SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

	For the quarterly period ended March 31, 2003.

or

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

	For the transition period from to

Commission File Number 0-22987

VALENTIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

650-697-1900
(Registrant’s Telephone Number Including Area Code)

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

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

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 5,555,708 as of May 14, 2003.

VALENTIS, INC.

INDEX

PART I: FINANCIAL INFORMATION
ITEM 1:	FINANCIAL STATEMENTS (Unaudited)
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Statements of Cash Flows
		Notes to the Condensed Consolidated Financial Statements
ITEM 2:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
		Overview
		Technology Platforms
		Del-1 Gene Medicine Product
		Legal Proceedings Regarding Intellectual Property
		Subsequent Events
		Results of Operations
		Liquidity and Capital Resources
		Additional Factors That May Affect Future Results
ITEM 3:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4:	CONTROLS AND PROCEDURES
PART II: OTHER INFORMATION
ITEM 1:	LEGAL PROCEEDINGS
ITEM 2:	CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6:	EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALENTIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2003			June 30, 2002
	(unaudited)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	5,969		$	11,212
Short-term investments	—			7,892
Interest and other receivables	63			471
Prepaid expenses and other current assets	593			479
Total current assets	6,625			20,054
Property and equipment, net	2,087			3,526
Goodwill	409			409
Other assets	54			55
Total assets	$	9,175		$	24,044
LIABILITIES AND STOCKHOLDERS’ EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable	$	252		$	68
Accrued compensation	1,044			1,004
Accrued clinical trial costs	1,796			2,047
Accrued restructuring charges	—			837
Other accrued liabilities	1,132			1,823
Deferred revenue	125			—
Current portion of long-term debt	63			138
Total current liabilities	4,412			5,917
Commitments
Series A redeemable convertible preferred stock	—			25,828
Stockholders’ equity (net capital deficiency):
Common stock	6			1
Additional paid-in capital	210,149			184,631
Accumulated other comprehensive loss	(373		)	(123		)
Accumulated deficit	(205,019		)	(192,210		)
Total stockholders’ equity (net capital deficiency)	4,763			(7,701		)
Total liabilities and stockholders’ equity (net capital deficiency)	$	9,175		$	24,044

See accompanying notes.

VALENTIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Collaborative research and development revenue	$	—		$	833		$	—		$	3,333
License and other revenue	1,063			—			2,658			412
Research and development grant revenue	—			—			—			17
Total revenue	1,063			833			2,658			3,762
Operating expenses:
Research and development	2,283			5,588			7,814			18,775
General and administrative	1,773			1,946			7,256			6,089
Restructuring charge	—			1,725			832			1,725
Amortization of goodwill and other acquired intangible assets	—			1,433			—			4,300
Total operating expenses	4,056			10,692			15,902			30,889
Loss from operations	(2,993		)	(9,859		)	(13,244		)	(27,127		)
Interest income	16			159			103			859
Interest expense and other, net	(49		)	(182		)	332			(101		)
Net loss	(3,026		)	(9,882		)	(12,809		)	(26,369		)
Deemed dividends - Accretion of warrants, issuance costs, and beneficial conversion feature	(3,684		)	(775		)	(4,972		)	(2,072		)
Adjustment resulting from the reduction in the Series A preferred stock conversion price	(22,293		)	—			(22,293		)	—
Dividends on convertible preferred stock	(112		)	(384		)	(882		)	(1,171		)
Net loss applicable to common stockholders	$	(29,115	)	$	(11,041	)	$	(40,956	)	$	(29,612	)
Basic and diluted net loss per share applicable to common stockholders	$	(6.61	)	$	(9.11	)	$	(17.92	)	$	(27.65	)
Shares used in computing basic and diluted net loss per common share	4,402			1,212			2,286			1,071

See accompanying notes.

VALENTIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended March 31,
	2003			2002
Cash flows from operating activities:
Net loss	$	(12,809	)	$	(26,369	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation	1,432			2,108
Loss (Gain) on disposal of assets	(99		)	136
Amortization of goodwill and other acquired intangibles	—			4,300
Amortization of deferred compensation	—			10
Stock options granted to non-employees for services rendered	—			303
Changes in operating assets and liabilities:
Other receivables	408			80
Prepaid expenses and other assets	(114		)	23
Deferred revenue	125			(3,333		)
Accounts payable	184			(240		)
Accrued liabilities	(1,673		)	169
Foreign currency translation adjustment	(250		)	(146		)
Net cash used in operating activities	(12,796		)	(22,959		)

Cash flows from investing activities:
Purchase of property and equipment	(20		)	(127		)
Proceeds from sale of property and equipment	126			—
Purchase of available-for-sale investments	—			(12,556		)
Maturities of available-for-sale investments	7,892			20,735
Net cash provided by investing activities	7,998			8,052

Cash flows from financing activities:
Payments on long-term debt	(75		)	(2,042		)
Preferred stock dividends paid in cash	(373		)	—
Proceeds from issuance of common stock, net of repurchases	3			13,194
Net cash provided by (used in) financing activities	(445		)	11,152

Net increase (decrease) in cash and cash equivalents	(5,243		)	(3,755		)
Cash and cash equivalents, beginning of period	11,212			13,691
Cash and cash equivalents, end of period	$	5,969		$	9,936

Supplemental disclosure of cash flow information:
Interest paid	$	10		$	103
Schedule of non-cash transactions:
Preferred stock dividends declared	$	882		$	1,171
Preferred stock dividends paid in common stock	$	573		$	1,171
Preferred stock converted into common stock	$	30,800		$	700
Accretion of preferred stock warrants, beneficial conversion feature and issuance costs	$	4,972		$	2,073

See accompanying notes.

VALENTIS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Valentis, Inc. (“Valentis”, the “Company”, “we”, “us” or “our”) in accordance with the rules and regulations of the Securities and Exchange Commission for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in our annual consolidated financial statements as required by accounting principles generally accepted in the United States have been condensed or omitted. The interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair statement of financial position at March 31, 2003 and the results of operations for the interim periods ended March 31, 2003 and 2002. The balance sheet at June 30, 2002 is derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results of operations to be expected for the fiscal year, although Valentis expects to incur a substantial loss for the year ended June 30, 2003. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended June 30, 2002, which are contained in Valentis’ Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission.

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

In January 2003, we received stockholder approval for, and completed, our proposed capital restructuring activities. Specifically, we effected the conversion of all outstanding shares of our Series A convertible redeemable preferred stock into common stock and, immediately thereafter, effected a reverse stock split of our common stock at a ratio of one-for-thirty. As a result of the reverse stock split, each outstanding share of common stock automatically converted into one-thirtieth of a share of common stock. Accordingly, common stock share and per share amounts for all periods presented have been adjusted to reflect the effects of the reverse stock split. See Note 8 for further information.

2. Significant Accounting Policies

Stock-Based Compensation Pro Forma Information

Valentis has elected to follow APB 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, ”Accounting for Stock-Based Compensation”, requires use of valuation models that were not developed for use in valuing employee stock options. Under APB 25, if the exercise price of Valentis' employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma net loss and net loss per share information is required by SFAS 148, which also requires that the information be determined as if Valentis has accounted for its employee stock options under the fair market value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model.

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Net loss applicable to common share holders – as reported	$	(29,115	)	$	(11,041	)	$	(40,956	)	$	(29,612	)
Deduct: Stock-based employee stock compensation expense determined under SFAS 123		(108)			(324)			(186)			(2,735)
Net loss applicable to common share holders – Pro Forma	$	(29,223	)	$	(11,365	)	$	(41,142	)	$	(32,347	)
Net loss per share applicable to common share holders– as reported	$	(6.61	)	$	(9.11	)	$	(17.92	)	$	(27.65	)
Net loss per share applicable to common share holders– Pro Forma	$	(6.64	)	$	(9.38	)	$	(18.00	)	$	(30.20	)

Revenue Recognition

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

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

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

3. Net Loss Per Share

Basic earnings per share is computed by dividing income or loss applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the effect of options and warrants, if dilutive. Due to our net loss position for all periods presented, diluted net loss per share has not been presented separately because the result would be antidilutive.

Options to purchase 117,698 shares of common stock at a weighted average price of $172.02 per share and options to purchase 143,228 shares of common stock at a weighted average price of $179.70 per share have been excluded from the calculation of diluted net loss per share for the three months ended March 31, 2003 and 2002, respectively, because the effect of inclusion would be antidilutive. Options to purchase 134,844 shares of common stock at a weighted average price of $165.14 per share and options to purchase 133,208 shares of common stock at a weighted average price of $198.90 per share have been excluded from the calculation of diluted net loss per share for the nine months ended March 31, 2003 and 2002, respectively, because the effect of inclusion would be antidilutive.

In December 2000, in connection with the sale of shares of Series A convertible redeemable preferred stock (the “Series A preferred stock”), the Company issued common stock purchase warrants exercisable for up to an aggregate of 37,560 shares of common stock and warrants to purchase up to an aggregate of 4,666 shares of common stock as compensation to certain Series A preferred stockholders who acted as placement agents or financial advisors in the private transaction.

The options and common stock purchase warrants will be included in the calculation of net income per share at such time as the effect is no longer antidilutive, as calculated using the treasury stock method for options and warrants.

4. Comprehensive Loss

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2003			2002			2003			2002
Net loss	$	(3,026	)	$	(9,882	)	$	(12,809	)	$	(26,369	)
Net unrealized loss on available-for-sale securities	—			(44		)	—			(115		)
Foreign currency translation adjustment	146			159			(250		)	(146		)
Comprehensive loss	$	(2,880	)	$	(9,767	)	$	(13,059	)	$	(26,630	)

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

	March 31, 2003			June 30, 2002
Unrealized gain (loss) on available-for-sale securities	$	—		$	1
Foreign currency translation adjustments	(373		)	(124		)
Accumulated other comprehensive loss	$	(373	)	$	(123	)

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

Redeemable Convertible Preferred Stock and Common Stock Warrants

On December 5, 2000, we completed the private placement of 31,500 shares of Series A preferred stock, at a purchase price of $1,000 per share, for an aggregate purchase price of $31.5 million. In connection with the sale of the Series A preferred stock, we issued Class A and Class B common stock purchase warrants exercisable for up to an aggregate of 37,560 shares of our common stock to purchasers of the Series A preferred stock, and Class A warrants to purchase up to an aggregate of 4,666 shares of our common stock as compensation to certain preferred stock purchasers who acted as placement agents or financial advisors in the private transaction. In January 2002, a Series A preferred stockholder converted 700 shares of Series A preferred stock into 2,592 shares of common stock. The conversion ratio for the Series A preferred stock was adjusted in January 2003. The 30,800 shares of Series A preferred stock that remained outstanding as of January 24, 2003, were initially convertible into 114,073 shares of common stock.

