<PAGE>

================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------

                                    FORM 10-K
              |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2000

                                       OR

            |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

              For the transition period from __________ to ________

                           Commission File No. 0-21130

                             ----------------------

                        ENCHIRA BIOTECHNOLOGY CORPORATION
             (Exact name of registrant as specified in its charter)

                    Delaware                            04-3078857
        (State or other jurisdiction of                (IRS Employer
         incorporation or organization)             Identification No.)

             Enchira Biotechnology
                  Corporation
           4200 Research Forest Drive
              The Woodlands, Texas                          77381
    (Address of principal executive offices)             (zip code)

                                 (281) 419-7000
              (Registrant's telephone number, including area code)

                             ----------------------

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

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

                                 Title of Class
                     Common Stock, par value $.01 per share
                         Preferred Stock Purchase Rights

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

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

      The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $16,553,700 as of March 8, 2001, based on the
closing sales price of the registrant's common stock on the Nasdaq National
Market on such date of $3.50 per share and assuming full conversion of the
registrant's Series B Convertible Preferred Stock. For purposes of the preceding
sentence only, all directors, executive officers and beneficial owners of ten
percent or more of the common stock are assumed to be affiliates. As of March 8,
2001, 9,079,313 shares of common stock were outstanding and 387,700 shares of
Series B Convertible Preferred Stock (convertible into 1,156,622 shares of
common stock) were outstanding.

      Certain sections of the registrant's definitive proxy statement relating
to the registrant's 2001 annual meeting of stockholders, which proxy statement
will be filed under the Securities Exchange Act of 1934 within 120 days of the
end of the registrant's fiscal year ended December 31, 2000, are incorporated by
reference into Part III of this Form 10-K.

================================================================================
<PAGE>

When used in this document, the words "anticipate," "believe," "expect,"
"estimate," "project" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated or projected. For additional discussion of such risks, uncertainties
and assumptions, see "Item 1. Business--Risk Factors" included elsewhere in this
report.

Part I.

Item 1. Business

Overview

      Enchira Biotechnology Corporation ("Enchira" or the "Company") is
developing high throughput in vitro DNA recombination technologies to accelerate
development of improved proteins for pharmaceuticals, agricultural and a broad
range of industrial applications. However, on March 6, 2001, Enchira received an
unfavorable ruling in an arbitration proceeding with Maxygen Inc. ("Maxygen")
with respect to certain of its gene shuffling RACHITT(TM) and high throughput
screening technologies which could result in costly licensing or royalty fees to
Enchira, an outright prohibition of Enchira's use of such technologies or other
remedies. Please see "--Enchira's Technology--Gene Shuffling Technology,"
"--Competition" and "Risk Factors--We Have an Arbitration Proceeding with
Maxygen Regarding Our RACHITT(TM) Technology in which We Have Received an
Unfavorable Ruling" for a more detailed description of the arbitration and its
possible consequences. Enchira is actively pursuing satisfactory resolution of
this dispute with Maxygen, pursuant to the arbitrator's ruling, as well as
exploring its other alternatives. As a result, at the present time, no assurance
can be given that we will continue to be able to use our RACHITT(TM) technology
for pharmaceutical or other applications. DNA recombination is a central aspect
of sexual reproduction and is the process that enables variation of offspring
from parents. It is the reason brothers and sisters within a family can vary so
greatly while coming from the same parents and parental DNA. Recombination is
the basis for evolution. Enchira believes that the harnessing of this technology
will lead to extraordinary improvements in man's ability to alter DNA to address
un-met medical needs and many other problems.

      Traditional molecular methods of altering proteins rely on random
mutations (termed "random mutagenesis") or directed mutations (termed
"site-directed mutagenesis"), both of which have significant limitations in
their ability to alter protein structure. Random mutagenesis typically relies on
screening through immense libraries for limited and rare gains in activity.
Site-directed mutagenesis can only be applied to limited areas within a DNA
sequence, and therefore, produces limited gains in protein activity. Also, there
is often inadequate structural knowledge to effectively apply site-directed
mutagenesis for most proteins. In contrast, DNA recombination combines genes
from parents such that the recombined (or chimeric) DNA molecules code for
altered but active protein molecules. It is the basis of the exquisite
selectivity of the immune system. Through recombination, the immune system can
produce highly specific antibodies and T cells to ward off attack from a vast
array of pathogens.

      Enchira's recombinant DNA technologies can be applied at the molecular
level to individual genes, or can be used to extend DNA recombination to gene
families, and clusters of genes within operons. This allows Enchira to conduct
controlled, directed evolution experiments to change DNA and proteins in
previously unfeasible ways and to accomplish the change on an accelerated
timescale.

      Enchira has demonstrated the application of its technology in enzyme
improvement for biodesulfurization enzyme pathways and in the alteration of
enzymes involved in fluorescence and antibiotic resistance. As a result, Enchira
entered into a licensing agreement with Genencor International, Inc.
("Genencor") in May 2000 to use Enchira's directed evolution capabilities to
improve the properties of specified industrial proteins. Enchira also
collaborates with researchers at The University of Texas M. D. Anderson Cancer
Center ("M. D. Anderson Cancer Center") in Houston to alter the binding
properties of certain human growth factors that may lead to creation of new
therapeutic proteins for treatment of breast cancer.


                                       2
<PAGE>

      In 2001, Enchira is committed to applying its high throughput in vitro DNA
recombination technologies to pharmaceutical applications. Genetic information
and other scientific knowledge arising from the human genome project forms the
basis for many opportunities to utilize the technology in drug development.
Enchira's long-term strategic plan includes both collaborative arrangements in
drug discovery applications as well as internal pharmaceutical product
development. Enchira seeks to augment its technology platform in the area of
bioinformatics, as well as other areas of strategic importance through in-house
development and acquisition as such opportunities become available.

      Enchira's executive offices and laboratories are located at 4200 Research
Forest Drive, The Woodlands, Texas 77381. Enchira can be contacted by phone
281-419-7000, fax 281-364-6112, or by e-mail (info@enchira.com). Enchira's
website is located at www.enchira.com.

Enchira's Technology

Gene Shuffling Technology

      Enchira has developed high throughput DNA recombination technologies for
"directed evolution." These technologies harness the power of genetic
recombination, which is largely the basis for evolution of all species. This
technology enables directed changes of DNA encoded materials to desired
genotypes and characteristics in ways previously unfeasible. The power of DNA
recombination lies with its ability to recombine DNA in ways that lead to
functionally modified but active proteins. Because genes encode an extremely
broad array of proteins, the application of this technology is also broad --
ranging from industrial proteins to altered agricultural products to improved
therapeutics and gene therapies. Each of these applications varies with respect
to the speed with which products can be developed, the technical challenges
required for successful commercial development, and the profit margins on
commercialized products.

      With Enchira's recombinant DNA technologies, different genes and gene
fragments from diverse sources with similar characteristics are recombined in a
controlled laboratory setting. This process generates combinatorial libraries of
new chimeric genes that will direct the synthesis of novel proteins. The term
"chimeric" refers to a gene composed of fragments from multiple sources.

      Enchira's technology platform for directed evolution and product
development includes proprietary methods of creating genetic diversity, a suite
of recombinant DNA methods, expertise in developing sophisticated, high
throughput screens, biocatalysis and metabolic engineering experience, and
expertise in protein-based therapeutics for oncology, bioinformatics,
proteomics, and molecular modeling. The Enchira toolbox of recombinant DNA
methods includes techniques appropriate for differing conditions of gene size
(single gene, gene famility, operon) and the desired degree of chimeragenesis.
Enchira has demonstrated the application of its technology in oxygenase enzyme
improvement and in alteration of enzymes involved in fluorescence and antibiotic
resistance.

      One element of the current technology platform is the RACHITT(TM) gene
shuffling method. The RACHITT(TM) name is derived from RAndom CHImeragenesis on
Transient Templates. A schematic diagram of the RACHITT(TM) method is available
at www.enchira.com/gene_shuffling. In the first step, a single strand of one
gene is chosen as the scaffolding (or "template") for the construction of a new
gene. This hybridization-based method then involves annealing (binding) a
population of short, single-stranded DNA donor fragments onto the intact,
full-length single-stranded scaffold or template. The small, single-stranded
fragments of other genes are called Chimerons(TM). These fragments can be
recruited from different but related genes or can be similar fragments recruited
from other (uncharacterized) genes in the cell. In fact, the "donor" DNA need
not be characterized at all, but can be DNA extracted from cells, clinical
samples or the environment. After the hybridization step, a complete
double-stranded DNA molecule is prepared by using enzymes to trim the
overlapping or unbound flaps, fill in gaps, and seal the nicks. In this process,
the template aligns DNA fragments such that a library of contiguous chimeric
molecules is generated. The transience of the "template" strand is achieved by
its specific removal in the next step. This key


                                       3
<PAGE>

feature ensures that the final population is composed of only the new, variant
genes, free from contamination by the parentals, which would increase the task
of subsequent screening and analysis. The last steps involve duplex formation
and cloning of the chimeric strands using well-established genetic engineering
techniques. Since a large number of possible combinations exist, the resulting
pool of molecules represents a large "library" of genetic variants, numbering
from the thousands to millions of candidate genes. This procedure can be
repeated in a matter of hours after the conditions for particular templates are
determined. The candidates are then screened using automation, robotics and
robust and predictive micro-assays in a process referred to as "high throughput
screening" (HTS), a process which Enchira has used for many years. Successful
use of the RACHITT(TM) technique is described in the paper "DNA Shuffling Method
for Generating Highly Recombined Genes and Evolved Enzymes," by W.M. Coco et al
to be published in Nature Biotechnology, April 2001 edition.

      On March 6, 2001 Enchira received a ruling in its arbitration proceeding
with Maxygen in which the arbitrator found that Enchira breached several
provisions of its License and Development Agreement with Maxygen dated May 19,
1997 (the "Collaboration Agreement") with respect to the RACHITT(TM) technology
and HTS. As a result, Enchira may be required to pay a cross license fee,
royalties or other remedies in order to continue using its RACHITT(TM)
technology, or it may be prohibited from further use of and rights in the
technology. Please see "--Competition" and "Risk Factors--We Have an Arbitration
Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have
Received an Unfavorable Ruling" for further discussion of the arbitration.

      Enchira believes that its suite of high throughput DNA recombination
technologies has significant advantages over other methods of DNA recombination,
and that its methods offer faster and less costly means of creating libraries of
chimeric genes. These advantages include:

            1.    Control on the frequency of recombination such that high
                  frequency, high-resolution recombination is possible. For
                  example, RACHITT(TM) has been demonstrated to produce
                  frequencies of recombination events (crossovers) that are at
                  least 5 to 10 fold greater than the published results given
                  for other competitive methods. As such, these libraries
                  contain a substantially greater diversity.

