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UNITED STATES

FORM 10-K

		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

For the fiscal year ended December 31, 2000.

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

For the transition period from              to               .

Commission File Number 0-31275

LARGE SCALE BIOLOGY CORPORATION

3333 Vaca Valley Parkway, Suite 1000, Vacaville, CA 95688

(707) 446-5501

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

     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    No 

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

     The aggregate market value of common stock held by non-affiliates of the Registrant was $89.5 million as of March 23, 2001.

     The number of shares outstanding of Registrant’s common stock as of March 23, 2001:

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s definitive proxy statement, which is expected to be filed not later than 120 days after the Registrant’s fiscal year ended December 31, 2000, to be delivered in connection with the Registrant’s Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.

PART I

Item 1. Business

Overview

      Large Scale Biology Corporation is using its proteomics and functional genomics technologies to develop products which we believe will allow diseases to be rapidly and correctly diagnosed, and treated with safe and effective personalized therapies which can be efficiently delivered. We are focused on proteins, the fundamental “nanomachines” of biology that carry out the myriad functions necessary to keep us alive, and when made incorrectly or in the wrong amounts can lead to disease. All biological processes, including diseases and responses to therapeutics, involve changes in proteins.

      Our technologies are in three major areas:

	•	Proteomics — the study of proteins in living organisms;
	•	Functional genomics — the study of how, when, where and which proteins are made in living organisms; and
	•	Biomanufacturing — the production of proteins.

      We believe that we can apply our technologies to enable the transformation of information on proteins and gene function into product opportunities, such as drugs, drug targets, therapeutics, diagnostics, the evaluation of drug effectiveness and toxicity and the production of therapeutic proteins.

      From our inception in 1987 until February 1999, our main focus was the development of our GENEWARE technology, described below. In February 1999, we acquired our proteomics subsidiary and since the acquisition, we use our proteomics and functional genomics technologies to develop products that are proteins or that impact proteins.

Developments in the Year 2000

      In fiscal year 2000 we accomplished the following:

	•	Initial public offering — In the third quarter of 2000, we raised approximately $89 million from the initial public offering and sale of our common stock, or IPO.
	•	Phase I clinical trial commenced — In November 2000, we began a Phase I clinical trial of our GENEWARE-produced vaccines for the treatment of non-Hodgkin’s lymphoma.
	•	First version of the HUMAN PROTEIN INDEX, or HPI, completed — In December 2000, we completed the first version of the HPI representing all the major tissues of the body.
	•	Intellectual Property — Patents were issued in each of the key components of our technologies, and we filed patent claims covering over 150 unique genes that confer important agricultural traits derived from our functional genomics technology.

Scientific Background

      All living things are made up of one or more cells. Although scientists still have much to learn about how cells actually function, we do know that all cells have several basic components. Inside each plant and animal cell is a nucleus, which contains deoxyribonucleic acid, or DNA, that makes up the genetic code. Genes are composed of DNA, and when a gene is turned on, or expressed, the genetic code is copied and converted into a cell component called messenger ribonucleic acid, or mRNA. This messenger carries the genetic code to a specific part of the cell, which is outside the nucleus and is where proteins are made. Beyond carrying the genetic code for a protein, mRNA is not thought to be functional.

      The proteins that are produced from the genetic code are the essential components of cells. Changes either in protein structure, quantity and location occur in all diseases, including those that are due to genetic defects. Therefore, we believe that proteomics will become crucial in discovering and developing drugs that treat disease, and in predicting, diagnosing and monitoring diseases. Proteins can also serve as therapeutics themselves; a well-known example is insulin.

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      We believe that biotechnology is moving from the era of gene discovery into an era focused on identifying the functions of the proteins that genes produce. Determining function involves the discovery of the role or relationship that a gene or a protein has with a particular biological process and the consequences of modulating its activity. Gene function cannot necessarily be inferred from its DNA sequence or mRNA levels, or reliably derived from comparison to other genes of known function. Discovering gene functions requires the integration of gene sequence and protein function. We believe our key technologies, ProGEx and GENEWARE, address these needs. In addition, we believe that our biomanufacturing technology will enable us to produce commercially valuable proteins rapidly and cost effectively.

Our Proteomics Technology

      ProGEx is our automated, high-throughput system that shows the protein composition, or proteome, of cells and tissues. This automated system requires minimal human attention during operation. High throughput means many units may be processed on a routine basis. Protein composition is a listing of the specific proteins present in tissues and cells, and their amounts. We use our ProGEx system to rapidly identify and quantify proteins found in normal human tissues and cells and the changes in proteins that are caused by diseases or by the use of particular drugs. We believe that proteomics will become very important in discovering and developing therapeutics, and in predicting, diagnosing and monitoring diseases. We believe that our ProGEx system provides information that is currently unavailable using genomics technologies alone and that this information is more practical than that which can be obtained with many alternative approaches to studying proteins that exist today.

