UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549   FORM 10-Q  x
  QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d)OF
  THE SECURITIES EXCHANGE ACT OF 1934For the quarterly
  period ended March 31, 2001ORo
  TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d)OF
  THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___ to ___Commission File
  Number 000-31147
  DELTAGEN,
INC.
(Exact name of Registrant as specified in its charter)  Delaware
  94-3260659(State or other jurisdiction of
  (I.R.S. Employerincorporation or organization)
  Identification No.)1003
  Hamilton Avenue, Menlo Park, CA
  94025(Address of principal executive offices)
  (Zip code)
  (650)
752-0200(Registrant's telephone number, including
area code)  Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  YES
  x
  
  NO
  o
  Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: Common Stock $0.001
  par value
  29,895,666Class
  Outstanding at May 4,
  2001
   DELTAGEN, INC.

FORM
10-Q

QUARTERLY
REPORT



TABLE
OF CONTENTS



PART
  I - FINANCIAL INFORMATIONItem 1.
  Financial StatementsConsolidated Balance Sheets
  (unaudited)Consolidated
  Statements of Operations (unaudited)Consolidated
  Statements of Cash Flows (unaudited)Notes to
  Consolidated Financial Statements (unaudited)Item 2.
  Management's Discussion and Analysis
  of Financial Condition
  and Results of OperationsItem 3.
  Quantitative and Qualitative
  Disclosures about Market RiskPART II - OTHER INFORMATIONItem 1.
  Legal ProceedingsItem 2.
  Changes in Securities
  and Use of ProceedsItem 3.
  Defaults Upon
  Senior DebtItem
  4.
  Submission
  of Matters to a Vote of Security HoldersItem 5.
  Other InformationItem 6.
  Exhibits and
  Reports on Form 8-KSignatures

Part I.Financial InformationItem 1.Financial Statements

DELTAGEN,
INC.CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)



March
  31,
  December
  31,2001
  2000AssetsCurrent assets:Cash and cash equivalents
  $90,904
  $93,352Short term investments
  19,849
  24,981Accounts receivable, net
  2,773
  1,682Prepaid expenses
  1,595
  945Total current assets
  115,121
  120,960Property and
  equipment, net
  9,096
  8,635Other assets
  623
  464Total assets
  $124,840
  $130,059Liabilities and Stockholders'
  EquityCurrent liabilities:Accounts payable
  $3,229
  $1,140Accrued liabilities
  3,338
  3,669Current portion of capital lease
  obligations
  17
  25Current portion of loans payable
  1,678
  1,599Current portion of deferred revenue
  6,934
  6,820Total current liabilities
  15,196
  13,253Capital lease
  obligations, less current portion
  15
  15Loans payable, less
  current portion
  2,758
  3,248Deferred revenue, less
  current portion
  2,411
  2,679Total liabilities
  20,380
  19,195Commitments and
  Contingencies  (Note 4)Stockholders' equity:Common stock, $0.001
  par value:Authorized: 75,000,000 sharesIssued and outstanding: 29,891,666 and
  29,867,968 at March 31, 2001 and December 31, 2000, respectively
  30
  30Additional paid-in
  capital
  169,518
  171,064Unearned stock-based
  compensation
  (6,536)
  (8,750)Notes receivable from
  stockholders
  (805)
  (805)Accumulated deficit
  (57,747)
  (50,675)Total stockholders' equity
  104,460
  110,864Total liabilities and stockholders
  equity
  $124,840
  $130,059The
  accompanying notes are an integral part of these consolidated financial
  statements

DELTAGEN,
INC.CONSOLIDATED STATEMENTS OF
OPERATIONS(unaudited)
(in thousands, except per share data)



Three  Months Ended 
  March 31,2001
  2000Contract revenue
  $2,451
  $286Costs and expenses:Research and development
  8,201
  5,627Selling, general and administrative
  2,893
  2,045Total costs and expenses
  11,094
  7,672Loss from operations
  (8,643)
  (7,386)Interest income
  1,727
  180Interest expense
  (156)
  (89)Net loss
  (7,072)
  (7,295)Deemed dividend
  related to     beneficial conversion feature     of preferred  stock
  -
  (22,360)Net loss attributable
  to     common stockholders
  $(7,072)
  $(29,655)Net loss per share
  attributable tocommon stockholders,     basic and diluted
  $(0.25)
  $(18.56)Weighted average
  shares     used in computing net loss per     share, basic and diluted
  28,601
  1,598The
  accompanying notes are an integral part of these consolidated financial
  statements

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

Three
  Months EndedMarch
  31,2001
  2000Cash flows from
  operating activities:Net loss
  $(7,072)
  $(7,295)Adjustments to reconcile net loss to net
  cash used in operating activities:Depreciation and amortization
  511
  245Provisions for bad debt
  22
  -Amortization of warrants issued in
  connection with loans
  12
  12Amortization of unearned stock-based
  compensation expense
  792
  2,762Amortization of discount on short-term
  investments
  (151)
  -Changes in operating assets and
  liabilities:Accounts receivable
  (1,113)
  478Prepaid expenses
  (650)
  11Other assets
  (159)
  (481)Accounts payable
  1,198
  (340)Accrued liabilities
  (331)
  542Deferred revenue
  (154)
  (175)Net cash used in operating
  activities
  (7,095)
  (4,241)Cash flows from
  investing activities:Purchase of short-term investments
  (19,717)
  -Maturities of short-term investments
  25,000
  -Acquisition of property and equipment
  (242)
  (1,441)Leasehold improvements
  (7)
  -Net cash provided by (used in)
  investing activities
  5,034
  (1,441)Cash flows from
  financing activities:Principal payments under capital lease
  obligations
  (8)
  (8)Repayment of loans payable
  (423)
  (130)Proceeds from the issuance of preferred
  stock, net of issuance costs
  -
  22,360Proceeds from the issuance of common
  stock, net of issuance costs and stock repurchased
  44
  573Net cash provided by (used in)
  financing activities
  (387)
  22,795Net increase
  (decrease) in cash and cash equivalents
  (2,448)
  17,113Cash and cash
  equivalents, beginning of period
  93,352
  848Cash and cash
  equivalents, end of period
  $90,904
  $17,961Supplemental
  disclosures of cash flow information:Cash paid during the period for interest
  $156
  $77Supplemental
  disclosures of non-cash investing and financing activities:Property and equipment acquired with
  accounts payable
  $723
  $-Issuance costs included in accounts
  payable
  $168
  $-Unearned stock-based compensation
  $-
  $10,459Reversal of
  unearned stock-based compensation
  $1,422
  $-The
  accompanying notes are an integral part of these consolidated financial
  statements

DELTAGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(unaudited)
March 31, 2001



1. Business of the Company

Deltagen, Inc.
(the "Company"), is a leading provider of genomics-based information,
products and programs that are used to discover drug targets and drug
candidates and to accelerate pharmaceutical and biotechnology drug and product
development. The Company researches, develops and uses technologies that build
upon technology platforms to discover the function, role, usefulness and
disease relevance of mammalian genes and secreted proteins in drug discovery
and development. The technology enables the Company to select and target genes
believed to be relevant to disease and delete, or "knock out," these
genes in mice. The Company then uses an extensive, integrated analysis program
to assess the function and potential pharmaceutical relevance of these genes
and the proteins these genes encode. The Company believes that the technology
allows the Company to knock out genes in mice and to make discoveries on the
mammalian function, role, usefulness and disease relevance of genes and
secreted proteins in drug discovery faster and on a larger scale than has been
previously possible.

2. Basis of Presentation

The
accompanying interim consolidated balance sheet as of March 31, 2001, the
consolidated statements of operations for the three months ended March 31, 2001
and 2000 and the consolidated statements of cash flows for the three months
ended March 31, 2001 and 2000 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information, the instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not contain
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. 
The unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Company's financial position and
its results of operations and its cash flows for the three months ended March
31, 2001 and 2000. The results for the three months ended March 31, 2001 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2001.

These
interim financial statements should be read in conjunction with the annual
audited financial statements included in the Companys Annual Report on Form
10-K (File No. 000-31147) filed with the Securities and Exchange Commission
(the SEC) on April 2, 2001.

3.  Net Loss Per Share

Basic
earnings per share is calculated based on the weighted-average number of common
shares outstanding during the period. Diluted earnings per share would give
effect to the dilutive effect of common stock equivalents consisting of stock options
and warrants.  Dilutive securities of
4,333,639 and 1,305,439 have been excluded from the diluted earnings per share
calculations for the periods ended March 31, 2001 and 2000, respectively, as
they have an antidilutive effect due to the Company's net losses.

