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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the year ended December 31, 2003

TRANSITION PERIOD FROM                      TO                     .

Commission File Number 0-31275

LARGE SCALE BIOLOGY

CORPORATION

(Exact name of registrant as specified in its charter)

3333 Vaca Valley Parkway, Vacaville, CA 95688

(Address of principal executive offices and zip code)

(707) 446-5501

(Registrant’s telephone number, including area code)

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

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

Common Stock, $0.001 par value

Preferred Stock Purchase Rights

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes  ¨  No  x

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2003 was approximately $25.8 million (based on the last reported sales price of $1.00 on June 30, 2003 on the NASDAQ National Market).

The number of shares outstanding of the Registrant’s common stock as of March 26, 2004 was 31,149,724.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement, which is expected to be filed not later than 120 days after the Registrant’s year ended December 31, 2003, to be delivered in connection with the Registrant’s 2004 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.

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Large Scale Biology Corporation

Form 10-K

For the Year Ended December 31, 2003

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

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

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

PART I

Item 1.    Business

Overview

Our goal is to develop therapeutic products using our proprietary biomanufacturing technologies and expertise. While none of our products have generated significant revenue, the product categories in which we have made the most progress using our technologies are vaccines, complex proteins and follow-on off-patent therapeutics. We are also applying our technology to develop and commercialize diagnostic tests and a gene improvement tool. We are focusing our efforts on the following products:

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Our proprietary technologies include methodologies for the analysis of both genes and proteins in an automated high-throughput fashion. We also own unique systems to manufacture proteins at pharmaceutical purity standards for both research and commercial purposes. These systems use proprietary viral-based gene delivery vehicles in green plants to produce vaccines and therapeutic proteins without genetically modifying the host plant. We believe that these manufacturing technologies will provide significant competitive advantages in speed and ease of production, safety, production capacity and cost of goods. Our freedom to operate with our gene expression and biomanufacturing technologies can enable our alliance partners and clients to enter generic biologics markets that are otherwise inaccessible due to process patents issued to competitors.

We were incorporated in California in 1987 and reincorporated in Delaware in 2000. From our inception until the end of 2000, our main focus was to develop our GENEWARE^®, genomics, proteomics and bioinformatics platforms, and to provide research and development services to customers. In 2001, our focus shifted to developing products and bringing our manufacturing operations up to regulatory standards for current good manufacturing practices, or cGMP.

The Company is headquartered in Vacaville, California and its mailing address is 3333 Vaca Valley Parkway, Vacaville, California, 95688, and our telephone number is (707) 446-5501. Our corporate web site address is www.lsbc.com. We have made all reports and amendments to reports from November 15, 2002 to December 31, 2003 available on our website. We make available free of charge through our web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission.

Developments in 2003

Manufactured Aprotinin Product—Initiated field production and biomanufacturing of recombinant Aprotinin at our Owensboro, Kentucky facility.

Granted Orphan Drug Designation on Fabry Disease Therapeutic—The Food and Drug Administration, or FDA, granted us Orphan Drug designation for our proprietary plant-produced human enzyme, alpha-galactosidase A, for its eventual use in enzyme replacement therapy to treat Fabry disease. Our alpha-galactosidase A showed promising therapeutic effects in preclinical studies. Using our Owensboro, Kentucky facility and cGMP, we have manufactured alpha-galactosidase A, suitable for clinical trials.

Entered into New Revenue-Generating Initiatives—

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Refocused Efforts to Our Products—Strategically shifted our focus from developing platform technologies and performing contract proteomics research to developing and commercializing vaccines and protein-based pharmaceutical products. We heightened our corporate focus on commercial pipeline products.

Acquired License—Entered into an exclusive license agreement with the Cincinnati Children’s Hospital Medical Center, Cincinnati, Ohio for the development of human lysosomal acid lipase for atherosclerotic plaque reduction to treat atherosclerosis, a leading cause of death in the U.S.

Formed Eclipse Diagnostics focused on our BAMF technology—Created a wholly-owned subsidiary, Eclipse Diagnostics, Inc., to apply our proprietary BAMF technology for diagnostic tests for cancer and other diseases.

Further Established Our Intellectual Property—We obtained 34 new patents worldwide, impacting each key component of our technology base, bringing our total patents to 106. These new patents cover anti-cancer molecules, plant and animal viral vectors, and biomanufacturing. We also filed 51 new patent applications covering various aspects of our technology base, which increases the total number of pending patents to 187.