      We are using our ProGEx system to develop products which include:

	•	Human Protein Index, or HPI, database — our database of the detailed protein composition of all normal human tissues and cells;
	•	Molecular Anatomy and Pathology, or MAP, database — our database that describes the changes in protein composition associated with disease;
	•	Molecular Effects of Drugs, or MED, database — our database that describes changes in protein composition associated with the administration of therapeutics and other treatments;
	•	Marker Proteins — proteins that are significantly correlated with a specific disease or the use of a therapeutic, or that can be used as drug targets, therapeutics or diagnostics;
	•	Protein Chips — protein chips used as commercial research products to identify specific proteins for drug development, diagnose disease and determine the effect of drugs. A discrete device or “platform” in which a series of analytical tests for proteins are performed simultaneously on a single sample utilizing an array of protein specific antibodies is referred to as a “protein chip.”

      Our ProGEx system is based on the integration of a series of methods that begins with our proprietary sample preparation and separation process that is followed by the use of our two-dimensional gels, mass spectrometry and sophisticated software for storing and analyzing biological data. ProGEx gels separate the proteins in complex mixtures, such as those obtained from cell or tissue samples. This is achieved using a two-step protein separation technique. Proteins are separated first along one dimension according to their composition and then along a second dimension according to their size. This results in a rectangular map on which individual proteins appear as small spots. The size of each spot in a ProGEx gel indicates the relative amount of a particular protein present in the sample.

      We then use mass spectometry to identify the proteins separated by our ProGEx gels. Mass spectrometry is a physical measurement technique that measures the masses or molecular sizes of proteins and fragments of proteins. We use our proprietary, high-throughput, robotic system to selectively remove protein spots from ProGEx gels and to fragment the proteins. The mass of each protein fragment is measured by mass spectrometry. This data can then be used to identify the protein. We also use mass spectrometry to characterize unknown proteins.

      Our ProGEx system generates large amounts of data that must be effectively organized into databases to allow for its efficient use. Bioinformatics is the use of computer software to store and analyze biological data. Our proprietary KEPLER bioinformatics software allows us to analyze and integrate this data into our

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      In February 2001, to expand our proteomics capacity, we completed a state-of-the-art facility in Germantown, Maryland. We believe this new 53,000 sq. ft. facility is the world’s most automated center dedicated to quantitative proteomics. We believe that our new facility will enable us to correlate our high-throughput proteomics capabilities with our proprietary gene function discovery and protein manufacturing technologies. We believe that this linkage will relate the function of genes to normal and diseased cells and tissues and will accelerate the identification of drug targets and proteins that can be used as drugs.

      We believe the automated nature of our ProGEx system removes the variability inherent in more traditional, manually operated proteomics systems. This allows us to achieve highly reproducible results which are crucial when comparing data over time from the numerous types of drug treatments and diseased tissues in our databases. The high degree of resolution we obtain using our ProGEx system enables us to separate individual proteins out of complex mixtures, which is critical for the efficient identification of marker proteins that may be useful as drug targets or diagnostics. Traditional methods are generally incapable of separating and identifying the low abundance proteins that we are able to detect and characterize with our ProGEx system.

Our Functional Genomics Technology

      Our GENEWARE technology is a modified viral vector system used to insert genes rapidly and temporarily into host organisms for gene discovery, gene function analysis and protein production. Our GENEWARE viral vectors carry a gene sequence of interest into a cell of a host organism. The gene sequence is converted into mRNA inside the nucleus of the cell. The mRNA then moves outside the nucleus to the cytoplasm where it is translated into protein. Our GENEWARE technology does not use the traditional methods of inserting a gene into the genome of the host organism. To discover gene function, we insert a gene into the GENEWARE vector that is then inoculated onto a plant causing changes that we analyze. Our GENEWARE technology allows us to turn on or turn off protein production from unknown gene sequences, thereby enabling us to determine the function and potential commercial use of those genes and proteins.

      Current applications of our GENEWARE technology are to:

	•	Identify gene sequences;
	•	Determine gene functions; and
	•	Manufacture therapeutic proteins, vaccines and other commercially useful proteins.

Biomanufacturing

      Our GENEWARE technology also allows us to manufacture therapeutic proteins, peptides and other molecules in plants. We believe that our GENEWARE technology offers significant time and cost advantages over traditional genetic engineering systems because it does not require alteration of the genome of the host organism. We have a manufacturing facility in Owensboro, Kentucky for the custom production of protein products using GENEWARE technology, and we are in the process of obtaining FDA approval for pharmaceutical grade production.

      Since 1991, we have conducted USDA-approved field trials to demonstrate that our GENEWARE technology is environmentally safe. We believe that our GENEWARE technology is environmentally safe because the viral vector and the genes we insert cannot be incorporated into the plant genome and, thus, cannot be transmitted to the next generation of the plant in the seed or pollen. Our GENEWARE viruses eventually lose the foreign gene that has been inserted and the virus then reverts to a weakened version of the naturally occurring virus.

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Strategy

      Our principal objective is to commercialize products and technologies in the field of human healthcare as we establish a leadership position in proteomics, functional genomics and biomanufacturing. We plan to meet this objective principally through multiple commercial collaborations with pharmaceutical, biotechnology, chemical and other life science companies in the fields of proteomics and functional genomics.