            2.    Elimination of parental sequences from the recombined
                  libraries. Competing methods of recombination produce
                  libraries that consist of typically 30% to 70% parental DNA.
                  In all directed evolution efforts, a library of recombinant
                  DNA molecules is produced and these libraries are expressed
                  and screened. The screening segment of the directed evolution
                  effort is the most costly and time-consuming segment since the
                  libraries may contain 100,000 to several million recombined
                  DNA molecules that are subsequently expressed to chimeric
                  proteins. By eliminating parental DNA from entering the
                  libraries, screening libraries are smaller, thus reducing
                  waste.

            3.    Greater control over location of recombination with the
                  RACHITT(TM) hybridization-based method. Hybridization enables
                  more precise control of the locations where recombination may
                  be allowed to occur. If one is working with a target protein
                  that contains sites that one desires to leave unchanged (such
                  as the active site of an enzyme), RACHITT(TM) can facilitate
                  this by limiting recombination to specific regions.

            4.    Very little DNA preparative work is required before gene
                  shuffling. In the RACHITT(TM) technique, Chimerons(TM) are
                  recruited directly from genomic DNA and introns (intervening
                  sequences that interrupt the coding sequence of a gene) do not
                  need to be excised. Other methods require time-consuming
                  isolation of mRNA and re-creation of the complementary DNA
                  (cDNA) sequence in order to generate fragments for shuffling
                  or reassembly.

            5.    It is a non-random process that "shuffles" genetic domains
                  that have already demonstrated their relevance. Some
                  conventional methods of creating diversity rely on chemical or
                  other means to randomly create changes (mutations) in the
                  target genes. The mutations in the genes from the Enchira
                  protocols are the result of recombining related sequences to
                  create new permutations.


                                       4
<PAGE>

            6.    Reactions are conducted in a test tube, which allows precise
                  control over the conditions of recombination. In this way,
                  researchers can customize each reaction based on the
                  particular sequences that are to be recombined and the number
                  of "crossovers" (recombination events) that are desired per
                  gene. Other methods do not offer this level of control.

      Enchira's gene shuffling technologies have provided a robust and versatile
platform for expansion of its capabilities, expertise and technologies into
areas strongly aligned with healthcare, including protein therapeutics and
oncology, industrial proteins, anti-infectives, bioinformatics, and proteomics.
Enchira plans to strengthen its platform in these key areas. The Company also
plans to apply its directed evolution technologies to development of Enchira's
discovery products as well as in an opportunistic fashion to other development
projects.

Protein therapeutics and oncology

      Enchira currently collaborates with Professor Mien-Chie Hung, Chairman of
the Department of Molecular and Cellular Oncology and Director of the Breast
Cancer Basic Research Program at The University of Texas M.D. Anderson Cancer
Center. The objective of this effort is to combine Enchira's directed evolution
capabilities with Dr. Hung's experience in the molecular biology of breast
cancer to create variants of protein ligands that have been evolved to bind cell
surface receptors implicated in the most severe cases of breast cancer. A
specific objective of this project is to create new variants that bind to a
particular growth factor receptor and block signal transduction, thus blocking
the proliferation of cancerous cells.

Anti-infectives and other products

      Enchira has a strong historical background in metabolic engineering and
has used recombinant DNA technology to create orders-of-magnitude improvements
in metabolic flux through microbial pathways. Using the tools of directed
evolution, Enchira is working on projects to alter the metabolic flux in an
antibiotic synthesis pathway. Enchira believes that these projects may lead to
improved antibiotics and more cost effective processes of manufacturing existing
antibiotics as well as other products that are produced using microorganisms.

Industrial proteins

      In August 2000, Enchira entered into a collaboration with Genencor
International to apply Enchira's directed evolution technology to improvement in
certain industrial enzymes. This program utilizes not only Enchira's technology
in directed evolution but also its extensive collective experience in developing
selections and screens for improved enzyme activity and in the subsequent
purification and characterization of the kinetic properties of the variants.
Improved versions of industrial enzymes face a relatively short approval
process, and Enchira believes such versions could be in the marketplace in 3 to
4 years.

Bioinformatics & Proteomics

      Analysis of the large numbers of improved genes and proteins can lead to a
better understanding of the underlying relationships between structure and
function. Dr. Tony Gorry, Friedkin Professor of Management and Professor of
Computer Science at Rice University, has recently joined Enchira's Board of
Directors to strengthen its efforts in this area.

Other capabilities and equipment

      Enchira's technology platform includes sophisticated analytical and high
throughput screening capabilities that are used to identify the improved genes
that are created through its proprietary processes. Enchira also has a fully
equipped fermentation pilot plant that can serve, if necessary, for the
production of kilogram quantities of developmental recombinant proteins.


                                       5
<PAGE>

Market Overview

      Enchira believes that its high throughput DNA recombination technologies
will be an effective means to improve protein-based therapeutics as well as to
improve the biocatalytic routes to prepare a variety of small-molecule drugs and
vitamins. Worldwide sales of pharmaceuticals are estimated to be $120 billion,
which includes protein-based pharmaceuticals of approximately $20 billion and
drugs produced through biocatalysis comprising approximately $10 billion.
Enchira's strategy involves a two-prong approach. In the short-term, Enchira
plans to apply its recombinant DNA technologies and HTS capabilities to product
discovery and development in the pharmaceutical sector through R&D agreements
with established companies in the pharmaceutical industry. These projects will
provide the shorter-term cash flow necessary to build the company for the
achievement of longer-term goals. In the longer term, Enchira plans to utilize
its capabilities in directed evolution and drug development to create new drug
leads internally for licensing to the pharmaceutical industry.

Therapeutic proteins

      Protein therapeutics represents one of the largest selling classes of
therapeutics. Many products within this category address unmet therapeutic
needs, and, as such, experience rapid adoption and growth. The high sales
potential is evidenced by the $4 billion combined annual sales of erythropoetin
by Amgen as Epogen(R), which is used to treat anemia in renal dialysis and by
Johnson and Johnson as Procrit(R), which is used to treat cancer chemotherapy
patients. Another example is the $650 million sales of Immunex's Embrel(R), a
certain inhibitor for treatment of rheumatoid arthritis.

      Protein therapeutics fall into four broad categories -- hormones,
cytokines, serum proteins, and enzymes. Examples in each class illustrate the
potential market size and therapeutic importance of these compounds.

      1.    Hormones. Hormones control many aspects of human development and
            regulation of the reproductive system. For example, human growth
            hormone is a 191 amino acid protein that is used to treat children
            who lack adequate endogenous growth hormone secretion, patients with
            chronic renal insufficiency, and patients with Turner syndrome.
            Human growth hormone is a $1.5 billion product developed by eight
            companies in the U.S. Interleukin-11 (IL-11) is a thrombopoietic
            growth factor comprising 177 amino acids that acts to increase blood
            platelet production. IL-11 is indicated for the prevention of severe
            thrombocytopenia (low platelets) and the reduction of the need for
            platelet transfusions following myelosuppressive chemotherapy in
            patients with nonmyeloid malignancies.

      2.    Cytokines. Cytokines are proteins secreted by cells to regulate
            immune system inflammatory responses. Interferons, a large class of
            cytokines, are a family of naturally occurring small proteins and
            glycoproteins with molecular weights of approximately 15,000 to
            27,600 daltons that are produced and secreted by cells in response
            to viral infections and to synthetic or biological inducers. Once
            bound to the cell membrane, interferons initiate a complex sequence
            of intracellular events, which in vitro studies have demonstrated
            include (i) induction of certain enzymes, (ii) suppression of cell
            proliferation, (iii) immunomodulating activities (e.g. enhancement
            of the phagocytic activity of macrophages and augmentation of the
            specific cytotoxicity of lymphocytes for target cells), and (iv)
            inhibition of virus replication in virus-infected cells.
            Specifically, interferon-(beta), a 165 amino acid protein, is
            indicated for use in patients with relapsing-remitting multiple
            sclerosis to reduce the frequency of clinical exacerbations. Year
            2000 sales of Biogen's 165 amino acid protein product, Avonex(R),
            were $761 million. Sales of (alpha)- interferon, which is used to
            treat a variety of viral and neoplastic diseases, were in excess of
            $2 billion in 2000.

      3.    Serum proteins. Serum proteins are proteins contained in the plasma
            component of blood. Factor VIII and IX are specific clotting factors
            that are deficient in patients with hemophilia A and B,
            respectively. The administration of Factor VIII and IX provides an
            increase in plasma levels of these


                                       6
<PAGE>

            proteins and can temporarily correct the coagulation defect in these
            patients. Collective sales of these products exceed $1 billion
            annually.

            4.    Enzymes. Enzymes comprise the majority of proteins within
                  cells and will represent a vast opportunity for directed
                  evolution, as the function of many newly identified enzymes
                  are determined. Enzymes are particularly amenable to molecular
                  evolution efforts based on recombination, since the structure
                  of most enzymes is complex and optimization with traditional
                  methods is extremely difficult. Genzyme's Cerezyme(R)is a 497
                  amino acid protein that is an analogue of the human enzyme,
                  (beta)-glucocerebrosidase that is used to treat Gaucher
                  disease. Gaucher disease is characterized by a deficiency of
                  (beta)-glucocerebrosidase activity, resulting in accumulation
                  of glucocerebroside in tissue macrophages that become engorged
                  and are typically found in the liver, spleen, and bone marrow
                  and occasionally in the lungs, kidneys, and intestines.
                  Genzyme had sales in 2000 of approximately $470 million for
                  Cerezyme(R)for Gaucher disease.

Antibodies

      Monoclonal antibodies comprise one of the fastest growing segments of the
protein-related therapeutic market, and, with the advent of recent humanization
technology, hundreds of antibodies have entered development. It is estimated
that one quarter of all biotech drugs in development are antibody-based. As with
other protein therapeutics, it appears likely that directed evolution can be
used to improve the affinity, specificity, potency, shelf life, and other
attributes of antibodies. To date, the highest affinity antibody ever developed
was developed using high throughput DNA recombination.

      To date, the FDA has approved nine monoclonal antibody-based products
for sale such as Rituxan(R) (IDEC). The majority of these antibodies have
been on the market for less than three years. A large number of companies are
developing monoclonal antibody-based products. The estimated 2000 revenues
for the two highest selling of these antibodies are in excess of $1.5 billion.

Vaccines

      Worldwide sales of vaccines exceeded $4 billion in 1999. The Company
believes that high throughput DNA recombination may be useful in many aspects
of vaccine development. Vaccines can be divided into three classes:
inactivated, subunit vaccines, and live attenuated vaccines.

      An inactivated virus vaccine is prepared by killing the virus using
chemical agents (e.g. hepatitis A vaccine). In contrast, the subunit vaccine
is prepared by purifying and concentrating surface proteins of the virus,
called subunits. Preparation of a subunit vaccine requires knowledge of
specific surface antigens and the potential of blocking these antigens to
prevent infection. Merck and Glaxo SmithKline have subunit vaccines for
Hepatitis B with sales over $500 million in the aggregate. Inactivated and
subunit vaccines have little or no risk of infection from the vaccine itself
if the virus has been adequately inactivated, but these vaccines may not
trigger a sufficient immune response to provide protection against the
wild-type (naturally-occuring) virus. Also, subunit and inactivated vaccines
can produce antibodies in the bloodstream, but are less able to produce
antibodies in mucous membranes where the wild-type virus enters the body.