A
reconciliation of shares used in the calculations is as follows:



Three
  Months Ended March 31,2001
  2000(unaudited)
  (unaudited)Basic and diluted:Net loss
  $(7,072)
  $(7,295)Deemed dividend related to beneficial
  conversion feature of preferred stock
  -
  (22,360)Net loss attributable to common
  stockholders
  $(7,072)
  $(29,655)Weighted average shares of common stock
  outstanding
  29,888
  2,446Less:  Weighted average shares
  subject to repurchase
  (1,287)
  (848)Weighted average shares used in basic and diluted net loss per share
  28,601
  1,598Net loss per share attributable to common
  stockholders
  $(0.25)
  $(18.56)

4.  Commitments and
Contingencies

On
May 24, 2000, Lexicon Genetics Incorporated filed a lawsuit against the
Company in the United States District Court for the District of Delaware. The
complaint in the lawsuit alleges that the Company's methods of making knockout
mice infringe United States Patent No. 5,789,215 (the '215 patent), under which
Lexicon claims to be an exclusive licensee. The complaint seeks a judgment that
the Company infringed this patent, a permanent injunction against further
infringement of the patent and an award of damages in an unspecified amount
that, under certain circumstances, may be trebled. On June 13, 2000, the
Company responded to Lexicon's complaint by filing an answer and seeking a
declaratory judgment in its favor. On October 31, 2000, an Order was
entered by the Court amending the complaint and adding GenPharm International,
the patentee of the '215 patent, as a plaintiff. On November 14, 2000,
Deltagen filed an answer as well as federal antitrust counterclaims under the
Sherman Antitrust Act against Lexicon and GenPharm, alleging that Lexicon
asserted a fraudulently procured patent (the '215 patent) against Deltagen in
an attempt to illegally monopolize the market for production and sale of
knockout mice, a violation of Section 2 of the Sherman Act. The counterclaim
asserts that Lexicon knew that the '215 patent was obtained by fraud and that
the patent was invalid when it brought suit against Deltagen. The antitrust
counterclaim also charges Lexicon and GenPharm with conspiracy to monopolize
the market for knockout mice, in violation of Section 2 of the Sherman Act, as
well as with concerted conduct in restraint of trade, in violation of Section 1
of the Sherman Act. The counterclaim seeks damages, including lost profits,
devaluation of the initial public offering and legal fees, as well as a
trebling of damages pursuant to Section 4 of the Clayton Act. In addition, the
answer seeks a declaratory judgment that Deltagen does not infringe the claims
of the '215 patent and that the patent is invalid. The answer also asserts that
the patent was obtained by knowing and willful fraud on the United States
Patent and Trademark Office, rendering the patent unenforceable.  A claim construction hearing is scheduled
for October 4, 2001.  The Company
intends to defend the action vigorously. The outcome of the hearing and the litigation
cannot be predicted. The Company believes that if Lexicon were to prevail in
this lawsuit, the impact would not significantly affect the operations of the
Company. The Company believes that the methods covered by the '215 patent
represent a modification of prior methods of generating knockout mice. Although
the Company believes this modification was previously described by others prior
to GenPharm's filing of its patent application, the Company has intentionally
avoided the use of this modification.

In
addition, on October 13, 2000, Lexicon and the University of Utah Research
Foundation filed a lawsuit against the Company in the United States District
Court for the Northern District of California. The complaint in this lawsuit
alleges that the Company is infringing United States Patents Nos. 5,631,153;
5,464,764; 5,627,059 and 5,487,992 (the Capecchi patents), under which Lexicon
claims to be an exclusive licensee. All of these patents relate to the use of a
positive-negative selection vector in gene targeting. The complaint seeks a
judgment that the Company infringed these patents, a preliminary and permanent
injunction against further infringement of the patents and an award of damages
in an unspecified amount that, under certain circumstances, may be trebled. On
November 8, 2000, the Company filed an answer denying infringement, and a
counterclaim seeking a declaratory judgment that the patents are invalid. The
counterclaim seeks an award of damages including attorney fees.

The
Company believes that the methods employed by the Company do not infringe these
patents and that the patents are invalid. The Company believes that the
Capecchi patents cover certain modifications to existing methods of generating
knockout mice, such modifications that the Company does not practice. These
modifications are therefore but one method available for use in generating
knockout mice. Numerous equally effective design-arounds exist, as well as
methods that predate the Capecchi patents that are in the public domain and
thus outside the scope of the patent. Thus, if Lexicon prevails in any such
lawsuit, the Company would only be prevented from using certain of its methods
but would not be prevented from using all of its current methods. However, an
adverse determination as to those certain methods could significantly affect
the development and marketing of its existing function database and DeltaSelect
programs and could cause the Company to incur significant financial liabilities
that could materially affect its business and operating results.

A
claim construction hearing is set for September 10, 2001, the outcome of which
cannot be predicted with certainty.  The
litigation is in the early stages and its outcome cannot be predicted. We may
be involved in additional litigation, investigations or proceedings in the
future. Any litigation, investigation or proceeding, with or without merit,
could be costly and time-consuming and could divert our management's attention
and resources which in turn could harm our business and financial results.

Item 2.Management's Discussion and Analysis of Financial
Conditions and Results of Operations

INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS

This
report contains forward-looking statements. 
The forward-looking statements are contained principally in this section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."  These
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be
materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements.  Forward-looking statements include, but are
not limited to, statements about:


limitations in the drug discovery process; 
 the capabilities, development and marketing of our products and services; 
 the benefits of knockout mice programs and, in particular, our technology and
methods; 
 the requirements of pharmaceutical and biotechnology companies; 
 our future revenues and profitability; 
 our estimates regarding our capital requirements and needs for additional
financing; 
 plans for future products and services and for enhancements of existing
products and services; 
 our patent applications, licensed technology and proposed patents; 
 the litigation between us, the University of Utah Research Foundation and
Lexicon Genetics Incorporated; 
 our ability to attract customers and establish licensing and other
agreements; and 
 sources of revenues and anticipated revenues, including contributions from
customers, license agreements and other  
collaborative efforts for the development and commercialization of
products, and the continued viability and duration of those agreements and
efforts.This
report contains statistical data regarding the biotechnology and pharmaceutical
industries that we obtained from private and public industry publications.  These publications generally indicate that
they have obtained their information from sources believed to be reliable, but
do not guarantee the accuracy and completeness of their information.  Although we believe that the publications
are reliable, we have not independently verified their data.

In
some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could,"
"would," "expects," "plans,"
"anticipates," "believes," "estimates,"
"projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements.  These statements reflect our current views
with respect to future events and are based on assumptions and subject to risks
and uncertainties.  Given these
uncertainties, you should not place undue reliance on these forward-looking statements.  We discuss many of these risks in this
report in greater detail under the heading "Risk Factors."  Also, these forward-looking statements
represent our estimates and assumptions only as of the date of this report.

You
should read this report and the documents that we reference in this report
completely and with the understanding that our actual future results may be
materially different from what we expect. We qualify all of our forward-looking
statements by these cautionary statements.

YOU
SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.

Overview

Deltagen
was formed in 1997 and is a leading provider of genomics-based information,
products and programs that are used to discover drug targets and drug
candidates and to accelerate pharmaceutical and biotechnology drug and product
development. We research, develop and use technologies that build upon our
technology platforms to discover the function, role, usefulness and disease
relevance of mammalian genes and secreted proteins in drug discovery and
development. Our technology enables us to select and target genes we believe to
be relevant to disease and delete, or "knock out," these genes in
mice. We then use an extensive, integrated analysis program to assess the
function and potential pharmaceutical relevance of these genes and the proteins
these genes encode. We believe that our technology allows us to knock out genes
in mice and to make discoveries on the mammalian function, role, usefulness and
disease relevance of genes and secreted proteins in drug discovery faster and
on a larger scale than has been previously possible.

We are implementing a
strategy to integrate our;

   Data and information generated from our
knockout animal models   Mammalian gene function and secreted protein
discoveries   Commercialization of the intellectual
property we generate on the use of mammalian genes and secreted proteins in
drug development through alliances and collaborations with others and our own internal
products and programs   Generation of information, products and
services for pharmaceutical and biotechnology drug discovery efforts   Development and expansion of our own products
and programs in collaboration with other companies and through our own internal
programsWe
have established collaborations and relationships with major pharmaceutical and
biotechnology companies worldwide to accelerate the discovery of and to
commercialize therapeutic and diagnostic products to improve human and animal
health. These companies include GlaxoSmithKline plc, Merck &
Co., Inc., Pfizer Inc. and Schering-Plough Research Institute.

We
believe that our ability to determine gene function, to develop products and to
identify potential drug candidates results from leveraging our powerful
technology platforms. Our genomics technologies, processes and information
systems are fully integrated with one another and rapidly generate information
on the function of and relationships between genes and the proteins these genes
encode and the usefulness of genes as new drug targets and proteins as new drug
candidates.

We
have used these systems to establish our products and programs that include our

 Large-scale program to generate mammalian gene knockout animals and
to discover gene function DeltaBase(TM) portfolio of gene knockout animal models and mammalian
gene function data analysis and management database DeltaXpress(TM) microarray-based mammalian gene knockout expression
data program Mammalian gene knockout secreted protein discovery programs,
including our Delta-GT(TM) secreted gene trap program Internal early-stage biopharmaceutical product development programs,
including our CD123 antigen program in-licensed as a potential treatment for
acute myelogenous leukemia (AML)To
date, we have generated revenue from our DeltaBase and DeltaSelect(TM)
programs.

DeltaBase
is our database that provides information, based on knockout mouse studies, on
gene function and validated gene targets for drug discovery. We created
DeltaBase to be marketed to the pharmaceutical and biotechnology industries to
help define the role that genes play in biological processes and disease. At
our current rate of production, we expect to provide gene function and target
validation information through DeltaBase on approximately 250 different
mammalian genes per year. We select genes for DeltaBase based upon what we
believe to be their potential to become useful drug targets. We generate
information on these genes by comprehensively analyzing knockout mice generated
through our proprietary gene knockout methods. Each knockout mouse undergoes a
standardized, detailed and extensive analysis in order to determine the
function and role that a particular gene plays in the mouse and that gene's suitability
as a drug target. We currently intend that DeltaBase will deliver a total of
approximately five million individual in vivo function data points per year. In
addition to accessing target validation data, DeltaBase subscribers will have
access to the knockout mice used to generate this data.

The
DeltaSelect program was our initial product. Customers received target
validation information for selected genes on a fee-for-service basis. This
program was provided to validate our proprietary technology and promote
interest in the DeltaBase product that became available in 2000. DeltaSelect
will now be utilized to develop new technologies and programs in collaboration
with pharmaceutical companies.

We have DeltaBase agreements
with both GlaxoSmithKline plc and Pfizer Inc. Each of these agreements provides
for payments aggregating $15 million over three years. In addition, we may
receive additional fees for access to our intellectual property.  In the first quarter of 2000, we derived all
of our revenue from the development and analysis of knockout mice under our
DeltaSelect program. We anticipate that a significant portion of our future
revenues will be derived from periodic licensing fees under agreements with
DeltaBase subscribers.