      The key elements of our strategy include the following:

      Become the definitive source of information about human proteins. We are developing our HPI database, and we completed the first version of the HPI in December 2000. It includes information about approximately 115,000 proteins that represent all of the major tissues of the human body. Based on results of protein characterization obtained in our high-throughput mass spectrometry facility, we estimate that the HPI currently covers the protein products of 18,000 human genes. Recent estimates of the total number of genes present in a human range between 28,000 and 120,000. The rapid progress made in sequencing the entire human genome has created additional opportunities for us to integrate our proprietary protein information with information on the function of human genes. We intend to derive revenues from multiple sources using our HPI database. We plan to offer value-added information to collaborators, based on the depth of information and relational capabilities of our databases. We also intend to use our databases in our internal research and development projects to identify new drug targets; that is, proteins that can be used as drugs and diagnostics. The HPI will be used in identifying proteins for the purposes of developing therapeutics and protein chips for research, drug development and diagnosis of disease.

      Identify potential drug targets, therapeutic proteins and diagnostics. We are integrating our proprietary proteomic and genomic technologies to identify potential drug targets and proteins that can be used as therapeutics and diagnostics. We have expanded the utility of our GENEWARE technology for use in human and animal systems from its initial use to discover and determine the function of plant genes. We intend to commercialize these applications with collaborators as well as apply them to our internal research and development projects.

      Become the leading provider of protein information for protein chips and other diagnostic tools. With our ProGEx technology we can identify proteins, known as markers, that correlate with diseases or the effects of drugs. Our short-term strategy is to license these marker proteins individually to collaborators interested in using them as drug targets or as diagnostic tools. Our intermediate-term strategy is to provide protein information for protein chips. We believe that protein chips and other diagnostics will enable health care professionals and others to measure critical health and drug-related conditions quickly and affordably for research and diagnosis of disease. We have established a collaboration with Biosite Diagnostics Incorporated, or Biosite, to develop antibodies from our protein markers that can be used in protein chips and other diagnostic tools.

      Clinically test our first therapeutic product. We are conducting a clinical trial to ascertain the safety of our patient-specific vaccines for the treatment of non-Hodgkin’s lymphoma produced using our GENEWARE system. The Phase I clinical trial to determine safety of the vaccine began in November 2000 and is being conducted at Stanford University Hospital. We intend to establish a collaboration for the further development and commercialization of this vaccine once effectiveness is established in later clinical trials.

      Commercialize our protein production technology. Our biomanufacturing technology is based on our GENEWARE technology. It allows us to rapidly and efficiently produce proteins in plants that can be used as drugs, vaccines and diagnostics. We intend to manufacture our own proteins, and we will also seek to manufacture proteins for our customers. Part of the value of proteins discovered using our proteomics technology will be obtained by manufacturing these proteins ourselves for the treatment of diseases. We have successfully produced a number of our own candidate therapeutic proteins, including our patient-specific vaccines for the treatment for non-Hodgkin’s lymphoma and an enzyme known as alpha-galactosidase, which may be a treatment for Fabry’s disease.

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Commercial Opportunities

ProGEx applications

      Identification of disease-specific marker proteins for use as drug targets and diagnostics. We use our ProGEx system to obtain information about proteins from thousands of cell and tissue samples in a matter of weeks. This process takes significantly longer using traditional methods. With our ProGEx system we can produce pictures of the proteomes from normal and diseased cell and tissue samples that we can compare to identify marker proteins associated with disease. These marker proteins are potential drug targets or diagnostics. This is a critical step in the drug discovery and development process and is a difficult and labor-intensive task to perform using traditional methods. We also are correlating our proteomic information with genomic information on gene function to identify drug targets and therapeutic proteins. We expect to derive value from marker proteins by licensing them as potential drug targets, content for protein chips or as diagnostic tools to numerous collaborators, as well as developing protein therapeutics ourselves.

      Monitoring and predicting specific drug effects. We use our ProGEx system to obtain a picture of the proteome from a patient, laboratory animal, cell or tissue sample before and after treatment with a specific drug to identify the effects of that drug on the proteome. The binding of a specific drug to its protein target typically affects the abundance or properties of numerous proteins in a cell or tissue sample. These changes in protein levels and properties generally correlate with the therapeutic action and toxic side effects, if any, of the specific drug. We believe that understanding these changes will allow us to predict the therapeutic and toxic effects of specific drug candidates. We intend to form collaborations with pharmaceutical and biotechnology companies to use our technology to monitor and predict the effects of drug candidates in development.

      Expansion of our proteomics databases. We are using our ProGEx system to expand our HPI, MAP and MED databases. In order to mine the extensive information in the databases, which consists of millions of protein measurements, we have developed a unique proteomic database architecture and advanced bioinformatics software tools, which allow us to correlate information from all three of our databases. We intend to derive revenue by using the databases to identify novel drug targets, therapeutic proteins and diagnostic marker proteins for use by us and our collaborators.