Implemented Major Cost Reductions—Implemented a cost reduction program which, when combined with our 2002 cost reduction efforts, resulted in $9.2 million in savings of expenses from 2002 to 2003 and $14.8 million, or 37%, in savings over two years when comparing total costs of general and administrative, and research activities incurred during 2001 to 2003. We wound-down our 2-dimensional gel proteomics operations at our Germantown, Maryland operation upon concluding the toxicoproteomics fee-for-service contract with the National Institute of Environmental Health Services, or NIEHS.

Recent Development

In January 2004, we shipped sample quantities of our plant-produced recombinant aprotinin product to prospective customers for research and manufacturing applications. We entered into a multi-year, non-exclusive agreement with Sigma-Aldrich Fine Chemicals, a division of Sigma-Aldrich Corporation to distribute research-grade aprotinin and anticipate product sales by the third quarter of 2004.

Science and Industry Background

All living things are made up of one or more cells. Although science still has much to learn about how cells actually function, it is commonly accepted that all cells have several basic components. Inside each plant and animal cell is a nucleus containing deoxyribonucleic acid, or DNA, that makes up its genetic code. Different sections of the DNA are called genes. A gene or a combination of genes encodes the information needed for conducting the various essential life functions. Each gene is composed of a specific, unique sequence of DNA. When a gene is turned on, or “expressed,” the genetically coded information is copied into a related molecule called messenger ribonucleic acid, or mRNA. This messenger travels to a location outside the nucleus where proteins are then made according to the genetic information contained in the mRNA.

Private industry and the federal government have each announced the completion of the sequencing of the human genome. Utilizing the genetic information of the human genome, numerous laboratories are rapidly identifying gene sequences that are involved in the causes of diseases. An increasing number of new biological drugs are being tested and are being used to treat diseases. The production of these biological drugs requires complicated, and usually, very expensive cellular production systems.

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Our plant-based GENEWARE system offers several advantages for the production of these biological compounds. A gene sequence, or mRNA, of a target protein is inserted into a plant virus, or vector. Non-recombinant (non GMO) non-food/feed plants are then inoculated with the vector. The virus penetrates cells of the plant and uses the cell’s mechanism to replicate and to express the mRNA carried by the virus to produce the target protein. The virus spreads from cell to cell within the plant but does not get incorporated within the DNA of the plant cells. Consequently, the mRNA is not passed on to the next generation of the plant. This system provides a large-scale manufacturing capability to produce commercially valuable proteins rapidly and cost effectively, without the environmental concerns that afflict the cultivation of transgenic food/feed crops used by other companies.

Our Strategy

Our corporate strategy is to focus our platform technologies on developing and commercializing our products and those of our partners. While our GENEWARE platform is broadly applicable, our current emphasis is to primarily use it for biomanufacturing health care products. Our strategic business focus consists of developing the following business opportunities:

We have successfully achieved proof of principle with our own human and animal-health-care therapeutics. While biomanufacturing and some early stages of regulatory and clinical development have been internally financed, we plan to achieve advanced clinical trials, final regulatory approvals and commercialization in collaboration with pharmaceutical and biotechnology companies. Our cat parvovirus vaccine has successfully completed early-stage pre-clinical trials, demonstrating safety and initial efficacy and is moving forward into advanced development. We have completed manufacturing process development of aprotinin and alpha-galactosidase A. We have received Orphan Drug designation from the FDA for alpha-galactosidase A and are currently preparing the regulatory documents to initiate clinical trials. We are improving our manufacturing process for human lysosomal acid lipase and are conducting research on its potential use as a therapeutic to reduce atherosclerotic plaque. We have been developing biomanufacturing capability for proteins and peptides to capitalize on the capacity constraints of the biotechnology industry. We have built a manufacturing facility in Owensboro, Kentucky, that is ready for FDA-compliant manufacturing of human therapeutics and vaccines developed by our partners and us.

We have created a wholly-owned subsidiary, Eclipse Diagnostics, Inc., to apply our proprietary BAMF technology for diagnostic tests of cancer and other diseases. Eclipse Diagnostics expects to perform diagnostic tests for specific diseases for major clinical reference labs, hospitals, and boutique labs. The reference lab partners would analyze serum samples, or perform mass spectrometry analysis where needed, prior to Eclipse’s BAMF diagnostic analysis. We expect that a test for ovarian cancer would be our introductory product, followed by tests that may include lung, breast, prostate, and pancreatic cancers. Upon successful completion of our first phase of our business plan, we expect to implement a fully vertical BAMF test with all laboratory steps performed directly or through outsourcing by Eclipse.