For
  the Three MonthsEnded
  March 31,Revenue:
  2001
  2000(in thousands)DeltaSelect
  $319
  $286DeltaBase
  2,132
  -Total
  $2,451
  $286



Under
our revenue recognition policy, revenues are recognized when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered and meet all customer-specified criteria, the price is fixed and
determinable and collectibility is reasonably assured. Revenue derived from
DeltaBase agreements is recognized on a straight-line basis over the term in which
services are to be provided. Research and development collaboration agreements
specify milestones to be met and the payments associated with meeting each
milestone. Revenue derived from these contracts is recognized upon completion
of the milestone. The amount of revenue recognized upon completion of each
milestone is such that the earned revenue, as a percentage of total anticipated
revenue, approximates the costs incurred in achieving the related milestone, as
a percentage of the total anticipated costs. Where the contract does not
specify milestones and payment is upon completion of the contract, revenue is
recognized based on the percentage-of-completion method of accounting. Any
payments received in advance of the completion of a milestone or services
performed are recorded as deferred revenue.

We
had net losses of $7.1 million and $7.3 
million for the three months ended March 31, 2001 and 2000,
respectively. The net loss attributable to common stockholders for the three
months ended March 31, 2000, was $29.7 million, after a dividend of $22.4
million relating to a beneficial conversion feature on our Series C
redeemable convertible preferred stock. Our losses have resulted primarily from
costs incurred in connection with research and development activities, from
selling, general and administrative costs associated with our operations and
non-cash charges for amortization of unearned stock-based compensation costs.
This amortization was $792,000 and $2.8 million for the three months ended
March 31, 2001 and 2000, respectively. Research and development expenses
consist primarily of salaries and related personnel costs, material costs,
legal expenses resulting from intellectual property filings and other expenses
related to the development of our DeltaBase, DeltaSelect and secreted protein
programs. We expense our research and development costs as they are incurred.
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel,
professional and other corporate expenses including business development and
general legal activities. In connection with the development and expansion of
our gene function and gene expression databases and our secreted protein
program, we expect to incur increasing research and development and general and
administrative costs. As a result, we will need to generate significantly
higher revenues to achieve profitability. We expect to report substantial net
losses through the next several years.

We
account for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees"; Financial Accounting
Standards Board Interpretation No. 44 (FIN No. 44), "Accounting for
Certain Transactions Involving Stock CompensationAn Interpretation of APB No.
25"; and Financial Accounting Standards Board Interpretation No. 28 (FIN
No. 28), "Accounting for Stock appreciation Rights and Other Variable
Stock Option or Award Plans," and comply with the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation."

Under
APB No. 25, compensation expense is based on the difference, if any, on the
date of the grant, between the fair value of our stock and the exercise price.
SFAS No. 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity investment.

We account for equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force Issue No. 96-18 (EITF No. 96-18),
"Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."

During
the three months ended March 31, 2001, we reversed approximately $1.4 million
of unearned stock-based compensation relating to terminated employees.  During the three months ended March 31, 2000
we recorded unearned stock-based compensation of approximately $10.5 million.
These amounts are being amortized as charges to operations over the respective
vesting period of the individual stock options, generally four years.

We
may incur additional stock-based compensation expense in the future as a result
of both options or other securities granted at below fair market value and
fluctuations in the market value of our stock that have a direct impact on the
value of options and warrants held by non-employees.

Results of Operations

Contract
revenue increased by $2.2 million to $2.5 million for the three months ended
March 31, 2001 from $286,000 for the comparable period in 2000.  The increase was due to revenue from our
DeltaBase gene function database product. In the first three months of 2000, all
of our revenue came from DeltaSelect contracts with GlaxoSmithKline plc,
Merck & Co., Inc., Pfizer Inc., Roche Bioscience, Schering-Plough
Research Institute and Tularik Inc.

Research
and development expenses were $8.2 million for the three months ended March 31,
2001 and $5.6 million for the comparable period in 2000. Excluding amortization
of unearned stock-based compensation expenses, research and development
expenses increased by $3.2 million to $7.3 million for the three months ended
March 31, 2001 from $4.1 million in the comparable period of 2000.  This increase was primarily attributable to
continued growth of research and development activities, including $2.3 million
related to increased personnel and laboratory supply costs to support development
of our gene function database and our DeltaSelect and secreted protein programs
and $802,000 in higher depreciation and amortization and facilities expenses.

Selling,
general and administrative expenses were $2.9 million during the first three
months of 2001 and $2.0 million for the comparable period of 2000. Excluding
amortization of unearned stock-based compensation costs, selling, general and
administrative expenses increased by $2.2 million to $3.0 million for the three
months ended March 31, 2001 from $774,000 in the comparable period of
2000.  This increase included $947,000
related to staffing and infrastructure costs, $822,000 related to marketing and
advertising costs and $456,000 related to legal and professional fees.

We
had net interest income of $1.6 million and $91,000 for the three months ended
March 31, 2001 and 2000, respectively. This increase resulted from increased
cash and investment balances as a result of an additional private equity
financing and the completion of our initial public offering during 2000.

Liquidity and Capital Resources

At
March 31, 2001, we had $110.8 million in cash, cash equivalents and short-term
investments, compared with $118.3 million at December 31, 2000. This $7.5
million decrease was due primarily to the use of $7.1 million in operating
activities and $431,000 in debt repayments. 
The use of cash in operating activities in the first three months of
2001 consisted primarily of the net loss for the period of $7.1 million and
changes in operating assets and liabilities of $1.2 million offset in part by
non-cash charges of $1.2 million related to depreciation and amortization
expenses including the amortization of unearned stock-based compensation. We
expect to devote substantial capital resources for facilities and equipment to
support expansion of our research and development efforts, to expand our sales
and marketing organization and for other general corporate activities. We
believe that our current cash and short-term investment balances, together with
revenues we believe will be derived from subscriptions to our gene function
database and collaborative research agreements, will be sufficient to fund our
operations through at least 2003. During or after this period, if cash
generated by operations is insufficient to satisfy our liquidity requirements
or we make acquisitions or other investments, we may need to sell additional
equity or debt securities or obtain additional credit arrangements. Additional
financing may not be available on terms acceptable to us or at all. The sale of
additional equity or convertible debt securities may result in additional
dilution to our stockholders. Any debt financing may have restrictive covenants
that adversely affect our operating plans and flexibility.

Deltagen
has not paid any cash dividends on its common stock in the past. We currently
intend to retain any earnings for use in the business and do not anticipate
paying any cash dividends on our common stock in the foreseeable future.

Prior to February, 2001 we
operated solely in the United States. 
Beginning February 15, 2001, our European subsidiary, Deltagen Europe
S.A. began operations.  The expenses of
these European operations have not been material and all sales of Deltagen
products to date have been made in U.S. dollars.  Accordingly, we have not had any material exposure to foreign
currency rate fluctuations.

Item 3.  Quantitative and Qualitative Disclosures
About Market Risk

We
invest our excess cash primarily in obligations of governmental agencies and
marketable debt securities of financial institutions and corporations with
strong credit ratings. These instruments have maturities of twenty-four months
or less when acquired. We do not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, we believe
that, while the instruments we hold are subject to changes in the financial
standing of the issuer of such securities, we are not subject to any material
risks arising from changes in interest rates, foreign currency exchange rates,
commodity prices, equity prices or other market changes that affect market risk
sensitive instruments.  Therefore no quantitative
tabular disclosure is included in this report.

RISK FACTORS

We expect to continue to incur substantial losses and we may
never achieve profitability, which in turn may harm our future operating
performance and may cause the market price of our stock to decline.

We
have had net losses every year since our inception in 1997 and, as of March 31,
2001, had an accumulated deficit of $57.7 million. We had net losses of
$7.1 million and $7.3 million in for the three months ended March 31,
2001 and 2000, respectively. The net loss for the three months ended March 31,
2000 is before a $22.4 million deemed dividend related to the beneficial
conversion of our preferred stock. Because we anticipate significant
expenditures for our research and development programs and for the development,
implementation and support of our gene function database, we expect to report
substantial net losses through at least the next several years. We may never
achieve profitability. If we do not become profitable within the time frame
expected by securities analysts or investors, the market price of our stock
will likely decline. If we do achieve profitability, we may not sustain or
increase profitability in the future.

We
expect that our expenditures will continue to increase, due in part to:

 continued investment in the research and development of our new and
existing products and our technology, including increased investment for the
development, implementation and support of our gene function database, our
standard and conditional knockout programs and our secreted protein programs;
and our increasing investment in management and other employees, sales
and marketing programs, customer service and operational and financial
controls.We are a newly public company with an unproven business
strategy, and our limited history of operations makes evaluation of our
business and prospects difficult.

We
have had a limited operating history and are at an early stage of development.
Our strategy of offering a gene function database and using knockout mice to
enable our customers to pursue promising candidates for drug target development
is unproven. Additionally, our pricing models for offering our products and
services are unproven. We currently have two subscribers for our gene function
database. We have generated only limited revenues amounting to approximately
$2.1 million, $1.2 million and $381,000 for the fiscal years ended
2000, 1999 and 1998, respectively. For the three months ended March 31, 2001
and 2000 we recognized revenues of $2.5 million and $286,000, respectively.  Our success will depend upon, among other
things, our ability to enter into licensing and other agreements on favorable
terms, our ability to determine and generate information on those genes which
have potential use as drug targets and the commercialization of products using
our data. Moreover, we had no experience selling our data, and we had never
provided a gene database before. Our sales force may not succeed in marketing
our database product, and our employees may not succeed in implementing and operating
our database in a manner that is satisfactory to our subscribers. Furthermore,
the plans for our secreted protein and conditional knockout programs are
unproven, and we cannot be sure that we will ever be able to develop these
programs or that any program that we develop will be commercially successful.
As a result of these factors, it is difficult to evaluate our prospects, and
our future success is more uncertain than if we had a longer or more proven
history of operations.