GENEWARE applications

      We use our GENEWARE technology to discover the function of genes and to produce proteins. We have built a database of information about gene function, initially in plants, and are applying this technology to other organisms. Some of the commercial applications of our GENEWARE technology include:

      Identifying the function of human genes. We use our GENEWARE technology to deliver target genes into human and other mammalian cell cultures. We examine the specific structural biochemical and physiological effects of expressing or inactivating genes in mammalian cells. We intend to integrate our genomic information on gene function with our proteomic databases by correlating the function of genes with proteomic information from normal and diseased cells and tissues to identify drug targets and therapeutic proteins.

      Identifying the function of plant genes. We use our GENEWARE technology for the rapid, simultaneous screening of entire plant genomes of major commercial crops in significantly less time than can be done using traditional technologies. We are able to routinely screen 400 unique genes per day and identify their functions in plants based on focused, high-throughput robotic tests. We are currently commercializing this capability in collaboration with The Dow Chemical Company and Dow AgroSciences, LLC, or collectively, Dow, and expect to form other collaborations in agriculture, industrial chemistry, forestry and horticulture.

      Producing proteins on a large scale. We have developed technology for the large-scale recovery and purification of protein products produced in plants. We use our GENEWARE technology to insert a gene into a plant so that the plant produces the protein of interest. We harvest the plants and put them through a series of industrial processes to rapidly separate and purify the protein product. We have successfully produced and purified a number of potential protein therapeutic products including patient-specific vaccines against non-Hodgkin’s lymphoma, currently in a Phase I clinical trial, and alpha-galactosidase, which may be a treatment for Fabry’s disease.

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Collaborations

      We structure our current collaborations in a variety of ways. We obtain immediate funding in the form of ongoing committed research and development payments and, in some cases, technology access fees, from our collaborators. We also seek to share in the long-term value of the products that we assist our collaborators in developing through the retention of certain product rights and from royalty fees from the sale of products developed using our technologies. Other collaborations take the form of alliances to jointly commercialize product applications evolved from combining specific technologies of each company. We generated $23.3 million in revenues in 2000 from these arrangements.

      Several large pharmaceutical companies including Glaxo Wellcome PLC, Procter & Gamble Co. and Novartis AG have collaborated with us on specific proteomics projects in pharmaceutical research and development. Biotechnology companies, such as Genentech, Inc., have also conducted research with us. We also have had research programs with numerous government agencies. We currently have approximately nine ongoing research and technology development programs, no one of which, other than the Dow collaboration described below, is believed to be material to our business.

      We established a three-year collaboration with Dow in September 1998 for its exclusive use of our GENEWARE technology for functional genomics in selected agricultural and industrial chemical categories. We and Dow have identified commercially significant genes for specific agricultural and industrial uses that may be marketed by Dow and its affiliates. We retain the right to use any of the identified genes resulting from this collaboration for uses in other categories not allocated to Dow. During this collaboration, we have developed our plant gene discovery-and-function process utilizing our proprietary technologies. In this collaboration we are entitled to receive research and development funding, milestone payments upon completion of milestones, annual technology access fees and royalties if and when Dow and its affiliates commercialize products from the collaboration. During the term of the agreement, Dow has the first opportunity to negotiate for worldwide rights to develop, manufacture, use or sell specified products, inventions and technologies outside the pharmaceutical field. Revenues recognized pursuant to this collaboration were $20 million in 2000. Dow can terminate this collaboration at any time on 90 days notice. This collaboration continues through August 2001. We are in discussions with Dow to exploit the technology developed under the research collaboration in one or more areas of commercial interest. We also intend to market access to our functional genomics technology for agricultural and industrial chemical purposes to other parties.

      In January 2001, we began a collaboration with Biosite to develop content for a protein chip. Under the agreement, we will provide to Biosite protein markers of diagnostic interest, and Biosite will use those protein markers to produce antibodies. We will own the antibodies and intend to use them to develop protein chips to be marketed either jointly with Biosite, independently or in conjunction with third parties.

      In February 2001, we formed a collaborative alliance with ProdiGene, Inc. to jointly market to third parties our combined capabilities to manufacture therapeutic antibodies made in transgenic plants. We believe that the alliance will commercially link our bioprocessing capabilities with ProdiGene’s transgenic plant protein production technology. We have commenced joint marketing efforts to third party pharmaceutical and biotechnology companies.

Intellectual Property

      We continually seek patent protection for our plant and animal viral systems for gene expression, proteomic, genomic and biomanufacturing technologies. As of March 23, 2001 we had 24 issued and 86 pending U.S. patents. Our issued U.S. patents expire between 2006 and 2018. Foreign patents corresponding to many of the U.S. patents and patent applications have been filed and/or issued in one or more other countries, resulting in a total of 15 issued and 86 pending foreign patents as of March 23, 2001. We believe that these issued patents in various technological areas are valuable to our business. In the proteomics field we have 10 issued U.S. patents with durations ranging from 2006 to 2017. In the GENEWARE field, we have 12 issued U.S. patents and 15 foreign country patents with durations ranging from 2011 to 2016. In the biomanufacturing field, we have 2 issued U.S. patents with durations through 2018.

      These patents give us the right to exclude others from practicing or selling products, technologies or services covered by the methods claimed, and from making, using or selling the equipment which are the subject of the claims of these patents.

