UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 000-21291

Introgen Therapeutics, Inc.

301 Congress Avenue, Suite 1850
Austin, Texas 78701
(Address of principal executive offices, including zip code)

(512) 708-9310
(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  þ  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 þ

     As of November 12, 2004, the registrant had 27,158,596 shares of its common stock, $0.001 par value per share, issued and outstanding.

INTROGEN THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

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INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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INTROGEN THERAPEUTICS, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Business

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below for a discussion of our business.

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

2. Basis of Presentation

     The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These financial statements do not include all of the information and footnotes required under generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all accounting entries considered necessary for a fair presentation have been made in preparing these financial statements, and such entries are normal in nature. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the consolidated financial statements and related footnotes as of December 31, 2003, and for the year then ended, included in our Annual Report on Form 10-K, filed with the SEC on March 5, 2004.

3. Net Loss Per Share

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

4. Stock Based Compensation

     Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” allows companies to adopt one of two methods for accounting for stock options. We have elected the method requiring disclosure only of stock-based compensation. Because of this election, we continue to account for our employee stock-based compensation plans, using the intrinsic value method, under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” as clarified by Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.” Accordingly, deferred compensation is recorded for stock-based compensation grants based on the excess of the fair market value of the common stock on the measurement date over the exercise price. The deferred compensation is amortized ratably over the vesting period of each unit of stock-based compensation grant, which is generally four years. If the exercise price of the stock-based compensation grants is equal to the fair value of our stock on the date of grant, no compensation expense is recorded.

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     The fair value of options granted for all periods presented was estimated on the applicable grant dates using the Black-Scholes option pricing model. Significant weighted average assumptions used to estimate fair value for all years include risk-free interest rates ranging from 3% to 6%, expected lives of ten years, no expected dividends, and volatility factors ranging from 62% to 107%. Had compensation expense been determined consistent with the other method set forth in SFAS No. 123, our net loss would have been increased to the following pro forma amounts (in thousands, except per share information):

5. Investment in VirRx, Inc.

     We have an agreement with VirRx, Inc. to purchase shares of VirRx’s Series A Preferred Stock for $150,000 on the first day of each fiscal quarter through January 1, 2006. We purchased $150,000 and $450,000 of this stock for cash during the three and nine month periods ended September 30, 2004, respectively. We recorded these purchases as research and development expense. VirRx is required to use the proceeds from these stock sales in accordance with the terms of a collaboration and license agreement between VirRx and us for the development of VirRx’s technologies. We may unilaterally terminate this collaboration and license agreement with 90 days prior notice, which would also terminate the requirement for us to make any additional stock purchases. In accordance with the provisions of Financial Accounting Standards Board Interpretation 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51,” VirRx is not consolidated in our financial statements. For additional discussion of our agreements with VirRx, see Note 6 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 5, 2004.

6. Notes Payable

     In May 2004, we amended the mortgage note payable related to our facilities. The original $6.0 million principal balance of our note payable was increased to $7.8 million. The proceeds from this increase were used to pay in full the principal and interest outstanding on another mortgage note payable with an original principal balance of approximately $3.3 million, which resulted in that other note being retired. In addition to this note retirement, the proceeds from this loan amendment were used to pay the costs related to this transaction of $96,000 and to add $668,000 to our cash and cash equivalents.

     The amended mortgage note payable bears interest at 6.25%. The note is payable in monthly installments of $56,400 until May 2006. At that time, we may extend the note to a November 2009 maturity date. Upon such extension, the interest rate is modified to the lesser of (a) 2.5% above the five-year U.S. Treasury Bond Note rate or (b) 8.5%, and principal and interest on the note become payable in equal monthly installments based on a 225-month amortization period. The principal balance outstanding on the note’s extended maturity date is payable in full at that time.

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     During the three months ended September 30, 2004, we financed $112,000 of equipment under notes payable. These notes payable bear substantially the same terms as our pre-existing notes payable for equipment, which are more fully described in Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the SEC on March 5, 2004.

7. Acquisition of Magnum Therapeutics, Inc.

     In October 2004, we acquired all of the outstanding capital stock of Magnum Therapeutics, Inc. (Magnum), a company owned by one of our executive officers. We paid approximately $1.6 million for the Magnum stock by issuing approximately 252,000 shares of our common stock at an agreed-upon value of $6.51 per share. Magnum’s primary assets are (1) the right to receiving funding under a grant from the National Institutes of Health and (2) certain patents and intellectual property. In the event certain of Magnum’s technologies result in commercial products, we may be obligated to pay royalties related to the sales of those products to certain third parties. We will record this transaction in our financial statements during the quarter ending December 31, 2004. As of September 30, 2004, we had received $794,000 from Magnum for contract research services we performed for Magnum, which we recorded as a liability on our balance sheet as of September 30, 2004, pending finalizing the written service agreements for this work and the recording of the acquisition of Magnum during the quarter ending December 31, 2004.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Product Development Overview

     Introgen Therapeutics, Inc. was incorporated in Delaware in 1993. We are a biopharmaceutical company focused on the discovery, development and commercialization of targeted therapies for the treatment of cancer and other diseases.