We currently have only four customers and will not succeed
unless we can attract many more customers.

We
have only three customers for our DeltaSelect program. One of these customers
is also a subscriber to our gene function database. We expect to enter into
only a limited number of future DeltaSelect agreements. To succeed we must
attract customers for our database and other programs. Our existing and future
agreements may not be renewed and may be terminated without penalty in the
event either party fails to fulfill its obligations under one of these
agreements. Failure to renew or the cancellation of these agreements by one of
our customers could result in a significant loss of revenues. In 2000,
GlaxoSmithKline and Schering-Plough accounted for 56% and 18%, respectively, of
our revenues. Our current customers are GlaxoSmithKline, Pfizer,
Schering-Plough and Merck.

Over
the past several years, companies in the pharmaceutical industry have undergone
significant consolidation. If two or more of our present or future customers merge,
we may not be able to receive the same fees under agreements with the combined
entities that we were able to receive under agreements with these customers
prior to their merger. Moreover, if one of our customers merges with an entity
that is not a customer, the new combined entity may prematurely terminate our
agreement. Any of these developments could harm our business or financial
condition.

Because we have only recently begun to offer our database
product, which we expect to be our principal source of revenue in the next few
years, our future prospects are uncertain.

We
believe the majority of our revenues will be derived from fees under agreements
with our database users. We may also derive revenues from royalties received
from these users. We have entered into agreements with two subscribers to our
database, however, we cannot be sure of the terms under which we may enter into
future agreements, such as fees payable to us or the term of the agreements, if
any. Our agreement with GlaxoSmithKline expires three years after our first
delivery of data and provides for termination for any reason within the first
three months after the one-year anniversary of the effective date upon the
payment of a specified termination fee.

If
our database is not acceptable to our prospective customers, it may not
generate revenues and our business and financial condition will be materially
harmed.

We
may not be able to comply with minimum performance levels or restrictive
provisions or other obligations that may be contained in any agreements, such
as minimum data delivery requirements. In addition, we may experience
unforeseen technical complications in the processes we use to generate
functional data for our gene database and functional genomics resources. These
complications could materially delay or limit the use of our gene function
database, substantially increase the anticipated cost of generating data or
prevent us from implementing our processes at appropriate quality and scale
levels, thereby causing our business to suffer.

No drugs have been developed and commercialized using
genomics-based research and therefore the future of our products and programs
is uncertain.

None
of the limited number of drugs developed to date using genomics-based research
have reached the commercial market. We cannot assure you that genomics-based
drug development efforts will ultimately be successful. We have not proven our
ability either to identify drug targets with commercial potential or
commercialize drug targets that we do identify. We cannot assure you that a
particular gene function in a mouse will have any correlation to a patient's
response to a particular drug. It is difficult to successfully select those
genes with the most potential for commercial development. Furthermore, we do
not know that any products based on genes that are the subject of our research
can be successfully developed or commercialized. If commercial opportunities
are not realized from genomic-based research, our existing customers could stop
using our products or we could have difficulty attracting or retaining
customers and, in any event, we would not realize any product royalties.

Our customers will control the development and
commercialization of products based on genes that we identify, which may mean
that our research efforts will never result in any royalty payments or third
party product sales.

Our
agreements with our customers may provide us with rights to obtain royalties
from the commercial development of compounds or therapeutic approaches derived
from access to our database, technology or intellectual property. However, we
may not be able to obtain these rights under future agreements. Our ability to
obtain these rights depends in part on the advantages and novelty of our
technologies, the validity of our intellectual property, the usefulness of our
data and our negotiating position relative to each potential customer.

We
will have limited or no control over the resources that any customer may devote
to the development of compounds or therapeutic approaches derived from our
access to our database. These customers may breach or terminate their
agreements with us, and they are not obligated to conduct any product
discovery, development or commercialization activities at all. Further, our
customers may decide not to develop products arising out of our customer
agreements or may not devote sufficient resources to the development, approval,
manufacture, marketing or sale of these products. If any of these events
occurs, our customers may not develop or commercialize any products based on
our gene function research, technologies or intellectual property, we would not
receive royalties on product sales and our results of operations would suffer.
Furthermore, our customers may resist sharing revenue derived from the
successful commercialization of a drug through royalty payments or others may
have competing claims to all or a portion of such revenues.

There are a finite number of gene families upon which
pharmaceutical and biotechnology companies focus their research, which limits
our potential revenue and growth.

Our
current and potential subscribers and customers traditionally focus their
research and development efforts on a finite number of gene families that they
view as reliable drug targets. Once we provide functional information on these
gene families, our ability to attract and retain subscribers to our database
will depend, in part, on the willingness of our subscribers to expand their
research and development activities to other gene families. If our customers do
not do this, we may lose existing subscribers or fail to attract new
subscribers for our database services, and as a result, our business and
financial condition may be harmed. In addition, we have made and will continue
to make significant investments in our database and knockout programs which we
may not recoup if we cannot find additional target opportunities.

We may fail to meet market expectations because of
fluctuations in our quarterly operating results, which could cause our stock
price to decline.

The
following are among the factors that could cause our operating results to
fluctuate significantly from period to period:

 changes in the demand for and pricing of our products and services; the nature, pricing and timing of other products and services
provided by us or our competitors; changes in the research and development budgets of our customers; acquisition, licensing and other costs related to the expansion of
our operations; the timing of milestones, licensing and other payments under the
terms of our customer agreements and agreements pursuant to which others
license technology to us; expenses related to, and the results of, patent filings and other
proceedings relating to intellectual property rights; and our unpredictable revenue sources as described below.We
anticipate significant fixed expenses due in part to our need to continue to
invest in product development and potential extensive support for our gene
function database subscribers. We may be unable to adjust our expenditures if
revenues in a particular period fail to meet our expectations, which would harm
our operating results for that period.

As
a result of these fluctuations, we believe that period-to-period comparisons of
our financial results will not necessarily be meaningful, and you should not
rely on these comparisons as an indication of our future performance.

Our revenues will be unpredictable and this may harm our
financial condition.

The
amount and timing of revenues that we may have from our business will be
unpredictable because:

 the timing of our DeltaSelect program agreements, gene function
database subscriber agreements and installations are determined by our
customers and subscribers; whether any products are commercialized and generate royalty
payments depends on the efforts, timing and willingness of our customers; we do not expect to receive any milestone or royalty payment under
licenses and other arrangements for a substantial period of time, if ever; to date, we have entered into only two customer agreements for our
gene function database and may not enter into any additional agreements; the time required to complete custom orders for our database
programs can vary significantly; and our sales cycle is lengthy, as described below.As
a result, our revenue may significantly vary from quarter to quarter, and our
quarterly results may be below market expectations. If this happens, the price
of our common stock may decline.

We expect that our sales cycle will be lengthy, which will
cause our revenues to be unpredictable and our business to be difficult to
manage.

Our
ability to identify and obtain subscribers for our gene function database
product and other services depends upon whether customers believe that our
products and services can help accelerate drug discovery efforts. Our sales
cycle will be lengthy because of the need to educate potential customers and
sell the benefits of our products and services to a variety of constituencies
within potential subscriber companies. These companies are large organizations
with many different layers and types of decision-makers. In addition, each
database subscription and development program or services agreement will
involve the negotiation of unique terms and issues which will take a
significant amount of time. We may expend substantial funds and management
effort with no assurance that a subscription program or services agreement will
result. Actual or proposed mergers or acquisitions of our prospective customers
may also affect the timing and progress of our sales efforts. Any of these
developments could harm our business or financial condition.

We may have conflicts or be in competition with our
customers, which will hurt our business prospects.

We
may pursue opportunities in fields, such as secreted proteins, that could
conflict with those of our customers. Moreover, disagreements could arise with
our customers or their partners over rights to our intellectual property or our
rights to share in any of the future revenues of compounds or therapeutic
approaches developed by our customers. These kinds of disagreements could
result in costly and time-consuming litigation and could have a negative impact
on our relationship with existing customers. Any conflict with our customers could
reduce our ability to attract additional customers or enter into future
customer agreements. Some of our customers could also become competitors in the
future. Our customers could develop competing products, preclude us from
entering into agreements with their competitors or terminate their agreements
with us prematurely.

We experience intense competition from other entities engaged
in the study of genes, and this competition could adversely affect our
business.

The
human and mouse genomes contain a finite number of genes. The human genome has
been mapped and identified. Our competitors have identified and will continue
to identify the sequence of numerous genes in order to obtain proprietary
positions with respect to those genes. In addition, our competitors may seek to
identify and determine the biological function of numerous genes in order to
obtain intellectual property rights with respect to specific uses of these
genes, and they may accomplish this before we do. We believe that the first
company to determine the functions of commercially relevant genes or the
commercially relevant portions of the genome will have a competitive advantage.

A
number of companies, institutions and government-financed entities are engaged
in gene sequencing, gene discovery, gene expression analysis, gene function
determination and other gene-related service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do and have been conducting research longer than we have. In
particular, a significant portion of this research is being conducted by
private companies and under the international Human Genome Project, a
multi-billion dollar program funded, in part, by the U.S. government, which
completed and released its initial rough draft of the human genome in June of
this year. Furthermore, other entities have and will continue to discover and
establish a patent position in genes or gene sequences that we wish to study.
Significant competition also arises from entities using standard target
identification approaches, traditional knockout mouse technology and other
functional genomics technologies. These competitors may have intellectual
property rights in functional or other data which are superior to our rights.
These competitors may also develop products earlier than we do, obtain
regulatory approvals faster than we can and invent products and techniques that
are more effective than ours. Furthermore, other methods for conducting
functional genomics research may ultimately prove more advanced, in some or all
respects, to the use of knockout mice. In addition, technologies more advanced
than or superior to our gene trap technology and gene function identification
technology may be developed, thereby rendering our gene trap and gene function
identification technologies obsolete. As we expand our range of products and
services, such as our secreted protein program, we will compete with additional
companies, some of which may be our customers at that time or our potential customers.