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      A registered trademark gives the owner the right to exclude others from using identical or confusingly similar marks within the same channels of commerce. We own the following registered trademarks in the United States and in many other countries:

      We own rights to the following marks in the United States and in many other countries:

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

      Dow, through its wholly owned subsidiary, Mycogen Corporation, owns or controls patent rights in the field of viral vectors covering the infection of plants and the expression of foreign genes in plants. Dow has informed us that it believes some of our plant viral activities may fall within the scope of its patents. We have informed Dow that we believe none of Dow’s patent rights cover our plant viral activities. We believe our business relations with Dow remain positive.

Employees

      As of February 28, 2001, we had 144 full-time employees, of which 106 comprise the research staff and are engaged in research, development and scale-up activities. The remainder work in general and administrative areas. Thirty-six employees hold Ph.D. degrees. We consider relations with our employees to be good, and none of the employees is covered by a collective bargaining agreement.

Competition

      The genomics and proteomics businesses are intensely competitive. Extensive research efforts characterize the genomics and proteomics industries, resulting in rapid technological progress. Many universities, public agencies and established pharmaceutical, biotechnology, chemical and other life sciences companies with substantially greater resources are developing and using technologies and are actively engaging in the development of products similar to or competitive with our products and technologies. In addition, other companies are engaged in development programs directed to the production of therapeutic proteins or peptides in plants.

      The markets for protein development and production, including human vaccines like the ones we are developing, also are highly competitive. Competitors with substantially greater resources are actively developing products similar to or competitive with our products. Several pharmaceutical, biotechnology, chemical and other life sciences companies engage in research and development in the use of novel gene expression systems to produce therapeutic proteins. Other companies are developing and marketing therapeutics for non-Hodgkin’s lymphoma and Fabry’s disease.

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      In the field of functional genomics, we face competition from many biotechnology companies. In the field of proteomics, we face competition from a small number of companies using similar methods to investigate protein expression. The maturation of the genomics industry, associated with the completion of the human genome sequence, have caused successful genomics companies with greater resources than ours to look to proteomics as an opportunity for continued growth.

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

Research and Development

      Our internally funded research and development expenses totaled $16.4, $9.5 and $7.0 million in 2000, 1999 and 1998, respectively. Our customer-sponsored research and development expenditures totaled $8.1, $7.4 and $2.6 million in 2000, 1999 and 1998, respectively.

Item 2. Properties

      Our principal research and development facilities and corporate headquarters are located in Vacaville, California. With a recent lease addition, we occupy a facility of approximately 45,000 square feet that includes administrative offices, a genetic engineering laboratory, a plant discovery and function laboratory and a bioinformatics software laboratory. In addition, we have a bioprocessing laboratory at this same facility that is physically designed for conversion to current good manufacturing practices and good laboratory practices operating standards and provides us with the capability to conduct research, process development and scale-up from bench through pilot scale within the same facility. Pilot scale is a stage before full-scale production during which smaller amounts are made to demonstrate that production methods work. We also own a facility of approximately 22,000 square feet in Owensboro, Kentucky for pilot and large scale extraction and downstream bioprocessing of protein products produced in plants. Our Proteomics subsidiary has recently moved from Rockville, Maryland into a leased laboratory and office facility in Germantown, Maryland of approximately 53,000 square feet. We incurred rental expenses for our Vacaville facility of $494,000 in 2000, $531,000 in 1999 and $476,000 in 1998 and for our Rockville facility of $196,000 in 2000 and $128,000 in 1999. We expect rental expenses for Vacaville and Germantown will be approximately $900,000 and $716,000, respectively, in 2001.

Item 3. Legal Proceedings

      We are not party to any material legal proceedings.

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

      No matters were submitted to a vote of our security holders through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 2000.

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PART II

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

      Our common stock is traded on The Nasdaq National Market under the symbol “LSBC.” Public trading of the common stock commenced on August 10, 2000. Prior to that, there was no public market for the common stock. The following table sets forth the high and low bid price per share of the common stock as reported on the Nasdaq National Market, during each quarter the stock has been publicly traded.

      As of March 23, 2001, the closing price per share of our common stock as reported by The Nasdaq National Market was $5.88. We believe that there are approximately 5,000 holders of record of our common stock, based upon data provided by our transfer agent through the end of February 2001.

      We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

      During the year ended December 31, 2000, we granted options to purchase 346,200 shares of our common stock to directors, officers, employees and consultants under our 2000 Stock Incentive Plan. During the year ended December 31, 2000, option holders exercised options for 954,226 shares of our common stock of which 653,004 were not registered under the Securities Act of 1933, as amended.

      The issuance and sale of the above unregistered securities were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 thereunder, pursuant to compensatory benefit plans and contracts related to compensation.