We have developed a novel gene shuffling technology called GRAMMR, which can generate large libraries of extensively shuffled gene sequences, and which we believe is faster and more

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efficient than competing gene shuffling technologies. We are in contract discussions to collaborate with the US Army Medical Research Institute of Infectious Diseases, or USAMRIID, to apply our proprietary GRAMMR technology for DNA shuffling and molecular evolution to improve biodefense therapy candidate products. In parallel with our program with the federal government, we plan to market GRAMMR gene shuffling technology to companies seeking to improve their biological drugs.

Commercial Opportunities

Aprotinin—Aprotinin is a natural protein that acts to prevent protein breakdown, and is used in medical procedures to reduce the systemic inflammatory response, or SIR, associated with cardiopulmonary bypass surgery, or CPB. Once triggered, SIR can lead to a cascade of subsequent inflammatory events that can collectively retard patient recovery. When administered intravenously in CPB procedures, aprotinin helps decrease the need for blood transfusions, reduces post-operative bleeding, and thus reduces re-exploration for bleeding.

The only aprotinin product in the United States market for use in CPB is currently obtained by extraction from cow lungs. We have successfully produced pilot-scale quantities of aprotinin that is identical to this product using our proprietary GENEWARE plant-based biomanufacturing system. Our aprotinin active pharmaceutical ingredient, or API, has the same biological activity as the animal-derived counterpart. When scaled to commercial-level production, we believe that our aprotinin can be produced cost effectively and in sufficient quantities to meet worldwide demand, without the safety concerns associated with animal derived products. We are in discussions with potential partners for supplying our aprotinin to the medical markets.

We have shipped sample quantities of our aprotinin product to prospective customers for research and manufacturing applications. We entered into a multi-year, non-exclusive agreement with Sigma-Aldrich Fine Chemicals to distribute non-pharmaceutical aprotinin and anticipate product sales by the third quarter of 2004.

Alpha-Galactosidase A—Alpha-galactosidase A is an enzyme used for replacement therapy to treat Fabry disease. Fabry disease is a genetic disorder that results in the inability of tissues within organs, primarily the liver, kidney and spleen, to recycle various structural lipid components resulting in the accumulation of these lipids in those organs and the heart. Fabry is a gender-based genetic degenerative disease that shortens a patient’s lifespan.

Our Alpha-galactosidase A is produced in plants at our biomanufacturing facility in Owensboro, Kentucky with our proprietary GENEWARE system. The enzyme is recovered and purified to clinical standards in a proprietary process that is validated and compliant with current good manufacturing practices, or cGMP. The preclinical testing was performed in a Fabry mouse model system with Dr. Roscoe Brady at the National Institute of Neurological Disease and Stroke under a collaborative research and development agreement. The preclinical data showed good efficacy and safety in the animals. We received an Orphan Drug designation from the FDA for Alpha-galactosidase A and plan to file an IND with the FDA and begin clinical trials to evaluate its safety and efficacy in humans.

Follow-on off-patent biologics—When patent protection for proprietary pharmaceuticals ends, the product becomes eligible for sale as a “generic” version. Often new competition arises, resulting in lower costs and wider availability for the generic product relative to the original patented drug. A number of biological protein and peptide biopharmaceutical products are, or soon will be, off patent. However, while the composition of a pharmaceutical product may be off-patent, the manufacturing method may be further protected by exclusive patents of the

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innovator company. Consequently, suppliers are blocked from producing the generic product. Our freedom to operate with our proprietary GENEWARE biomanufacturing technology could provide our alliance partners the ability to enter markets otherwise blocked by process patents.

Our GENEWARE technology can produce molecules that are, or will be, off-patent including recombinant versions of Aprotinin, Interferon alpha 2a and 2b, and Granulocyte Colony Stimulating Factor, or G-CSF. We are in partnering discussions with several companies for the co-development, marketing and distribution of these types of off-patent molecules for research, manufacturing and medical applications.