Some of our competitors have
developed commercially available databases containing gene sequence, gene
expression, gene function, genetic variation or other functional genomic
information and are marketing or plan to market their data to pharmaceutical
and biotechnology companies. Additional competitors may attempt to establish
databases containing this information in the future. We expect that competition
in our industry will continue to intensify. We also believe that some
pharmaceutical and biotechnology companies are discussing the possibility of
working together to discover the functions of genes and share gene
function-related data among themselves. The formation of this type of
consortium could reduce the prospective customer base for our gene
function-related business. Moreover, the pharmaceutical industry has undergone
significant mergers and this trend is expected to continue. This concentration
of the industry could further limit our potential customer base and therefore
harm our business.

If we fail to properly manage our growth, our business could
be adversely affected.

We
expect to continue to experience significant growth in the number of our
employees and the scope of our operations, including an increase in the scale
of our mouse knockout program. As of March 31, 2001, we had approximately 240
full-time employees. We expect our number of employees to continue to increase
for the foreseeable future. In addition, we have substantially increased the
scale of our knockout mouse production in the last year and expect to continue
doing so for the foreseeable future. Our overall growth and need to develop
many different areas of our company have placed, and may continue to place, a
strain on our management and operations. If we are unable to manage our growth
effectively, our losses could increase. The management of our growth will
depend, among other things, upon our ability to broaden our management team and
attract, hire, train and retain skilled employees. Our success will also depend
on the ability of our officers and key employees to continue to implement and
improve our operational and other systems. We will also be required to expend
funds, which may be substantial, to improve our operational, financial and
management controls, reporting systems and procedures.

In
addition, we will have to invest in additional customer support resources. Our
current and potential database subscribers typically have worldwide operations
and may require support at multiple U.S. and foreign sites and in multiple
languages. To provide this support, we may need to open offices in addition to
our Menlo Park and San Carlos, California facilities, which will result in
additional burdens on our systems and resources and require additional capital
expenditures.

We may engage in future acquisitions, which could adversely
affect your investment in us as we may never realize any benefits from such
acquisitions, which also could be expensive and time consuming.

We
intend to acquire and license additional products and programs, if we determine
that these products or programs complement our existing technology or augment
our existing information technology platforms. We currently have no commitments
or agreements with respect to any material acquisitions. If we do undertake any
transactions of this sort, the process of integrating an acquired business,
technology, service or product may result in operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we
may never realize the anticipated benefits of any acquisition. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities and amortization
expenses related to goodwill and other intangible assets, which could adversely
affect our results of operations and financial condition.

We may need to raise additional capital that may not be
available, which could adversely affect our operations.

Our
products and services may not produce revenues that, together with our existing
cash and other resources, are adequate to meet our cash needs. We plan to fund
our operations from our existing cash balances, but we may in the future seek
to raise additional funds from the sale of stock or from debt financing. Our
cash requirements depend on numerous factors, including:

 our ability to attract and retain customers for our gene function
database and other products and services; expenses in connection with the development and expansion of our
gene function database, our secreted protein or other products and services; expenditures in connection with license agreements and acquisitions
of and investments in complementary technologies and businesses; the need to increase research and development spending to keep up
with competing technologies and market developments; and expenditures as we expand our sales, marketing and customer service
organizations and improve our management, operational and financial systems.If
we need additional funding, we may be unable to obtain it on favorable terms,
or at all. If adequate funds are not available, we may have to curtail
operations significantly or obtain funds by entering into arrangements
requiring us to relinquish rights to certain technologies, products or markets.
In addition, if we raise funds by selling stock or convertible securities, our
existing stockholders could suffer dilution.

We depend on key employees in a competitive market for skilled
personnel, and without additional employees, we cannot grow or achieve
profitability.

We
are highly dependent on the principal members of our management, operations and
scientific staff, including William Matthews, Ph.D., our President and
Chief Executive Officer, and Mark W. Moore, Ph.D., our Chief Scientific
Officer. The loss of either of their services would harm our business.

Our
future success also will depend in part on the continued service of our key
scientific, software, consultant and management personnel and our ability to
identify, hire and retain additional personnel, including customer service,
marketing and sales staff. We experience intense competition for qualified
personnel. We may be unable to attract and retain personnel necessary for the
development of our business. Moreover, our business is located in the San
Francisco Bay Area of California, where demand for personnel with the skills we
seek is extremely high and is likely to remain high. Because of this
competition, our compensation costs may increase significantly.

We currently have no patents, and if we are unable to protect
our proprietary information, our business will be adversely affected.

Our
business and competitive position depends upon our ability to protect and
exploit our proprietary techniques, methods, compositions, inventions, database
information and software technology. However, our strategy of obtaining such
proprietary rights around as many genes as possible is unproven. Unauthorized
parties may attempt to obtain and use information that we regard as
proprietary. Although we intend for our gene function database subscription
agreements to require our potential subscribers to control access to our
database and information, policing unauthorized use of our database information
and software may be difficult.

We
currently have no issued patents or registered copyrights. Patents have issued
to other entities based on claims relating to knockout mice. In addition, many
applications have been filed seeking to protect partial human gene sequences,
many of which are based primarily on gene sequence information alone. Some of
these applications have issued as patents. Some of these may claim sequences
which we have used or may use in the future to generate knockout mice in our
gene knockout program. In addition, other applications have been filed which
seek to protect methods of using genes and gene expression products, some of
which attempt to assign biological function to the DNA sequences based on
laboratory experiments, computer predictions, mathematical algorithms and other
methods. The issuance of these applications as patents will depend, in part,
upon whether practical utility can be sufficiently established for the claimed
sequences and whether sufficient correlation exists between the experimental
results predictions, algorithms and other methods and actual functional
utility. The patent application process before the United States Patent and
Trademark Office and other similar agencies in other countries is confidential
in nature. As each application is evaluated independently and confidentially,
we cannot predict whether applications have been filed or which, if any, will
ultimately issue as patents. However, it is probable that patents will be
issued to our competitors claiming knockout mice, partial human gene sequences
and methods of using genes and gene expression products.

Numerous
applications have been filed by other entities claiming gene sequences. Many
patents have already issued and we expect more will issue in the future. In
addition, others may discover uses for genes or proteins other than uses
covered in any patents issued to us, and these other uses may be separately
patentable. We may not be able to obtain issued patents on our patent
applications because our patent applications may not meet the requirements of
the patent office. The holder of a patent covering a particular use of a gene
or a protein, isolated gene sequence or deduced amino acid sequence could
exclude us from using that gene, protein or sequence. In addition, a number of
entities make gene information, techniques and methods publicly available,
which may affect our ability to obtain patents.

Some of our patent
applications may claim compositions, methods or uses that may also be claimed
in patent applications filed by others. In some or all of these applications, a
determination of priority of inventorship may need to be decided in an
interference proceeding before the U.S. Patent and Trademark Office. Regardless
of determined outcome, this process is time-consuming and expensive.

Issued
patents may not provide commercially-meaningful protection against competitors.
Other companies or institutions may challenge our or our customers' patents or
independently develop similar products that could result in an interference
proceeding in the U.S. Patent and Trademark Office or a legal action. In the
event any researcher or institution infringes upon our or our customers' patent
rights, enforcing these rights may be difficult and can be time-consuming.
Others may be able to design around these patents or develop unique products
providing effects similar to our products.

Our
ability to use our patent rights to limit competition in the creation and use
of knockout mice, as well as our ability to obtain patent rights, may be more
limited in certain markets outside of the United States because the protections
available in other jurisdictions may not be as extensive as those available
domestically.

We
pursue a policy of having our employees, consultants and advisors execute
proprietary information and invention agreements when they begin working for
us. However, these agreements may not be enforceable or may not provide
meaningful protection for our trade secrets or other proprietary information in
the event of unauthorized use or disclosure. We also cannot prevent others from
independently developing technology or software that might be covered by
copyrights issued to us, and trade secret laws do not prevent independent
development.

We may be subject to litigation and infringement claims which
may be costly and divert management's attention.

The
technology we use in our business may subject us to claims that we infringe on
the patents or proprietary rights of others. The risk of this occurring will tend
to increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover gene function
through mouse gene knockouts and engage in other genomics-related businesses.
Furthermore, many of our competitors and other companies performing research on
genes have already applied for patents covering some of the genes upon which we
perform research, and many patents have already been issued which cover these
genes, as well as genes we may wish to use in the future.

In
1998, Lexicon Genetics Incorporated, one of our competitors, informed us that
it was a coexclusive licensee under a patent covering certain isogenic DNA
technology that may be used to modify the genome of a target cell. On
May 24, 2000, Lexicon Genetics Incorporated filed a lawsuit against us in
the United States District Court for the District of Delaware. The complaint in
the lawsuit alleges that our methods of making knockout mice infringe United
States Patent No. 5,789,215, under which Lexicon claims to be an exclusive
licensee. The complaint seeks a judgment that we infringed this patent, a
permanent injunction against further infringement of the patent and an award of
damages in an unspecified amount that, under certain circumstances, may be
trebled. On June 13, 2000, we responded to Lexicon's complaint by filing
an answer and seeking a declaratory judgment in our favor. On October 31,
2000, an Order was entered by the Court amending the complaint and adding
GenPharm International, the patentee of the '215 patent, as a plaintiff. On
November 14, 2000, we filed an answer as well as federal antitrust
counterclaims under the Sherman Antitrust Act against Lexicon and GenPharm,
alleging that Lexicon asserted a fraudulently procured patent (the '215 patent)
against us in an attempt to illegally monopolize the market for production and
sale of knockout mice, a violation of Section 2 of the Sherman Act. The
counterclaim asserts that Lexicon knew that the '215 patent was obtained by fraud
and that the patent was invalid when it brought suit against us. The antitrust
counterclaim also charges Lexicon and GenPharm with conspiracy to monopolize
the market for knockout mice, in violation of Section 2 of the Sherman
Act, as well as with concerted conduct in restraint of trade, in violation of
Section 1 of the Sherman Act. The counterclaim seeks damages including
lost profits, devaluation of the initial public offering and legal fees, as
well as a trebling of damages pursuant to Section 4 of the Clayton Act. In
addition, the answer seeks a declaratory judgment that we do not infringe the
claims of the '215 patent and that the patent is invalid. The answer also
asserts that the patent was obtained by knowing and willful fraud on the U.S.
Patent and Trademark Office rendering the patent unenforceable. We intend to
defend the action vigorously.

A
claim construction hearing is scheduled for October 4, 2001.  The outcome of the hearing or the litigation
cannot be predicted. We believe that if Lexicon were to prevail in this
lawsuit, the impact would not significantly affect our operations. We believe
that the methods covered by the '215 patent represent a modification of prior
methods of generating knockout mice. Although we believe this modification was previously
described by others prior to GenPharm's filing of its patent application, we
have intentionally avoided the use of this modification.

In addition, on
October 13, 2000, Lexicon and the University of Utah Research Foundation
filed a lawsuit against us in the United States District Court for the Northern
District of California. The complaint in this lawsuit alleges that we are
infringing United States Patents Nos. 5,631,153, 5,464,764, 5,627,059 and
5,487,992 (the Capecchi patents), under which Lexicon claims to be an exclusive
licensee. All of these patents relate to the use of a positive-negative
selection vector in gene targeting. The complaint seeks a judgment that we
infringed these patents, a preliminary and permanent injunction against further
infringement of the patents and an award of damages in an unspecified amount
that, under certain circumstances, may be trebled. On November 8, 2000, we
filed an answer denying infringement, and a counterclaim seeking a declaratory
judgment that the patents are invalid. The counterclaim seeks an award of
damages including attorney fees.

We
believe that the methods employed by us do not infringe these patents and that
the patents are invalid. We believe that the Capecchi patents cover certain
modifications to existing methods of generating knockout mice, such
modifications that we do not practice. These modifications are therefore but
one method available for use in generating knockout mice. Numerous equally
effective design-arounds exist, as well as methods that predate the Capecchi
patents that are in the public domain and thus outside the scope of the patent.
Thus, if Lexicon prevails in any such lawsuit, we would only be prevented from
using certain of our methods but would not be prevented from using all of our
current methods. However, an adverse determination as to those certain methods
could significantly affect the development and marketing of our existing
function database and DeltaSelect programs and could cause us to incur
significant financial liabilities that could materially affect our business and
operating results.

A
claim construction hearing is scheduled for September 10, 2001, the outcome of
which cannot be predicted with certainty. 
The litigation is in the early stages and its outcome cannot be
predicted.

We
may be involved in future lawsuits alleging patent infringement or other
intellectual property rights violations. In
addition, litigation may be necessary to:

 assert claims of infringement; enforce our patents, if any; protect our trade secrets or know-how; and determine the enforceability, scope and validity of the proprietary
rights of others.We
may be unsuccessful in defending or pursuing these lawsuits. Regardless of the
outcome, litigation, including our litigation with Lexicon, can be very costly,
can divert management's efforts and could materially affect our business and
operating results. An adverse determination may subject us to significant
liabilities or restrict or prohibit us from selling our products.

Because
we do not have any issued patents, and because knockout mouse and gene-related
patents even if obtained may not be enforceable, our intellectual property may
not have any material value, which would diminish our business prospects.

One
of our strategies is to obtain proprietary rights around as many gene knockouts
as possible. Although we have filed patent applications covering the knockout
mice we produce, we do not currently have any issued patents. We rely on a
combination of copyright and trademark law, trade secrets, non-disclosure
agreements and contractual provisions in our agreements with our customers to
establish and maintain intellectual property rights. While the U.S. Patent and
Trademark Office in the past has issued patents to others covering function of
genes, knockout mice, types of cells, gene sequences and methods of testing
cells, we do not know whether or how courts may enforce those patents, if that
becomes necessary. If a court finds these types of inventions to be
unpatentable, or interprets them narrowly, the benefits of our strategy may not
materialize and our business and financial condition could be harmed.

Our rights to the use of technologies licensed to us by third
parties are not within our control, and without these technologies, our
products and programs may not be successful and our business prospects could be
harmed.

We
rely, in part, on licenses to use certain technologies which are material to
our business, including a secreted protein gene trap which we license exclusively
from the University of Edinburgh. We do not own the patents that underlie these
licenses. Our rights to use these technologies and employ the inventions
claimed in the licensed patents are subject to our licensors abiding by the
terms of those licenses and not terminating them. In most cases, we do not
control the prosecution or filing of the patents to which we hold licenses.
Instead we rely upon our licensors to prevent infringement of those patents.
Some of the licenses under which we have rights, such as the license from the
University of Edinburgh, provide us with exclusive rights in specified fields,
but we cannot assure you that the scope of our rights under these and other
licenses will not be subject to dispute by our licensors or third parties.

Our activities involve hazardous material and may subject us
to environmental liability, which would seriously harm our financial condition.

Our
research and development activities involve the controlled use of hazardous and
radioactive materials and generate biological waste. We are subject to federal,
state and local laws and regulations governing the storage, handling and
disposal of these materials and waste products. Although we believe that our
safety procedures for handling and disposing of these materials and wastes
comply with legally prescribed standards, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. We may be sued
for any injury or contamination that results from our use or the use by third
parties of these materials, and our liability may exceed our insurance coverage
and our total assets. Future environmental regulations could require us to
incur significant costs.

Compliance with governmental regulations regarding animal
welfare and genetically modified organisms could increase our operating costs
or adversely affect our customers' ability to obtain governmental approval of
gene based products, which would adversely affect the commercialization of our
technology.

The
Animal Welfare Act, or AWA, is the federal law that currently covers animals in
laboratories. It applies to institutions or facilities using any regulated live
animals for research, testing, teaching or experimentation, including
diagnostic laboratories and private companies in the pharmaceutical and
biotechnology industries. The AWA currently does not cover rats, mice or birds.
However, the United States Department of Agriculture, which enforces the AWA,
has been sued on this matter and recently agreed, as part of the settlement of
this lawsuit, to begin the process of changing the regulations issued under the
AWA to include rats, mice and birds within its coverage. Congress subsequently
prohibited, for the next fiscal year ending September 30, 2001, the
expenditure of any money for the purpose of changing the regulations with
respect to including rats, mice and birds.

Currently,
the AWA imposes a wide variety of specific regulations which govern the humane
handling, care, treatment and transportation of certain animals by producers
and users of research animals, most notably personnel, facilities, sanitation,
cage size, feeding, watering and shipping conditions. We cannot assure you that
the USDA will not in the future include rats, mice and birds in its regulations
and that we will not become subject to registration, inspections and reporting
requirements. Compliance with the AWA could be expensive, and current or future
regulations could impair our research and production efforts.

Since
we develop animals containing changes in their genetic make-up, we may become
subject to a variety of laws, guidelines, regulations and treaties specifically
directed at genetically modified organisms, or GMOs. The area of environmental
releases of GMOs is rapidly evolving and is currently subject to intense
regulatory scrutiny, particularly internationally. If we become subject to
these laws we could incur substantial compliance costs. For example, the
Biosafety Protocol, or the BSP, a recently adopted treaty, is expected to cover
certain shipments from the U.S. to countries abroad that have signed the BSP.
The BSP is also expected to cover the importation of living modified organisms,
a category that could include our animals. If our animals are not contained as
described in the BSP, our animals could be subject to the potentially extensive
import requirements of countries that are signatories to the BSP.

If we, or our collaborators, do not comply with government
regulations, we may not be able to develop or sell our technologies and
products.

Regulation of New Drugs or Biological Drugs for Human Use

We
are planning to engage in the future in the development and commercialization
of therapeutic products that will be subject to United States Federal, state
and local, and foreign regulation, principally in the United States under the
Food,
Drug & Cosmetic Act as amended, the Public Health Service Act as
amended, and other laws. Governmental authorities in the United States and in
other countries, including the Food and Drug Administration (FDA) extensively
regulate the testing, manufacturing, labeling, advertising, promotion,
recordkeeping, safety, efficacy, storing, exporting and marketing, among other
things, of human therapeutic products.

In
the United States, our potential therapeutic products likely will be regulated
as human drugs (including biological drugs). The FDA will require us to file
and obtain approval of a Biologics License Application (BLA) (for biological
drugs) or a New Drug Application (NDA) (for other drugs) before we can commercialize
any such products. BLAs cover both the facility in which the products are
manufactured and the products themselves. Generally, biological drug regulation
is more rigorous than other drug regulation, particularly because biologics are
subject to lot-to-lot release requirements whereas other drugs are not.

The
steps required before approval of a new human drug (including a biological
drug) for marketing in the United States generally include:

 preclinical laboratory tests and animal tests; the submission to the FDA of an Investigational New Drug, or IND,
application for human clinical testing, which must become effective before
human clinical trials may lawfully commence; adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product; the submission to the FDA of a BLA or NDA; FDA review of the BLA or NDA; and satisfactory completion of an FDA inspection of the manufacturing
facilities at which the product is made to assess compliance with current Good
Manufacturing Practices which includes elaborate testing, control,
documentation and other quality assurance procedures.The
testing and approval process requires substantial time, effort and financial
resources. After approval is obtained, a supplemental approval is generally
required for each proposed new indication and for many different types of
manufacturing changes. The supplement often contains data similar to that
submitted in the original BLA or NDA.

Preclinical
studies include laboratory evaluation of the product chemistry, formulation,
and stability, as well as animal studies to assess the safety and potential
efficacy of the product. Preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of the preclinical studies, together with manufacturing
information and analytical data are submitted to the FDA as part of the IND and
are reviewed by the FDA before the commencement of clinical trials. The IND
automatically will become effective in 30 days unless the FDA, before that
time, raises concerns or questions and imposes a "clinical hold". In
such case, the IND sponsor must resolve with the FDA any outstanding concerns
before the trial can proceed. Once trials have commenced, the FDA may stop the
trials by imposing a clinical hold because of concerns about, for example, the
safety of the product being tested or the adequacy of the trial design.

Clinical
trials involve the administration of investigational products to healthy
volunteers or patients under the supervision of a qualified principal
investigator consistent with an informed consent. An independent Institutional
Review Board, or IRB, must review and approve each clinical trial at each
institution at which the study will be conducted. The IRB will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.

Clinical
trials typically are conducted in three sequential phases, but the phases may
overlap. In Phase I, the initial introduction of the drug into human subjects,
the drug is usually tested for safety or adverse effects, dosage tolerance,
absorption, metabolism, distribution, excretion and pharmacodynamics. Phase II
clinical trials usually involve studies in a limited patient population to
evaluate the efficacy of the drug for specific, targeted indications, to
determine dosage tolerance and optimal dosage and to identify possible adverse
effects and safety risks. Phase III clinical trials generally further evaluate
clinical efficacy and test further for safety within an expanded patient
population and at multiple clinical sites. The goal of these studies is to
obtain definitive statistical and clinical evidence of the efficacy and safety
of the drug and dosage regimens. Phase IV clinical trials are conducted after
approval to gain additional experience from the treatment of patients in the
intended therapeutic indication. If the FDA approves a product, additional
clinical trials may be necessary. A company may be able to use the data from
these clinical trials to meet all or part of any Phase IV clinical trial
requirement. These clinical trials are often referred to as Phase III/IV
post-approval clinical trials.

In some cases, drug reviews
may proceed under the accelerated approval regulations, "fast track"
statutory provisions, or the expedited review regulations. The accelerated
approval provisions apply to products used in the treatment of serious or
life-threatening illnesses that appear to provide meaningful therapeutic
benefits over existing treatments. The expedited review regulations apply to
products for life-threatening and severely-debilitating illnesses, especially
where no satisfactory alternative therapy exists. These regulations permit
approval of such products at the end of phase 2, or before clinical research is
completed based on the drug's effect on a clinical endpoint or surrogate
endpoint. FDA retains considerable discretion to determine eligibility for
expedited and accelerated review and approval mechanisms.

The
results of the preclinical studies and clinical trials, together with detailed
information on the manufacture and composition of the product, are submitted to
the FDA in the NDA or BLA requesting approval to market the product. Before
approving an NDA or BLA, the FDA will inspect the facilities at which the
product is manufactured and will not approve the product unless the
manufacturing facility is in compliance with current Good Manufacturing
Practices. The FDA may delay approval of an NDA or BLA if applicable regulatory
criteria are not satisfied, require additional testing or information, and/or
require postmarketing testing and surveillance to monitor safety, purity or
potency of a product. It may also limit the indicated uses for which an
approval is given. There can be no assurance that FDA will approve any future
NDAs or BLAs or that manufacturing facilities will pass FDA preapproval
inspections.

Pervasive and Continuing Human Drug Regulation

Any
future drug approvals that are granted remain subject to continual FDA review,
and newly discovered or developed safety or efficacy data may result in
withdrawal of products from marketing. Moreover, if and when such approval is
obtained, the manufacture and marketing of future drugs will remain subject to
extensive regulatory requirements administered by the FDA and other regulatory
bodies, including compliance with current Good Manufacturing Practices, adverse
event reporting requirements and the FDA's general prohibitions against
promoting products for unapproved or "off-label" uses. Companies are
subject to inspection and market surveillance by the FDA for compliance with
these regulatory requirements. Domestic manufacturing facilities are subject to
biennial inspections by the FDA and must comply with the FDA's Good
Manufacturing Practices regulations. In complying with these regulations,
manufacturers must spend funds, time and effort in the areas of production,
record keeping, personnel and quality control to ensure full technical
compliance. The FDA stringently applies regulatory standards for manufacturing.
Failure to comply with the requirements can, among other things, result in
warning letters, product seizures, recalls, fines, injunctions, suspensions or
withdrawals of regulatory approvals, operating restrictions and criminal
prosecutions. Any such enforcement action could have a material adverse effect
on Deltagen. Unanticipated changes in existing regulatory requirements or the
adoption of new requirements could also have a material adverse effect on
Deltagen.

Foreign Regulation

Companies
are be subject to a variety of regulations governing clinical trials and sales
of their products outside the United States. Companies must obtain approval of
their products by the comparable non-U.S. regulatory authorities prior to the
commencement of product marketing in the country whether or not the company has
obtained FDA approval. The approval process varies from country to country and
the time needed to secure approval may be longer or shorter than that required
for FDA approval. The European Union requires approval of a Marketing
Authorization Application by the European Medicines Evaluation Agency. These
applications require the completion of extensive preclinical and clinical
studies and manufacturing and controls information.

Other Regulation

We
are also subject to a variety of other federal and state laws and regulations
in the U.S. and in other countries pertaining to our facilities, the shipment,
exportation and importation of various articles and health and safety matters.
For example, the Department of Transportation and various international
guidelines and regulations govern the transport of different types of
materials. The Bureau of Export Administration of the Department of Commerce
exercises export controls over technology such as our gene database. The
Department of Health and Human Services and USDA both regulate various types of
articles that present the possibility of spreading communicable and other diseases,
including the regulation of vectors, such as animals and articles that present
risks of other harm to plants, human beings and other animals. The
Environmental Protection Agency has responsibility for facility emissions and
other environmental matters, including the regulation of new chemical
substances, which could include gene sequences.

Ethical and social issues may limit or discourage the use of
knockout mice or other genetic processes which could reduce our revenues and
adversely affect our business.

Governmental
authorities could, for social or other purposes, limit the use of genetic
processes or prohibit the practice of our gene trap and knockout mouse
technologies. Public attitudes may be influenced by claims that genetically
engineered products are unsafe for consumption or pose a danger to the
environment. The subject of genetically modified organisms, like knockout mice,
has received negative publicity and aroused public debate. In addition, animal
rights activists could protest or make threats against our facilities, which
may result in property damage. Ethical and other concerns about our methods,
particularly our use of knockout mice, could adversely affect our market
acceptance.

All our research is conducted at two facilities, and a natural
disaster at these facilities is possible and could result in a prolonged
interruption of our business.

We
conduct all our scientific and management activities at two facilities in
California. Both locations are in seismically active areas. We have taken
precautions to safeguard our mouse colony including through insurance, storage
of animals off-site at a back-up facility in Massachusetts, the freezing of
sperm and the storing of embryonic stem cells, or ES cells, to allow for the
regeneration of mice. However, a natural disaster, such as an earthquake, fire,
flood or outbreak of infectious disease, could cause substantial delays. This
could interrupt mouse breeding, cause us to incur additional expenses and
adversely affect our reputation with customers.

Security risks in electronic commerce or unfavorable internet
regulations may deter future use of our products and services.

We
may provide access to our gene function database on the Internet. A fundamental
requirement to conduct our business over the Internet is the secure
transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography or other
developments may result in a compromise or breach of the security measures we use
to protect the content in our gene function database. Anyone who is able to
circumvent our security measures could misappropriate our proprietary
information or confidential customer information or cause interruptions in our
operations. We may be required to incur significant costs to protect against
security breaches or to alleviate problems caused by breaches, and these
efforts may not be successful. Further, a well-publicized compromise of
security could deter people from using the Internet to conduct transactions
that involve transmitting confidential information. For example, recent attacks
by computer hackers on major e-commerce web sites have heightened concerns
regarding the security and reliability of the Internet.

Because
of the growth in electronic commerce, the U.S. Congress has held hearings on
whether to further regulate providers of services and transactions in the
electronic commerce market, and federal and state authorities could enact laws,
rules and regulations affecting our business and operations. If enacted, these
laws, rules and regulations could make our business and operations more costly
and burdensome as well as less efficient.

We rely on third-party data sources, and without these
sources, our products and programs would be incomplete and less appealing to
customers, seriously harming our business prospects.

We
may rely on scientific and other data supplied by third parties, and all of our
gene sequence data comes from public genomics data. This data could be
defective, be improperly generated or contain errors or other defects, which
could corrupt our gene function database and our other programs and services.
In addition, we cannot guarantee that our sources acquired this data in
compliance with legal requirements. In the event of any such defect, corruption
or finding of nonconformance, our business prospects could be adversely
affected.

Our common stock may experience extreme price and volume
fluctuations, which could lead to costly litigation for us and make an
investment in us less appealing.

The
market price of our common stock may fluctuate substantially due to a variety
of factors, including:

 announcements of technological innovations or new products by us or
our competitors; developments or disputes concerning patents or proprietary rights,
including announcements with respect to our litigation with Lexicon or of
infringement, interference or other litigation against us or our licensors; the timing and development of our products and services; media reports and publications about genetics and gene-based
products; changes in pharmaceutical and biotechnology companies' research and
development expenditures; announcements concerning our competitors, or the biotechnology or
pharmaceutical industry in general; changes in government regulation of genetic research or gene-based
products, and the pharmaceutical or medical industry in general; general and industry-specific economic conditions; actual or anticipated fluctuations in our operating results; changes in financial estimates or recommendations by securities
analysts; changes in accounting principles; and the loss of any of our key scientific or management personnel.In
addition, the stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of biotechnology companies,
particularly companies like ours without consistent product revenues and
earnings, have been highly volatile and may continue to be highly volatile in
the future. This volatility has often been unrelated to the operating
performance of particular companies. For example, the stock prices of many
biotechnology companies, even those that would benefit from publicly available
gene sequence information, declined on news of the announcement by former
President Clinton and British Prime Minister Blair that, as their respective
governments had each advocated before, gene sequence information should be
freely available in the public domain. In the past, securities class action
litigation has often been brought against companies that experience volatility
in the market price of their securities. Moreover, market prices for stocks of
biotechnology-related and technology companies, particularly following an
initial public offering, frequently reach levels that bear no relationship to
the operating performance of such companies. These market prices generally are
not sustainable and are subject to wide variations. Whether or not meritorious,
litigation brought against us could result in substantial costs, divert
management's attention and resources and harm our financial condition and
results of operations.

The future sale of common stock could negatively affect our
stock price.

We
had 29,891,666 shares of common stock outstanding at March 31, 2001.

If
our common stockholders sell substantial amounts of common stock in the public
market, or the market perceives that such sales may occur, the market price of
our common stock could fall. The holders of approximately 18,180,856 shares of
our common stock will have rights, subject to some conditions, to require us to
file registration statements covering their shares or to include their shares
in registration statements that we may file for ourselves or other
stockholders. Furthermore, if we were to include in a company-initiated
registration statement shares held by those holders pursuant to the exercise of
their registration rights, those sales could impair our ability to raise needed
capital by depressing the price at which we could sell our common stock.

Our principal stockholders, executive officers and directors
own a significant percentage of our stock, and as a result, the trading price
for our shares may be depressed and these stockholders can take actions that
may be adverse to your interests.

Our
executive officers and directors and entities affiliated with them beneficially
own, in the aggregate, approximately 63 % of our common stock. This significant
concentration of share ownership may adversely affect the trading price for our
common stock because investors often perceive disadvantages in owning stock in
companies with controlling shareholders. These stockholders, acting together,
will have the ability to exert substantial influence over all matters requiring
approval by our stockholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or substantially all of
our assets. In addition, they could dictate the management of our business and
affairs. This concentration of ownership could have the effect of delaying,
deferring or preventing a change in control, or impeding a merger or
consolidation, takeover or other business combination that could be favorable
to you.

Our incorporation documents and Delaware law may inhibit a
takeover that stockholders consider favorable and could also limit the market
price of your stock.

Our
restated certificate of incorporation and bylaws contain provisions that could
delay or prevent a change in control of our company. Some of these provisions:

 authorize the issuance of preferred stock which can be created and
issued by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to
those of common stock; provide for a classified board of directors; and prohibit stockholder action by written consent.In
addition, we are governed by the provisions of Section 203 of Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us. These and other provisions in our amended and
restated certificate of incorporation and bylaws and under Delaware law could
reduce the price that investors might be willing to pay for shares of our
common stock in the future and result in the market price being lower than it
would be without these provisions.

PART II.  OTHER
INFORMATIONItem 1.  Legal Proceedings

On
May 24, 2000, Lexicon Genetics Incorporated filed a lawsuit against us in
the United States District Court for the District of Delaware. The complaint in
the lawsuit alleges that our methods of making knockout mice infringe United
States Patent No. 5,789,215, under which Lexicon claims to be an exclusive
licensee. The complaint seeks a judgment that we infringed this patent, a
permanent injunction against further infringement of the patent and an award of
damages in an unspecified amount that, under certain circumstances, may be
trebled. On June 13, 2000, we responded to Lexicon's complaint by filing
an answer and seeking a declaratory judgment in our favor. On October 31,
2000, an Order was entered by the Court amending the complaint and adding
GenPharm International, the patentee of the '215 patent, as a plaintiff. On
November 14, 2000, we filed an answer as well as federal antitrust
counterclaims under the Sherman Antitrust Act against Lexicon and GenPharm,
alleging that Lexicon asserted a fraudulently procured patent (the '215 patent)
against us in an attempt to illegally monopolize the market for production and
sale of knockout mice, a violation of Section 2 of the Sherman Act. The
counterclaim asserts that Lexicon knew that the '215 patent was obtained by
fraud and that the patent was invalid when it brought suit against us. The antitrust
counterclaim also charges Lexicon and GenPharm with conspiracy to monopolize
the market for knockout mice, in violation of Section 2 of the Sherman
Act, as well as with concerted conduct in restraint of trade, in violation of
Section 1 of the Sherman Act. The counterclaim seeks damages including
lost profits, devaluation of the initial public offering and legal fees, as
well as a trebling of damages pursuant to Section 4 of the Clayton Act. In
addition, the answer seeks a declaratory judgment that we do not infringe the
claims of the '215 patent and that the patent is invalid. The answer also
asserts that the patent was obtained by knowing and willful fraud on the U.S.
Patent and Trademark Office rendering the patent unenforceable. We intend to
defend the action vigorously.

A
claim construction hearing is set for October 4, 2001.  Neither the outcome of the hearing nor of
the litigation can be predicted. We believe that if Lexicon were to prevail in
this lawsuit, the impact would not significantly affect our operations. We
believe that the methods covered by the '215 patent represent a modification of
prior methods of generating knockout mice. Although we believe this
modification was previously described by others prior to GenPharm's filing of
its patent application, we have intentionally avoided the use of this
modification.

In
addition, on October 13, 2000, Lexicon and the University of Utah Research
Foundation filed a lawsuit against us in the United States District Court for
the Northern District of California. The complaint in this lawsuit alleges that
we are infringing United States Patents Nos. 5,631,153, 5,464,764, 5,627,059
and 5,487,992 (the Capecchi patents), under which Lexicon claims to be an
exclusive licensee. All of these patents relate to the use of a
positive-negative selection vector in gene targeting. The complaint seeks a
judgment that we infringed these patents, a preliminary and permanent
injunction against further infringement of the patents and an award of damages
in an unspecified amount that, under certain circumstances, may be trebled. On
November 8, 2000, we filed an answer denying infringement, and a
counterclaim seeking a declaratory judgment that the patents are invalid. The
counterclaim seeks an award of damages including attorney fees.

We
believe that the methods employed by us do not infringe these patents and that
the patents are invalid. We believe that the Capecchi patents cover certain
modifications to existing methods of generating knockout mice, such
modifications that we do not practice. These modifications are therefore but
one method available for use in generating knockout mice. Numerous equally
effective design-arounds exist, as well as methods that predate the Capecchi
patents that are in the public domain and thus outside the scope of the patent.
Thus, if Lexicon prevails in any such lawsuit, we would only be prevented from
using certain of our methods but would not be prevented from using all of our
current methods. However, an adverse determination as to those certain methods
could significantly affect the development and marketing of our existing
function database and DeltaSelect programs and could cause us to incur
significant financial liabilities that could materially affect our business and
operating results.

A
claim construction hearing is set for September 10, 2001, the outcome of which
cannot be predicted with any certainty. 
The litigation is in the early stages and its outcome cannot be
predicted.

We
may be involved in additional litigation, investigations or proceedings in the
future. Any litigation, investigation or proceeding, with or without merit,
could be costly and time-consuming and could divert our management's attention
and resources which in turn could harm our business and financial results.

Item 2.  Changes in Securities

a)  Not applicable.b)  Not applicable.c)  Not applicabled)  On August 2, 2000, our Registration Statement
on Form S-1 (File No. 333-34668), the IPO Registration Statement, was declared
effective by the Securities and Exchange Commission.  The IPO Registration Statement registered a total of 7,000,000
shares of common stock all of which were issued and sold by us.  The offering commenced on August 3, 2000 and
was closed on August 8, 2000.  The
shares sold by us were sold at an aggregate offering price of $105 million,
netting proceeds of approximately $95.9 million to us after underwriting fees
of approximately $7.4 million and other offering expenses of approximately $1.7
million.  On August 30, 2000 the underwriters' of our offering exercised their
over–allotment for the purchase of approximately 1,025,000 shares.  The shares sold by us were sold at an
aggregate offering price of $15.4 million, netting proceeds of approximately
$14.3 million to us after underwriting fees of approximately $1.1 million and
other offering expenses.Since
the effective date of the IPO Registration Statement, the net offering proceeds
of $110.2 million have been invested in bank deposits, money market funds,
corporate debt securities and obligations of government agencies.

Repayment of indebtedness
  
  $
  --Purchase and installation of
  equipment          and build out of facilities
  
  --Working capital
  
  --Temporary investments
  
  $110,200,000None
of the net offering proceeds have been paid to any director, officer, or 10% or
greater stockholder of the Company or an affiliate of these persons.Item 3.  Defaults Upon Senior
Securities

Not
applicable.

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

The
Companys Annual Meeting of Stockholders was held on April 26, 2001.  F. Noel Perry and Nicholas J. Simon III were
elected to three-year terms ending with the 2004 Annual Meeting.  The voting was as follows:

For
  Against
  AbstainF. Noel Perry
  26,599,318
  4650
  --Nicholas J. Simon III
  26,599,118
  4850
  --`

Item 5.  Other Information

Not
applicable.



Item 6.  Exhibits and Reports
on Form 8-K

a)          Exhibits

None.

b)          Reports
on Form 8-K

No
reports on Form 8-K were filed during the three months ended March 31, 2001.



DELTAGEN, INC.

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.





DELTAGEN,
INC.





Date:     May 14, 2001
  
  /s/ 
  William Matthews, Ph.D.William
  Matthews, Ph.D.President
  and Chief Executive Officer



Date:     May 14, 2001
  
  /s/ 
  Richard H. HawkinsRichard
  H. HawkinsChief
  Financial Officer