      Our Registration Statement on Form S-1, as amended (SEC File No. 333-34198) for our IPO became effective on August 9, 2000, covering an aggregate of 5,750,000 shares of our common stock, including the underwriters’ over-allotment option. The managing underwriters were J.P. Morgan & Co. Incorporated, Chase H&Q and William Blair & Company, LLC. On August 15, 2000, we closed on the sale of 5,000,000 shares of our common stock at a price of $17.00 per share, resulting in gross proceeds of $85.0 million. After deducting $5.9 million in underwriting discounts and $2.2 million of other related expenses, the net proceeds to us were $76.9 million. On September 8, 2000, we sold an additional 750,000 shares of our common stock at a price of $17.00 per share pursuant to the exercise by the underwriters of their over-allotment option, resulting in gross proceeds of $12.8 million. After deducting $0.9 million of underwriters discounts, our net proceeds from the exercise of the over-allotment were $11.9 million. In total, gross proceeds from the IPO were $97.8 million and expenses were $9.0 million, resulting in total net proceeds of $88.8 million.

      We have invested the proceeds from our IPO in temporary investments in money market funds, commercial paper and short-term bonds. We have not segregated those proceeds from other funds. The estimated use of proceeds for working capital set forth below includes operating expenses for research and development and for general and administrative activities. Provided below is a reasonable estimate of the amount of our net offering proceeds used in each of the following categories, through December 31, 2000:

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      There are no other purposes for which at least the lesser of five percent (5%) of our total offering proceeds or $100,000 has been used. Moreover, none of the net offering proceeds were paid directly or indirectly to directors, officers, or their associates, persons owning 10 percent (10%) or more of any class of our equity securities, or our affiliates. The application of the proceeds set forth above does not represent a material change from the anticipated use of proceeds described in the prospectus contained in our Registration Statement.

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Item 6. Selected Financial Data

      You should read the following selected financial data in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and the accompanying notes included in this Report. We derived the consolidated statement of operations data for the years ended December 31, 2000, 1999 and 1998 and the consolidated balance sheet data as of December 31, 2000 and 1999 from our audited consolidated financial statements included elsewhere in this Report. We derived the statements of operations data for the years ended December 31, 1997 and 1996 and the balance sheet data as of December 31, 1998, 1997 and 1996 from our audited consolidated financial statements not included in this Report.

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

      You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the accompanying notes. This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the factors discussed under the heading “Factors That May Affect Our Business” below.

Overview

      Large Scale Biology uses its proprietary proteomics and functional genomics technologies to develop products and establish commercial collaborations with pharmaceutical, biotechnology, chemical and other life sciences companies, to enable the transformation of proteomic and genomic information into multiple product opportunities, such as drug targets, therapeutics and diagnostics for drug effectiveness and toxicity.

      Before February 1999, we were primarily engaged in the development and commercialization of genomics technologies. In February 1999, we acquired 92.5% of the outstanding common stock of Large Scale Proteomics Corporation, or Proteomics, a company primarily engaged in the development of proteomics technologies. In March 2000, we acquired the remaining 7.5% of Proteomics’ common stock. We used the purchase method of accounting to record this acquisition.

      Substantially all of our revenues relate to our collaborative agreements and are derived from technology access fees, ongoing research funding and milestone payments for achievement of specific results. We record technology access fees and milestone payments as deferred revenue and amortize these payments on a straight-line basis over the remaining life of the related collaborative agreement. The life of a collaborative agreement is based on the terms of the agreement. We recognize research funding as we earn it.

      In September 1998, we entered into a three-year collaboration and license agreement, or the Dow Agreement, with The Dow Chemical Company and its subsidiary Dow AgroSciences LLC, or collectively, Dow. Under the Dow Agreement, we receive funding for sponsored genomics research, and we are entitled to royalties if and when Dow sells products that result from this collaboration, and technology access fees and payments when we reach specific milestones. Revenues from the Dow Agreement represented 86% and 88% of our revenues during 2000 and 1999, respectively. We expect to recognize revenues of $8.4 million in 2001 from the amortization of deferred revenue related to the Dow Agreement. The research collaboration under the Dow Agreement terminates on September 1, 2001. If the research collaboration is not extended beyond August 31, 2001 or we do not receive additional technology access fees and milestone payments, future revenues and operating margins could be materially lower than previously reported.

      During the third quarter of 2000, we raised net proceeds of approximately $89 million, including the exercise of the underwriters’ over-allotment option, as a result of our initial public offering, or IPO, which was declared effective on August 9, 2000.

      As a result of our investment in our technologies, we have incurred significant losses in each year since our inception in 1987. As of December 31, 2000, we had an accumulated deficit of $95.0 million. We expect additional losses as we expand our research and development efforts, make investments in strategic collaborations and enhance our technologies.

      Since our IPO, we initiated a Phase I clinical trial of the GENEWARE produced non-Hodgkin’s lymphoma vaccines and expanded internally funded research projects, including the assembly of our first version of the Human Protein Index. In January 2001, we announced our collaboration with Biosite to produce antibodies for use in protein chips. The resulting increase in expenses we believe will enhance the value of our technologies but could delay our profitability and result in increased annual net losses.