Vaccines—Vaccines can represent a cost-efficient form of healthcare. Vaccines recruit the immune system to recognize and combat a wide range of diseases, including viral and microbial infectious diseases and some cancers. LSBC is developing several vaccines for the human and animal care markets. We have conducted early clinical research with our personalized vaccine against the lymphatic cancer non-Hodgkin’s lymphoma with successful initial results. With financial support from several US Government agencies, we are in early stage development of vaccines to treat human pappilloma virus and HIV infections. We are also developing vaccines for animal health and veterinary care to treat a variety of infectious diseases affecting animals. Our GENEWARE biomanufacturing system helps enable the efficient improvement and production of vaccines that are either difficult to produce by using conventional technologies or where high costs of production preclude market expansion.

Human lysosomal acid lipase—Cardiovascular disease, especially atherosclerosis, is a major cause of morbidity and mortality in the US and many other industrialized countries. While several drugs are currently marketed to slow down progression of atherosclerotic disease or treat its symptoms, excessive build-up of plaque, which is a leading cause of heart disease, is often treated surgically and involves invasive procedures and long periods of convalescence. LSBC has recently begun research on a human enzyme, lysosomal acid lipase (LAL), which we believe could some day be used by clinicians to erode and dissolve plaque build-up in affected blood vessels. Discovered by University of Cincinnati scientists, LAL could represent a new approach in the treatment of cardiovascular disease. LSBC has obtained an exclusive, worldwide license for use of LAL in this field and is developing and evaluating the enzyme in collaboration with the discovery team at University of Cincinnati.

BAMF Diagnostics—We plan to commercialize through a wholly owned subsidiary, Eclipse Diagnostics, Inc., a new diagnostic product called BAMF technology that enables detection of cancer and other diseases through a blood serum-based tests. BAMF is a proprietary pattern recognition discovery algorithm that identifies protein biomarkers in the blood, which form the basis of a test to detect cancer. We believe that development of commercial diagnostic tests based on our BAMF technology could improve patient outcome through earlier diagnosis of disease. We expect our first commercial product using our BAMF technology to be for the diagnosis of ovarian cancer.

GRAMMR Gene Shuffling—GRAMMR is a new shuffling, or genetic reassortment research tool used to more efficiently develop a wide variety of improved product attributes. Traditional shuffling methods are typically complex, slow, labor-intensive, and have not always yielded the desired results. GRAMMR provides a number of significant advantages over traditional gene shuffling procedures, including higher efficiency, more rapid turnaround, greater adaptability and higher cost-efficiency. Our GRAMMR technology can reduce the complications of gene shuffling and empowers the user with greater control over the molecular evolution process. We can offer our partners and clients a complete range of GRAMMR-associated services, from gene shuffling and gene expression to protein manufacturing.

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Our Technologies

GENEWARE—Our proprietary and patented GENEWARE system makes use of natural genetic systems for encoding genetic information in plants to rapidly produce biologically-active proteins. A gene sequence of a target protein is cloned into a modified plant virus, or vector that is not harmful to humans. Growing plants are inoculated with the vector to temporarily introduce the genetic information into the plants. The target proteins encoded by the gene sequences are produced in the host plant and after approximately two weeks the plants are harvested. Utilizing proprietary and patented processes we extract and purify the target protein from the plants. These GENEWARE vectors have been used to produce numerous therapeutic proteins and vaccine antigens in large quantities.

The GENEWARE production system is environmentally safe because the viral vector and the genes we insert cannot be incorporated into the plant genome and, thus, cannot be transmitted to the next generation of the plant in the seed or pollen; it has a limited host range; and the modified virus does not persist in the soil to the next planting season. Since 1991, we have conducted more than ten USDA-approved field trials, each demonstrating that GENEWARE is environmentally safe. In addition, we apply our GENEWARE system only to non-food crops and follow standard operating procedures during field and greenhouse production and testing to further ensure environmental safety.

While our GENEWARE technology can be used to identify and alter gene-product functions, we are primarily using the GENEWARE system to manufacture therapeutic proteins, peptides and other molecules in plants. GENEWARE can achieve significant time and cost advantages over traditional, transgenic genetic-engineering systems and alternative manufacturing technologies. GENEWARE can be a very efficient and competitive protein production system due to its potential for high expression, speed of production, safety and minimal capital requirements compared to alternate expression systems. We have used our Owensboro, Kentucky production facility to extract proteins from hundreds of tons of field-produced plants, and have validated this facility for cGMP manufacturing of aprotinin and alpha-galactosidase A.

BAMF Diagnostics—Our proprietary BAMF technology combines our bioinformatics and proteomics technologies. Our proteomics technology allows for the rapid determination of the protein composition, or proteome, of cells, tissues and body fluids that are associated with disease or abnormal conditions. Protein composition is a listing of the specific proteins present in a given sample, and their amounts. By assembling and monitoring changes in this data, we are able to, among other things, to identify the presence of proteins that are caused by diseases.

Bioinformatics is the gathering and analysis of the data generated when working with genes and proteins. We use proprietary technologies to integrate and manage biological information, which among other things, increases our ability to assess the importance of biological data in the discovery of disease.

Our proprietary BAMF technology was derived from our bioinformatics capability. It utilizes multiple proteins called biomarkers that are derived from profiling thousands of proteins to diagnose disease. In an ongoing research collaboration with Lance Liotta, M.D., Ph.D. and Emanuel Petricoin, Ph.D., co-directors of the Clinical Proteomics Program at the National Cancer Institute and Food and Drug Administration (NCI/FDA), we are using our BAMF technology to identify protein biomarkers in the blood as a diagnostic to detect ovarian cancer and other diseases.

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GRAMMR Gene Shuffling—We invented gene shuffling and molecular evolution technology that is easier to use, more efficient, and more cost-effective than other gene shuffling methods. Directed molecular evolution is an approach to enhancing the functionality of candidate genes and accelerating the development of improved products. We believe that gene shuffling, or reassortment, is the key to unlocking the potential of genetic diversity and developing biological molecules with novel or improved traits. Various gene-shuffling methods have been applied to improve a variety of commercially important products such as pharmaceutical proteins, vaccines, antibodies, viral vectors, and industrial enzymes. GRAMMR enables researchers to improve genes and the protein products derived from those genes which we believe have a number of inherent advantages over other gene shuffling methods, including: yield of a greater variety of chimeric products from fewer rounds of shuffling; rapid generation of thousands of shuffled gene sequences in a single day; adaptability to large genes, divergent genes, and complete gene clones; reliable conservation of the integrity of genes, resulting in improved screening efficiencies; and cost effectiveness.

Intellectual Property

We continually seek patent protection for our proteomics, genomics, biomanufacturing, and plant and animal viral gene expression technologies. As of December 31, 2003, we had 66 issued and 90 pending U.S. patents. Our issued U.S. patents expire between 2008 and 2020. Foreign patents corresponding to many of the U.S. patents and patent applications have been filed and/or issued in one or more other countries, resulting in a total of 40 issued and 97 pending foreign patents as of December 31, 2003. In the plant and animal viral systems field, we have 19 issued U.S. patents and 34 issued foreign patents with durations ranging from 2011 to 2020. In the proteomics field we have 37 issued U.S. patents and 1 issued foreign patent with durations ranging from 2006 to 2020. In the genomics field, we have 3 issued U.S. patents and 2 issued foreign patents with durations to 2019. In the bioprocessing field, we have 7 issued U.S. patents and 3 issued foreign patents with durations through 2019. Despite the issuance of 34 new patents in 2003, total active patents declined from 107 to 106, primarily due to abandonment of proteomics patents not core to our technological pursuits. While we believe that our patents in various technological areas are valuable to our business, our business as a whole is not materially dependent on any one patent.

We and other companies in the biotechnology field typically apply for and receive, in the aggregate, thousands of patents annually in the U.S. and other countries. These patents give us the right to exclude others from practicing or selling products, technologies or services covered by the methods claimed, and from making, using or selling the products which are the subject of the claims of these patents.

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

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.

Collaborations

Our revenues have been derived principally from collaborations with others. The business structure varies depending on the specific product or research objectives of the collaborations.

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Research agreements may include payments for technology access, costs of research, certain rights to intellectual property developed and participation in sales of products resulting from the agreements. We may 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. Current agreements include those with Schering-Plough for animal healthcare vaccine products and Sigma-Aldrich Fine Chemicals for the non-exclusive distribution of research-grade aprotinin, and Growers Research Group LLC for development of a biological pest control product. Other collaborations may take the form of alliances to jointly commercialize product applications evolved from combining specific technologies of each company.

We actively seek revenue from government funding sources that promote the development of products having strategic importance to us. For instance, we have performed research activities under a multi-year grant from the National Institute of Standards and Technology to develop new vaccine production technology.

We acquire licenses for exclusive or non-exclusive rights for specific processes, technology or molecules. Such licenses are often accompanied by joint research collaborations to develop products for commercialization. For example, recently we acquired an exclusive license for use of human lysosomal acid lipase, or LAL, with the Cincinnati Children’s Hospital Medical Center, Cincinnati, Ohio and entered into a research collaboration with them to develop LAL for treating atherosclerosis, a leading cause of death in the United States and other developed countries.

Employees

As of March 26, 2004, we have 76 full-time employees, of which 53 are engaged in research and development or biomanufacturing activities. The remainder work in general and administrative areas. Seventeen employees hold Ph.D. degrees.

Research and Development

Our internally funded research and development expenses were $11.5 million, $21.2 million, and $22.4 million in 2003, 2002, and 2001, respectively. Our customer-sponsored research and development expenditures were $4.7 million, $1.2 million, and $3.5 million in 2003, 2002, and 2001, respectively.

Competition

The markets for protein development and production, including human vaccines and therapeutics such as the ones we are developing, are highly competitive. Competitors with substantially greater resources are actively developing products similar to, or competitive with, our products. Several pharmaceutical, biotechnology, chemical and other life sciences companies engage in research and development in the use of novel gene expression systems to produce therapeutic proteins. Two other companies are marketing products overseas that would, or might, be competitive with our Alpha-galactosidase A product.

Our recombinant Aprotinin product and follow-on off-patent therapeutics such as interferons and GCSF are, or will be, off patent protection by the time they are ready for marketing. While we expect to enter pre-existing markets with the same or similar products, our efficient GENEWARE manufacturing and the anticipated favorable cost of production through use of our GENEWARE system, should give us a competitive edge. One of our potential products, lysosomal acid lipase, has no functional equivalent and thus, no direct competing product.

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Technologies competitive with our BAMF technology are under development and being marketed by other companies and academic institutions. The field of bioinformatic analysis of blood serum to diagnose diseases such as cancer is in an early stage. We are not aware of commercially available competitive technology that has been demonstrated to be superior to ours.

Item 2.    Properties

Our principal research and development facility and corporate headquarters are located in Vacaville, California, at a facility of approximately 45,000 square feet that includes administrative offices, a genetic engineering laboratory, a plant discovery and function laboratory and a bioinformatics software laboratory, under a lease that expires on February 28, 2009. We own a facility of approximately 22,000 square feet and land of approximately 23 acres in Owensboro, Kentucky for pilot and large-scale protein extraction and downstream biomanufacturing of products. We have a facility in Germantown, Maryland of approximately 53,000 square feet under a lease that expires on December 31, 2010. This facility was previously occupied by our proteomics operations, which was wound down on December 31, 2003. We are currently seeking to sublease this property.

Item 3.    Legal Proceedings

From time to time we become a party to legal proceedings that are incident to our normal business operations such as employment litigation. In the opinion of management, these lawsuits will not result in any material adverse effects on the Company’s financial condition.

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

None.

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Part II

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

Market Information.    The Company’s common stock is traded on the NASDAQ National Market under the symbol “LSBC.” Public trading of our common stock commenced on August 10, 2000. The following table sets forth the high and low sale price per share of the Company’s common stock during each quarter of 2003 and 2002.

Holders.    Based upon data provided by our transfer agent, the Company had approximately 5,522 beneficial holders of our common stock as of March 15, 2004. This total includes persons whose stock is in nominee or “street name” accounts through brokers.

Dividends.    The Company has never declared or paid any cash dividends on its common stock and we do not anticipate declaring any dividends in the foreseeable future. We currently intend to reinvest future earnings, if any, for use in research and development or other business needs.

Use of Proceeds.    During the third quarter of 2000, the Company received net proceeds of approximately $89 million from an initial public offering, or IPO, of common stock. Provided below is a reasonable estimate of the amount of IPO net proceeds used in each of the following categories, through December 31, 2003:

The use of proceeds for working capital includes expenditures for research and development and general and administrative activities. Cash and investments are temporary investments consisting of money market funds and bank certificates of deposit.

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

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You should read the following selected financial data in conjunction with Item 7, “Management’s

Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included in Part IV of this Report. We derived the consolidated statement of operations data for the years ended December 31, 2003, 2002, and 2001 and the consolidated balance sheet data as of December 31, 2003 and 2002 from our audited consolidated financial statements included in this Report. We derived the consolidated statement of operations data for the year ended December 31, 2000 and 1999 and the consolidated balance sheet data as of December 31, 2001, 2000 and 1999 from our audited consolidated financial statements not included in this Report.