      Live virus vaccines are a weakened form of the virus that is infectious
enough to trigger a lasting immune response to the wild-type virus. Examples of
live virus vaccines include those for polio, yellow fever, measles, mumps,
rubella, and chicken pox. These vaccines are developed by multiplying the
viruses sequentially in non-human cells wherein the viruses gradually change in
activity towards humans. The weakened virus is then tested in animal models for
safety and effectiveness, followed by tests in humans in small- and large-scale
trials.

      The primary advantage of live virus vaccines is their ability to activate
a complete immune response, including development of antibodies at the infection
site and within the blood as well as cell-mediated immunity.


                                       7
<PAGE>

Consequently, live virus vaccines are often considered to be more effective in
providing immunity than subunit or inactivated vaccines. Live virus vaccines
also offer attractive routes for administration through the nose or mouth. In
persons with weakened immune systems however, the live vaccine has the potential
to produce a disease resembling the wild-type infection. Additional potential
risks have been recognized for live virus vaccines. First, live virus strains
can continue to change as they multiply in human hosts, so it is possible that
the modified virus could revert to the wild-type strain - a recognized potential
problem with the polio vaccine. Second, a weakened vaccine virus may exchange
genetic information with wild-type strains after the vaccine has been
administered, again creating the potential for a disease similar to that caused
by the wild-type strain. Recombination of the viral DNA with human DNA of the
patient is another potential theoretical concern.

      High throughput DNA recombination may offer new opportunities for vaccine
development. With conventional methods, live attenuated vaccines are produced
through rounds of growth under defined conditions, as described above. For
example, cold-adapted influenza vaccine technology developed at the University
of Michigan created weakened influenza strains by growing the virus under
progressively colder conditions until the viruses lost their ability for
sufficient growth at human body temperature. High throughput DNA recombination
may offer approaches to accelerate this process of evolving whole vaccines to
desired phenotypes. Likewise, many subunit vaccine candidates are not
sufficiently immunogenic. Shifting the presentation of these antigens using
recombination may induce immunogenicity. Advantages include development of
vaccines for indications that are currently unavailable on the market and
improved versions of existing vaccine products.

Anti-infectives and Biocatalysis

      Biocatalysis is a process whereby an enzyme or a series of enzymes from
microorganisms are used to produce molecules that cannot be produced or are
uneconomical to produce by traditional synthetic chemistry methods. In many
instances the DNA sequence for these enzymes is available as well as the
sequence for an entire operon encoding a series of enzymes that are required for
a biocatalytic conversion. These enzymes and their operons are amenable to high
throughput DNA recombination and directed evolution, providing potential
opportunities for Enchira's technology.

      The majority of anti-infective agents and traditional cancer
chemotherapeutics are produced by biocatalysis. Polyketide pharmaceuticals
represent an important subgroup of these products, and this class of compound is
used in antibiotics, anticancer drugs, cholestrol-lowering drugs,
immuno-suppressants, and applications in animal health and agricultural
products. Examples are listed in the table below. Currently, 20 polyketide
products are available commercially with annual aggregate sales of more than $10
billion. Two broad-spectrum antibiotics, clarithromycin, and azithromycin,
accounted for sales of approximately $2.3 billion in 2000. The emergence of
antibiotic-resistant organisms has recently spurred new interest in development
of improved or novel anti-infectives. By employing Enchira's high throughput
recombination technologies to the genes coding for polyketide synthase
complexes, improved versions of these antibiotics active against resistant
strains may be developed.


                                       8
<PAGE>

<TABLE>

      -----------------------------------------------------------------------
<S>                                                  <C>
      Compound                                       Action
      -----------------------------------------------------------------------
      azithromycin (Zithromax(R)).                   Antibacterial
      -----------------------------------------------------------------------
      clarithromycin (Biaxin(R))                     Antibacterial
      -----------------------------------------------------------------------
      erythromycin                                   Antibacterial
      -----------------------------------------------------------------------
      rifamycin (Rifampin(R))                        Antibacterial
      -----------------------------------------------------------------------
      tetracyclines                                  Antibacterial
      -----------------------------------------------------------------------
      doxorubicin (Adriamycin(R))                    Anticancer
      -----------------------------------------------------------------------
      amphotericin B                                 Antifungal
      -----------------------------------------------------------------------
      lovastatin (Mevacor(R))                        Cholesterol-lowering
      -----------------------------------------------------------------------
      pravastatin (Pravacol(R))                      Cholesterol-lowering
      -----------------------------------------------------------------------
      simvastatin (Zocor(R))                         Cholesterol-lowering
      -----------------------------------------------------------------------
      tacrolimus (FK506, Prograf(R))                 Immunosuppressant
      -----------------------------------------------------------------------
      sirolimus (Rapamycin(R))                       Immunosuppressant
      -----------------------------------------------------------------------
      spinosad                                       Insecticide
      -----------------------------------------------------------------------
      avermectin                                     Veterinary product
      -----------------------------------------------------------------------
</TABLE>

Business Strategy

      Enchira's strategy involves a two-prong approach. In the short-term,
Enchira plans to apply its recombinant DNA technologies and HTS capabilities to
product discovery and development in the pharmaceutical sector through R&D
agreements. These projects will provide the shorter-term cash flow necessary to
build the company for the achievement of longer-term goals. In the longer term,
Enchira plans to utilize its capabilities in directed evolution and drug
development to create new drug leads internally for licensing to the
pharmaceutical industry.

Research and Development Progress

      Enchira's technical efforts have focused on expanding the scope of its
intellectual property position in the directed evolution field and applying the
technology to commercially relevant targets identified by Enchira and its
collaborators. One of Enchira's objectives in 2000 was to demonstrate utility of
the RACHITT(TM) technology in a model system that would be recognized by experts
in the field. The manuscript, "DNA Shuffling Method for Generating Highly
Recombined Genes and Evolved Enzymes," which describes the successful
application of this technology, will be published in Nature Biotechnology (a
prestigious, peer reviewed scientific journal) in the April 2001 edition. In
addition to this external affirmation, Enchira's scientists conducted a number
of internal demonstrations to explore the potential for the RACHITT(TM)
technology as well as to develop new ways to "shuffle" larger and larger
sections of DNA, to use less well-characterized sources of donor DNA, and to
shuffle DNA by other methods. These projects confirmed the ability to recruit
DNA (Chimerons(TM)) directly from uncharacterized environmental extracts, to
"shuffle" multi-gene operons, and to create large libraries of recombinant human
growth factor genes. Another objective is to automate the gene shuffling
processes, thereby increasing its precision and further increasing the rate of
product development.

      Enchira has been applying its directed evolution platform to a number of
important targets. These include an industrial enzyme target identified by
Genencor in its collaboration with Enchira, an oncology target as part of the
collaboration with the MD Anderson Cancer Center, an antibiotic synthesis system
that may create antibiotics with improved properties, and a human growth factor.
Other targets may be added in future potential collaborations. Enchira also
received funding from the United States Department of Energy for the third and
final year of a three-year program to develop a biocatalyst for gasoline
desulfurization through application of its directed evolution technologies.


                                       9
<PAGE>

Collaborations and Licenses

      In May 2000, Enchira licensed the RACHITT(TM) technology to Genencor for
use in the field of industrial proteins for cleaning, textiles, grain
processing, animal feed, and food ingredients. The license agreement included an
upfront fee, milestone payments, and product royalties. In August 2000, Enchira
executed a follow-on R&D collaboration agreement for directed evolution of
certain industrial enzymes, which represents a $1.5 billion market. In October
2000, Enchira established a joint collaboration with the M. D. Anderson Cancer
Center to apply its directed evolution technologies to the development of more
effective cancer therapies targeted toward epidermal growth factor receptors. In
this collaboration, Enchira will provide directed evolution and robotic
screening research.

      While Enchira plans to remain opportunistic with respect to directed
evolution programs with corporate and academic collaborators, the primary focus,
and the focus of its internal programs, is aimed toward the therapeutic sector
since this sector has historically produced substantially higher margin
products.

Competition

      Enchira has applied the principles of directed evolution for over 10 years
to improvements in the metabolic flux through its biodesulfurization system. The
field of directed evolution has become increasingly popular in the last 2-3
years, and a number of companies have arisen promoting "gene shuffling"
technologies, most notably Maxygen, Diversa, and Applied Molecular Evolution.
Maxygen's technology, based on the Stemmer or "sexual PCR" and "staggered
extension" methods, involve fragmentation and reassembly of related genes using
PCR (polymerase chain reaction). Diversa creates diversity by isolating whole,
active genes from environmental samples. If necessary, they can create diversity
at targeted regions in the gene using site-saturation mutagenesis or they can
"reassemble" related genes into novel combinations. Applied Molecular Evolution
identifies certain critical regions of proteins and then creates a library of
randomly generated variants at this region.

      Enchira believes that its technologies represent unique and rapid methods
of directed evolution. The RACHITT(TM) gene shuffling method does not rely on
either PCR reassembly of genes, isolation of active genes from nature, or
randomization of particular gene segments. Instead, a transient template is used
as a scaffold to gather related gene segments, and retains only the relevant DNA
through flap-trimming. It is not a random process. As described earlier, the
process is completed by fill-in of the unpaired portions of the scaffold,
ligation of the fragments, and destruction of the template. Other distinguishing
features include 1) the ability to use immediately complex DNA as a source of
fragments, 2) a larger number of recombinations per gene than reported by other
methods and 3) no requirement for an understanding of structure/function
relationships in order to target particular regions of the gene. Enchira is
currently involved in arbitration proceedings with Maxygen. On March 6, 2001,
retired Federal Judge Charles Renfrew, the arbitrator in Enchira's arbitration
proceeding with Maxygen, issued a ruling in which he sided with Maxygen on three
of their four arguments that Enchira breached the Collaboration Agreement
between the two parties. He directed the parties to meet in an attempt to reach
an agreement for an appropriate remedy which could result in the requirement
that Enchira cross license its RACHITT(TM) technology from Maxygen or an
outright prohibition of Enchira's use of and rights in the RACHITT(TM)
technology. See "Risk Factors--We Have an Arbitration Proceeding with Maxygen
Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable
Ruling" for a more complete description of such arbitration.

Patents and Proprietary Technology

      A provisional patent application for Enchira's RACHITT(TM) technology was
filed at the US Patent and Trademark Office (the "PTO") on October 19, 1999, and
an updated regular application was filed at the PTO on February 29, 2000. The
Company filed a worldwide patent application on the RACHITT(TM) technology under
the Patent Cooperation Treaty ("PCT") on October 19, 2000. In addition to the
RACHITT(TM) patent applications, Enchira filed a number of other patent
applications involving other recombinant DNA technologies. These


                                       10
<PAGE>

applications included 11 Provisional Patent applications and four regular
applications filed with the PTO as well as one additional PCT application.

      Enchira continues to maintain its core patents in biodesulfurization
technologies. In total, Enchira has rights to 33 U.S. patents (including cell
recombinant DNA and fundamental process patents) and 35 foreign patents related
to biodesulfurization. Biodesulfurization-related patents issued to or licensed
by Enchira begin to expire in the year 2010. See "--Risk Factors--Any inability
to adequately protect our proprietary technologies could harm our competitive
position."

Employees and Consultants

      Enchira believes that its success will be based, among other things, on
achieving and retaining scientific and technological superiority and on
identifying and retaining capable management. Enchira has assembled a highly
qualified team of scientists as well as executives with experience in the
biotechnology industry.

      As of December 31, 2000, Enchira employed 33 people, 14 of whom hold Ph.D.
degrees. Enchira's employees represent collective expertise in molecular
biology, microbiology, biochemistry, chemistry and chemical engineering.

Government Regulation

      Certain of Enchira's current and planned operations are, or may be,
subject to regulation under various federal and state laws pertaining to
protection of the environment and employee health and safety. In the course of
its current research and development activities, Enchira generates small
quantities of solid and hazardous wastes that are subject to regulation under
the Resource Conservation and Recovery Act ("RCRA") and various other federal
and state regulations. The research and development activities of Enchira are
also subject to the Occupational Safety and Health Act ("OSHA") and similar
state laws and regulations. Enchira believes that it is in compliance with all
such material federal and state laws.

Risk Factors

Enchira may be referred to as "we," "us," or "our" in the Risk Factors below.

      o     WE HAVE AN ARBITRATION PROCEEDING WITH MAXYGEN REGARDING OUR
            RACHITT(TM) TECHNOLOGY IN WHICH WE HAVE RECEIVED AN UNFAVORABLE
            RULING.

      On April 27, 2000, we received notice from Maxygen that they had elected
to seek arbitration under the Collaboration Agreement. Maxygen claims that we
used their confidential information, which they allege was provided to us under
the Collaboration Agreement to develop our own RACHITT(TM) directed evolution
technology. We continue to deny all of Maxygen's allegations and believe that
our technology was independently developed after the collaboration terminated.
The arbitration hearing was held in November 2000.

      On March 6, 2001, we received an unfavorable ruling in our arbitration
proceeding with Maxygen from Judge Renfrew, the arbitrator. His opinion found
that Enchira breached several provisions of the Collaboration Agreement with
Maxygen with respect to Enchira's RACHITT(TM) and high throughput screening
technologies, but Judge Renfrew did not specify a remedy for such breaches in
his ruling. Judge Renfrew directed that the parties meet to see if they can
arrive at an agreement for an appropriate remedy. If the parties cannot reach an
agreement, we will again appear before Judge Renfrew who will issue a decision
on the appropriate remedies. While we will work with Maxygen and the arbitrator
to reach a conclusion to this proceeding, we also intend to investigate
alternative actions that will permit us to continue to develop the RACHITT(TM)
technology that we believe is our independent technology.


                                       11
<PAGE>

      We cannot assure that Maxygen will agree to cross license the RACHITT(TM)
technology to us or that we will otherwise be able to enter into a settlement
that allows us to continue to develop the RACHITT(TM) technology on terms
favorable to us or at all. In addition, the uncertainty surrounding the outcome
of the arbitration and the delay in bringing such matter to conclusion could
materially and adversely affect our ability to secure additional capital on a
timely basis or at all. Further, should the settlement or other remedies imposed
by the arbitrator be adverse to us and we are not otherwise able to overcome the
arbitrator's decision, our ability to continue as a going concern may be
limited.

      -     WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY NOT BE PROFITABLE
            IN THE FUTURE.

      We have incurred net losses since our inception and expect losses to
continue in the foreseeable future as we continue to expense capital for the
ongoing development and commercialization of our high throughput in vitro DNA
recombination technology. We have received a limited amount of revenue to date
from the use or sale of such technology. At December 31, 2000, we had an
accumulated deficit of $83 million. We remain uncertain about the amount of time
required for us to become profitable. We cannot ensure that we will achieve
sustained profitability, if at all.

      -     IF WE DON'T ESTABLISH AND MAINTAIN COLLABORATIONS WITH OTHER
            PARTIES, THE DEVELOPMENT OF OUR PRODUCTS MAY BE DELAYED OR STOPPED.

      Because we do not currently possess the financial and other resources
necessary to develop potential products that may result from our technologies,
or the financial and other resources to complete any approval processes, which
may be required for these products, we must enter into collaborative
arrangements to develop our products. If we do not maintain our current
collaboration with Genencor, which is contingent upon the ultimate resolution of
the Maxygen arbitration, or if we do not enter into new collaborative
agreements, then our revenues will be reduced, and products utilizing our
technologies may not be developed, manufactured or marketed. We have limited or
no control over the resources that any collaborator may devote to our products.
Any of our present or future collaborators may not perform their obligations as
expected. These collaborators may breach or terminate their agreements with us
or otherwise fail to conduct their collaborative activities successfully and in
a timely manner. Further, our collaborators may elect not to develop products
arising out of our collaborative arrangements or devote sufficient resources to
the development, manufacture, marketing or sale of these products. As a result
of the current status of our arbitration proceeding with Maxygen, our current
collaborators may delay development under our collaborations with them until
there is a conclusion to the arbitration proceeding. Also, the recent ruling
will make it more difficult for us to enter into new collaborations until a
favorable conclusion is reached. If any of these events occur, we may not be
able to develop our technologies or commercialize our products.

      -     BECAUSE WE ARE A DEVELOPMENT STAGE COMPANY DEVELOPING AND DEPLOYING
            NEW TECHNOLOGIES, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
            TECHNOLOGIES OR PRODUCTS, WHICH COULD CAUSE US TO BE UNPROFITABLE OR
            CEASE OPERATIONS.

      You must evaluate our business in light of the uncertainties and
complexities affecting a development stage biotechnology company. Our existing
proprietary technologies are new and in the early stage of development. We may
not be successful in the commercial development of these or any further
technologies or products. Successful products require significant development
and investment to demonstrate their cost-effectiveness prior to regulatory
approval and commercialization. To date, we have not commercialized any
biotechnology products, and we have no strategic partners who have yet
incorporated our technologies or inventions into their own commercial products
from which we can generate royalties. Because of these uncertainties, our
discovery process may not result in the identification of product candidates
that our strategic partners or we will commercialize. If we are not able to use
our technologies to discover new materials or products with significant
commercial potential, we will not be able to achieve our objectives or build a
sustainable or profitable business.


                                       12
<PAGE>

      -     ETHICAL, LEGAL AND SOCIAL CONCERNS ABOUT GENETICALLY ENGINEERED
            PRODUCTS COULD LIMIT OR PREVENT THE USE OF OUR PRODUCTS AND
            TECHNOLOGIES AND LIMIT OUR REVENUE.

      Some of our products are genetically engineered. If we are not able to
overcome the ethical, legal and social concerns relating to genetic engineering,
our products may not be accepted. Any of the risks discussed below could result
in expenses, delays or other impediments to our programs or the public
acceptance and commercialization of products dependent on our technologies or
inventions. Our ability to develop and commercialize one or more of our
technologies and products could be limited by the following factors:

            1.    Public attitudes about the safety and environmental hazards
                  of, and ethical concerns over, genetic research and
                  genetically engineered products, which could influence public
                  acceptance of our technologies and products;

            2.    Public attitude regarding, and potential changes to laws
                  governing, ownership of genetic material which could harm our
                  intellectual property rights with respect to our genetic
                  material and discourage strategic partners from supporting,
                  developing or commercializing our products and technologies;
                  and

            3.    Governmental reaction to negative publicity concerning
                  genetically modified organisms, which could result in greater
                  government regulation of genetic research and derivative
                  products, including labeling requirements.

      The subject of genetically modified organisms has received negative
publicity, which has aroused public debate. The adverse publicity could lead to
greater regulation and trade restrictions on imports and exports of genetically
altered products.

      -     MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE
            THAN WE DO MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS
            OBSOLETE.

      The biotechnology industry is characterized by rapid technological change,
and the area of gene research is a rapidly evolving field. Our future success
will depend on our ability to maintain a competitive position with respect to
technological advances. Rapid technological development by others may result in
our products and technologies becoming obsolete. We face, and will continue to
face, intense competition. There are a number of companies who compete with us
in various steps throughout our technology process. Many of these competitors
have significantly greater financial and human resources than we do. These
organizations may develop technologies that are superior alternatives to our
technologies. Further, our competitors may be more effective at implementing
their gene-related technologies to develop commercial products. Any products
that we develop through our high throughput in vitro DNA recombination
technology will compete in multiple, highly competitive markets. Many of our
potential competitors in these markets have substantially greater financial,
technical and marketing resources than we do, and we cannot assure you that they
will not succeed in developing products that would render our products or those
of our strategic partners obsolete or noncompetitive. In addition, many of these
competitors have significantly greater experience than we do in their respective
fields.

      o     ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES
            COULD HARM OUR COMPETITIVE POSITION.

      Our success will depend in part on our ability to obtain patents and
maintain adequate protection of our other intellectual property for our
technologies and products in the United States and other countries. If we do not
adequately protect our intellectual property, competitors may be able to
practice our technologies and erode or negate our competitive advantage. The
laws of some foreign countries do not protect our proprietary rights to the


                                       13
<PAGE>

same extent as the laws of the United States, and we may encounter significant
problems in protecting our proprietary rights in these foreign countries. We may
fail to apply for patents on important technologies or products in a timely
fashion or at all, and in any event, the applications we do file may be
challenged and may not result in issued patents. Our existing patents and any
future patents we obtain may not be sufficiently broad to prevent others from
practicing our technologies or from developing competing products. Furthermore,
others may independently develop similar or alternative technologies or design
around our patented technologies. In addition, others may challenge or
invalidate our patents, or our patents may fail to provide us with any
competitive advantages. If the use or validity of any of our patents is ever
challenged, it would result in litigation costs and the diversion of management
in defending the patent. In addition, we generally do not control the patent
prosecution of technology that we license from others. Accordingly, we are
unable to exercise the same degree of control over this intellectual property as
we would over technology we own.

      We rely upon trade secret protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators, and
consultants. Nevertheless, employees, collaborators, or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.

      o     LITIGATION OR OTHER PROCEEDINGS OR THIRD PARTY CLAIMS OF
            INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND TIME
            AND MONEY AND COULD SHUT DOWN SOME OF OUR OPERATIONS.

      Our commercial success depends in part on not infringing the patents and
proprietary rights of third parties and not breaching any licenses that we have
entered into with regard to our technologies and products. The biotechnology
industry is characterized by extensive litigation regarding patents and other
intellectual property rights. Other parties may have been issued relevant
patents or may have filed relevant patent applications that could affect our
ability to obtain patents or to operate as we would like to in our research,
development, and commercialization efforts. If we wish to use technologies
claimed by third parties in issued and unexpired patents, then we may need to
obtain license(s) from the owner(s) of such patent(s), enter into litigation, or
incur the risk of litigation. Litigation or failure to obtain necessary licenses
may impede our ability to obtain collaborations or to develop our products and
could prevent us or our collaborators from developing or commercializing our
products. As a result of our arbitration proceeding with Maxygen, we may be
required to obtain a license or cross license from Maxygen for the RACHITT(TM)
technology or we may otherwise not be allowed to continue to use or have rights
in the technology.

      Other biotechnology companies have filed patent applications and obtained
patents, and in the future will likely continue to file patent applications and
obtain patents, claiming directed evolution technologies similar to our
RACHITT(TM) technology. If these patents are valid or if these applications
issue into valid patents, we will have to either circumvent the claims in these
patents, or obtain licenses to use the patented technology in order to use these
genes or technologies in the research, development and commercialization of our
products and technologies. If we are unsuccessful in circumventing or acquiring
licenses to these patents (including the possible license or cross license for
the RACHITT(TM) technology from Maxygen), our ability to research, develop or
commercialize products may be blocked.

      -     LAWS MAY LIMIT OUR PROVISION OF GENETICALLY ENGINEERED PRODUCTS IN
            THE FUTURE, WHICH COULD REDUCE OUR ABILITY TO SELL THESE PRODUCTS.

      All phases in the development of our potential products are subject to
significant federal, state, local and/or foreign governmental regulation.
Regulatory agencies may not allow us to produce and/or market our products in a
timely manner or under technically or commercially feasible conditions, or at
all, which could harm our business.


                                       14
<PAGE>

      In the United States, products for our target markets are regulated based
on their application, by either the FDA, the Environmental Protection Agency, or
EPA, or, in the case of plants and animals, the United States Department of
Agriculture, or USDA. The FDA regulates drugs, food and feed, as well as food
additives, feed additives and substances generally recognized as safe that are
used in the processing of food or feed. In the future we may pursue strategic
alliances for further research and development of drug products for humans that
would require FDA approval before they could be marketed in the United States.
In addition, any product candidates must also be approved by the regulatory
agencies of foreign governments before any products, or products of our
strategic partners incorporating our technologies or inventions, to the extent
that they come within the FDA's jurisdiction, may be subject to lengthy FDA
reviews and unfavorable FDA determinations if they raise safety questions which
cannot be satisfactorily answered, if results from pre-clinical or clinical
trials do not meet regulatory requirements or if they are deemed to be food
additives whose safety cannot be demonstrated. An unfavorable FDA ruling could
be difficult to resolve and could prevent a product from being commercialized.
Even after investing significant time and expenditures, we may not obtain
regulatory approval for any of our products. We have not submitted an
investigational new drug application for any product candidate, and no product
candidate developed with our technologies has been approved for
commercialization in the United States or elsewhere.

      The EPA regulates biologically derived chemical substances not within the
FDA's jurisdiction. An unfavorable EPA ruling could delay commercialization or
require modification of the production process resulting in higher manufacturing
costs, thereby making the product uneconomical. In addition, the USDA may
prohibit genetically engineered plants from being grown and transported except
under an exemption, or under controls so burdensome that commercialization
becomes impracticable. The USDA may not exempt our future products.

      -     WE MAY BE SUED FOR PRODUCT LIABILITY.

      We may be held liable if any product we develop, or any product, which is
made with the use of any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We currently have no product liability insurance. When we attempt to obtain
product liability insurance, this insurance may be prohibitively expensive, or
may not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our strategic partners. If we
are sued for any injury caused by our products, our liability could exceed our
total assets.

      -     WE WILL NEED ADDITIONAL FUNDS. WE MAY NEED TO ENTER INTO FINANCING
            ARRANGEMENTS WITH UNFAVORABLE TERMS OR WHICH COULD ADVERSELY AFFECT
            YOUR OWNERSHIP INTEREST AND RIGHTS AS COMPARED TO OUR OTHER
            STOCKHOLDERS. IF SUCH FINANCING IS NOT AVAILABLE, WE MAY NEED TO
            CEASE OPERATIONS.

      We currently anticipate that our available cash resources and receivables
and committed funding from strategic partners will be sufficient to meet our
capital requirements for at least the next two years.

      However, our capital requirements depend on several factors, including:

            1.    Whether we will be able to acquire a cross license from
                  Maxygen for the RACHITT(TM) technology or otherwise conclude
                  the arbitration proceeding in a manner and at a cost which
                  allows us to continue development of the
                  RACHITT(TM) technology;

            2.    Legal fees associated with pursuing a satisfactory resolution
                  to the dispute with Maxygen, pursuant to the arbitrator's
                  ruling, as well as costs of exploring other alternatives;


                                       15
<PAGE>

            3.    The level of research and development investment required to
                  maintain our technology leadership position;

            4.    Our ability to enter into new agreements with strategic
                  partners or to extend the terms of our existing collaborative
                  agreements and the terms of any agreement of this type;

            5.    The success rate of our discovery efforts to achieve
                  milestones and receive royalties;

            6.    Our ability to successfully commercialize products developed
                  independently and the demand for such products; and

            7.    Costs of recruiting and retaining qualified personnel.

      As additional capital is required to operate our business, we cannot
assure you that additional financing will be available on terms favorable to us,
or at all. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our operations, take advantage of
opportunities, develop products or technologies or otherwise respond to
competitive pressures could be significantly limited. In addition, if financing
is not available, we may need to cease operations.

      If we raise additional funds through the issuance of equity securities,
the percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution or such equity securities may provide for rights,
preferences or privileges senior to those of the holders of our common stock. If
we raise additional funds through the issuance of debt securities, such debt
securities would have rights, preferences and privileges senior to holders of
common stock and the terms of such debt could impose restrictions on our
operations.

      -     WE RELY HEAVILY ON A FEW KEY EMPLOYEES FOR MANAGEMENT AND PRODUCT
            DEVELOPMENT EFFORTS.

      We depend on the efforts of our executive officers, scientists and other
key employees, the loss of any one of whom could materially and adversely affect
us. Shortages of qualified scientists within certain disciplines may occur and
competition for the services of qualified scientists may intensify. We may not
succeed in recruiting or retaining these personnel in the future.

      -     WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO
            IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE
            TIME CONSUMING AND COSTLY.

      Our research and development processes involve the controlled use of
hazardous materials, including chemical, radioactive and biological materials.
Our operations also produce hazardous waste products. We cannot eliminate
entirely the risk of accidental contamination or discharge and any resultant
injury from these materials. Federal, state and local laws and regulations
govern the use, manufacture, storage, handling and disposal of these materials.
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 total
assets. In addition, compliance with applicable environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development or production efforts.

      -     SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY
            NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL
            STOCKHOLDERS.

      Our officers, directors and principal stockholders (greater than 5%
stockholders) together control approximately 65% of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
exert a significant degree of influence over our management and affairs and over
matters requiring stockholder approval,


                                       16
<PAGE>

including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change in control of us and might affect the market price of our common stock,
even when a change may be in the best interests of all stockholders. In
addition, the interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders and
accordingly, they could cause us to enter into transactions or agreements which
we would not otherwise consider.

      -     OUR STOCK PRICE IS VOLATILE.

      The market price of our common stock, like other emerging technology
companies, has been highly volatile. In the future, the market price of our
common stock could fluctuate substantially due to a variety of factors,
including the results of our arbitration with Maxygen, our ability to secure
additional collaborative programs relating to our RACHITT(TM)- directed
evolution technology, governmental regulation, developments in patent or other
proprietary rights of us or our competitors, fluctuations in our operating
results and fluctuations in the market prices of emerging technology stocks and
market conditions in general.

      -     DIVIDENDS ON OUR PREFERRED STOCK DILUTE OWNERSHIP IN OUR COMMON
            STOCK AND CREATE A DEFICIENCY IN BOTH FIXED CHARGES AND IN PREFERRED
            STOCK DIVIDEND COVERAGE.

      In the past, we have from time to time elected to pay dividends on our
preferred stock with our common stock, although we may pay dividends in cash or
a combination of common stock and cash. Dividends will be payable on the
preferred stock only when, as and if declared by our Board of Directors as
permitted under Delaware law although we do incur an obligation to pay such
dividends in a manner to be determined at our sole discretion until they become
payable. We have incurred net losses since our inception, and we expect our
losses to increase in the foreseeable future. While we intend to pay dividends
on the preferred stock in common stock, we anticipate that we will continue to
incur losses and thus will continue to have a deficiency in fixed charges and
preferred stock dividend coverage. Preferred stock dividends may be paid only
out of capital surplus (within the meaning of the Delaware General Corporation
Law) or out of our net profits for the fiscal year in which the dividend is
declared and the preceding fiscal year. We have issued a total of 509,451 shares
of common stock to date as dividends on the preferred stock. The Company has not
declared a dividend payment since November 1998, and since that date, has not
paid dividends on Series B Preferred Stock except on conversion of Series B
Preferred Stock to common stock

      -     CERTAIN CHARTER AND BYLAW PROVISIONS AND OUR STOCKHOLDER RIGHTS PLAN
            MAY NEGATIVELY AFFECT THE STOCKHOLDERS.

      Certain provisions of our charter, bylaws and rights plan may discourage
proposals by third parties to acquire a controlling interest in us, which could
deprive stockholders of the opportunity to consider an offer that would be
beneficial to them.

      -     FUTURE SALES OF COMMON STOCK MAY NEGATIVELY AFFECT THE STOCKHOLDERS.

      On December 31, 2000, 9,067,700 shares of our common stock were
outstanding, 1,156,622 shares of common stock were issuable upon conversion of
shares of our preferred stock and 905,492 shares of common stock were issuable
upon the exercise of outstanding options and warrants. Future sales of
substantial amounts of our common stock in the public market could have an
adverse effect on prevailing market prices of the common stock and the
marketability of and price obtainable for shares of the common stock.

      -     OUR COMMON STOCK COULD BE DELISTED FROM NASDAQ.

      Although our common stock meets the current listing requirements of, and
presently lists on, the Nasdaq National Market, we must maintain certain minimum
financial requirements for continued inclusion on Nasdaq. If we cannot satisfy
Nasdaq's maintenance requirements, Nasdaq may delist our common stock. In such
event, trading in


                                       17
<PAGE>

our common stock would thereafter be conducted in the over-the-counter markets
in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of our common stock could be impaired, not only in
the number of shares which could be bought and sold, but also through delays in
the timing of the transactions, reductions in security analysts' and the news
media's coverage of us, and lower prices for our common stock than it might
otherwise attain.

      -     STOCKHOLDERS FACE THE RISKS OF HOLDING "PENNY STOCKS."

      If Nasdaq delisted our common stock, it could become subject to Rule 15g-9
under the Securities and Exchange Act of 1934, as amended, (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to sale. Consequently, the rule may adversely
affect the ability of the holders of our common stock to sell their shares in
the secondary market.

      Regulations of the Securities and Exchange Commission, or the Commission,
define a "penny stock" to be any non-Nasdaq equity security that has a market
price (as therein defined) of less than $5.00 per share or with an exercise
price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the Commission relating to the penny stock market. The Commission also requires
disclosure about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
the Commission requires monthly statements to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.

      These penny stock restrictions will not apply to our common stock if
Nasdaq continues to list it and has certain price and volume information
provided on a current and continuing basis or meets certain minimum net tangible
assets or average revenue criteria. We cannot ensure that our common stock will
qualify for exemption from these restrictions. Even if our common stock were
exempt from such restrictions, we would remain subject to Section 15(b)(6) of
the Exchange Act, which gives the Commission the authority to prohibit any
person engaged in unlawful conduct while participating in a distribution of a
penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the Commission finds that such a restriction
would be in the public interest. If our common stock were subject to the rules
on penny stocks, the market liquidity for our common stock could be severely and
adversely affected.

Item 2. Properties

Facilities

      The Company's corporate offices and laboratories are situated in a 25,000
square-foot leased building located at 4200 Research Forest Drive in The
Woodlands, Texas, a suburb of Houston, Texas. Pursuant to the lease, monthly
payments of $33,678 are required for base rent. The lease for this facility
expires in 2003. Approximately 20,500 square feet of this space is devoted to
research and development. The facility includes two laboratories designed for
molecular biology/microbiology/microbial physiology, a biochemistry laboratory,
a high throughput screening laboratory with robotics, a media preparation
laboratory, two analytical laboratories which provide DNA sequencing, gel
documentation, GC/MS and LC/MS and other analyses, a fermentation laboratory,
and microbiology laboratory.

Item 3. Legal Proceedings

      On April 27, 2000, Enchira received notice from Maxygen that they had
elected to seek arbitration under the Collaboration Agreement. Maxygen claims
that Enchira used their confidential information to develop the


                                       18
<PAGE>

RACHITT(TM) technology, which they allege was provided to Enchira under the
Collaboration Agreement. Enchira continues to deny all of Maxygen's allegations
and believes that its technology was independently developed after the
collaboration terminated. The arbitration hearing was held in November 2000.

      On March 6, 2001, Enchira received an unfavorable ruling from the
arbitrator in its arbitration proceeding with Maxygen. His opinion found that
Enchira breached several provisions of the Collaboration Agreement with Maxygen
with respect to Enchira's RACHITT(TM) and HTS technologies, but he did not
specify a remedy for such breaches in his ruling. The arbitrator directed that
the parties attempt to arrive at an agreement for an appropriate remedy. If the
parties cannot reach an agreement, they will again appear before the arbitrator
who will issue a decision on damages or some other remedy. While Enchira will
work with Maxygen and the arbitrator to reach a conclusion to this proceeding,
it also intends to investigate alternative actions that will permit Enchira to
continue to develop the RACHITT(TM) technology that Enchira believes is its
independent technology. Please see "Risk Factors--We Have an Arbitration
Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have
Received an Unfavorable Ruling" for a more complete discussion.


                                       19
<PAGE>

Part II.

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

      The Company's common stock (symbol: ENBC) is traded on the Nasdaq National
Market. The following table sets forth the range of high and low sales prices
for each calendar quarter in the two years ended December 31, 2000 as reported
on the Nasdaq National Market:

<TABLE>
<CAPTION>

Year Ended December 31, 2000                                High          Low
                                                            ----           ---
<S>                                                       <C>           <C>
First Quarter .................................           $30.63        $ 3.75
Second Quarter ................................            15.50          5.00
Third Quarter .................................            10.81          5.31
Fourth Quarter ................................             8.94          3.06
</TABLE>

<TABLE>
<CAPTION>

Year Ended December 31, 1999                                High           Low
                                                            ----           ---
<S>                                                       <C>           <C>
First Quarter .................................           $ 4.63        $ 0.38
Second Quarter ................................             6.50          1.25
Third Quarter .................................             4.75          1.81
Fourth Quarter ................................             4.63          2.03
</TABLE>

      As of March 5, 2001, 9,079,313 shares of common stock were outstanding and
Enchira had approximately 161 shareholders of record.

Dividends

      Enchira has never paid cash dividends on its common stock. Enchira
currently intends to retain any earnings to finance the growth and development
of its business and does not anticipate paying cash dividends on its common
stock in the foreseeable future. For a discussion of dividends paid or payable
on the Series B Redeemable Convertible Preferred Stock, see "Item 1. Business --
Risk Factors -- Dividends on Preferred Stock Dilute Ownership in our Common
Stock and Create a Deficiency in Both Fixed Charges and Preferred Stock Dividend
Coverage."

Item 6. Selected Financial Data

      The selected financial data set forth below with respect to the Company's
statements of operations for each of the five years in the period ended December
31, 2000 and with respect to the Company's balance sheets as of December 31,
1996, 1997, 1998, 1999 and 2000 are derived from the audited financial
statements of Enchira. The financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto included
elsewhere in this report.


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                      -----------------------

                                              1996             1997            1998             1999             2000
                                          -----------      -----------      -----------      -----------      -----------
                                                          (in thousands, except share and per share data)
<S>                                       <C>              <C>              <C>              <C>              <C>
Statements of Operations Data:
 Revenues:
      Sponsored research revenues ...     $     1,778      $     1,652      $       689      $     1,415      $       841
                                          -----------      -----------      -----------      -----------      -----------
Costs and expenses:
      Research and development ......           9,210            9,087            7,706            4,848            4,195
      General and administrative ....           2,608            2,754            2,188            1,906            2,934
                                          -----------      -----------      -----------      -----------      -----------
          Total costs and expenses ..          11,818           11,841            9,894            6,754            7,129
                                          -----------      -----------      -----------      -----------      -----------
Interest and investment income ......             807              650              394              214              308
Loss on disposal of fixed assets ....              --               --              (34)            (140)             (43)
                                          -----------      -----------      -----------      -----------      -----------
Net loss ............................     $    (9,233)     $    (9,539)     $    (8,845)     $    (5,265)     $    (6,023)
                                          ===========      ===========      ===========      ===========      ===========
Net loss per common share - basic and
      diluted .......................     $     (7.29)     $     (7.64)     $     (5.20)     $     (1.78)     $     (1.10)
                                          ===========      ===========      ===========      ===========      ===========
Shares used in computing net loss
      per common share - basic and
      diluted .......................       1,606,861        1,681,351        1,875,414        4,635,930        7,576,121
                                          ===========      ===========      ===========      ===========      ===========
</TABLE>

      Net loss per common share has been computed by dividing the net loss,
which has been increased for periodic accretion and dividends on the Series A
Preferred Stock issued in October 1994 and the Series B Preferred Stock issued
in February and March 1997, by the weighted average number of shares of common
stock outstanding during the period.

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                      ------------

                                             1996          1997          1998          1999          2000
                                           --------      --------      --------      --------      --------
                                                                     (in thousands)
<S>                                        <C>           <C>           <C>           <C>           <C>
Balance Sheet Data:
Cash and cash equivalents ...........      $  3,106      $  9,661      $  2,795      $  2,510      $  7,524
Working capital .....................         8,770        10,102         2,488         5,591        11,357
Total assets ........................        13,711        14,965         6,127         8,064        15,858
Accumulated deficit .................       (42,713)      (55,204)      (67,200)      (75,079)      (82,973)
Total stockholders' equity .........         12,715        13,698         5,306         7,557        14,257
</TABLE>

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

Overview

      Enchira has devoted substantially all of its efforts to research and
development. There have been no revenues from operations other than sponsored
research revenues and one site license fee in 1998 and there is no assurance of
future revenues. Enchira has an accumulated deficit since inception of
approximately $83 million and believes that it can conserve its existing
financial resources to fund operations through 2002. As of March 9, 2001,
Enchira had approximately $13.3 million in cash, cash equivalents and
investments and approximately $1.6 million in liabilities.

      On April 27, 2000, Enchira received notice from Maxygen that they had
elected to seek arbitration under the Collaboration Agreement. Maxygen claims
that Enchira used their confidential information to develop the RACHITT(TM)
technology, which they allege was provided to Enchira under the Collaboration
Agreement. Enchira continues to deny all of Maxygen's allegations and believes
that its technology was independently developed after the collaboration
terminated. The arbitration hearing was held in November 2000.


                                       21
<PAGE>

      On March 6, 2001, Enchira received an unfavorable ruling from the
arbitrator in its arbitration proceeding with Maxygen. The arbitrator's opinion
found that Enchira breached several provisions of the Collaboration Agreement
with Maxygen with respect to Enchira's RACHITT(TM) and HTS technologies, but
remedies for such breaches were not specified in the ruling. The arbitrator
directed that the parties attempt to arrive at an agreement for an appropriate
remedy. If the parties cannot reach an agreement, they will again appear before
the arbitrator who will issue a decision on damages or some other remedy. While
Enchira will work with Maxygen and the arbitrator to reach a conclusion to this
proceeding, it also intends to investigate alternative actions that will permit
Enchira to continue to develop the RACHITT(TM) technology that Enchira continues
to believe is its independent technology. The ultimate resolution of the
arbitrator's ruling could require Enchira to pay costly licensing or royalty
fees or result in an outright prohibition of Enchira's use of such technology.
Please see "Risk Factors--We Have an Arbitration Proceeding with Maxygen
Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable
Ruling" for a more complete discussion.

Results of Operations

      Enchira had sponsored research revenues for the years ended December 31,
1998, 1999 and 2000 of, $688,882, $1,415,177 and $840,552, respectively.
Sponsored research revenues increased by $726,295 from 1998 to 1999 resulting
from an increased funding from a grant from the Department of Energy ("DOE").
From 1999 to 2000 sponsored research revenues decreased by $574,625 reflecting a
decrease in funding from the DOE grant.

      Enchira had research and development expenses for the years ended December
31, 1998, 1999 and 2000 of $7,706,490, $4,847,641 and $4,195,043, respectively.
The decrease from 1998 to 1999 of $2,858,849 is primarily a result of a
reduction in workforce at the end of the first quarter of 1999 and a decrease in
the use of consultants and outside services. The decrease of $652,598 from 1999
to 2000 is primarily a result of a reduction in research and development
personnel.

      Enchira had general and administrative expenses for the years ended
December 31, 1998, 1999 and 2000 of $2,187,668, $1,905,815 and $2,934,150,
respectively. The decrease of $281,853 from 1998 to 1999 resulted from a
decrease in insurance costs, cost of consultants, recruiting expenses and
professional fees. The increase of $1,028,335 from 1999 to 2000 resulted
primarily from increased legal costs associated with the arbitration with
Maxygen and an increase in the use of consultants.

      Interest and investment income decreased by $180,306 in 1999 as a result
of a decrease in cash and cash equivalents and related investments in marketable
securities in the first half of the year. Interest and investment income
increased from 1999 to 2000 by $94,954 as a result of as increase in cash, cash
equivalents and related investments resulting from cash proceeds from issuance
of common stock.

Liquidity and Capital Resources

      Since its inception in December 1989, Enchira has devoted substantially
all of its resources to research and development. To date, all of the Company's
revenues have resulted from interest and investment income and sponsored
research payments from collaborative agreements. Enchira has incurred cumulative
losses since inception and expects to incur continued losses for at least the
next several years, due primarily to continued research and development
activities and acceleration of the development of its directed evolution
technology platform and analytical and high throughput screening capabilities.
Enchira expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. As of December 31, 2000, the Company's
accumulated deficit was approximately $83 million.