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Results of Operations

Comparison of Years Ended December 31, 2000 and 1999

      Revenues. Revenues in 2000 were $23.3 million, an increase of $7.2 million, or 45% over 1999. Revenues earned under the Dow Agreement were $20.0 and $14.2 million in 2000 and 1999, respectively. This increase in revenues is principally attributable to amortization of deferred revenue from milestone payments received during 1999. We had deferred revenues at December 31, 2000 of $8.4 million relating to Dow that will be amortized through the end of the research collaboration under the Dow Agreement on August 31, 2001. Unless the research collaboration under the Dow Agreement is renewed or extended, contracted research and other milestone payments from Dow will be discontinued after August 31, 2001 and, therefore, will be less than in 2000. Growth in our revenues for 2001 and beyond is dependent upon our successfully entering into new collaboration agreements in one or more of our key technology bases.

      Development agreement expenses. Development agreement expenses relate to research activities incurred in connection with our collaborative agreements. Development agreement expenses for 2000 were $8.1 million, an increase of $0.7 million, or 9% over 1999. The increase is primarily attributable to a new research agreement started in 2000. We expect that development agreement expenses will decrease if the Dow research collaboration is not extended, as offset by any increase to meet commitments under any new collaborative agreements.

      Research and development expenses. Research and development expenses for 2000 were $16.4 million, an increase of $6.9 million, or 73% over 1999. The increase is the result of $2.0 million of increased spending for expanded operations and personnel at Proteomics, $1.8 million of amortization expense related to stock options granted in December 1999, $0.9 million of increased salary expense for new personnel and wage rate increases at the Vacaville and Owensboro facilities and $0.8 million of new expenditures to third parties for non-Hodgkin’s lymphoma preclinical and clinical trials. We anticipate that research and development expenses will continue to increase significantly for non-Hodgkin’s lymphoma clinical trials and for new or expanded internally funded research projects. Under our agreement with Biosite, we have committed to pay $6.8 million over 14 months for program target antibodies. Research and development expenses will increase accordingly. In addition, if the Dow research collaboration is not extended and we do not enter into a replacement collaboration agreement, research resources are expected to be utilized in internally funded projects resulting in a significant increase in our unreimbursed research and development expenses.

      General, administrative and marketing expenses. General, administrative and marketing expenses for 2000 were $8.1 million, an increase of $1.6 million, or 25% over 1999, excluding a charge of $1.5 million in 1999 related to previously capitalized patent costs. The increase is partially attributable to $0.8 million of amortization expense related to stock options granted in December 1999 and $0.4 million of increased salary expense for new personnel and wage rate increases. Additionally, we expanded our infrastructure to meet the demands of a public company. We anticipate that our legal and regulatory expenses related to our patents will increase as we file, prosecute and defend new and existing patents. We also expect general, administrative and marketing expenses to increase as we expand our infrastructure to accommodate our anticipated growth.

      Stock compensation bonus. The stock compensation bonus of $7.3 million for 2000 is a noncash charge incurred for stock options that we issued to certain key officers and employees in December 1999 which vested upon the completion of our IPO.

      Amortization of goodwill and purchased intangibles. The amortization of goodwill and purchased intangibles of $1.2 and $0.6 million in 2000 and 1999, respectively, relate to our purchase of 92.5% of Proteomics in February 1999 and the exercise of our option to purchase the remaining 7.5% in March 2000. Amortization charges for goodwill and purchased intangibles are expected to be approximately $1.3 million per year through 2002 and $0.2 million in 2003.

      Interest income (expense). Interest income increased to $2.6 million in 2000 from $0.5 million in 1999 due to the investment of the proceeds from our IPO in August 2000. We expect interest income to increase in 2001 as the proceeds from our IPO are invested over an entire year. However, monthly interest income is expected to decrease with the planned expenditures for operations and facilities and with the current trend of decreasing interest rates.

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      Change in fair value of warrant. The noncash charges of $0.8 and $5.4 million in 2000 and 1999, respectively, relate to the increase in the fair value of a warrant we issued to Dow in connection with the Dow Agreement. This warrant had a “put option” that could have required us to repurchase common stock issued to Dow upon exercise of the warrant. This “put option” expired upon the effective date of our IPO. Consequently, the warrant liability was reclassified to permanent equity and no subsequent charges will be incurred.

      Provision for income tax. Although we had a net loss of $34.7 million before provision for income taxes for our year ended December 31, 1999, we had taxable income for federal and state income tax purposes which we offset by our use of federal and state net operating loss carryforwards. As a result, we incurred alternative minimum taxes of $190,000. Taxable income in 1999 was primarily because of taxable milestone payments under the Dow Agreement and the charge for in-process research and development that was not deductible for tax purposes.

Comparison of Years Ended December 31, 1999 and 1998

      Revenues. Revenues in 1999 were $16.1 million, an increase of $12.7 million, or 374%, over 1998. Revenues earned under the Dow Agreement were $14.2 million in 1999 and $2.9 million in 1998, which reflects a full year of research activities in 1999 as compared to only four months in 1998. The increase in revenues is partly due to the inclusion of $1.8 million of revenues from the operations of Proteomics since February 1, 1999, the effective date of our acquisition of that subsidiary.