     Our primary approach for the treatment of cancers is to deliver genes that increase production of normal cancer-fighting proteins. Rather than acting to repair or replace aberrant or missing genes and thereby creating a long-term or permanent change to the patient’s genome, our products work in a different manner by acting as templates for the transient in vivo production of proteins that have pharmacological properties. The resultant proteins engage disease-related molecular targets or receptors to produce a specific therapeutic effect.

     We believe the use of genes that do not integrate into the patient’s genome and that are cleared from the body after administration in order to induce the production of biopharmaceutical proteins is an emerging field presenting a new approach for treating many cancers without the toxic side effects common to traditional therapies. We have developed significant expertise in identifying therapeutic genes, which are genes that may be used to treat disease, and in using what we believe are safe and effective delivery systems to transport these genes to the cancer cells. We believe we are able to treat a number of cancers in a way that kills cancer cells without harming normal cells.

ADVEXIN® Therapy (p53)

     Our lead product candidate, ADVEXIN therapy, combines the p53 gene with a non-replicating, non-integrating adenoviral gene delivery system we have developed and extensively tested. The p53 gene is one of the most potent members of a group of naturally-occurring tumor suppressor genes, which act to kill cancer cells, arrest cancer cell growth and protect cells from becoming cancerous.

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     We are conducting two multi-national, multi-site Phase 3 clinical trials of ADVEXIN therapy, both by itself and in combination with chemotherapy, in recurrent squamous cell cancer of the head and neck. Multi-national, multi-site Phase 2 clinical trials of ADVEXIN therapy in 217 patients with recurrent squamous cell cancer of the head and neck treated previously with surgery, radiation or chemotherapy indicated treatment with ADVEXIN therapy provided tumor growth control, including shrinkage and eradication of some tumors, and was well tolerated. Monotherapy data from these Phase 2 clinical trials indicate ADVEXIN therapy compares favorably with Erbitux® in a number of areas, including tumor growth control and survival.

     The design of our two Phase 3 clinical trials has been reviewed by the Food and Drug Administration (FDA) under a protocol assessment. We have received Fast Track designation for ADVEXIN therapy from the FDA. By designating ADVEXIN therapy as a Fast Track product, the FDA will take actions to expedite the evaluation and review of the ADVEXIN therapy marketing application. ADVEXIN therapy for head and neck cancer is also designated as an Orphan Drug under the Orphan Drug Act, which may give us seven years of marketing exclusivity for ADVEXIN therapy for this indication if ADVEXIN therapy is approved by the FDA.

     We have completed or are currently conducting numerous Phase 1 and Phase 2 clinical trials of ADVEXIN therapy by itself and in combination with chemotherapy or radiation therapy in a variety of cancers. These clinical trials include:

•		A Phase 2 clinical trial of ADVEXIN therapy combined with systemic chemotherapy for the treatment of breast cancer;
•		A Phase 2 clinical trial of ADVEXIN therapy in squamous cell carcinoma of the oral cavity, or oropharynx, that can be removed surgically, to assess the feasibility, efficacy and safety of administering ADVEXIN therapy at the time of surgery for suppression of remaining tumor cells, followed by a combination of chemotherapy and radiation therapy;
•		A completed Phase 2 clinical trial of ADVEXIN therapy administered as a complement with radiation therapy in non-small cell lung cancer;
•		A Phase 1/early Phase 2 clinical trial of ADVEXIN therapy for the treatment of advanced, unresectable squamous cell esophageal cancer;
•		A Phase 1/early Phase 2 clinical trial in which ADVEXIN therapy is being administered to prevent precancerous oral lesions from developing into cancerous lesions;
•		A Phase 1 clinical trial of ADVEXIN therapy in prostate cancer; and
•		A Phase 1 clinical trial of ADVEXIN therapy in bronchoalveolar cancer.

     To date, clinical investigators at sites in North America, Europe and Japan have treated over 500 patients with ADVEXIN therapy, establishing a large safety database.

     A growing body of data suggests ADVEXIN therapy demonstrates clinical activity in a variety of cancer indications. Safety data from our clinical trials suggests this activity may be achieved without the treatment-limiting side effects frequently associated with many other cancer therapies.

     Our clinical trials indicate ADVEXIN therapy is well tolerated as a monotherapy. The addition of ADVEXIN therapy to standard chemotherapy or radiation does not appear to increase the frequency or severity of side effects normally associated with these treatment regimens.

     Recent pre-clinical studies provide new insight into the molecular pathways by which the p53 gene, the active component of ADVEXIN therapy, kills tumor cells. These pre-clinical studies were undertaken to provide additional

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molecular data supporting the activity observed during the clinical development of ADVEXIN therapy and to provide additional information regarding the specific pathways that mediate the observed clinical effects of ADVEXIN therapy. The studies were conducted by our collaborators at Okayama University in Japan and at The University of Texas M. D. Anderson Cancer Center and were published in a 2004 issue of Molecular Cancer Therapeutics. Other pre-clinical data suggest the enhanced therapeutic effects of a combination of ADVEXIN and Erbitux therapies in an animal model of human non-small cell lung cancer. Other pre-clinical studies conducted by our collaborators at Wayne State University, the Karmanos Cancer Institute located in Detroit, Michigan and the University of California — Irvine, as published in a 2004 issue of The Laryngoscope, show that the combination of ADVEXIN therapy and docetaxel resulted in increased levels of programmed cell death in head and neck tumor cells.

     We hold the worldwide rights for pre-clinical and clinical development, manufacturing, marketing and commercialization of ADVEXIN therapy. Two patients, who were part of our ADVEXIN therapy studies program and who had recently celebrated their five-year survival anniversary, were recently featured in Conquest magazine, a publication of The University of Texas M. D. Anderson Cancer Center.

INGN 241 (mda-7)

     Our second product candidate, INGN 241, uses the mda-7 gene, a promising tumor suppressor gene. We believe the mda-7 gene has broad potential to induce apoptosis, or cell death, in many types of cancer. We have combined the mda-7 gene with our adenoviral gene delivery system to form INGN 241. Our pre-clinical studies have shown the protein produced by INGN 241 suppresses the growth of many cancer cells, including those of the breast, lung, ovaries, colon, prostate and the central nervous system, while not affecting growth of normal cells. It appears mda-7 functions via a novel mechanism of tumor suppression because INGN 241 kills cancer cells, even if other tumor suppressor genes, including p53, are not functioning properly.

     We have conducted pre-clinical work indicating that in addition to its known activity as a tumor suppressor gene, the protein produced by the mda-7 gene may also stimulate the body’s immune system to kill metastatic tumor cells and to protect the body against cancer. These indications offer the potential of providing an added advantage in treating various cancers because mda-7 may attack cancer using two different mechanisms. Because the mda-7 gene may act as a cytokine, or immune system modulator, it is also known as interleukin-24, or IL-24. The mda-7 gene and the protein it produces may also work as a radiation sensitizer to make several types of human cancer cells more susceptible to radiation therapy as evidenced by observations during our pre-clinical work. We have published the results of a pre-clinical study indicating INGN 241 may suppress the growth in vivo of non-small cell lung cancer through apoptosis in combination with anti-angiogenesis.

     We have completed enrollment of a Phase 1/early Phase 2 clinical trial using INGN 241 to evaluate safety, mechanism of action and efficacy in approximately 25 patients with solid tumors. This trial indicated that in patients with solid tumors, INGN 241 was well tolerated, was biologically active and displayed minimal toxicity associated with its use. As a successor to this work, we have initiated a Phase 2 clinical trial of INGN 241 in patients with metastatic melanoma to further determine if intratumoral injection of INGN 241 can exert regional and systemic biological activity, with secondary objectives that include analysis of toxicity, tumor response and induction of specific immunity against the melanoma tumors. This Phase 2 clinical trial is designed to enroll up to 25 patients. We have a Small Business Technology Transfer grant from the National Cancer Institute to support work on this clinical trial. This grant will provide $1.5 million of remaining funding in future periods during the course of this clinical trial to evaluate the efficacy and biologic activity of INGN 241 in this indication.

     Pre-clinical studies in INGN 241 in breast cancer cell lines have shown treatment with a combination of INGN 241 plus Herceptin® induces cell death in Her-2/neu positive breast cancer cells at a rate above that seen with either agent alone. In these studies, we noted that while Herceptin exhibited no activity on Her-2/neu negative cells, the combination with INGN 241 did induce cell death in these cells. Data from these pre-clinical studies were recently published in the journal Surgery. The results of other pre-clinical studies published in the journal Molecular Therapy indicate inhibition of tumor growth by INGN 241 in combination with radiotherapy.

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INGN 225 (p53 immunotherapy)

     As a supplement to our gene-induced therapeutic protein programs, we are developing INGN 225 using ADVEXIN therapy to create a highly specific therapeutic cancer vaccine that stimulates a particular type of immune system cell known as a dendritic cell. Published research in Current Opinion in Drug Discovery & Development concluded ADVEXIN therapy can be used with a patient’s isolated dendritic cells as an antigen delivery and immune enhancing therapeutic strategy. Pre-clinical testing has shown the immune system can recognize and kill tumors after treatment with dendritic cells stimulated by ADVEXIN therapy. These findings suggest a vaccine consisting of ADVEXIN therapy stimulated dendritic cells (INGN 225) could have broad utility as a treatment for progression of solid tumors. We are conducting a Phase 1/early Phase 2 clinical trial, performed in collaboration with the University of South Florida and the Moffitt Cancer Center, in patients with small-cell lung cancer and are initiating a Phase 1/early Phase 2 clinical trial in patients with breast cancer, both using INGN 225 after treatment with standard chemotherapy.

INGN 401 (FUS-1)

     INGN 401 is our systemically-delivered, nanoparticle tumor suppressor therapy that uses the FUS-1 gene, a gene frequently altered or missing in the development of many solid tumors. Pre-clinical studies have shown gene delivery of FUS-1, which we exclusively license from M. D. Anderson Cancer Center, significantly inhibits the growth of tumors and greatly reduces the metastatic spread of lung cancer in animals when delivered to tumor cells via either an adenoviral or a non-viral delivery system. Results from some of these pre-clinical studies have been published in Cancer Research and Cancer Gene Therapy. A Phase 1 clinical trial is ongoing at M. D. Anderson Cancer Center testing INGN 401 in patients with advanced non-small cell lung cancer who have previously been treated with chemotherapy.

Other Programs

     We are conducting research on additional genes, including the BAK gene, which hold promise as therapeutic candidates. The BAK gene is a pro-apoptotic gene that kills cancer cells. We are working with our collaborators at M. D. Anderson Cancer Center to identify and develop both viral and non-viral vectors containing this gene. We have exclusive rights to use the BAK gene under a license with Tanox, Inc., the rights of which were previously held by LXR Biotechnology, Inc.

     We license from M. D. Anderson Cancer Center a group of genes known as the 3p21.3 family of genes. Pre-clinical research performed on these genes by collaborators at The University of Texas Southwestern Medical Center and M. D. Anderson Cancer Center suggests the 3p21.3 genes play a critical role in the suppression of tumor growth in lung and other cancers. This family of genes includes the FUS-1 gene we are testing in a Phase 1 clinical trial for INGN 401. We are working with M. D. Anderson Cancer Center to further evaluate other 3p21.3 genes as clinically relevant therapeutics.

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

     We are investigating vector technologies for delivering gene-based products into targeted cells. Through our strategic collaboration with VirRx, Inc., we are developing INGN 007, a replication-competent viral therapy that over-expresses an adenoviral gene and thereby causes rapid disruption of tumor cells in which the adenovirus replicates. Pre-clinical testing indicates INGN 007 can eradicate human tumors in animal models. We anticipate pursuing clinical confirmation of this therapeutic candidate. We are also evaluating whether this replicating viral construct could form the basis of a self-amplifying delivery system, which could complement our existing

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replication-disabled, adenoviral gene delivery system in selected therapeutic scenarios. We are working also with VirRx to develop another novel oncolytic adenovirus, designated INGN 009, which has been engineered to kill cancer cells through viral replication and which has been designed to kill cells carrying a mutation common in many colon cancers. The results of several pre-clinical studies indicate these viral therapies can be modified so their activity is targeted to tumor cells. In addition, their anti-cancer effects can be enhanced to produce proteins that kill cancer cells.

     Data from pre-clinical studies indicate a proprietary, non-viral gene delivery system we control results in prolonged expression of delivered genes in mice implanted with human lung tumors. Repeated injections of the non-viral vector produce enhanced effects in animals bearing tumors. We believe our non-viral formulation may produce robust and persistent gene expression in cancer patients, which in turn may lead to enhanced clinical effects.

Manufacturing and Process Development

     We own and operate a state-of-the-art, validated manufacturing facility we believe complies with the FDA’s current Good Manufacturing Practices requirements, commonly known as CGMP requirements. We produce ADVEXIN therapy in this facility for use in our Phase 1, 2 and 3 clinical trials. The design and processes of this facility have been reviewed with the FDA. The validation of our manufacturing processes is ongoing. We plan to use this facility for our market launch of ADVEXIN therapy. To date, we have produced over 20 batches of ADVEXIN therapy clinical material, including all clinical material used in the Phase 1, 2 and 3 clinical trials for this product candidate. In addition, we have entered into agreements with third parties under which we have provided process development and manufacturing services related to products they are developing. We recently completed construction of a separate, second facility for continued production of INGN 241 and other investigative materials for use in clinical trials.

Patents and Intellectual Property

     We place substantial emphasis on developing and maintaining a strong intellectual property program. We own or exclusively control numerous patents and pending patent applications in the United States and elsewhere covering ADVEXIN therapy and INGN 241 (mda-7) therapy in particular, adenoviral p53 and adenoviral mda-7 in general, clinical applications of adenoviral and other forms of p53 and mda-7, and adenoviral production. Certain of our patents are licensed from The University of Texas System, Columbia University and Aventis Pharmaceuticals, Inc. The patents directed to clinical applications of p53 broadly cover the use of p53 in combination with standard chemotherapy and clinical therapy with adenoviral p53 in general. Our adenoviral production patent position is of particular potential commercial importance in that it covers most methods currently in use by us and others for commercial scale adenoviral production and purification processes. We have recently been successful in having two of three European patents held by our competitors finally revoked by the technical board of appeals of the European Patent Office, with no possibility of further appeal, with the one remaining European patent revoked but still subject to appeal by the patent holder. In addition to our p53 and mda-7 intellectual property position, we own or have exclusively licensed rights in a number of other patents and applications directed to the clinical application of various other tumor suppressor genes and oncolytic viruses.

     Recent notable intellectual property activity includes the issuance of the following United States patents:

•		No. 6,805,858, which covers several methods by which ADVEXIN therapy is administered to cancer patients. This patent is directed to various routes of administration of adenoviral p53, including virtually all of those routes currently being used for adenoviral delivery, such as direct administration to the tumor or to the body region where the tumor is located, as well as systemic, intravenous or intratracheal delivery. This patent was issued to the Board of Regents of the University of Texas System and is exclusively licensed to us.
•		No. 6,726,907, which broadly covers purified adenoviral compositions or preparations without limitation as to the type of adenovirus, the use or application of the adenovirus and how the adenovirus is produced. This

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		patent complements and broadens a previously issued patent in our intellectual property portfolio directed to processes for purifying adenoviruses. This patent was issued directly to us.
•		No. 6,740,320, which broadly covers adenoviral p53 constructs for use in therapeutic applications and is not limited to our ADVEXIN therapy adenoviral p53 product. This patent extends our patent coverage for ADVEXIN therapy to the year 2021, not taking into account possible patent extensions. We believe this patent establishes our control of ADVEXIN therapy specifically and pharmaceutical adenoviral p53 products in general. This patent was issued to the Board of Regents of the University of Texas System and is exclusively licensed to us.
•		No. 6,689,600, which covers our technology for producing long-term, storage-stable adenovirus. This patent addresses the need for formulations that permit the long-term storage of adenoviral therapeutics under regular refrigerated conditions. We believe the storage-stable formulations described in this patent may eventually replace formulations currently in use by the adenovirus industry by providing conveniences and efficiencies in storage, distribution, pharmacy handling and clinical administration. This patent was issued directly to us.
•		No. 6,720,408, which directly covers the mda-7/IL-24 tumor suppressor gene. This gene forms the genetic basis of our INGN 241 product. This patent, which was issued to the trustees of Columbia University, is exclusively licensed to us for gene therapy applications through an agreement with Corixa Corporation.

Acquisition of Magnum Therapeutics, Inc.

     In October 2004, we acquired all outstanding capital stock of Magnum Therapeutics, Inc. (Magnum), a company owned by one of our executive officers. We paid approximately $1.6 million for the Magnum stock by issuing approximately 252,000 shares of our common stock at an agreed-upon value of $6.51 per share. Magnum’s primary assets are (1) the right to receiving funding under a grant from the National Institutes of Health and (2) certain patents and intellectual property. In the event certain of Magnum’s technologies result in commercial products, we may be obligated to pay royalties related to the sales of those products to certain third parties.

Financial Overview

     Since our inception in 1993, we have used our resources primarily to conduct research and development activities for ADVEXIN therapy and, to a lesser extent, for other product candidates. At September 30, 2004, we had an accumulated deficit of $113.0 million. We anticipate we will incur losses in the future that may be greater than losses incurred in prior periods. At September 30, 2004, we had cash, cash equivalents and short-term investments of $20.8 million. During the nine months ended September 30, 2004, we used $15.6 million of cash, cash equivalents and short-term investments to conduct our business. We expect to incur substantial additional operating expenses and losses over the next several years as our research, development, pre-clinical testing and clinical trial activities increase and as we expand our operations and develop systems to support commercialization of our product candidates. These losses, among other things, have caused and may cause our total assets, stockholders’ equity and working capital to decrease. Currently, we earn revenue or income from federal research grants, contract services and process development activities, the lease of a portion of our facilities to M. D. Anderson Cancer Center and interest income on cash placed in short-term, investment grade securities. In order to fund our operating losses, we will need to raise additional funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. We do not know whether such additional financing will be available when needed, or on terms favorable to us or our stockholders.

     In June 2003, we sold 2.0 million shares of our common stock for an aggregate purchase price of $11.5 million to selected institutional investors through a private placement pursuant to Regulation D promulgated under the Securities Act of 1933, as amended. Our net proceeds from this transaction, after related fees and expenses, were $10.8 million. In connection with this sale, we issued warrants to purchase 400,000 shares of our common stock at $7.89 per share. These warrants are exercisable at any time by the warrant holders through June 2008. Beginning in

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June 2005, we may force the exercise of these warrants if the average closing market price of our common stock during any 20 consecutive trading days is greater than $15.78 per share. The resale of the shares of common stock issued and issuable upon the exercise of the warrants issued in this transaction was registered on a registration statement on Form S-3, effective August 7, 2003 (Commission File No. 333-107028).

     In December 2003, we sold approximately 2.9 million shares of our common stock in a direct equity offering pursuant to a shelf registration for an aggregate purchase price of approximately $20.0 million. Our net proceeds from this transaction, after related fees and expenses, were approximately $18.5 million. The issuance of the shares of common stock in this transaction was registered pursuant to a registration statement on Form S-3, effective August 25, 2003 (Commission File No. 333-107799) registering the issuance of shares of our common stock with an aggregate offering price of $100.0 million. We may sell additional shares of our common stock pursuant to this registration statement in the future.

     We have a Small Business Technology Transfer grant from the National Cancer Institute to support our Phase 2 clinical trial of INGN 241 in patients with metastatic melanoma. This grant will provide $1.5 million of remaining funding in future periods during the course of this clinical trial to evaluate the efficacy and biologic activity of INGN 241 in this indication.

     During the nine months ended September 30, 2004, we amended the mortgage note payable related to our facilities. The original $6.0 million principal balance of our note payable was increased to $7.8 million. The proceeds from this increase were used to pay in full the principal and interest outstanding on another note payable with an original principal balance of approximately $3.3 million, which resulted in that other note being retired. In addition to this note retirement, the proceeds from this loan amendment were used to pay the costs related to this transaction and to add $668,000 to our cash and cash equivalents. The amended mortgage note payable bears interest at 6.25%. The note is payable in monthly installments of $56,400 until May 2006. At that time, we may extend the note to a November 2009 maturity date. Upon such extension, the interest rate is modified to the lesser of (1) 2.5% above the five-year U.S. Treasury Bond Note rate or (2) 8.5%, and principal and interest on the note become payable in equal monthly installments based on a 225-month amortization period. The principal balance outstanding on the note’s extended maturity date is payable in full at that time.

Summary of Significant Accounting Policies

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

     Cash, Cash Equivalents and Short-Term Investments. Our cash, cash equivalents and short-term investments include investments in short-term, investment grade securities, which currently consist primarily of United States federal government obligations. These investments are classified as held-to-maturity and are carried at amortized cost. At any point in time, amortized costs may be greater or less than fair value. If investments are sold prior to maturity, we could incur a realized gain or loss based on the fair market value of the investments at the date of sale. We could incur future losses on investments if the investment issuer becomes impaired or the investment is downgraded.

     Research and Development Expenses. In conducting our clinical trials of ADVEXIN therapy and other product candidates, we procure services from numerous third-party vendors. The cost of these services constitutes a significant portion of the cost of these trials and of our research and development expenses in general. These vendors do not necessarily provide us billings for their services on a regular basis and, accordingly, are often not a timely source of information to determine the costs we have incurred relative to their services for any given accounting period. As a result, we make significant accounting estimates as to the amount of costs we have incurred relative to these vendors in each accounting period. These estimates are based on numerous factors, including, among others, costs set forth in our contracts with these vendors, the period of time over which the vendor will

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render the services and the rate of enrollment of patients in our clinical trials. Using these estimates, we record expenses and accrued liabilities in each accounting period we believe fairly represent our obligations to these vendors. Actual results could differ from these estimates, resulting in increases or decreases in the amount of expense recorded and the related accrual. Our experience has been our estimates have reasonably reflected the expenses we actually incur.

Results of Operations

Comparison of the Quarters Ended September 30, 2004 and September 30, 2003

Revenues

     Contract Services, Grant and Other Revenue. In the 2003 and 2004 periods, we earned revenue from (a) research grants from U.S. Government agencies and (b) contract research services provided to Aventis Pharmaceuticals Products, Inc. (Aventis), one of our stockholders, under an agreement through which Aventis provided funding for the conduct of a Phase 2 clinical trial of ADVEXIN therapy in breast cancer. In the 2003 period, we also earned contract services revenues from third parties under agreements to provide manufacturing process development services and to produce products for them. Total contract services, grant and other revenue was $209,000 for the quarter ended September 30, 2004, compared to $9,000 for the quarter ended September 30, 2003. This increase was primarily due to increased grant funding under our Small Business Technology Transfer grant from the National Cancer Institute to support our Phase 2 clinical trial of INGN 241 in patients with metastatic melanoma as a result of our increased activity related to that research. During the 2004 period, we received $794,000 from Magnum for contract research services performed on its behalf, which we recorded as a liability on our balance sheet as of September 30, 2004, pending finalizing the written service agreements for this work and the recording of the acquisition of Magnum during the quarter ending December 31, 2004.

Costs and Expenses

     Research and Development. Research and development expenses were $5.7 million for the quarter ended September 30, 2004, compared to $3.6 million for the quarter ended September 30, 2003, an increase of 58%. These expenses included compensation expense related to stock options of zero dollars in the 2004 period and $49,000 in the 2003 period. Research and development expenses increased as a result of increased activity related to the preparation of the Biologics License Application (BLA) for ADVEXIN therapy for filing with the FDA, which resulted in us hiring more employees and engaging additional consultants to perform this work.

     General and Administrative. General and administrative expenses were $1.7 million for the quarter ended September 30, 2004, compared to $1.4 million for the quarter ended September 30, 2003, an increase of 21%. These expenses included compensation expense related to stock options of $57,000 in the 2004 period and $120,000 in the 2003 period. General and administrative expenses increased primarily due to increased activity related to the preparation of the BLA for ADVEXIN therapy for filing with the FDA, which resulted in us hiring more employees and engaging additional consultants to perform this work.

     Compensation Related to the Issuance of Stock Options. Compensation related to the granting of stock options was $57,000 for the quarter ended September 30, 2004, compared to $169,000 for the quarter ended September 30, 2003, a decrease of 66%. This decrease was a result of (a) deferred compensation from stock options granted in periods prior to 2003 becoming fully amortized in early 2004, resulting in no further expense charges related to those options during the three months ended September 30, 2004, offset by (b) expense charges related to options granted to two non-employees/non-directors during 2004 computed using the variable, fair-value method of accounting.

     The amount of stock option compensation expense to be recorded in future periods may increase if additional options are issued at a price below the market price of common stock at the date of grant, the market value of our stock increases or additional options are granted to individuals or entities other than employees or directors. This compensation expense may decrease if unvested options for which deferred compensation has been recorded are

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subsequently forfeited or as previously recorded deferred compensation becomes fully amortized.

Interest Income, Interest Expense and Other Income

     Interest income was $70,000 for the quarter ended September 30, 2004, compared to $402,000 for the quarter ended September 30, 2003, a decrease of 83%. Included in the 2003 amount is $350,000 we received from the settlement of litigation related to a decline during the quarter ended March 31, 2001, in the market value of certain commercial paper we held as an investment at that time. Excluding the amount from this settlement, interest income for the quarter ended September 30, 2003, was $52,000. Interest income in 2004 increased compared to interest income in 2003, exclusive of the litigation settlement, primarily due to higher yields on invested funds in 2004 compared to 2003.

     Interest expense was $125,000 for the quarter ended September 30, 2004, compared with $153,000 for the quarter ended September 30, 2003, a decrease of 18%. This decrease was primarily due to certain of our capital leases becoming fully paid during periods subsequent to September 30, 2003.

     Other income was $269,000 for the quarter ended September 30, 2004, compared to $292,000 for the quarter ended September 30, 2003, a decrease of 8%. This change was primarily due to variations in the amount of facilities operating expenses we recover from tenants to whom we sublease space in our facilities.

Comparison of the Nine Months Ended September 30, 2004 and September 30, 2003

Revenues

     Contract Services, Grant and Other Revenue. In the 2003 and 2004 periods, we earned revenue from (a) research grants from U.S. Government agencies and (b) contract research services provided to Aventis under an agreement through which Aventis provided funding for the conduct of a Phase 2 clinical trial of ADVEXIN therapy in breast cancer. In the 2003 period, we also earned contract services revenues from third parties under agreements to provide manufacturing process development services and to produce products for them. Total contract services, grant and other revenue was $592,000 for the nine months ended September 30, 2004, compared to $302,000 for the nine months ended September 30, 2003. This increase was primarily due to increased grant funding under our Small Business Technology Transfer grant from the National Cancer Institute to support our Phase 2 clinical trial of INGN 241 in patients with metastatic melanoma as a result of increased activity related to that research. During the 2004 period, we received $794,000 from Magnum for contract research services performed on its behalf, which we recorded as a liability on our balance sheet as of September 30, 2004, pending finalizing the written service agreements for this work and the recording of the acquisition of Magnum during the quarter ending December 31, 2004.

Costs and Expenses

     Research and Development. Research and development expenses were $16.0 million for the nine months ended September 30, 2004, compared to $10.9 million for the nine months ended September 30, 2003, an increase of 47%. These expenses included compensation expense related to stock options of $44,000 in the 2004 period and $171,000 in the 2003 period. Research and development expenses increased as a result of increased activity related to the preparation of the BLA for ADVEXIN therapy for filing with the FDA, which resulted in us hiring more employees and engaging additional consultants to perform this work.

     General and Administrative. General and administrative expenses were $5.3 million for the nine months ended September 30, 2004, compared to $4.6 million for the nine months ended September 30, 2003, an increase of 15%. These expenses included compensation expense related to stock options of $104,000 in the 2004 period and $1.0 million in the 2003 period. General and administrative expenses increased primarily due to increased activity related to the preparation of the BLA for ADVEXIN therapy for filing with the FDA, which resulted in us hiring more employees and engaging additional consultants to perform this work. Also, in the 2004 period, we expensed $381,000 of costs incurred with respect to securities offering activities for the sale of our common stock, which offering was not completed.

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     Compensation Related to the Issuance of Stock Options. Compensation related to the issuance of stock options was $148,000 for the nine months ended September 30, 2004, compared to $1.2 million for the nine months ended September 30, 2003, a decrease of 88%. This compensation for the 2003 period arose primarily as a result of:

•		Stock options granted to certain members of our Board of Directors for which some of the options were fully vested upon issuance and had exercise prices below the market value of our common stock at the date of grant, which resulted in compensation expense;
•		Stock options, which were fully vested upon issuance, issued to our corporate secretary, who is not a director or employee and for whom option grants result in compensation charges under fair value accounting; and
•		Amortization of deferred compensation remaining from stock options granted in earlier periods.

     This compensation expense decreased in the 2004 period because:

•		The options granted to members of our Board of Directors during the 2004 period had exercise prices equal to the market value of our common stock at the date of grant, resulting in no compensation expense;
•		The options granted to our corporate secretary during the 2004 period vest over multiple periods, resulting in recognition of some compensation expense arising from those options being deferred to future periods; and
•		Deferred compensation related to previously granted stock options became fully amortized in previous periods.

     The amount of stock option compensation expense to be recorded in future periods may increase if additional options are issued at a price below the market price of common stock at the date of grant, the market value of our stock increases or additional options are granted to individuals or entities other than employees or directors. This compensation expense may decrease if unvested options for which deferred compensation has been recorded are subsequently forfeited or as previously recorded deferred compensation becomes fully amortized.

Interest Income, Interest Expense and Other Income

     Interest income was $196,000 for the nine months ended September 30, 2004, compared to $938,000 for the nine months ended September 30, 2003, a decrease of 79%. Included in the 2003 amount is $775,000 we received from the settlement of litigation related to a decline during the quarter ended March 31, 2001, in the market value of certain commercial paper we held as an investment at that time. Excluding the amount from this settlement, interest income for the nine months ended September 30, 2003, was $163,000. Interest income in 2004 increased compared to interest income in 2003, exclusive of the litigation settlement, primarily due to higher average cash balances during the 2004 period as a result of the proceeds received from the sales of our common stock in June 2003 and December 2003 and higher yields on invested funds in 2004 compared to 2003.

     Interest expense was $353,000 for the nine months ended September 30, 2004, compared with $483,000 for the nine months ended September 30, 2003, a decrease of 27%. This decrease was primarily due to our capital leases becoming fully paid during periods subsequent to September 30, 2003.

     Other income was $825,000 for the nine months ended September 30, 2004, compared to $794,000 for the nine months ended September 30, 2003, an increase of 4%. This change was primarily due to variations in the amount of facilities operating expenses we recover from tenants to whom we sublease space in our facilities.

Liquidity and Capital Resources

     We have incurred annual operating losses since o