Prior to the conversion of the Series A preferred stock to Common Stock on January 24, 2003 (as discussed in Note 8), the Series A preferred stockholders were entitled to cumulative dividends, which accrued at an annual rate of 5%, payable quarterly, in cash or, at our election, in shares of common stock. If we elected to pay dividends in shares of our common stock, those shares were valued at the average closing bid price for our common stock during the twenty consecutive trading days ending on and including the trading day immediately prior to the dividend payment date. The number of shares of common stock issued for dividends during the nine months ended March 31, 2003 and 2002 were 84,336 shares and 13,797 shares, respectively.

Each share of Series A preferred stock, together with accrued and unpaid dividends, was originally convertible, at the option of the holder, into that number of shares of our common stock that is calculated by dividing the stated value, plus accrued and unpaid dividends, by a fixed conversion price of $270.00, subject to certain adjustments. This conversion price was adjusted to $7.26 in January 2003 (see Note 8).

In January 2002, a Series A preferred stockholder converted all of its 700 shares of Series A preferred stock, with a stated value of $1,000 per share, into 2,592 shares of the Company’s common stock at a conversion price of $270.00 per share. The Series A preferred stockholder still holds Class A and Class B common stock purchase warrants exercisable for 710 and 227 shares of our common stock, respectively.

Other than as required by law, the holders of the Series A preferred stock had no voting rights, except that the consent of the holders of a majority of the Series A preferred stock was required to effect any change in our certificate of incorporation that would materially and adversely affect any rights of the Series A preferred stock or create any series of preferred stock with rights senior to those of the Series A preferred stock. Pursuant to the terms of the Series A Amendment, Consent and Waiver regarding the Subscription Agreement and Certificate of Designations for the Series A Preferred Stock of Valentis, Inc., executed by and among the Company and each of the holders of the Series A preferred stock on November 11, 2002 and subject to certain conditions thereof, we received the consent of each holder of Series A preferred stock to effect certain changes in our certificate of incorporation that

materially and adversely affected the rights of the Series A preferred stock, as more fully described in Note 8 in our Notes to Unaudited Condensed Consolidated Financial Statements.

Class A Warrants

In connection with the issuance of the Series A preferred stock on December 5, 2000, Valentis issued common stock purchase warrants, Class A, exercisable for an aggregate of 31,983 shares of common stock to the purchasers of the Series A preferred stock and to the placement agents. The Class A Warrants are immediately exercisable and remain exercisable for four years at an exercise price of $307.50 per share, subject to adjustment. In the event that the average closing bid price of the common stock during any ten consecutive trading days exceeds 275% of the exercise price, the Company may cancel the Class A warrants.

Class B Warrants

Valentis issued common stock purchase warrants, Class B, to the purchasers of the Series A preferred stock, exercisable for an aggregate of 10,243 shares of common stock. The Class B Warrants became exercisable one year after issuance and remain exercisable for three years at an exercise price of $307.50 per share, subject to adjustment.

Summary of Certain Preferred Stock and Warrant Accounting

The total cash proceeds from the sale of Series A preferred stock of $31.5 million for the Series A preferred stock and Class A and B warrants were discounted by approximately $6.0 million, representing the value assigned to the Class A and B warrants exercisable for an aggregate of 42,226 shares of common stock issued in the private placement. The $6.0 million value of the warrants was subject to accretion over the 3.5-year redemption period. After reducing the proceeds by the value of the warrants, the remaining proceeds were used to compute a discounted conversion price in accordance with EITF 00-27, “Application of EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments.” The discounted conversion price was compared to the fair market value of the Valentis common stock on December 5, 2000 (the date of issuance of the Series A preferred stock) resulting in a beneficial conversion feature of approximately $1.1 million which represents the difference between the fair market value of Valentis’ common stock and the discounted conversion price, and was subject to accretion over the 3.5-years redemption period.

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

The accretion of Class A and B warrants for the three and nine months ended March 31, 2003 was approximately $2.5 million and $3.3 million, respectively. The accretion of Class A and B warrants for the three and nine months ended March 31, 2002 was approximately $515,000 and $1.4 million, respectively. The accretion of the beneficial conversion feature for the three and nine months ended March 31, 2003 was approximately $439,000 and $592,000, respectively. The accretion of the beneficial conversion feature for the three and nine months ended March 31, 2002 was approximately $94,000 and $251,000, respectively. The aggregate accretion value associated with the warrants and beneficial conversion feature were included in the calculation of net loss applicable to common stockholders.

Issuance costs of approximately $1.9 million were accounted for as a discount on the Series A preferred stock and were accreted over the 3.5-year redemption period. Accretion of approximately $776,000 and $1.0 million for the three and nine months ended March 31, 2003, respectively, was included in the calculation of net loss applicable to common stockholders. Accretion of approximately $166,000 and $443,000 for the three and nine months ended March 31, 2002, respectively, was included in the calculation of net loss applicable to common stockholders.

Additionally, as a result of the simultaneous conversion of the Series A preferred stock to common stock and the reduction in the Series A preferred stock conversion price (see Note 8), the excess of the fair value of the common stock issued to the Series A preferred stockholders over the fair value of the common stock issuable pursuant to the original conversion terms was approximately $22.3 million. This amount also was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003.

Dividends on the Series A preferred stock, calculated at value at the rate of 5% per annum, were approximately $111,000 and $881,000 for the three and nine months ended March 31, 2003, respectively, and were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders. Dividends on the Series A preferred stock, calculated at value at the rate of 5% per annum, were approximately $384,000 and $1.2 million for the three and nine months ended March 31, 2002, respectively, and were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders.

6. Corporate Restructuring Actions

In conjunction with the Company’s announcement in January 2002 that it would suspend clinical development of its cancer immunotherapy products, Valentis implemented a restructuring plan to better align the Company’s cost structure with current market conditions. This plan significantly reduced the Company’s preclinical product development efforts and suspended its clinical programs in oncology in an effort to lower future expenditures and conserve cash. A total of 47 positions, primarily in preclinical and manufacturing research and development, and associated general and administrative staff, were eliminated as a result of the restructuring.

For the year ended June 30, 2002, we recorded restructuring and related charges of approximately $1.8 million, of which approximately $1.5 million was recorded for employee severance. Of the $1.5 million charge, approximately $700,000 was paid as of June 30, 2002 and the remaining approximately $800,000 was fully paid during the nine months ended March 31, 2003, including approximately $73,000 that was paid during the three months ended March 31, 2003. All of the 47 employees whose positions were eliminated were terminated as of June 30, 2002. In addition, the Company wrote off certain equipment and furniture located in the Company’s research facility in The Woodlands, Texas that would no longer be used due to the restructuring. The net book value of these assets totaled approximately $279,000 and was recorded in the year ended June 30, 2002 as an impairment charge associated with the Company’s restructuring plan.

7. Goodwill and Intangible Assets

Valentis recorded $1.4 million for amortization of goodwill and other acquired intangible assets for the quarter ended March 31, 2002, which was associated with the acquisitions of GeneMedicine in fiscal 1999 and PolyMASC in fiscal 2000. We adopted SFAS 142 (see Note 10) on July 1, 2002. As of June 30, 2002, we had approximately $409,000 of goodwill, which is no longer being amortized but is subject to an impairment analysis on at least an annual basis in accordance with the requirements of SFAS 142. We completed the initial required impairment analyses in accordance with SFAS 142 as of July 1, 2002 and additionally as of December 31, 2002, and determined that goodwill was not impaired.

In accordance with SFAS 142, companies are required in the year of adoption to exclude the impact of SFAS 142 from comparable interim periods until pre-adoption periods are no longer presented. The following tables adjust the Company’s net loss to exclude the effects of goodwill amortization during the three months and the nine months ended March 31, 2003 and 2002 and during the years ended June 30, 2002, 2001 and 2000 (in thousands, except per share amounts).

	Three Months Ended March 31,								Nine Months Ended March 31,
	2003				2002				2003				2002
Reported net loss attributable to common stockholders	$	(29,115		)	$	(11,041		)	$	(40,956		)	$	(29,612		)
Plus FAS 142 adjustments:
Goodwill amortization	—				1,433				—				4,300
Adjusted net loss attributable to common stockholders	$		(29,115	)	$		(9,608	)	$		(40,956	)	$		(25,312	)
Adjusted net loss per common share	$	(6.61		)	$	(7.93		)	$	(17.92		)	$	(23.63		)

	Year Ended June 30,
	2002			2001			2000

Reported net loss attributable to common stockholders	$	(37,237	)	$	(40,576	)	$	(47,655	)
Plus FAS 142 adjustments:
Goodwill amortization	4,914			5,733			5,016
Adjusted net loss attributable to common stockholders	$	(32,323	)	$	(34,843	)	$	(42,639	)
Adjusted net loss per common share	$	(29.15	)	$	(35.41	)	$	(48.34	)

8. Capital Restructuring Actions

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

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

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

Upon conversion of the Series A preferred stock to common stock the remaining $3.5 million of unaccreted deemed dividend representing the balance of amounts attributed to common stock purchase warrants, beneficial conversion feature and issuance costs related to the Series A preferred stock was fully accreted and recorded as a deemed dividend. This deemed dividend was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003. Additionally, as a result of the simultaneous conversion of the Series A preferred stock to common stock and the reduction in the Series A preferred stock conversion price, the excess of the fair value of the common stock issued to the Series A preferred stockholders over the fair value of the common stock issuable pursuant to the original conversion terms was approximately $22.3 million. This amount also was included in the calculation of net loss applicable to common stockholders for the three and nine months ended March 31, 2003.

9. Move to The Nasdaq SmallCap Market

Our common stock began trading on The Nasdaq SmallCap Market effective as of the opening of business on January 31, 2003, pursuant to an exception described below. There was no change in the method by which the Company’s common stock is traded, and the transfer to The Nasdaq SmallCap Market was transparent to stockholders. The Nasdaq National Market and The Nasdaq SmallCap Market both operate under the same electronic, screen-based dealer market with trading executed through an advanced computer and telecommunications network. The decision of The Nasdaq Stock Market to grant the Company’s request to transfer the Company’s common stock from The Nasdaq National Market to The Nasdaq SmallCap Market was made by a panel established by Nasdaq to review the Company’s ability to satisfy the continued listing requirements applicable to Nasdaq National Market issuers.