      Development agreement expenses. Development agreement expenses in 1999 were $7.4 million, an increase of $4.9 million, or 190%, over 1998. Research activities under the Dow Agreement accounted for $6.7 million of such expenses in 1999, and $1.5 million in 1998. The increase in development agreement expenses in 1999 attributable to the Dow Agreement reflects the inclusion of a full year of research activities as compared to only four months in 1998. Additionally, the inclusion of the operations of Proteomics since February 1, 1999 accounts for $0.7 million of the increase. These amounts were partially offset by development agreements that terminated during 1998.

      Research and development expenses. Research and development expenses in 1999 were $9.5 million, an increase of $2.5 million, or 36%, over 1998. The inclusion of the operations of Proteomics since February 1, 1999 accounts for $1.4 million of the increase in 1999. The addition of research personnel, increased research funding paid to third parties and expanded research facilities in Vacaville, California and Owensboro, Kentucky accounts for the remainder of the increase.

      General, administrative and marketing expenses. General, administrative and marketing expenses in 1999 were $8.0 million, an increase of $4.5 million, or 128%, over 1998. The increase was due in part to an increase in legal and regulatory fees of $1.2 million related to patents and a $1.5 million charge for previously capitalized patent costs. Additionally, the inclusion of operations of Proteomics since February 1, 1999 accounts for $1.6 million of the increase.

      Purchased research and development expenses. Purchased research and development expenses for 1999 were $21.4 million, which represents a charge for in-process research and development acquired in connection with our acquisition of Proteomics.

      Change in fair value of warrant. These noncash charges of $5.4 and $1.2 million in 1999 and 1998, respectively, relates to the increase in the fair value of a warrant issued in connection with the Dow Agreement.

Liquidity and Capital Resources

      The increase in our annual need for funds reflects the expanding scope of our research and development activities. On August 9, 2000, our IPO was declared effective, and we subsequently received approximately $89 million of net proceeds during 2000, including the exercise of the underwriters’ over-allotment option. Prior to our IPO, we funded our operations through payments from our collaborative agreements of $62.2 million, the sale of $48.5 million of our equity securities, other income of $6.8 million and debt and warrant financing of $9.1 million.

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      At December 31, 2000, we had cash and cash equivalents of $40.0 million and marketable securities of $45.0 million. Net cash used in operating activities of $13.0 million in 2000 was principally due to $27.3 million paid to our suppliers and employees, partially offset by $1.5 million of milestone payments and $8.3 million of research funding received under the Dow Agreement, $3.0 million from other agreements and interest of $1.8 million from our investments. Net cash provided by operating activities of $6.3 million for 1999 was principally due to $16.6 million of milestone payments and $7.8 million of research funding received under the Dow Agreement, less $21.4 million paid to our suppliers and employees. We entered into an agreement with Biosite in January 2001 whereby we have committed to pay $6.8 million over 14 months for program targets. Cash paid to suppliers and employees will increase accordingly. In the future, for us to achieve positive net cash flow from operating activities, we believe we must enter into new collaboration agreements and carefully manage the level of internally funded research and development activities.

      Net cash used in investing activities of $42.3 million in 2000 was principally due to $37.0 million of net investment in marketable securities, $4.5 million for purchases of property, plant and equipment and $0.8 million for increases in intangible assets. Net cash used in investing activities of $8.4 million in 1999 included $5.1 million for purchases of property, plant and equipment. We have committed to spend approximately $4.0 million in 2001 for the construction of certain facilities in Owensboro and Germantown. An additional $2.7 million for these projects was included in construction in process and accounts payable at December 31, 2000 that will be paid during 2001. Our total planned expenditures for property, plant and equipment during 2001 are approximately $15 million. We anticipate that our capital expenditures will increase in the future to meet the demands from new collaboration agreements and research and development efforts. We may use a portion of our cash to acquire or invest in complementary businesses, products or technologies, or to obtain the right to use such complementary technologies.

      Net cash provided by financing activities of $88.4 million in 2000 was primarily the result of $90.5 million of proceeds from our IPO and exercise of stock options, offset by $2.2 million of net principal payments on long-term debt. Net cash provided by financing activities of $5.6 million in 1999 included $3.4 million of milestone payments allocated to the warrant we issued to Dow in connection with the Dow Agreement and net proceeds of $2.2 million from loans related to our $5.0 million equipment financing arrangement.

      In the future, our liquidity and capital resources will depend upon, among other things, the level of our research and development activities, clinical, regulatory and marketing expenses and funding from our collaborations. We believe that our cash and cash equivalents and our marketable securities, together with revenues from our collaborations and other sources will be adequate to fund our anticipated cash and working capital requirements at least through December 31, 2002. During or after this period, if our capital resources are insufficient to meet our future capital requirements and expenses, we may need to sell additional equity or debt securities or obtain additional credit arrangements. Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.

Recently Issued Accounting Standards

      In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, or SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities and was effective for us beginning January 1, 2001. This statement requires balance sheet recognition of derivatives as assets or liabilities measured at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS No. 133 will not have a material impact on our financial statements.

      In December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB 101. SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. We comply with the provisions of SAB 101.

Inflation

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

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Factors That May Affect Our Business

      We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks and others are discussed elsewhere in this Form 10-K.

      This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, which involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations