form 10-Q. Any of these risk factors could materially and adversely affect our business, operating results and financial condition. Additional risks and uncertainties not presently known to us, or those we currently deem immaterial, may also materially harm our business, operating results and financial condition.

We have a history of losses and may never be profitable.

We have engaged in research and development activities since our inception. We incurred losses from operations of approximately $15.7 million, $34.5 million and $39.5 million, for our fiscal years ended June 30, 2003, 2002 and 2001, respectively, For the nine months ended March 31, 2004, we generated a loss from operations of approximately $2.8 million, which included the recognition of one-time license revenue of $6.5 million in July 2003 from a license and settlement agreement resulting from the resolution of a patent infringement litigation. As of March 31, 2004, we had an accumulated deficit totaling approximately $209.9 million. The development and sale of our products will require completion of clinical trials and significant additional research and development activities. We expect to incur net losses for the foreseeable future as we continue with the research, development and commercialization of our gene-based products. Our ability to achieve profitability depends on successful completion of clinical trials, market acceptance of our products, the competitive position

of our products and the other risk factors set forth in this quarterly report on Form 10-Q. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our ability to achieve profitability depends upon our research and development efforts and whether we can successfully develop and commercially introduce our products, which will require extensive additional research and development and may never result in successful products.

Our future success is dependent upon, among other factors, our ability to develop working products, including our DELTAVASC™ product, which is a formulation of the angiogenesis gene Del-1 with a polymer delivery vehicle. All of our potential products currently are in research, preclinical development or the early stages of clinical testing, and commercialization of those products will not occur for at least the next several years, if at all. The development of new drugs is a highly risky undertaking and there can be no assurance that our research and development efforts will be successful. Gene therapeutics is a new field and may not lead to commercially viable pharmaceutical products.

We are subject to extensive government regulation by the FDA and others, including completion of clinical trials, which may cause us to delay or withdraw the introduction of our products.

Under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and related regulations, the Food and Drug Administration, or FDA, regulates the development, clinical testing, manufacture, labeling, sale, distribution and promotion of drugs and biologics in the United States. Prior to market introduction in the United States, a potential drug or biological product must undergo rigorous clinical trials that meet the requirements of the FDA in order to demonstrate safety and efficacy in humans. Depending upon the type, novelty and effects of the drug and the nature of the disease or disorder to be treated, the FDA approval process can take several years, require extensive clinical testing and result in significant expenditures. Similarly, our ability to commercially introduce our products outside the United States is subject to stringent government regulation by foreign government agencies. Our lead product, DELTAVASC™ is currently undergoing Phase II clinical trials in the United States, and based on the completion of patient enrollment in March 2004, we expect the trial data to be available at the end of September 2004. DELTAVASC™ is a novel cardiovascular product designed to grow new blood vessels in patients suffering from peripheral arterial disease and will require significant additional clinical testing. The clinical testing and FDA approval process is likely to require substantial time, effort and financial and human resources, and there can be no assurance that any approval will be granted on a timely basis, if at all.

Even if we successfully complete the required preclinical testing and clinical trials, we may not be able to obtain the regulatory approvals necessary to market our gene therapy and other products in the United States or abroad. The approval procedures for marketing outside the United States vary among countries and can involve additional testing. Accordingly, we cannot predict with any certainty how long it will take or how much it will cost to obtain regulatory approvals for manufacturing and marketing our products or whether we will be able to obtain those regulatory approvals at all. Our failure to obtain government approvals or any delays in receipt of such approvals would have a material adverse effect on our business, results of operations and financial condition.

We are dependent on the successful outcomes of clinical trial of our products and we cannot assure you that clinical testing will be completed successfully within any specific time period.

We are currently supporting primarily the ongoing DELTAVASC™ Phase II clinical trial. The DELTAVASC™ clinical trial is a multi-center, prospective, placebo-controlled, randomized trial conducted at approximately 20 centers in the United States. This clinical trial is a study performed within the FDA regulations and guidelines regarding whether patients suffering from peripheral arterial disease can grow new blood vessels after being treated with DELTAVASC™ compared to patients given the placebo. In order to introduce and market our products, we must be able to, among other things, demonstrate safety and efficacy with substantial evidence from well-controlled clinical trials. We have limited experience in conducting clinical trials, and we may encounter problems that cause us, or the FDA, to delay, suspend or terminate these studies and trials. Problems we may encounter include the unavailability of preferred sites for conducting the trials, an insufficient number of test subjects and other factors which may delay the advancement of our clinical trials, lead to increased costs or result in the termination of the clinical trials altogether. Furthermore, the FDA may suspend clinical trials at any time if it believes the subjects participating in the trials are being exposed to unacceptable health risks or if it finds deficiencies in the clinical trial process or the conduct of the investigation. While many of these risks are common to biotechnology companies in general, in light of the issues raised in 2000 when the FDA stopped a gene therapy clinical trial due to the death of a patient, we may face greater risks in this area than other biotechnology companies because of our focus on gene-based therapeutics.

Clinical trials and the FDA approval process are long, expensive and uncertain processes, which require substantial

time, effort and financial and human resources. This process may take a number of years. We cannot assure you that our Phase II or Phase III clinical testing will be completed within any specific time period, if at all. There can be no assurance that any FDA approval will be granted on a timely basis, if at all, or that any of our products will prove safe and effective in clinical trials or will meet all applicable regulatory requirements necessary to receive marketing approval from the FDA or the comparable regulatory bodies of other countries. In addition, after marketing approval is granted, the FDA or other government agencies in other countries may require post-marketing clinical studies that typically entail extensive patient monitoring and may result in restricted marketing of the product or products for an extended period of time. If the future results of any clinical trial regarding our products fails to validate the safety and effectiveness of treatments using our products, our ability to generate revenues from those products would be adversely affected and our business would be harmed.

The results of early Phase I and Phase II clinical trials are based on a small number of patients over a short period of time, and our success may not be indicative of results in a large number of patients or long-term efficacy.

The results in early phases of clinical testing are based upon limited numbers of patients and a limited follow-up period. Typically, our Phase I clinical trials for indications of safety enroll less than 50 patients. Our Phase II clinical trials for efficacy typically enroll approximately 100 patients. Actual results with more data points may not confirm favorable results from our earlier stage trials. In addition, we do not yet know if early results will have a lasting effect. If a larger population of patients does not experience positive results, or if these results do not have a lasting effect, our products may not receive approval from the FDA. Failure to demonstrate the safety and effectiveness of our gene based products in larger patient populations would have a material adverse affect on our business that would cause our stock price to decline significantly.

We must be able to continue to secure additional financing in order to continue our operations, which might not be available or which, if available, may be on terms that are not favorable to us.

The continued development and clinical testing of our potential products will require substantial additional financial resources. Our future funding requirements will depend on many factors, including:

• scientific progress in our research and development programs;

• size and complexity of such programs;

• scope and results of preclinical studies and clinical trials;

• time and costs involved in obtaining FDA and other regulatory approvals;

• ability to establish and maintain corporate collaborations;

• time and costs involved in filing, prosecuting and enforcing patent claims;

• competing technological and market developments; and

• the cost of manufacturing material for preclinical, clinical and commercial purposes.

We will have insufficient working capital to fund our cash needs unless we are able to raise additional capital in the future. We have financed our operations primarily through the sale of equity securities and through corporate collaborations. We do not anticipate generating revenues for the foreseeable future and must fund our operations through additional third party financing. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms will have a material adverse effect on our business, financial condition and results of operations.

We may also take actions to conserve our cash resources through reductions in our personnel, delaying or scaling back our development program or relinquishing greater or all rights to products at an earlier stage of development or on less favorable terms than we otherwise would. Any or all of these actions would materially adversely affect our business, financial condition and results of operations.

The future success of our business depends on our ability to attract and retain corporate partners to develop, introduce and market our gene therapy and other products.

Our business strategy is to attract business partners to fund or conduct research and development, clinical trials, manufacturing, marketing and sales of our gene therapy and other products. We currently have no corporate partners for our DELTAVASC™ product, and are seeking partners to develop, introduce and market our products. We face intense competition from many other companies for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology. If we are unable to attract and retain corporate partners to develop, introduce and market our products, our business will be materially and adversely affected.

Our strategy and any reliance on corporate partners, if we are able to establish such collaborative relationships, are subject to additional risks. Our partners may not devote sufficient resources to the development, introduction and marketing of our products or may not pursue further development and commercialization of products resulting from collaborations with us. If a corporate partner elects to terminate its relationship with us, our ability to develop, introduce and market our products may be significantly impaired and we may be forced to discontinue the product altogether. We may not be able to negotiate alternative corporate partnership agreements on acceptable terms, if at all. The failure of any future collaboration efforts could have a material adverse effect on our ability to develop, introduce and market our products and, consequently, could have a material adverse effect on our business, results of operations and financial condition.

Adverse events in the field of gene therapy may negatively impact regulatory approval or public perception of our potential products.

The death in 2000 of a patient undergoing a physician-sponsored, viral-based gene therapy trial has been widely publicized. Following this death and publicity surrounding the field of gene therapy, the FDA appears to have become more restrictive regarding the conduct of gene therapy clinical trials. This approach by the FDA can lead to delays in the timelines for regulatory review, as well as potential delays in the conduct of our gene therapy clinical trials. In addition, the negative publicity around the field of gene therapy appears to have affected patients’ willingness to participate in some gene therapy clinical trials. If fewer patients are willing to participate in our clinical trials, the timelines for recruiting patients and conducting the trials will be delayed. The commercial success of our potential products will depend in part on public acceptance of the use of gene therapy for the prevention or treatment of human diseases. Negative public reaction to gene therapy in general could result in stricter labeling requirements of gene therapy products, including any of our products, and could cause a decrease in the demand for products we may develop.

We face strong competition in our market and competition from alternative treatments in the biopharmaceuticals market.

The pharmaceutical and biotechnology industries are highly competitive. We are aware of several pharmaceutical and biotechnology companies that are pursuing gene-based therapeutics For example, we are aware that Vical Inc., Targeted Genetics Corp., GenVec, Inc., Cell Genesys, Inc., Avigen, Inc., Introgen and Corautus are also engaged in developing gene-based therapies. Many of these companies are addressing diseases that have been targeted by us directly or indirectly. Our competitive position depends on a number of factors, including safety, efficacy, reliability, marketing and sales efforts, the existence of competing products and treatments and general economic conditions. Some competitors have substantially greater financial, research, product development, manufacturing, marketing and technical resources than we do. Some companies also have greater name recognition than us and long-standing collaborative relationships. In addition, gene therapy is a new and rapidly evolving field and is expected to continue to undergo significant and rapid technological change, which could render our products obsolete.

We also face competition from biotechnology and pharmaceutical companies using more traditional approaches to treating human diseases. Our competitors, academic and research institutions or others may develop safer, more effective or less costly biologic delivery systems, gene-based therapeutics or chemical-based therapies. In addition, competitors may achieve superior patent protection or obtain regulatory approval or product commercialization earlier than we do. Any such developments could seriously harm our business, financial condition and results of operations.

If we are unable to obtain rights to proprietary genes, proteins or other technologies, we will be unable to operate our business.

Our gene-based products involve multiple component technologies, many of which may be patented by others. For example, our products use gene sequences, some of which have been, or may be, patented by others. As a result, we may be required to obtain licenses to those gene sequences, proteins or other technologies. We may not be able to obtain a license to

those technologies on reasonable terms, if at all. As a consequence, we might be prohibited from developing potential products or we might have to make cumulative royalty payments to several companies. These cumulative royalties would reduce amounts paid to us or could make our products too expensive to develop or market.

We rely on patents and other proprietary rights to protect our intellectual property and any inability to protect our intellectual property rights would adversely impact our business.

We rely on a combination of patents, trade secrets, trademarks, proprietary know-how, nondisclosure and other contractual agreements and technical measures to protect our intellectual property rights. We file patent applications to protect processes, practices and techniques related to our gene-therapy products that are significant to the development of our business. We have been issued 58 United States patents and 71 foreign patents on the technologies related to our products and processes. We have approximately 20 pending patent applications in the United States and 72 foreign pending patent applications. Our patent applications may not be approved. Any patents granted now or in the future may offer only limited protection against potential infringement and development by our competitors of competing products. Moreover, our competitors, many of which have substantial resources and have made substantial investments in competing technologies, may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets.

In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through proprietary information agreements with employees, consultants and other parties. Our proprietary information agreements with our employees and consultants contain industry standard provisions requiring such individuals to assign to us, without additional consideration, any intellectual property conceived or reduced to practice by them while employed or retained by us, subject to customary exceptions. Proprietary information agreements with employees, consultants and others may be breached, and we may not have adequate remedies for any breach. Also, our trade secrets may become known to or independently developed by competitors. Any failure to protect our intellectual property would significantly impair our competitive position and adversely affect our results of operations and business.

We could become subject to litigation regarding our intellectual property rights, which could seriously harm our business.

In previous years, there has been significant litigation in the United States involving patents and other intellectual property rights. Competitors in the biotechnology industry may use intellectual property litigation against us to gain advantage. In the future, we may be a party to litigation to protect our intellectual property or as a result of an alleged infringement of others’ intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation, if successful, also could force us to stop selling, incorporating or using our products that use the challenged intellectual property; obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or redesign the products that use the technology. We may also be required in the future to initiate claims or litigation against third parties for infringement of our intellectual property rights to protect these rights or determine the scope or validity of our intellectual property or the rights of our competitors. These claims could result in significant expenditures to pursue and the diversion of our technical and management personnel. If we are forced to take any of these actions, our business may be seriously harmed.

Any claims, with or without merit and regardless of whether we prevail in the dispute, would be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to develop noninfringing technology or to enter into royalty or licensing agreements. An adverse determination in a judicial or administrative proceeding and failure to obtain necessary licenses or develop alternate technologies could prevent us from developing and selling our products, which would have a material adverse effect on our business, results of operations and financial condition.

We rely on third party contractors to manufacture our product and our failure to effectively manage our relationships with these contractors could adversely affect our ability to market and sell our products.

We do not manufacture any of our products, including our DELTAVASC™ product, and instead rely on third party contract manufacturers. We currently do not have long-term supply contracts with any of our third party contractors. None of our contract manufacturers is obligated to perform services or supply products to us for any specific period, or in any specific quantities, except as may be provided in a particular purchase order. In addition, the successful commercialization of our products on a large scale will require that we effectively transfer production processes from our research and development lab to such third party’s manufacturing process and effectively coordinate with our contract manufacturers. Although we have a license agreement with DSM Biologics for the manufacture and supply of plasmid DNA, neither DSM nor any third party has

successfully manufactured plasmid DNA on a sustained large-scale commercial basis. We expect to depend on our contract manufacturing partner, Cangene Corporation, or another contract manufacturer for commercial-scale manufacturing of our products. Our contract-manufacturing partners may be unable to develop adequate manufacturing capabilities for commercial-scale quantities of gene products. If Cangene or third parties are unable to establish and maintain large scale manufacturing capabilities, we will be unable to introduce, market and sell sufficient products and our business will be harmed.

We may experience delays in our ongoing clinical trials or regulatory approval of our products as a result of failures by our contract manufacturers to comply with FDA manufacturing practices and requirements.

Drug-manufacturing facilities regulated by the FDA must comply with the FDA’s good manufacturing practice regulations, which include quality control and quality assurance requirements, as well as maintenance of records and documentation. Manufacturers of biologics also must comply with the FDA’s general biological product standards and also may be subject to state regulation. Such manufacturing facilities are subject to ongoing periodic inspections by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed as part of the product approval process before being utilized for commercial manufacturing. Noncompliance with the applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, withdrawal of marketing approvals, and criminal prosecution. Any of these actions by the FDA would materially and adversely affect our ability to continue clinical trials and adversely affect our business. We cannot assure you that our contract manufacturers will attain or maintain compliance with current or future good manufacturing practice requirements. As we have experienced, the failure of our contract manufacturer to comply with good manufacturing practice requirements could cause significant delay of important clinical trials. For example, in August 2001, we discovered manufacturing issues at our contract manufacturer that resulted in a delay in our Del-1 peripheral arterial disease, or PAD, clinical trial. When we discovered the issues, we postponed enrollment in the clinical trial until we could fully assess their impact. We also informed the FDA of the issues. On September 19, 2001, the FDA placed a clinical hold on our Del-1 PAD clinical trial. On February 12, 2002, the FDA allowed us to proceed with our PAD safety trial using newly manufactured material. Since that time, we have manufactured new material at another manufacturing site. If we were to discover other problems, the FDA could suspend or further delay our clinical trials or place restrictions on our ability to conduct clinical trials, including the mandatory withdrawal of the product from the clinical trials.

Our research and development processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products that could subject us to unanticipated environmental liability and would adversely affect our results of operations.

Our research and development processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local environmental laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and waste products. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated completely. In the event of such an accident, we could be held liable for any damages that result, and any such liability could exceed our resources. Although we believe that we are in compliance in all material respects with applicable environmental laws and regulations, there can be no assurance that we will not be required to incur significant costs to comply with environmental laws and regulations in the future or that any of our operations, business or assets will not be materially adversely affected by current or future environmental laws or regulations.

We depend on key personnel to develop our products and, if we are unable to hire additional personnel due to the intense competition in the Bay Area and other obstacles in recruiting qualified personnel for key management, scientific and technical positions, our business may suffer.

Our ability to attract and retain management, scientific and technical staff to develop our potential products and formulate our research and development strategy is a critical factor in determining whether we will be successful in the future. The San Francisco Bay Area, where our corporate headquarters and clinical development center is located, is home to a large number of biotechnology and pharmaceutical companies, and there is a limited number of qualified individuals to fill key scientific and technical positions. Competition for highly skilled personnel is intense and we may not be successful in attracting and hiring qualified personnel to fulfill our current or future needs.

Although we have programs in place to retain personnel, including programs to create a positive work environment and competitive compensation packages, none of our officers or key employees are bound by an employment agreement for any specific term and these individuals may terminate their employment at any time. Our future success depends upon the

continued services of our executive officers and other key scientific, marketing, manufacturing and support personnel. As of April 30, 2004, we had a total of 19 employees, including 13 employees supporting our research and development efforts. We do not have “key person” life insurance policies covering any of our employees and the loss of services of any of our key employees would adversely affect our business. Additionally, after the corporate reorganization announced in January 2002 that resulted in the termination of 47 positions and the subsequent corporate reorganization announced in October 2002 that resulted in the termination of 34 positions, it may be more difficult to recruit personnel in the future. If we do not attract and retain qualified personnel, our research and development programs could be delayed, which could materially and adversely affect the development of our products and our business.

The concentration of ownership among our executive officers, directors and their affiliates may delay or prevent a change in our corporate control and prevent new investors from influencing significant corporate decisions.

Our executive officers, directors and their affiliates beneficially own or control in excess of 35% of the outstanding shares of common stock, with over 25% of the outstanding shares held by two such entities, Perseus-Soros BioPharmaceutical Fund, L.P. and Diaz & Altschul Capital Management, LLC. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us.

Our stock price has been and may continue to be volatile and an investment in our common stock could suffer a decline in value.

The trading price of the shares of our common stock has been and may continue to be highly volatile. We receive only limited attention by securities analysts and may experience an imbalance between supply and demand for our common stock resulting from low trading volumes. The market price of our common stock may fluctuate significantly in response to a variety of factors, most of which are beyond our control, including the following:

• results of our clinical trials and preclinical studies, or those of our competitors;

• our ability to attract and retain corporate partners;

• negative regulatory action or regulatory approval with respect to our products or our competitors’ products;

• developments related to our patents or other proprietary rights or those of our competitors;

• announcements by us or our competitors of new products, technological innovations, contracts, acquisitions, corporate partnerships or joint ventures;

• changes in our eligibility for continued listing of our common stock on The Nasdaq SmallCap Market; and

• market conditions for biopharmaceutical or biotechnology stock in general.

The stock market has, from time to time, experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging biotechnology and biopharmaceutical companies and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock. In addition, sales of substantial amounts of our common stock in the public market could lower the market price of our common stock.

We have received a “going concern” opinion from our independent auditors, which may negatively impact our business.

We have received a report from our independent auditors covering the consolidated financial statements for the fiscal year ended June 30, 2003 that included an explanatory paragraph which stated that the financial statements have been prepared assuming we will continue as a going concern. The explanatory paragraph stated that our recurring operating losses and declining cash and investment balances have raised substantial doubt about our ability to continue as a going concern. Any doubt about our ability to continue as a going concern will adversely affect our ability to enter into collaborative relationships with business partners and our ability to sell our products.

In January 2004, we completed a private placement of our common stock, which raised $10.0 million. Despite this financing, we may need to raise additional funds in the future to continue our operations. We may not be able to obtain

additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital and dispel any continuing doubts about our ability to continue as a going concern enterprise will have a material adverse effect on our business, financial condition and results of operations.

There are no assurances that we can maintain our listing on The Nasdaq SmallCap Market and the failure to maintain listing could adversely affect the liquidity and price of our common stock.

On January 31, 2003, our common stock began trading on The Nasdaq SmallCap Market pursuant to an exception from delisting. Nasdaq has notified us that in the event we fail to demonstrate compliance, as well as an ability to sustain compliance, with all requirements for continued listing on The Nasdaq SmallCap Market, including Nasdaq’s corporate governance criteria, our securities will be delisted from The Nasdaq Stock Market. If our securities are delisted from The Nasdaq Stock Market, the trading of our common stock is likely to be conducted on the OTC Bulletin Board. The delisting of our common stock from The Nasdaq SmallCap Market will result in decreased liquidity of our outstanding shares of common stock and a resulting inability of our stockholders to sell our common stock or obtain accurate quotations as to their market value, which would reduce the price at which our shares trade. The delisting of our common stock could also deter broker-dealers from making a market in or otherwise generating interest in our common stock and would adversely affect our ability to attract investors in our common stock. Furthermore, our ability to raise additional capital would be severely impaired. As a result of these factors, the value of the common stock would decline significantly, and our stockholders could lose some or all of their investment.

If we fail to manage growth effectively, our business could be disrupted, which could harm our operating results.

If any of our products successfully complete clinical trials and receive FDA approval, we may experience growth in our business. We must be prepared to expand our workforce and to train, motivate and manage additional employees as the need for additional personnel arises. Our personnel, systems, procedures and controls may not be adequate to support our future operations. Any failure to effectively manage future growth could have a material adverse effect on our business, results of operations and financial condition.

If our facilities were to experience an earthquake or other catastrophic loss, our operations would be seriously harmed.

Our facilities could be subject to a catastrophic loss such as fire, flood or earthquake. All of our research and development activities, our corporate headquarters and other critical business operations are located near major earthquake faults in Burlingame, California. Any such loss at any of our facilities could disrupt our operations, delay development of our products and result in large expense to repair and replace our facilities. We currently do not maintain insurance policies protecting against catastrophic loss, except for fire insurance with coverage amounts normally obtained in our industry.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain a strict investment policy that ensures the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investments consist primarily of commercial paper, obligations of U.S. Government agencies and corporate bonds. The table below presents notional amounts and related weighted-average interest rates by year of maturity for our investment portfolio and long-term debt obligations (in thousands, except percentages). All of our market risk sensitive instruments mature in 2004.

	2004
Cash equivalents
Fixed rate	$	6,049
Average rate	0.56		%
Short-term investments
Fixed rate	4,627
Average rate	0.48		%
Long-term investments
Fixed rate	—
Average rate	—
Total investment securities	$	10,676
Average rate	1.04		%

ITEM 4. CONTROLS AND PROCEDURES

Our management have evaluated, with the participation of our President and Chief Executive Officer, who is our principal executive officer, and our Senior Director of Finance and Controller, who is our principal financial officer, the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our President and Chief Executive Officer and our Senior Director of Finance and Controller concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission rules and forms.

There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In July 2003, our wholly owned subsidiary, PolyMASC Pharmaceuticals, announced that it settled its patent infringement litigation against ALZA Corporation, a unit of Johnson & Johnson. Under the settlement, PolyMASC received $6.5 million, and granted a worldwide license to ALZA under its PEG-liposome patents. The agreement settles pending patent infringement litigation in the United States and Germany, as well as Opposition proceedings in the Japan Patent Office and before the European Patent Office.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On December 2, 2003, we entered into a securities purchase agreement, pursuant to which the purchasers named therein purchased, and we issued and sold in December and January 2004 an aggregate of 4,878,047 shares of our common stock at a price of $2.05 per share for aggregate gross proceeds of approximately $10.0 million in cash. In addition, the purchasers were issued five-year warrants, which are exercisable for up to an additional 1,951,212 shares our common stock at an exercise price of $3.00 per share. The shares of common stock and warrants to purchase common stock were issued and sold to several new investors and certain current investors, including Perseus-Soros Biopharmaceutical Fund, LP. Wells Fargo Securities LLC acted as our exclusive placement agent for the private placement and was paid a cash fee of $400,000, plus reimbursement of expenses. The issuance of the common stock was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.	Exhibits

	31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
	31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
	32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

	32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

b.	Reports on Form 8-K

	On February 5, 2004, Valentis filed a current report on Form 8-K regarding the completion of its private placement, the sale and issuance of an additional 1,724,336 shares of its common stock at a purchase price of $2.05 per share, warrants exercisable for up to an additional 689,728 shares of common stock at an exercise price of $3.00 per share and the receipt of additional gross proceeds of approximately $3.5 million

	On February 18, 2004, Valentis filed a current report on Form 8-K regarding the announcement of results for its second fiscal quarter ended December 31, 2003.

SIGNATURES

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.

		VALENTIS, INC.


Date: May 17, 2004		/s/ BENJAMIN F. MCGRAW III
		Benjamin F. McGraw III
		Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)


Date: May 17, 2004		/s/ JOSEPH A. MARKEY
		Joseph A. Markey
		Senior Director of Finance and Controller (Principal Financial and Accounting Officer)