The exception requires the Company to, among other things, (i) file an application for new listing, pay all applicable listing fees and evidence compliance with all requirements for continued listing on The Nasdaq SmallCap Market, but for the minimum bid price requirement; and (ii) make public filings with the Securities and Exchange Commission and Nasdaq evidencing a certain amount of stockholders’ equity and compliance with all other requirements for continued listing on The Nasdaq SmallCap Market. In addition, as described more fully in the section labeled “Additional Factors That May Affect Future Results” below, the listing of the

Company’s common stock on The Nasdaq SmallCap Market is pursuant to an exception to the independent director and audit committee composition requirements set forth in Nasdaq Marketplace Rules 4350(c) and 4350(d)(2). Effective April 17, 2003, and for the duration of the exception to the independent director and audit committee composition requirements, the Company's Nasdaq symbol will be VLTSC. The "C" will be removed from the symbol when the Nasdaq Listing Qualifications Panel has confirmed compliance with the terms of the exception and all other criteria for continued listing.

The continued listing of the Company’s common stock on The Nasdaq SmallCap Market is subject to the Company’s ability to demonstrate compliance, as well as an ability to sustain compliance, with all requirements for continued listing. SmallCap issuers must maintain a minimum bid price of at least $1.00 per share, stockholders’ equity of at least $2.5 million and a market value of publicly held shares of at least $1 million, among other requirements.

10. New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations, and Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations that are completed after June 30, 2001. There was no impact to the Company upon adoption of SFAS 141. Under SFAS 142, goodwill will no longer be amortized but will be subject to a test for impairment on at least an annual basis. The Company adopted SFAS 142 on July 1, 2002, and at such time the Company had approximately $409,000 of unamortized goodwill resulting from the acquisition of PolyMASC Pharmaceuticals plc in September 1999, which is subject to the new accounting rules. As a result of adopting SFAS 142, we are required to perform an initial impairment review of the Company’s goodwill as of July 1, 2002 and an annual impairment review thereafter. The initial review was completed during the quarter ended December 31, 2002. The Company concluded that no adjustment to goodwill was necessary as of July 1, 2002. However, there can be no assurance that when other periodic reviews are completed, a material impairment charge will not be recorded.

In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal of Long-Lived Assets, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001, with transition provisions for certain matters. SFAS 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of Statement 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The new rules also supersede the provisions of APB Opinion 30 with regard to reporting the effects of a disposal of a segment of a business. The Company adopted SFAS 144 on July 1, 2002. The adoption did not have a material impact on our results of operations, financial position or cash flows.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), Accounting for Costs Associated with Exit or Disposal Activities. This statement supercedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of an entity’s commitment to an exit plan. The statement further establishes fair value as the objective for initial measurement of the liability and that employee benefit arrangements requiring future service beyond a “minimum retention period” be recognized over the future service period. This statement is effective prospectively for exit or disposal activities initiated after December 31, 2002. The Company’s adoption of SFAS 146 did not have a material impact on our results of operations, financial position or cash flows.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company’s adoption of FIN 45 did not have a material impact on our results of operations, financial position or cash flows.

In December 2002, the Financial Accounting Standards Board issued SFAS 148. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The additional disclosure requirements of SFAS 148 are effective for fiscal periods ended after December 15,

2002. We do not intend to adopt the fair value based method of accounting for stock-based employee compensation, but have adopted the disclosure provisions required by SFAS 148.

In November 2002, the FASB issued Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a company for arrangements under which it will perform multiple revenue-generating activities. EITF 00-21 addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating the impact that the adoption of EITF 00-21 will have on its financial position and results of operations.

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

The discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words “believes,” “anticipates,” “expect,” and other words of similar import or the negative of those terms or expressions. Such forward-looking statements will have known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those set forth in such forward-looking statements as a result of the “Risk Factors” and other risks detailed in the Company’s reports filed with the Securities and Exchange Commission.

OVERVIEW

BUSINESS SUMMARY AND RECENT ACTIONS		Since our last 10-Q filing:

		· We continue to advance our lead product, Del-1, through development. Del-1 is a novel gene therapy for the growth of new blood vessels in patients with vascular diseases. In April 2003, we achieved a corporate milestone by completing the scheduled dosing in our Phase I dose escalation safety trial. There were no observed severe adverse events from the drug. We plan to present interim results from the trial at the American Society of Gene Therapy meeting in June 2003. We are on schedule to begin our Del-1 peripheral arterial disease Phase II trial in mid-2003.

		· We remain focused on control of expenses and continue to reduce spending wherever practical.

		· We continue to pursue the patent infringement lawsuit with Alza Corporation.


*TECHNOLOGY PLATFORMS*

VALENTIS HAS THREE PRODUCT PLATFORMS FOR THE DEVELOPMENT OF NOVEL THERAPEUTICS: GENE MEDICINE, GENESWITCH® AND DNA VACCINE PLATFORMS. VALENTIS IS DEVELOPING THE GENE MEDICINE PLATFORM ITSELF AND IS DEVELOPING THE OTHER PLATFORMS THROUGH PRODUCT DEVELOPMENT LICENSES.		Valentis is converting biologic discoveries into innovative products. The Company’s lead product is based on the Del-1 angiogenesis gene, formulated with one of the Company’s PINC™ proprietary polymer delivery systems. The Company has licensed certain of its other technologies including the GeneSwitch® and DNA vaccine delivery technologies to pharmaceutical and biotechnology companies.

		Valentis develops products in a single business segment, gene therapy, by combining gene delivery and gene regulation technologies with novel genes.


GENE MEDICINE PRODUCTS		Valentis uses non-viral, or synthetic, delivery systems to develop gene medicines. Each product consists primarily of two components: (i) a DNA plasmid, a circular segment of DNA that contains a therapeutic gene and components that regulate its expression; and (ii) polymers and/or other synthetic agents to facilitate the delivery of the DNA plasmids into target cells

		by various modes of administration.

		Valentis’ gene medicine products, typically administered by conventional pharmaceutical routes after being reconstituted from single-vial, stable, lyophilized (freeze-dried) formulations, provide novel ways to achieve prolonged production of therapeutic proteins in their most natural and active form at specific sites within the body. Upon delivery, genes formulated with synthetic delivery systems enter targeted cells and produce the therapeutic proteins.


DEL-1 GENE MEDICINE PRODUCT

VALENTIS IS PRIORITIZING ITS EFFORTS ON THE CLINICAL DEVELOPMENT OF ITS DEL-1 GENE MEDICINE PRODUCT FOR PERIPHERAL ARTERIAL DISEASE.		We have completed the scheduled dosing of patients in our Phase I dose escalation safety trial for our lead product, Del-1. Twenty-seven patients with peripheral arterial disease (PAD) were enrolled and treated in this trial. To date, the safety profile is positive with no observed severe adverse effects related to the drug. The results of this trial have allowed us to choose a dose and dosing pattern for our Phase II safety and efficacy trial. We plan to present interim results from the trial at the American Society of Gene Therapy meeting in June 2003.

		We are on schedule to begin our Del-1 peripheral arterial disease Phase II trial in mid-2003.

		Del-1 is a protein involved in the early growth and development of blood vessels. It is a unique angiogenic factor that promotes vascular growth and inhibits endothelial cell death. Del-1 has a distinct mechanism of action from other known angiogenic factors such as members of the VEGF and FGF families. By stimulating angiogenesis, Del-1 has demonstrated the potential to be effective in the treatment of a variety of cardiovascular diseases, including peripheral arterial disease (PAD) and ischemic heart disease (IHD).


GENESWITCH® SYSTEM		We have a technology licensing agreement for our GeneSwitch® gene regulation technology with GlaxoSmithKline (Glaxo) and a multi-product license and option agreement with Schering AG that includes our GeneSwitchÒ and delivery technologies.

		The GeneSwitchÒ gene regulation system allows researchers to control the level and duration of selected genes in transgenic animals and cell cultures, aiding in the identification and characterization of a gene’s function.


SYNTHETIC VACCINE DELIVERY SYSTEMS		Epimmune Inc. has a non-exclusive license for our proprietary DNA vaccine delivery technology for use in developing treatments for cancer. Epimmune has also licensed Valentis' proprietary PINC™ gene delivery technology for Epimmune's preventive and therapeutic DNA vaccines in development against the human immunodeficiency virus (HIV) and the hepatitis C virus (HCV).

		Epimmune's genetic vaccines contain EpiGenes™, DNA sequences from HIV or HCV, that code for protein fragments

		(epitopes) that stimulate cytotoxic and helper T cell responses. These immune responses are important defenses against infection. Epimmune's preclinical data demonstrates that PINC™ formulations are effective in delivering EpiGene™ vaccines.

		Also, Valentis' provided Genencor with an option to a license for proprietary PINC™ gene delivery technology for Genencor's preventive and therapeutic DNA vaccines in development against the hepatitis B virus ("HBV") and the human papilloma virus ("HPV"). Genencor's genetic vaccines contain DNA sequences from HBV or HPV, which code for protein fragments (epitopes) that stimulate cytotoxic and helper T cell responses. These immune responses are important defenses against infection.

		We have developed synthetic vaccine delivery systems based on our proprietary PINC™ polymers. Our proprietary PINC™ polymer-based delivery technologies provide more consistent levels of gene expression and enhance transfection efficiency of plasmid DNA delivered intramuscularly or intratumorally.


*LEGAL PROCEEDINGS REGARDING INTELLECTUAL PROPERTY*

POLYMASC FILED LAWSUITS AGAINST ALZA CORPORATION, SP LABO N.V. SP EUROPE AND ESSEX PHARMA GMBH, ALL MEMBERS OF THE SCHERING P LOUGH, GROUP FOR INFRINGEMENT OF OUR “LIPOSOMES” PATENT.		On April 6, 2001, Valentis’ wholly owned subsidiary, PolyMASC Pharmaceuticals plc (PolyMASC), filed a lawsuit against ALZA Corporation (subsequently acquired by Johnson & Johnson Inc.) for patent infringement based on ALZA’s manufacture and sale of its liposomal products, Doxil® and Caelyx®. The lawsuit was filed in the U.S. District Court in Delaware and alleges infringement of U.S. Patent Number 6,132,763, titled “Liposomes.” The patent, issued October 17, 2000, is directed towards PEGylated liposomes (liposomes having PEG chains attached). Doxil® and Caelyx® are PEGylated liposomes encapsulating the drug doxorubicin. PolyMASC is seeking monetary damages and enhanced damages should the court find that ALZA’s infringement was willful. The District Court issued a ruling in December 2002, in which the court decided the meaning of certain terms used in the patent claims at issue in the litigation. In the ruling, the district court adopted the claim interpretation proposed by ALZA. As a result, the Court entered judgment of non-infringement in favor of ALZA. The Company is appealing that decision to the Federal Circuit Court of Appeals.

		On April 24, 2002, Valentis announced that PolyMASC had initiated infringement proceedings in Dusseldorf, Germany, against SP Labo N.V., SP Europe and Essex Pharma GmbH, all members of the Schering-Plough Group. The suit alleges infringement of European Patent Nos. EP572,049B1 and EP445,131B1, based on the sales of Caelyx®. Both patents are European counterparts to U.S. Patent Number 6,132,763 described above. PolyMASC is seeking monetary damages.

		The Company announced in January 2003 that the Japanese Patent Office has dismissed ALZA’s demand for invalidation, brought by ALZA on August 20, 2001 relating to claim five of Japanese Patent No. 2948246, which is the Japanese

		counterpart to the U.S. and European patents described above. ALZA was seeking to overturn the previous finding of the Opposition Division of the Japanese Patent Office in favor of PolyMASC’s patent.


*CAPITAL RESTRUCTURING*

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

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

		Following the Annual Meeting, the Board of Directors authorized a one-for-thirty reverse stock split (the “Reverse Stock Split”) whereby each outstanding share of common stock automatically converted into one-thirtieth of a share of common stock. Accordingly, common stock share and per share amounts for all period presented have been adjusted to reflect the impact of the Reverse Stock Split. The Company filed the Restated Certificate on January 24, 2003, and the conversion of Series A preferred stock and the reverse stock split occurred on the same day. As a result of the conversion of the Series A preferred stock (and the payment of accrued and unpaid dividends and arrearage interest on unpaid dividends), the Company issued approximately 4.3 million shares. In lieu of fractional shares of common stock, stockholders received a cash payment based on the closing price of the common stock on January 23, 2003. The par value of the common stock remains at $.001. The Company’s common stock began trading on a split-adjusted basis when the market opened on January 27, 2003.

		Upon conversion of the Series A preferred stock to common stock the remaining $3.5 million of unaccreted deemed

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

VALENTIS MOVED TO THE NASDAQ SMALLCAP MARKET.		Our common stock began trading on The Nasdaq SmallCap Market effective as of the opening of business on January 31, 2003, pursuant to an exception described below. There was no change in the method by which the Company’s common stock is traded, and the transfer to The Nasdaq SmallCap Market was transparent to stockholders. The Nasdaq National Market and The Nasdaq SmallCap Market both operate under the same electronic, screen-based dealer market with trading executed through an advanced computer and telecommunications network. The decision of The Nasdaq Stock Market to grant the Company’s request to transfer the Company’s Common Stock from The Nasdaq National Market to The Nasdaq SmallCap Market was made by a panel established by Nasdaq to review the Company’s ability to satisfy the continued listing requirements applicable to Nasdaq National Market issuers.

		The exception requires the Company to, among other things, (i) file an application for new listing, pay all applicable listing fees and evidence compliance with all requirements for continued listing on The Nasdaq SmallCap Market, but for the minimum bid price requirement; and (ii) make a public filing with the Securities and Exchange Commission and Nasdaq evidencing a certain amount of stockholders’ equity. In addition, as described more fully in the section labeled “Additional Factors That May Affect Future Results” below, the listing of the Company’s common stock on The Nasdaq SmallCap Market is pursuant to an exception to the independent director and audit committee composition requirements set forth in Nasdaq Marketplace Rules 4350(c) and 4350(d)(2). Effective April 17, 2003, and for the duration of the exception to the independent director and audit committee composition requirements, the Company's Nasdaq symbol will be VLTSC. The "C" will be removed from the symbol when the Nasdaq Listing Qualifications Panel has confirmed compliance with the terms of the exception and all other criteria for continued listing.

		The continued listing of the Company’s common stock on The Nasdaq SmallCap Market is subject to the Company’s ability to demonstrate compliance, as well as an ability to sustain compliance, with all requirements for continued listing. SmallCap issuers must maintain a minimum bid price of at least $1.00 per share, stockholders’ equity of at least $2.5 million and a market value of publicly held shares of at least $1 million, among other requirements.

FINANCING AND CAPITAL REQUIREMENTS		In order to maintain our Nasdaq SmallCap Market listing through 2003 and to continue to fund operations, we will need to raise additional funds. We will have insufficient working capital to fund our near term cash needs unless we are able to raise additional capital in the near future. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms will have a material adverse effect on our business, financial condition and results of operations, including our viability as an enterprise. As a result of these concerns, we are pursuing strategic alternatives, which may include the sale of securities, the sale or merger of our business, the sale of certain assets, or other actions (see the section labeled “Liquidity and Capital Resources” below).

VALENTIS ELECTED NEW MEMBERS TO BOARD OF DIRECTORS AND RECONSTITUTED AUDIT COMMITTEE.		In January 2003, Dennis J. Purcell and Reinaldo M. Diaz were elected to Valentis’ Board of Directors. Messrs. Diaz and Purcell filled two of the vacancies created by the resignations of Drs. Raju Kucherlapati, Bert W. O’Malley and John S. Schroeder. In April 2003, Dr. Schroeder rejoined the Board of Directors. Also in April 2003, the Company reconstituted its audit committee to include Patrick G. Enright (chairman of the committee), Mark McDade and Dr. Schroeder.

*SUBSEQUENT EVENTS*

VALENTIS SOLICITED PROXIES FOR SPECIAL MEETING OF STOCKHOLDERS.

In May 2003, the Company filed with the Securities and Exchange Commission and mailed to stockholders a definitive proxy statement and Notice of Special Meeting of Stockholders to be held on May 29, 2003. The Company is soliciting proxies for the following purposes of the Special Meeting:

· To approve an amendment to the Valentis, Inc. 1997 Amended and Restated Equity Incentive Plan to increase the aggregate number of shares of Common Stock reserved for issuance thereunder by 580,000 shares and to increase the maximum number of shares of Common Stock that may be covered by options granted to any one person in any calendar year thereunder to 500,000 shares.

· To approve an amendment and restatement of the Valentis, Inc. Amended and Restated 1998 Non-Employee Directors' Stock Option Plan to increase the aggregate number of shares of Common stock reserved for issuance thereunder by 211,666 shares and to make certain changes to the non-discretionary grants made thereunder.

· To approve the adoption of the Valentis, Inc. 2003 Employee Stock Purchase Plan and the reservation of 600,000 shares of Common Stock for issuance thereunder.

· To approve an amendment to the Company's current certificate of incorporation to permit stockholders of the Company to take action by written consent in lieu of a meeting.

· To transact such other business as may properly come before the Special Meeting or any adjournment or postponement thereof.

RESULTS OF OPERATIONS

Overview

For the quarter ended March 31, 2003, we incurred significant losses primarily due to the advancement of our research and development programs and because we generated limited revenue. This is consistent with our performance since inception. We expect that operating results will fluctuate from quarter to quarter and that such fluctuations may be substantial. We expect to incur substantial losses for the foreseeable future and do not expect to generate revenue from the sale of products in the foreseeable future, if at all.

There have been no significant changes in our critical accounting policies during the three and nine months ended March 31, 2003 as compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2002 filed with the SEC on September 28, 2002.

Revenue

Valentis’ revenue for the three months ended March 31, 2003 and 2002 was approximately $1.1 million and $833,000, respectively. Revenue for the nine months ended March 31, 2003 and 2002 was approximately $2.7 million and $3.8 million, respectively. Revenues attributable to technology license agreements, collaborative research and development performed under our corporate collaborations, and grants were (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2003		2002		2003		2002
Collaborative research and development revenue	$	—	$	833	$	—	$	3,333
License and other collaborative revenue	1,063		—		2,658		412
Grant revenue	—		—		—		17
Total revenue	$	1,063	$	833	$	2,658	$	3,762

Changes in revenue for the three and nine months ended March 31, 2003, compared to the previous year are explained below:

• Collaborative research and development revenue relates to the Company’s collaboration with Roche. No revenue was recognized from Roche for the three and nine months ended March 31, 2003, as the collaboration with Roche ended in the prior year in accordance with the terms of the agreement. Revenue recognized from Roche for the three and nine months ended March 31, 2002 was recognized in accordance with the performance of research obligations under the agreement.

• The difference between license and other collaborative revenue for the three and nine months ended March 31, 2003 and 2002 primarily reflects the increase from the GeneSwitch® licensing amendment with GlaxoSmithKline of $980,000, and from the GeneSwitch® and delivery technologies licensing agreement with Schering of $989,000, which are net of required royalty payments to a third party of $31,000.

• No grant revenue was recorded in the three and nine months ended March 31, 2003 due to the completion of Small Business Innovation Research (SBIR) grants in August 2001.

Expenses

Research and development expenses decreased approximately $3.3 million and $11.0 million for the three and nine months ended March 31, 2003, respectively, as compared to the prior year periods. For the three months ended March 31, 2003 and 2002, research and development expenses were approximately $2.3 million and approximately $5.6 million, respectively. For the nine months ended March 31, 2003 and 2002, research and development expenses were approximately $7.8 million and approximately $18.8 million, respectively. The decreases were attributable to staff reductions resulting from our restructuring actions, savings resulting from the reduction of preclinical product development efforts and suspension of clinical programs in oncology.

The scope and magnitude of future research and development expenses are difficult to predict at this time given the number of studies that will need to be conducted for any of our potential products. In general, biopharmaceutical development involves a series of steps—beginning with identification of a potential target and including, among others, proof of concept in animal studies and Phase I, II, and III clinical studies in humans—each of which is typically more expensive than the previous step. Our research and development expenses currently include costs for scientific personnel, animal studies, supplies, equipment, consultants, patent filings,

overhead allocation, human trials and sponsored research at academic and research institutions. We expect quarterly research and development spending to remain at approximately at the same level as the quarter ended March 31, 2003 for the foreseeable future.

General and administrative expenses decreased approximately $100,000 to approximately $1.8 million for the quarter ended March 31, 2003 compared to approximately $1.9 million for the corresponding period in 2002. The decrease was attributable primarily to savings resulting from the reduction of general and administrative staff associated with our restructuring actions, savings from reduce costs incurred in supporting research, development and clinical activities due to the reductions in preclinical product development and suspension of clinical programs in oncology. The decrease in expense was partially offset by increased professional fees related to our capital restructuring. For the nine months ended March 31, 2003, general and administrative expenses increased approximately $1.2 million to approximately $7.3 million compared to approximately $6.1 million for the corresponding period in 2002. The increase was attributable primarily to increased professional fees related to our capital restructuring. The increase in expense was partially offset by savings resulting from the closure of our London operations in the quarter ended June 30, 2002 and the reduction of general and administrative staff associated with our reductions in preclinical product development and our suspended clinical programs in oncology.

Valentis recorded $1.4 million for amortization of goodwill and other acquired intangible assets for the quarter ended March 31, 2002, which is associated with the acquisitions of GeneMedicine in fiscal 1999 and PolyMASC in fiscal 2000. We adopted SFAS 142 (see Note 7 to Notes to the Unaudited Condensed Consolidated Financial Statements) on July 1, 2002. As of June 30, 2002, we had approximately $409,000 of goodwill, which is no longer being amortized but is subject to an impairment analysis on at least an annual basis in accordance with the requirements of SFAS 142. We completed the required initial impairment analysis as of July 1, 2002 in accordance with SFAS 142, and updated our analysis for the quarter ended December 31, 2002, and determined that goodwill was not impaired. However, there can be no assurance that when other periodic reviews are completed, a material impairment charge will not be recorded.

Corporate Restructuring

As a result of its restructuring, the Company has significantly reduced its presence in Texas. The Company leases a 38,000 square-foot building in The Woodlands, Texas. The initial term of The Woodlands facility lease, which began in January 1995, is 10 years, after which time Valentis may renew for an additional period of five years. The Company is actively managing the disposal of The Woodlands facility to reduce lease obligations and pursue assignment or sublease options without material financial impact. Therefore, the Company has not recorded a charge related to exiting this facility in connection with the corporate restructuring.

On October 8, 2002, the Company announced that it had further reduced its staff and planned expenditures to allow it to continue the development of its two lead products: (1) Del-1 gene medicine for the treatment of a variety of cardiovascular diseases including peripheral arterial disease (PAD) and ischemic heart disease (IHD), and (2) the GeneSwitch® product through the licensing of this technology to other companies. In connection therewith, the Company reduced staff by 34 individuals in order to reduce the Company’s cash expenditures. This reduction included, J. Tyler Martin, M.D., Senior Vice President, Research and Development, who left the Company. Margaret M. Snowden, General Counsel, continued with the Company and transitioned out of the Company after leading the Company’s patent infringement litigation. Ms. Snowden continued with the Company until the end of April 2003 and currently serves in an outside consulting capacity to Valentis. For the three months ended December 31, 2002, we recorded restructuring and related charges separately in the consolidated statements of operations of approximately $832,000 for employee severance. All of the approximately $832,000 was paid during the quarter ended December 31, 2002.

Interest Income and Expense and Other, Net

Interest and other income (expense), net, increased approximately $10,000 to approximately ($33,000) for the three months ended March 31, 2003 compared to approximately ($23,000) of net expenses in the corresponding period of 2002. For the nine months ended March 31, 2003, interest and other income (expense), net, decreased approximately $323,000 to approximately $435,000 of net income, compared to approximately $758,000 of net income in the corresponding period of 2002. The differences were primarily attributable to lower interest rates and lower investment balances in 2003 as compared to 2002.

Deemed Dividends Related to Series A Preferred Stock

The deemed dividends related to the Series A preferred stock (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements) include the accretion of Class A and B warrants, the accretion of a beneficial conversion feature and the accretion of related issuance costs.

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

The accretion of Class A and B warrants for the three and nine months ended March 31, 2003, was approximately $2.5 million and $3.3 million, respectively, compared to $515,000 and $1.4 million for the corresponding periods of the prior year. The accretion of the beneficial conversion feature for the three and nine months ended March 31, 2003 was approximately $439,000 and $592,000, respectively, compared to $94,000 and $251,000 for the corresponding periods of the prior year. The aggregate accretion value associated with the warrants and beneficial conversion feature were included in the calculation of net loss applicable to common stockholders.

Issuance costs of approximately $1.9 million were accounted for as a discount on the Series A preferred stock and are accreted over the 3.5-year redemption period. Accretion of approximately $776,000 and $1.0 million, respectively, for the three and nine months ended March 31, 2003, was included in the calculation of net loss applicable to common stockholders. Accretion of issuance costs were approximately $166,000 and $443,000 for the three and nine months ended March 31, 2002.

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

Dividends on Series A Preferred Stock

Dividends on the Series A preferred stock (see Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements) were calculated at the rate of 5% per annum and were approximately $111,000 and $881,000 for the three and nine months ended March 31, 2003, respectively, compared to $384,000 and $1.2 million for the corresponding periods of the prior year. These dividends were charged against additional-paid-in-capital and included in the calculation of net loss applicable to common stockholders.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2003, Valentis had $6.0 million in cash, cash equivalents and investments compared to $19.1 million at June 30, 2002. The decrease of $13.1 million in cash and investments balances relates primarily to funding ongoing operations and restructuring expenses. Our capital expenditures were $20,000 and $127,000 for the nine months ended March 31, 2003 and 2002, respectively. Valentis expects its capital expenditures to remain at current spending levels to reflect the Company’s overall cost reduction plans and prioritization of its research and development efforts.

The Company has experienced operating losses since its inception through March 31, 2003, including a net loss of $3.0 million and $12.8 million for the three and the nine months ended March 31, 2003, respectively, and its accumulated deficit was $205.0 million at March 31, 2003. The Company expects such losses to continue into the foreseeable future as it proceeds with the research, development and commercialization of its technologies.

Since its inception, Valentis has financed its operations principally through public and private issuances of its common and preferred stock and funding from collaborative arrangements.

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

As discussed in the “Overview” section above, the conversion and reverse stock split were approved by the holders of the Company’s common stock at the Company’s Annual Meeting of Stockholders held on January 23, 2003. The Company filed its restated certificate of incorporation on January 24, 2003, and the conversion of Series A preferred stock and the reverse stock split occurred on the same day. As a result of the conversion of the Series A preferred stock (and the payment of accrued and unpaid dividends and arrearage interest on unpaid dividends), the Company issued approximately 4.3 million shares after giving effect to the reverse stock split). In lieu of fractional shares of common stock, stockholders received a cash payment based on the closing price of the common stock on January 23, 2003. The par value of the common stock remains at $.001.

The conversion of the Series A preferred stock was associated with the completion in December 2000 of a private placement of 31,500 shares of Series A preferred stock, at a purchase price of $1,000 per share, for an aggregate purchase price of $31.5 million. In connection with the sale of the preferred stock, we issued common stock purchase warrants exercisable for up to an aggregate of 37,560 shares of our common stock and warrants to purchase up to an aggregate of 4,666 shares of our common stock as compensation to certain Series A preferred stockholders who acted as placement agents or financial advisors in the private transaction. Additional details associated with our December 5, 2000 private placement of Series A preferred stock and Warrants can be obtained from the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002, as amended, filed with the Securities and Exchange Commission or from the Registration Statement on Form S-3 (File No. 333-54066) filed with the Securities and Exchange Commission on January 19, 2001.

On December 27, 2001, Valentis completed an underwritten public offering of 204,333 shares of its common stock for a total public offering price of $13.8 million in new financing. The proceeds after underwriting discounts, commissions and offering costs were $12.6 million. We have used and expect to continue to use the net proceeds from the sale of the common stock for general corporate purposes, which may include funding research, development and product manufacturing, increasing our working capital, reducing indebtedness, acquisitions or investments in businesses, products or technologies that are complementary to our own, and capital expenditures.

In October 1998, we entered into an equipment financing agreement with a financing company. We financed $366,000 in equipment purchases under this agreement structured as loans. The equipment loans are being repaid over 43 months at an interest rate of 10.1% and are secured by the related equipment. As of March 31, 2003, the outstanding balance under this financing agreement was $63,000, which will be fully repaid during fiscal year 2003. Valentis has fully utilized the borrowing capacity under this agreement.

Valentis leases its facilities under operating leases. These leases expire between October 2004 and October 2007 with renewal options at the end of the initial terms of the facilities leases.

Minimum annual rental commitments under the operating leases, excluding amounts to be received under subleases, and future minimum payments under the equipment loan agreement at March 31, 2003 are as follows (in thousands):

Year ended June 30,	Operating Leases		Equipment Loan		Total
2003 (Remaining term)	$	414	$	63	$	477
2004	1,662		—		1,662
2005	940		—		940
2006	249		—		249
2007	256		—		256
Thereafter	65		—		65
	$	3,586	$	63	$	3,649

We will need to raise additional funds to continue our operations. We will have insufficient working capital to fund our near term cash needs unless we are able to raise additional capital in the near future. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms will have a material adverse effect on our business, financial condition and results of operations, including our viability as an enterprise. As a result of these concerns, we are pursuing strategic alternatives, which may include the sale of securities, the sale or merger of our business, the sale of certain assets or other actions.

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

The Company will be required to seek additional sources of funding to complete development and commercialization of its products. Based upon the Company’s current operating plan, it anticipates that its cash, cash equivalents and investments and projected interest income will enable it to maintain its current and planned operations at least through June 30, 2003, in the absence of additional financial resources. In October 2002, management modified the Company’s operating plans to reduce operating expenses in order to have sufficient cash resources to operate at least through June 30, 2003. This modification to the Company’s operating plan, which included a reduction in personnel, required the Company to delay, scale back or eliminate its research and development programs and commercialization efforts. In an effort to seek additional sources of financing, the Company may have to relinquish greater or all rights to products at an earlier stage of development or on less favorable terms than it would otherwise seek to obtain.

The Company is currently seeking additional collaborative agreements with corporate partners and may seek additional funding through public or private equity or debt financing or merger of its business. The Company may not be able to enter into any such agreements, however, or if entered into, any such agreements may not reduce or eliminate the Company’s requirements to seek additional funding. Additional financing to meet the Company’s funding requirements may not be available on acceptable terms or at all. If the Company raises additional funds by issuing equity securities, substantial dilution to existing stockholders may result.

New Accounting Pronouncements

recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company’s adoption of FIN 45 did not have a material impact on our results of operations, financial position or cash flows.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

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

We have received a “going concern” opinion from our independent auditors and this may negatively impact our business and stock price.

We have experienced operating losses since our inception through March 31, 2003, including a net loss of $12.8 million for the nine months ended March 31, 2003, and our accumulated deficit was $205.0 million at March 31, 2003. The Company expects such losses to continue into the foreseeable future as it proceeds with the research, development and commercialization of its technologies. The Company’s cash and cash equivalents decreased from $8.3 million at December 31, 2002 to $6.0 million at March 31, 2003.

As discussed in our Form 10-K filed with the Securities and Exchange Commission for the period ended June 30, 2002, as amended, we have received a report from our independent auditors covering the consolidated financial statements for the fiscal year ended June 30, 2002 that included an explanatory paragraph which stated that the financial statements have been prepared assuming Valentis will continue as a going concern. The explanatory paragraph stated the following conditions which raised substantial doubt about our ability to continue as a going concern: (i) we have incurred recurring operating losses since inception; (ii) we have declining cash and investment balances and net capital deficiency; and (iii) we have been notified that we have not complied with certain listing requirements of The Nasdaq National Market, and holders of our Series A preferred stock could have required us to redeem their shares for cash. As described more fully in the section labeled “Capital Restructuring” above, all outstanding shares of Series A preferred stock automatically converted into shares of the Company’s common stock on January 24, 2003, and the redemption rights formerly associated with the Series A preferred stock have been eliminated. As described more fully below, effective with the open of business on January 31, 2003, the Company’s common stock began trading on The Nasdaq SmallCap Market pursuant to an exception.

We will need to raise additional funds to continue our operations. We will have insufficient working capital to fund our near term cash needs unless we are able to raise additional capital in the near future. Based upon the Company’s current operating plan, it anticipates that its cash, cash equivalents and investments and projected interest income will enable it to maintain its current and planned operations at least through June 30, 2003, in the absence of additional financial resources. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms will have a material adverse effect on our business, financial condition and results of operations, including our viability as an enterprise. As a result of these concerns, we are pursuing strategic alternatives, which may include the sale or merger of our business, sale of certain assets or other actions.

There are no assurances that the Company can maintain its listing on The Nasdaq SmallCap Market.

Effective with the open of business on January 31, 2003, the Company’s common stock began trading on The Nasdaq SmallCap Market, pursuant to an exception, which required the Company to among other things, (i) file an application for listing on The Nasdaq SmallCap Market, pay all applicable listing fees and evidence compliance with all requirements for continued listing on The Nasdaq SmallCap Market, but for the minimum bid price requirement; and (ii) make a public filing with the SEC and Nasdaq evidencing at least $7 million of stockholders’ equity by January 31, 2003. On February 3, 2003, the Company received a letter from the Nasdaq Listing Qualifications Panel (the “Panel”) extending the Company’s deadline for making a public filing evidencing stockholders’ equity of at least $7 million to February 14, 2003. On February 14, 2003, the Company made a public filing of a Current Report on Form 8-K in satisfaction of this requirement. The Panel also acknowledged that the Company had timely submitted to Nasdaq monthly projections on a balance sheet and income statement basis through calendar 2003. Based on those projections, the Panel added the following term to the listing exception described above: on or before May 15, 2003 and September 30, 2003, the Company must file with the SEC and Nasdaq the Form 10-Q for the quarter ended March 31, 2003 and the Form 10-K for the fiscal year ending June 30, 2003, respectively. Each of these filings must evidence the Company’s continued compliance with the $2.5 million minimum stockholders’ equity requirement and all other requirements for continued listing on The Nasdaq SmallCap Market. In addition to the foregoing, the Company must be able to demonstrate an ability to sustain compliance with all requirements for continued listing on The Nasdaq SmallCap Market. As evidenced by this Quarterly Report on Form 10-Q, the Company is currently in compliance with the $2.5 million minimum stockholders’ equity requirement, and, subject to Panel’s determination with respect to the Company’s compliance with the listing requirements described in the paragraph below, the Company believes that it is currently in compliance with all other requirements for continued listing on The Nasdaq SmallCap Market. The Company is also filing this Quarterly Report on Form 10-Q with Nasdaq to comply with the Panel’s terms.

On March 28, 2003, the Company received a letter from the Panel citing the Company’s non-compliance with the independent director, audit committee composition and shareholder approval requirements set forth in Nasdaq Marketplace Rules 4350(c), 4350(d)(2) and 4350(i)(1)(A). The letter stated that the Company does not have a sufficient number of independent directors to comply with Nasdaq’s audit committee composition requirements as required by Nasdaq Marketplace Rules 4350(c) and 4350(d)(2). The letter also stated that the Company granted a stock option that did not comply with the shareholder approval requirement set forth in Nasdaq Marketplace Rule 4350(i)(1)(A). The Panel invited the Company to submit a written response to the letter no later than April 4, 2003. Following the Company’s response, which set forth the reasons the Company believed that it was in compliance with each of Nasdaq Marketplace Rules 4350(c), 4350(d)(2) and 4350(i)(1)(A), the Company received notification from the Panel on April 15, 2003 that the Company’s common stock would continue to be listed on The Nasdaq SmallCap Market pursuant to an exception from the independent director and audit committee composition requirements of Nasdaq Marketplace Rules 4350(c) and 4350(d)(2). This exception will expire on May 30, 2003. The Panel decided that one of the Company’s directors is not independent because his previous employer became an affiliate of the Company within three years of the director leaving his position with that employer. The Panel also notified the Company that it had not violated the shareholder approval requirements of Nasdaq Marketplace Rule 4350(i)(1)(A). The Company has submitted its response, which sets forth the reasons the Company believes that it is in compliance with each of Nasdaq Marketplace Rules 4350(c) and 4350(d)(2). Specifically, on April 17, 2003, the Company elected Dr. John S. Schroeder as a member of the Board of Directors and reconstituted its audit committee. Accordingly, the Company believes that is has achieved compliance with the independent director and audit committee composition requirements set forth in Nasdaq Marketplace Rules 4350(c) and 4350(d)(2); however, there can be no absolute assurance that the Panel will agree that the Company has satisfied these requirements.

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

We must be able to continue to secure additional financing in order to continue our operations.

We will have insufficient working capital to fund our near term cash needs unless we are able to raise additional capital in the near future. We may not be able to obtain additional financing on acceptable terms, or at all. Any failure to obtain an adequate and timely amount of additional capital on commercially reasonable terms will have a material adverse effect on our business, financial condition and results of operations, including our viability as an enterprise. As a result of these concerns, we are pursuing strategic

alternatives, which may include the sale or merger of our business or sale of certain assets.

We have financed our operations primarily through the sale of equity securities and through corporate collaborations. We raised $27.9 million in our initial public offering in September 1997, $18.8 million through a private placement of our common stock in April 2000, $29.6 million through the sale of Series A preferred stock and common stock warrants in December 2000 and $12.6 million from a public offering of common stock in December 2001. Since September 1999, we have received $5.2 million from corporate collaborations, of which $4.4 million was from Roche Holdings and $800,000 from Boehringer Ingelheim. In addition, since September 1999, we have received $4.1 million from licensing our technologies to others. We have not generated significant royalty revenues from product sales, and we do not expect to do so for the foreseeable future, if ever.

Our cash and cash equivalents at March 31, 2003 were $6.0 million. Based on the Company’s current operating plan, we anticipate that our cash and cash equivalents and projected interest income will enable us to maintain our current and planned operations at least through June 30, 2003, in the absence of additional financial resources. In order to maintain our current and planned operations beyond June 30, 2003, we will be seeking additional corporate transactions, such as corporate partnership agreements, licenses and/or asset sales, as well as additional funding through public or private equity or debt financing or merger of its business. We may not be able to enter into any such corporate transactions, however or, if entered into, the terms of any such agreements may not generate near-term revenues. Moreover, additional financing to meet our funding requirements may not be available on acceptable terms or at all.

Actions we may take to conserve our cash resources include a reduction in our personnel, delaying, scaling back or eliminating some or all of our research or development programs or relinquishing greater or all rights to products at an earlier stage of development or on less favorable terms than we otherwise would. Any or all of these actions would materially adversely affect Valentis’ business, financial condition and results of operations. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result.

In addition, the development and marketing of our potential products will require substantial additional financial resources. Because we cannot expect internally generated cash flow to fund the development and marketing of our products, we must look to outside sources for funding. These sources could involve one or more of the following types of transactions, which we continue to actively seek:

• technology partnerships;

• technology sales;

• technology licenses;

• issuance of debt securities; or

• sales of common or preferred stock.

Our future capital requirements will depend on many factors, including:

• scientific progress in our research and development programs;

• size and complexity of such programs;

• scope and results of preclinical studies and clinical trials;

• ability to establish and maintain corporate collaborations;

• time and costs involved in obtaining regulatory approvals;

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

• competing technological and market developments; and

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

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

Our business strategy is to attract business partners to fund or conduct research and development, clinical trials, manufacturing, marketing and sales of our gene therapy or other products. This strategy makes us highly dependent upon corporate collaborations as a source of funding for our research and development and clinical trials. We currently have no corporate partners for our GeneSwitch® or del–1 products, and are seeking partners to develop and market them. We face intense competition from many other companies for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology. If we are unable to attract and retain corporate partners to develop and market our products, or if our corporate partnerships are not successful, our business will fail.

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

We have engaged in research and development activities since our inception. We have generated only small amounts of revenue and have experienced significant operating losses since we began business. For the quarter ended March 31, 2003, we recorded total revenues of approximately $1.1 million and a net loss of approximately $3.0 million. As of March 31, 2003, we had an accumulated deficit totaling approximately $205.0 million. The development of our products will require significant additional research and development activities. These activities, together with general and administrative expenses, are expected to result in operating losses for the foreseeable future.

If the market price of our common stock continues to be highly volatile, the value of your investment in the common stock could decline.

Within the last 12 months, our common stock has traded between a high of $72.90 and a low of $[2.45] (as adjusted for the one-for-thirty reverse stock split effected January 24, 2003). The market price of the shares of our common stock has been and may continue to be highly volatile, particularly in light of the recent one-for-thirty reverse stock split of our common stock, which has significantly reduced the number, and liquidity, of the freely tradable shares of our common stock.

The market price of our common stock may fluctuate significantly in response to many factors, most of which are beyond our control, including the following:

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

• our operating results, including results below the expectations of public market analysts and investors;

• developments in our relationships with corporate partners;

• developments affecting our corporate partners;

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

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

• changes in the position of securities analysts with respect to our stock;

• fluctuations in the trading volume of our stock;

• acquisition or merger of the Company by or with another company;

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

• market conditions for biopharmaceutical or biotechnology stock in general.

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

The sale and issuance of the Series A preferred stock impacts earnings available to common stockholders.

Under accounting rules, approximately $7.1 million of the proceeds from our sale of Series A preferred stock was allocated to the common stock purchase warrants, the beneficial conversion feature and issuance costs and are reflected as additional paid-in capital. This $7.1 million were to be accreted to the preferred stock amount and recorded as deemed dividends over the term of the initial 3.5-year redemption period. This accretion, along with the preferred stock dividend, increases the net loss (reduces the net income) available to common stockholders.

Upon conversion of the Series A Preferred Stock to common stock in January 2003, the remaining $3.5 million of unaccreted deemed dividends representing the balance of amounts attributed to common stock purchase warrants, beneficial conversion feature and issuance costs related to the Series A preferred stock were accreted and recorded as a deemed dividend. This deemed dividend is included in the calculation of net loss applicable to common stockholders in the financial statements for the period ending March 31, 2003. Additionally, as a result of the simultaneous conversion of the Series A preferred stock to common stock and the reduction in the Series A preferred stock conversion price, the excess of the fair value of the common stock issued to the Series A preferred stockholders over the fair value of the common stock issuable pursuant to the original conversion terms was approximately $22.3 million. This amount also is included in the calculation of net loss applicable to common stockholders in the financial statements for the period ending March 31, 2003.

Concentration of ownership among our existing principal stockholders, executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

Our existing principal stockholders, executive officers, directors and their affiliates beneficially own or control in excess of 70% of the outstanding shares of common stock, with over 50% of the outstanding shares held by two such persons, Perseus-Soros BioPharmaceutical Fund, L.P. and Diaz & Altschul Capital Management, LLC. As a result, such persons may have the ability to effectively control the Company and direct its affairs and business. Such concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of the Company.

Development and commercial introduction of our gene therapy and other products will require several years of research and development and clinical trials and must satisfy applicable government regulations.

All of our potential products currently are in research, preclinical development or the early stages of clinical testing, and commercialization of those products will not occur for at least the next several years, if at all. Gene therapeutics is a new field and may not lead to commercially viable pharmaceutical products.

Prior to commercialization, a potential drug or biological product must undergo rigorous clinical trials that meet the requirements of the Food and Drug Administration, or FDA, in order to demonstrate safety and efficacy in humans. We have limited experience in conducting clinical trials, and we may encounter problems that cause us, or the FDA, to delay, suspend or terminate these studies and trials. Problems we may encounter include the unavailability of preferred sites for conducting the trials, an insufficient number of test subjects and other factors which may delay the advancement of our clinical trials, lead to increased costs or result in the termination of the clinical trials altogether. Furthermore, the FDA may suspend clinical trials at any time if it believes the subjects participating in the trials are being exposed to unacceptable health risks or if it finds deficiencies in the clinical trial process or the conduct of the investigation. While many of these risks are common to biotechnology companies in general, in light of the issues raised in 2000 when the FDA stopped a gene therapy clinical trial due to the death of a patient, we may face greater risks in this area than other biotechnology companies because of our focus on gene-based therapeutics.

Even if we successfully complete the required preclinical testing and clinical trials, we may not be able to obtain the regulatory approvals necessary to market our gene therapy and other products in the United States or abroad. The approval procedures for marketing outside the United States vary among countries and can involve additional testing. We and other gene therapy companies have limited experience with the regulatory process, which for our industry tends to be costly, time-consuming and subject to unpredictable delays. Accordingly, we cannot predict with any certainty how long it will take or how much it will cost to obtain regulatory approvals for manufacturing and marketing our products or whether we will be able to obtain those regulatory approvals at all.

We must rely on our partners to demonstrate large-scale manufacturing capabilities in order to be successful.

Our limited manufacturing experience makes our ability to successfully introduce our potential products more difficult than it would be otherwise. Although we entered into a strategic collaboration with DSM Biologics (“DSM”) and Qiagen N.V., for manufacturing and supplying plasmid DNA to the gene therapy industry, neither DSM nor any third party has successfully manufactured plasmid DNA on a sustained large-scale commercial basis. Either our current contract manufacturing organization (“CMO”), Cangene Corporation (“Cangene”), another CMO or a future corporate partner will have full responsibility for manufacturing material for

commercial sale. We will depend on Cangene and/or our corporate partners for commercial-scale manufacturing of our products. Cangene and/or our corporate partners may be unable to develop adequate manufacturing capabilities for commercial-scale quantities of gene products. If Cangene or third parties are unable to establish and maintain large scale manufacturing capabilities, we will be unable to introduce sufficient products to sustain our business.

Problems in our partners’ manufacturing facilities may delay clinical trials or regulatory approval for Del-1 or future products.

Drug-manufacturing facilities regulated by the FDA must comply with the FDA’s Good Manufacturing Practice regulations. Such facilities are subject to periodic inspection by the FDA and state authorities. Manufacturers of biologics also must comply with the FDA’s general biological product standards and also may be subject to state regulation. We may be unable to ensure that our contract manufacturers attain or maintain compliance with current or future Good Manufacturing Practice requirements. As we have experienced, the failure of our contract manufacturer to comply with Good Manufacturing Practice requirements could cause significant delay of important clinical trials. For example, in August 2001, we discovered manufacturing issues at our contract manufacturer that resulted in a delay in our Del-1 peripheral arterial disease (“PAD”) clinical trial. When we discovered the issues, we postponed enrollment in the clinical trial until we could fully assess their impact. We also informed the FDA of the issues. On September 19, 2001, the FDA placed a clinical hold on our Del-1 PAD clinical trial. On February 12, 2002, the FDA allowed us to proceed with our PAD safety trial using newly manufactured material. Since that time, we have continued to manufacture new material at another manufacturing site.

If we were to discover other problems, the FDA could suspend or further delay our clinical trials or place restrictions on our ability to conduct clinical trials, including the mandatory withdrawal of the product from the clinical trials. This, or an unexpected increase in the cost of compliance, could hinder our ability to develop products for commercialization.

If the success of our potential products in animal models is not replicated in our human trials, the development of our gene therapy or other products will be negatively impacted.

Although a number of our potential products, including Del-1, have shown successful results in early stage animal models, these results may not be replicated in our human trials for those products. In addition, human results could be different from our expectations following our preclinical studies with large animals. If results in our human trials for a particular product are not consistent with the results in the animal models, then we may have to return the product to preclinical development or abandon development of the potential product.

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

The results in early phases of clinical testing are based upon limited numbers of patients and a limited follow-up period. Typically, our Phase I clinical trials for indications of safety enroll less than 50 patients. Our Phase II clinical trials for efficacy typically enroll less than 100 patients. Actual results with more data points may not confirm favorable results from earlier stage trials. In addition, we do not yet know if early results will have a lasting effect. If a larger population of patients does not experience positive results, or if these results do not have a lasting effect, our products may not receive approval from the FDA. Moreover, any report of clinical trial results that are below the expectations of financial analysts or investors would most likely cause our stock price to drop dramatically.

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

The death in 2000 of a patient undergoing a physician-sponsored, viral-based gene therapy trial has been widely publicized. Following this death and publicity surrounding the field of gene therapy, the FDA appears to have become more conservative regarding the conduct of gene therapy clinical trials.

This approach by the FDA can lead to delays in the timelines for regulatory review, as well as potential delays in the conduct of our gene therapy clinical trials. In addition, the negative publicity around the field of gene therapy appears to have affected patients’ willingness to participate in gene therapy clinical trials. If fewer patients are willing to participate in our clinical trials, the timelines for recruiting patients and conducting the trials will be delayed. The commercial success of our potential products will depend in part on public acceptance of the use of gene therapy for the prevention or treatment of human diseases. Negative public reaction to gene therapy in general could result in stricter labeling requirements of gene therapy products, including any of our products, and could cause a decrease in the demand for products we may develop.

Intense competition in the biopharmaceuticals market may adversely impact our business.

The pharmaceutical and biotechnology industries are highly competitive. We are aware of several pharmaceutical and biotechnology companies that are pursuing gene therapeutics For example, we are aware that Vical Inc., Targeted Genetics Corp., GenVec, Inc., Cell Genesys, Inc., Avigen, Inc. and GenStar Therapeutics Corp. are also engaged in developing gene therapies. Many of these companies are addressing diseases that have been targeted by us directly or through our corporate partners, and many of them may have more experience in these areas.

We also face competition from biotechnology and pharmaceutical companies using more traditional approaches to treating human diseases. Our competitors may develop safer, more effective or less costly biologic delivery systems, gene therapeutics or chemical-based therapies. In addition, competitors may achieve superior patent protection or obtain regulatory approval or product commercialization earlier than we do.

Many of our competitors have substantially more experience and financial and infrastructure resources than we do in the following areas:

• research;

• development, including clinical trials;

• obtaining FDA and other regulatory approvals; and

• manufacturing, marketing and distribution.

Gene therapy is a new and rapidly evolving field and is expected to continue to undergo significant and rapid technological change. Rapid technological development by our competitors could result in our actual and proposed technologies, products or processes losing market share or becoming obsolete.

We face intense competition and other obstacles in recruiting the limited number of qualified personnel for key management, scientific and technical positions.

Our success depends on our ability to attract and retain management, scientific and technical staff to develop our potential products and formulate our research and development strategy. The San Francisco Bay Area, where our corporate headquarters and clinical development center is located, is home to a large number of biotechnology and pharmaceutical companies, and there is a limited number of qualified individuals to fill key scientific and technical positions. Our recruiting efforts are further hampered by the high cost of living in the Bay Area and the competing opportunities in academia that may attract individuals with advanced scientific degrees.

Although we have programs in place to retain personnel, including programs to create a positive work environment and competitive compensation packages, competition for key scientific and technical employees in our field is intense, and it may be difficult for us to retain our existing personnel or attract additional qualified employees. Additionally, after the corporate reorganization announced in January 2002 that resulted in the termination of 47 positions and the subsequent corporate reorganization announced in October 2002 that resulted in the termination of 34 positions, it may be more difficult to recruit personnel in the future. If we do not attract and retain qualified personnel, our research and development programs could be delayed, and we could experience difficulties in generating sufficient revenue to maintain our business.

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

Our gene medicine products involve multiple component technologies, many of which may be patented by others. For example, our products use gene sequences, some of which have been, or may be, patented by others. As a result, we may be required to obtain licenses to those gene sequences, proteins or other technologies. We may not be able to obtain a license to those technologies on reasonable terms, if at all. As a consequence, we might be prohibited from developing potential products or we might have to make cumulative royalty payments to several companies. These cumulative royalties would reduce amounts paid to us or could make our products too expensive to develop or market.

An inability to protect our patents and proprietary rights may adversely impact our business.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively. Our success will depend to a significant degree on our ability to:

• obtain patents and patent licenses;

• preserve trade secrets; and

• operate without infringing on the proprietary rights of others.

We own or have licenses to patents on a number of genes, processes, practices and techniques critical to our existing and potential gene therapy or other products. Patent positions in the field of biotechnology are highly uncertain and involve complex legal, scientific and factual questions. Our patent applications may not result in issued patents. Even if we secure a patent, the patent may not afford adequate protection against our competitors. If we fail to obtain and maintain patent protection for our technologies, our competitors may market competing products that threaten our market position. In addition, the failure of our licensors to obtain and maintain patent protection for technology they license to us could similarly harm our business.

On April 6, 2001, Valentis’ wholly owned subsidiary, PolyMASC Pharmaceuticals plc (PolyMASC), filed a lawsuit against ALZA Corporation (subsequently acquired by Johnson & Johnson Inc.) for patent infringement based on ALZA’s manufacture and sale of its liposomal products, Doxil® and Caelyx®. The lawsuit was filed in the U.S. District Court in Delaware and alleges infringement of U.S. Patent Number 6,132,763, titled “Liposomes.” The patent, issued October 17, 2000, is directed towards PEGylated liposomes (liposomes having PEG chains attached). Doxil® and Caelyx® are PEGylated liposomes encapsulating the drug doxorubicin. PolyMASC is seeking monetary damages and enhanced damages should the court find that ALZA’s infringement was willful. The District Court issued a ruling in December 2002, in which the court decided the meaning of certain terms used in the patent claims at issue in the litigation. In the ruling, the district court adopted the claim interpretation proposed by ALZA. As a result, the Court entered judgment of non-infringement in favor of ALZA. The Company is appealing that decision to the Federal Circuit Court of Appeals. The Company intends to seek immediate disposition of the case at the District Court level in order to bring the claim construction issues up for review by the Federal Circuit Court of Appeals. If the claim construction issues are resolved in ALZA’s favor, our ability to enforce the patent will be substantially harmed.

On April 24, 2002, Valentis announced that PolyMASC had initiated infringement proceedings in Dusseldorf, Germany, against SP Labo N.V., SP Europe and Essex Pharma GmbH, all members of the Schering-Plough Group. The suit alleges infringement of European Patent Nos. EP572,049B1 and EP445,131B1, based on the sales of Caelyx®. Both patents are European counterparts to U.S. Patent Number 6,132,763 described above. PolyMASC is seeking monetary damages.

The Company announced in January 2003 that the Japanese Patent Office has dismissed ALZA’s demand for invalidation, brought by ALZA on August 20, 2001 relating to claim five of Japanese Patent No. 2948246, which is the Japanese counterpart to the U.S. and European patents described above. ALZA was seeking to overturn the previous finding of the Opposition Division of the Japanese Patent Office in favor of PolyMASC’s patent.

In any event, these and other intellectual property disputes could be costly, could divert management’s attention and resources away from our operations, and could subject us to significant liability for damages or invalidation of our patent rights. As the biotechnology industry expands, the risks increase that other companies may challenge our proprietary rights or claim that our processes and potential products infringe on their patents. If we infringe on another company’s patented processes or technology, we may have to obtain a license in order to continue manufacturing or marketing the affected product or using the affected process or have to pay damages. We may be unable to obtain a license on acceptable terms or at all.

We also rely on unpatented trade secret technologies. Because these technologies do not benefit from the protection of patents, we may be unable to meaningfully protect these trade secret technologies from unauthorized use or misappropriation by a third party.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Valentis’ exposure to market risk for changes in interest rates relates primarily to our investment portfolio and long-term debt obligations. We maintain a strict investment policy that ensures the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investments consist primarily of commercial paper, medium-term notes, U.S. Treasury notes and obligations of U.S. Government agencies and corporate bonds. The table below presents notional amounts and related weighted-average interest rates by year of maturity for Valentis’ investment portfolio and long-term debt obligations (in thousands, except percentages). All of Valentis’ market risk sensitive instruments mature in 2003.

	2003
Cash equivalents
Fixed rate	$	4,490
Average rate	1.26		%
Short-term investments
Fixed rate	—
Average rate	—
Long-term investments
Fixed rate	—
Average rate	—
Total investment securities	$	4,490

Average rate	1.26		%

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and principal finance and accounting officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days of the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s principal accounting officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and principal accounting officer concluded that the Company’s disclosure controls and procedures were effective.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 6, 2001, Valentis’ wholly owned subsidiary, PolyMASC Pharmaceuticals plc, filed a lawsuit against ALZA Corporation (subsequently acquired by Johnson & Johnson Inc.) for patent infringement based on ALZA’s manufacture and sale of its liposomal products, Doxil® and Caelyx®. The lawsuit was filed in the U.S. District Court in Delaware and alleges infringement of U.S. Patent Number 6,132,763, titled “Liposomes.” The patent, issued October 17, 2000, is directed towards PEGylated liposomes (liposomes having PEG chains attached). Doxil® and Caelyx® are PEGylated liposomes encapsulating the drug doxorubicin. PolyMASC is seeking monetary damages and enhanced damages should the court find that ALZA’s infringement was willful. The District Court issued a ruling in December 2002, in which the court decided the meaning of certain terms used in the patent claims at issue in the litigation. In the ruling, the district court adopted the claim interpretation proposed by ALZA. As a result, the Court entered judgment of non-infringement in favor of ALZA. The Company is appealing that decision to the Federal Circuit Court of Appeals.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The Company issued 83,526 shares of common stock to holders of Series A preferred stock as a stock dividend and interest on dividends for the period from October 17, 2002 to January 24, 2003. In addition, as a result of the conversion of the outstanding shares of Series A preferred stock on January 24, 2003, the Company issued 4,242,424 shares of common stock to holders of Series A preferred stock. The issuance of these shares was not registered under the Securities Act of 1933 because their issuance did not constitute a sale thereunder.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On January 23, 2003, at the Company’s Annual Meeting of Stockholders, the following proposals were submitted to a vote of the holders of the Company’s common stock:

Proposal 1: To approve an amendment to the Company’s Certificate of Incorporation to (i) adjust the conversion price of the Series A Convertible Redeemable Preferred Stock from $9.00 to $0.242 (the “Series A Adjusted Conversion Price”) and (ii) eliminate the redemption provisions relating to the Series A Preferred Stock.

Proposal 2: To approve (i) an amendment to the Company’s Certificate of Incorporation to cause all outstanding shares of Series A Preferred Stock to be automatically converted into Common Stock, at the Series A Adjusted Conversion Price (the “Series A Conversion”), at 5:00 p.m. Eastern Standard Time on the date the Restated Certificate is filed with the Secretary of State of the State of Delaware and (ii) the Series A Conversion, including the issuance of approximately 127 million shares of Common Stock upon the Series A Conversion.

Proposal 3: To approve an amendment to the Company’s Certificate of Incorporation to increase the number of shares of Common Stock that the Company is authorized to issue from 65 million to 190 million;

Proposal 4: To approve an amendment to the Company’s Certificate of Incorporation to effect a reverse stock split of the Company’s outstanding Common Stock, to become effective immediately after the Series A Conversion, in the range of 1:5 to 1:40, as determined in the discretion of the Board of Directors of the Company.

Proposal 5: To elect two directors to hold office until the 2005 Annual Meeting of Stockholders;

Proposal 6: To ratify the selection of Ernst & Young LLP as independent auditors of the Company for its fiscal year ending June 30, 2003.

The voting of stockholders with respect to each of the foregoing proposals was as follows:

	Votes For	Votes Against	Votes Abstained

Proposal 1:	20,213,976	811,876	55,522
Proposal 2:	20,230,067	804,323	46,984
Proposal 3:	20,146,417	900,689	34,268
Proposal 4:	20,192,656	859,076	29,281
Proposal 5: Election of Directors
Patrick G. Enright	29,177,390	846,420	—
Alan C. Mendelson	29,216,838	806,972	—
Proposal 6:	29,533,141	310,623	180,046

The directors continuing in office after the Annual Meeting were Patrick G. Enright, Raju Kucherlapati, Mark McDade, Bert O’Malley, Benjamin F. McGraw III, Alan C. Mendelson and John S. Schroeder. On January 31, 2003, Drs. Kucherlapati, O’Malley and

Schroeder resigned from the Board of Directors, and the remaining members of the Board of Directors appointed Dennis J. Purcell and Reinaldo M. Diaz to fill the vacancies. On April 17, 2003, Dr. Schroeder rejoined the Board of Directors.

The amendments set forth in Proposal Nos. 1 and 2 above also required the consent of the holders of the Series A preferred stock. On November 11, 2002, the Company and each holder of the outstanding shares of Series A preferred stock entered into the Series A Amendment, Consent and Waiver, by which each holder of Series A Preferred Stock approved and consented to the Restated Certificate, which provided for such amendments.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

	a.	Exhibits

		None.

	b.	Reports on Form 8-K

		On April 24, 2003, Valentis filed a current report on Form 8-K regarding the receipt by the Company of a notification from the Nasdaq Listing Qualifications Panel on April 15, 2003, that the Company’s common stock will continue to be listed on The Nasdaq SmallCap Market via an exception from the independent director and audit committee composition requirements of Nasdaq Marketplace Rules 4350(c) and 4350(d)(2).

		On April 11, 2003, Valentis filed a current report on Form 8-K regarding the receipt by the Company of a Nasdaq Staff Determination Letter on March 28, 2003, citing the Company’s non-compliance with the independent director, audit committee composition and shareholder approval requirements set forth in the Nasdaq Marketplace Rules.

		On February 14, 2003, Valentis filed a current report on Form 8-K evidencing stockholders’ equity of at least $7 million, which current report included a balance sheet no older than 45 days, with pro forma adjustments, as required by the exception to The Nasdaq SmallCap Market listing requirements granted to the Company by the Nasdaq Listing Qualifications Panel.

		On February 3, 2003, Valentis filed a current report on Form 8-K regarding the (i) correction of the announcement of the number of shares of the Company’s common stock issued upon the conversion of the Series A preferred stock and (ii) changes in the composition of the Company’s Board of Directors.

		On January 31, 2003, Valentis filed a current report on Form 8-K regarding the listing of the Company’s common stock on The Nasdaq SmallCap Market effective as of the opening of business on January 31, 2003, pursuant to an exception.

		On January 27, 2003, Valentis filed a current report on Form 8-K regarding the approval of the Company’s stockholders of the conversion of the Series A preferred stock into common stock and a reverse stock split at a ratio of one-for-thirty, and the completion of such transactions.

SIGNATURES

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

		VALENTIS, INC.


Date: May 15, 2003		/s/ BENJAMIN F. MCGRAW III
		Benjamin F. McGraw III Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)

Date: May 15, 2003		/s/ JOSEPH A. MARKEY
		Joseph A. Markey Senior Director of Finance and Controller (Principal Financial and Accounting Officer)

CERTIFICATIONS

I, Benjamin F. McGraw III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Valentis, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

	By:	/s/ Benjamin F. McGraw III
		Benjamin F. McGraw III, Pharm.D.
		President and Chief Executive Officer (Principal Executive Officer

I, Joseph A. Markey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Valentis, Inc.;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 15, 2003

	By:	/s/ Joseph A. Markey
		Joseph A. Markey
		Senior Director, Finance and Controller (Principal Financial Officer)

TECHNOLOGY PLATFORMS

LEGAL PROCEEDINGS REGARDING INTELLECTUAL PROPERTY

CAPITAL RESTRUCTURING