      The Company completed a private placement of its common stock during
September 2000. The Company offered and sold 2,000,000 shares of its common
stock at $6.4325 per share. Net proceeds from the offering were approximately
$12.5 million. In connection with the closing, warrants to purchase 600,000
shares of the Company's common stock were issued at an exercise price of $7.44.
In addition, warrants to purchase 31,375 shares of the


                                       22
<PAGE>

Company's stock at an exercise price of $7.44 per share were issued to The Trout
Group, LLC, one of the Company's placement agents, in partial payment of their
placement fees. The warrants expire in two years and have been recorded at an
aggregate estimated fair value of $2,522,094, which was computed using the
Black-Scholes option pricing model and the following assumptions: risk free rate
of 6.19 percent; expected dividend yield of zero; expected life of two years;
and a weighted-average expected volatility at an average weight of 125 percent.

      For the year ended December 31, 2000, Enchira used $4,762,169 of funds in
operating activities. At December 31, 2000, Enchira had cash, cash equivalents
and short-term investments totaling $11,999,870 and working capital of
$11,357,129. Enchira believes that it can conserve its existing financial
resources to fund operations through 2002.

      Enchira expects to incur substantial additional research and development
expenses, including expenses associated with its directed evolution technology
platform and analytical and high throughput screening capabilities. Enchira is
subject to cost sharing arrangements under various collaborative agreements, as
discussed below. Enchira also expects its general and administrative expenses to
increase as it increases its business development efforts and continues to
pursue a satisfactory resolution to the dispute with Maxygen.

      Enchira has experienced negative cash flow from operations since its
inception and has funded its activities to date primarily from equity financings
and sponsored research revenues. Enchira will continue to require substantial
funds to continue its research and development activities and to market, sell
and commercialize its technology. Enchira will need to raise substantial
additional capital to fund its future operations. The Company's capital
requirements will depend on many factors, including the cost of resolving the
arbitration with Maxygen or obtaining a cross license if ultimately
unsuccessful; the problems, delays, expenses and complications frequently
encountered by companies developing and commercializing new technologies; the
progress of the Company's research and development activities; timing of
environmental regulations; the rate of technological advances; determinations as
to the commercial potential of the Company's technology under development; the
status of competitive technology; the establishment of collaborative
relationships; the success of the Company's sales and marketing programs; the
cost of filing, prosecuting and defending and enforcing patents and intellectual
property rights; and other changes in economic, regulatory or competitive
conditions in the Company's planned business. Estimates about adequacy of
funding for the Company's activities are based upon certain assumptions,
including assumptions that the research and development programs relating to the
Company's technology can be conducted at projected costs and that progress
towards the commercialization of its technology will be timely and successful.
There can be no assurance that changes in the Company's research and development
plans, acquisitions or other events will not result in accelerated or unexpected
expenditures.

      To satisfy its capital requirements, Enchira may seek additional financing
through equity financing, government funding and through alliances with
pharmaceutical companies and corporate partners. There can be no assurance that
any such fundings will be available to Enchira on favorable terms or at all. If
adequate funds are not available when needed, Enchira may be required to delay,
scale back or eliminate some or all of its research and product development
programs. If Enchira is successful in obtaining additional financings, the terms
of such financings may have the effect of diluting or adversely affecting the
holdings or the rights of the holders of the Company's common and preferred
stock.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

      None

Item 8. Financial Statements.

      The financial statements required by this Item are incorporated under Item
14 in Part IV of this report.


                                       23
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

      None.


                                       24
<PAGE>

Part III.

Item 10. Directors and Executive Officers of the Registrant.

      The information required by this Item as to the directors and executive
officers of Enchira is hereby incorporated by reference from the information
appearing under the captions "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement which involves the election of
directors and is to be filed with the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of the Company's fiscal year on December 31, 2000.

Item 11. Executive Compensation.

      The information required by this Item as to the management of Enchira is
hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" and "Election of Directors - Director
Compensation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 2000. Notwithstanding the foregoing, in accordance
with the instructions to Item 402 of Regulation S-K, the information contained
in the Company's proxy statement under the sub-heading "Report of the
Compensation Committee of the Board of Directors" and "Performance Graph" shall
not be deemed to be filed as part of or incorporated by reference into this Form
10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The information required by this Item as to the ownership by management
and others of securities of Enchira is hereby incorporated by reference from the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" to the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Commission
pursuant to the Securities Exchange Act of 1934 within 120 days of the end of
the Company's fiscal year on December 31, 2000.

Item 13. Certain Relationships and Related Transactions.

      The information required by this Item as to certain business relationships
and transactions with management and other related parties of Enchira is hereby
incorporated by reference to such information appearing under the captions
"Certain Transactions" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Securities Exchange Act of 1934 within 120 days of the end of the Company's
fiscal year on December 31, 2000.


                                       25
<PAGE>

Part IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

      (a) Documents Filed as a Part of this Report

1.   Financial Statements:

                                                                            Page
                                                                            ----

Report of Independent Public Accountants..............................       F-1

Balance Sheets as of December 31, 1999 and 2000.......................       F-2

Statements of Operations for the Years Ended December 31, 1998, 1999
and 2000..............................................................       F-3

Statements of Stockholders' Equity for the Years Ended December 31,
1998, 1999 and 2000...................................................       F-4

Statements of Cash Flows for the Years Ended December 31, 1998, 1999
and 2000..............................................................       F-5

Notes to Financial Statements.........................................       F-6

      All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.

2. Exhibits:

      Exhibits to the Form 10-K have been included only with the copies of the
Form 10-K filed with the Commission and the Nasdaq Stock Market. Upon request to
EBC and payment of a reasonable fee, copies of the individual exhibits will be
furnished.

Exhibit No.                            Description
-----------                            -----------

  3.1(a)      EBC's Amended and Restated Certificate of Incorporation
              (incorporated by reference to Exhibit 2 to Post Effective
              Amendment No. 1 to EBC's Registration Statement on Form 8-A as
              filed with the Commission on March 15, 1993).

  3.1(b)      Certificate of Amendment to EBC's Amended and Restated Certificate
              of Incorporation (incorporated by reference to Exhibit 3.1 to
              EBC's Current Report on Form 8-K dated June 8, 2000).

 *3.1(c)      EBC's Certificate of Designation of Series One Junior
              Participating Preferred Stock.

  3.1(d)      EBC's Certificate of the Powers, Designation, Preferences and
              Rights of the Series B Convertible Preferred Stock (incorporated
              by reference to Exhibit 3.1(d) to EBC's Annual Report on Form 10-K
              for the year ended December 31, 1997).

  3.2         EBC's Bylaws (incorporated by reference to Exhibit 3 filed with
              Post-Effective Amendment No. 1 to EBC's Registration Statement on
              Form 8-A as filed with the Commission on March 15, 1993).

  4.1         Form of Stock Purchase Agreement, dated as of February 21, 1997,
              by and between EBC and the Purchasers of the Series B Convertible
              Preferred Stock (incorporated by reference to Exhibit 4.2 to EBC's
              Annual Report on Form 10-K for the year ended December 31, 1996
              (the "1996 Form 10-K")).


                                       26
<PAGE>

Exhibit No.                            Description
-----------                            -----------

  4.2         Form of Stock Exchange Agreement, dated as of February 21, 1997,
              by and between EBC and the Exchanging Holders of Series A
              Convertible Preferred Stock (incorporated by reference to Exhibit
              4.3 to the 1996 Form 10-K).

 *4.3         Stockholder Rights Agreement dated as of March 8, 1995 between EBC
              and Computershare Investor Services LLC (as successor in interest
              to Society National Bank and Harris Trust & Savings Bank).

  4.4         First Amendment to Stockholder Rights Agreement dated as of April
              30, 1997 between EBC and Computershare Investor Services LLC (as
              successor in interest to Society National Bank and Harris Trust &
              Savings Bank) (incorporated by reference to Exhibit 4.3 to Post
              Effective Amendment No. 2 to EBC's Registration Statement on Form
              8-A as filed with the Commission on June 23, 2000 (the "2000 8-A
              Amendment")).

  4.5         Second Amendment to Stockholder Rights Agreement dated as of June
              23, 2000 between EBC and Computershare Investor Services LLC (as
              successor in interest to Society National Bank and Harris Trust &
              Savings Bank) (incorporated by reference to Exhibit 4.4 to the
              2000 8-A Amendment).

  4.6         Form of Subscription Agreement for EBC's June 1999 private
              placement (incorporated by reference to Exhibit 4.1 to EBC's
              Current Report on Form 8-K dated June 11, 1999).

 *4.7         Form of Warrant for EBC's June 1999 private placement.

  4.8         Form of Subscription Agreement for EBC's September 2000 private
              placement (incorporated by reference to Exhibit 4.1 to EBC's
              Current Report on Form 8-K dated September 8, 2000 (the "September
              2000 Form 8-K")).

  4.9         Form of Warrant for EBC's September 2000 private placement
              (incorporated by reference to Exhibit 4.2 to the September 2000
              Form 8-K).

  10.1+       License Agreement dated May 17, 2000 between EBC and Genencor
              International Inc. (incorporated by reference to Exhibit 10.1 to
              Amendment No. 1 to EBC's Quarterly Report on Form 10-Q/A for the
              quarter ended June 30, 2000).

  10.2+       Collaboration Agreement dated August 25, 2000 between EBC and
              Genencor International Inc. (incorporated by reference to Exhibit
              10.1 to EBC's Quarterly Report on Form 10-Q for the quarter ended
              September 30, 2000 (the "Third Quarter 2000 Form 10-Q")).

 *10.3+       Sponsored Laboratory Study Agreement dated October 4, 2000 between
              EBC and The University of Texas M.D. Anderson Cancer Center.

 *10.4        Site License Agreement dated March 6, 1998 between EBC and Petro
              Star Inc.

  10.5        Registration Agreement dated April 29, 1991 between EBC and
              Gryphon Ventures II, Limited Partnership (incorporated by
              reference to Exhibit 10.7 to EBC's Registration Statement on Form
              S-1 (No. 33-56718)).

  10.6        Registration Agreement dated January 30, 1992 among EBC, The
              Travelers Indemnity Company and Gryphon Ventures II, Limited
              Partnership (incorporated by reference to Exhibit 10.6 to EBC's
              Registration Statement on Form S-1 (No. 33-56718)).

 *10.7        Lease Agreement dated May 24, 1993 between EBC and Woodlands
              Office Equities -


                                       27
<PAGE>

Exhibit No.                            Description
-----------                            -----------

              '95 Limited (as successor in interest to The Woodlands
              Corporation).

 *10.8        Lease Agreement dated January 24, 1994 between EBC and Woodlands
              Office Equities - '95 Limited (as successor in interest to The
              Woodlands Corporation).

  10.9        Extension, Modification and Ratification of Lease dated March 23,
              1998 between EBC and Woodlands Office Equities - '95 Limited (as
              successor in interest to The Woodlands Corporation) (incorporated
              by reference to Exhibit 10.36 to EBC's Annual Report on Form 10-K
              for the fiscal year ended December 31, 1998 (the "1998 Form
              10-K")).

              Management Contracts and Compensatory Plans

  10.10       EBC 1997 Stock Option Plan, as amended (incorporated by reference
              to Exhibit A to EBC's Definitive Proxy Statement as filed with the
              Commission on April 27, 1999 (the "1999 Proxy Statement")).

  10.11       EBC 1992 Stock Compensation Plan (incorporated by reference to
              Exhibit 10.10 to EBC's Registration Statement on Form S-1 (No.
              33-56718)).

  10.12       EBC Non-Employee Director Option Plan, as amended (incorporated by
              reference to Exhibit B to the 1999 Proxy Statement).

  10.13       Simplified Employee Pension Plan Retirement Plan Adoption
              Agreement (incorporated by reference to Exhibit 10.15 to EBC's
              Registration Statement on Form S-1 (No. 33-56718)).

  10.14       Employment Agreement dated December 4, 1998 between EBC and Peter
              P. Policastro (incorporated by reference to Exhibit 10.35 to the
              1998 Form 10-K).

  10.15       Employment Agreement dated January 31, 1996 between EBC and Daniel
              J. Monticello (incorporated by reference to Exhibit 10.10 to the
              1996 Form 10-K).

  10.16       Employment Agreement dated July 18, 1995 between EBC and Paul G.
              Brown, III (incorporated by reference to Exhibit 10.10 to EBC's
              Registration Statement on Form S-1 (No. 33-96096)).

  10.17       Employment Letter dated August 30, 2000 between EBC and David
              Carpi (incorporated by reference to Exhibit 10.2 to the Third
              Quarter 2000 Form 10-Q).

 *11.1        Computation of earnings per share.

 *23.1        Consent of Arthur Andersen LLP.

----------
*     Filed herewith

+     Portions of this exhibit have been omitted based on a request for
      confidential treatment pursuant to Rule 24b-2 of the Exchange Act. Such
      omitted portions have been filed separately with the Commission.

----------
      (b) Reports on Form 8-K

      None.


                                       28
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EBC has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                    ENCHIRA BIOTECHNOLOGY CORPORATION


                                    By: /s/ Peter P. Policastro
                                       -----------------------------------------
                                           Peter P. Policastro
                                           Chief Executive Officer and President

DATED the 29th day of March 2001.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of EBC and in
the capacities and on the dates indicated:

            Name                          Title                       Date
            ----                          -----                       ----

  /s/ Peter P. Policastro      Chief Executive Officer and       March 29, 2001
---------------------------     President (Principal
    Peter P. Policastro         executive officer)


   /s/ Paul G. Brown III       Chief Financial Officer and       March 29, 2001
---------------------------     Vice President--Finance and
    Paul G. Brown, III          Administration (Principal
                                financial and accounting
                                officer)


   /s/ William E. Nasser       Chairman of the Board             March 29, 2001
---------------------------
     William E. Nasser


 /s/ Daniel J. Monticello      Vice President--Science and       March 29, 2001
---------------------------      Technology and Director
Daniel J. Monticello, Ph.D.


   /s/ R. James Comeaux        Director                          March 29, 2001
---------------------------
     R. James Comeaux


    /s/ Nancy T. Chang         Director                          March 29, 2001
---------------------------
      Nancy T. Chang


  /s/ Thomas E. Messmore       Director                          March 29, 2001
---------------------------
    Thomas E. Messmore


      /s/ Ramon Lopez          Director                          March 29, 2001
---------------------------
        Ramon Lopez


   /s/ G. Anthony Gorry        Director                          March 29, 2001
---------------------------
     G. Anthony Gorry


   /s/ William D. Young        Director                          March 29, 2001
---------------------------
     William D. Young


                                       29
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Enchira Biotechnology Corporation:

      We have audited the accompanying balance sheets of Enchira Biotechnology
Corporation ("the Company") (a Delaware corporation), as of December 31, 1999
and 2000, and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Enchira Biotechnology
Corporation as of December 31, 1999 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States.


ARTHUR ANDERSEN LLP

Houston, Texas
March 9, 2001


                                      F-1
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                        ------------
                                                                                  1999                 2000
                                                                               ------------      ------------
<S>                                                                            <C>               <C>
                         ASSETS
Current assets:
   Cash and cash equivalents .............................................     $  2,510,274      $  7,524,191
   Short term investments ................................................        3,445,199         4,475,679
   Prepaid expenses and other current assets .............................          143,014           900,266
                                                                               ------------      ------------
        Total current assets .............................................        6,098,487        12,900,136
                                                                               ------------      ------------

Long term investments ....................................................               --         1,280,937
Furniture, equipment and leasehold improvements, net .....................          926,684           638,865
Intangible and other assets, net .........................................        1,038,927         1,038,175
                                                                               ------------      ------------
        Total assets .....................................................     $  8,064,098      $ 15,858,113
                                                                               ============      ============

        LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued liabilities ..............................     $    327,150      $    544,836
   Capital lease, short term .............................................               --            12,304
   Deferred revenue ......................................................          180,000           730,000
   Note payable ..........................................................               --           255,867
                                                                               ------------      ------------
        Total current liabilities ........................................          507,150         1,543,007
                                                                               ------------      ------------

Capital lease, long term .................................................               --            57,991

Commitments and contingencies

Stockholders' equity:
   Series B convertible preferred stock $0.01 par value (liquidation value
        $24,077,081; 760,000 shares authorized; 519,400 and 387,700 shares
        issued and outstanding,
        respectively) ....................................................       28,100,250        23,512,474
   Common stock, $0.01 par value (30,000,000 shares
        authorized, 6,572,135 and 9,067,700 shares
        issued and outstanding, respectively) ............................           65,721            90,677
   Additional paid-in capital ............................................       54,470,252        73,626,674
   Accumulated deficit ...................................................      (75,079,275)      (82,972,710)
                                                                               ------------      ------------
        Total stockholders' equity .......................................        7,556,948        14,257,115
                                                                               ------------      ------------
        Total liabilities and stockholders' equity .......................     $  8,064,098      $ 15,858,113
                                                                               ============      ============
</TABLE>

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


                                      F-2
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                                -----------------------
                                                        1998            1999             2000
                                                    -----------      -----------      -----------
<S>                                                 <C>              <C>              <C>
Sponsored research revenues ...................     $   688,882      $ 1,415,177      $   840,552
                                                    -----------      -----------      -----------

Costs and expenses:
   Research and development ...................       7,706,490        4,847,641        4,195,043
   General and administrative .................       2,187,668        1,905,815        2,934,150
                                                    -----------      -----------      -----------

        Total costs and expenses ..............       9,894,158        6,753,456        7,129,193
                                                    -----------      -----------      -----------

Interest and investment income ................         393,764          213,458          308,412
Loss on disposal of fixed assets ..............         (33,855)        (139,641)         (43,311)
                                                    -----------      -----------      -----------
Net loss ......................................     $(8,845,367)     $(5,264,462)     $(6,023,540)
                                                    ===========      ===========      ===========

  Net loss per common share - basic and diluted     $     (5.20)     $     (1.78)     $     (1.10)
                                                    ===========      ===========      ===========

  Shares used in computing net loss per common
     share -- basic and diluted ...............       1,875,414        4,635,930        7,576,121
                                                    ===========      ===========      ===========
</TABLE>

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


                                      F-3
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             Preferred Stock                 Common Stock
                                             ---------------                 ------------
                                        Shares          Amount           Shares         Amount
                                        ------          ------           ------         ------
<S>                                     <C>          <C>                <C>            <C>
Balance at December 31, 1997 .....      702,100      $ 33,853,380       1,750,204      $ 17,502
Exercise of common stock  options            --                --           4,286            43
Warrants issued ..................           --                --              --            --
Dividends on series B preferred
   stock paid in common stock ....           --        (3,144,825)        417,203         4,172
Accretion and dividends on
   series B preferred stock ......           --         3,531,611              --            --
Conversion of series B
   preferred stock to common
   stock .........................       (5,700)         (285,000)          5,615            56
Fractional shares paid in cash at
   one-for-seven reverse split ...           --                --             (54)           (1)
Common stock issued to
   consultant ....................           --                --           1,888            19
Net loss .........................           --                --              --            --
                                       --------      ------------      ----------      --------
Balance at December 31, 1998 .....      696,400        33,955,166       2,179,142        21,791
Accretion and dividends on
   series B preferred stock ......           --         2,995,084              --            --
Conversion of series B
   preferred stock to common
   stock .........................     (177,000)       (8,850,000)        174,379         1,744
Common stock issued to
   consultant ....................           --                --           1,549            16
Issuance of common stock and
   warrants ......................           --                --       4,214,820        42,148
Exercise of common stock
   warrants ......................           --                --           2,245            22
Net loss .........................           --                --              --            --
                                       --------      ------------      ----------      --------
Balance at December 31, 1999 .....      519,400        28,100,250       6,572,135        65,721
Accretion and dividends on
   series B preferred stock ......           --         2,312,556              --            --
Conversion of series B
   preferred stock to common
   stock .........................     (131,700)       (6,585,000)        328,261         3,283
Dividends on series B preferred
   stock paid in common stock ....           --          (199,810)         39,025           390
Dividends on series B preferred
   stock paid in cash ............           --          (115,522)             --            --
Common Stock issued to
   consultant ....................           --                --          12,820           128
Issuance of common stock and
   warrants, net .................           --                --       2,000,000        20,000
Exercise of common stock
   warrants and options ..........           --                --         115,459         1,155
Net loss .........................           --                --              --            --
                                       --------      ------------      ----------      --------
Balance at December 31, 2000 .....      387,700      $ 23,512,474       9,067,700      $ 90,677
                                       ========      ============      ==========      ========

<CAPTION>
                                             Additional
                                               Paid-in         Accumulated
                                               Capital            Deficit            Total
                                               -------            -------            -----
<S>                                          <C>               <C>               <C>
Balance at December 31, 1997 .....           $ 35,031,606      $(55,204,265)     $ 13,698,223
Exercise of common stock  options                  42,557                --            42,600
Warrants issued ..................                404,500                --           404,500
Dividends on series B preferred
   stock paid in common stock ....              3,140,601                --               (52)
Accretion and dividends on
   series B preferred stock ......               (381,648)       (3,149,963)               --
Conversion of series B
   preferred stock to common
   stock .........................                284,944                --                --
Fractional shares paid in cash at
   one-for-seven reverse split ...                   (195)               --              (196)
Common stock issued to
   consultant ....................                  6,732                --             6,751
Net loss .........................                     --        (8,845,367)       (8,845,367)
                                             ------------      ------------      ------------
Balance at December 31, 1998 .....             38,529,097       (67,199,595)        5,306,459
Accretion and dividends on
   series B preferred stock ......               (379,866)       (2,615,218)               --
Conversion of series B
   preferred stock to common
   stock .........................              8,848,256                --                --
Common stock issued to
   consultant ....................                  5,984                --             6,000
Issuance of common stock and
   warrants ......................              7,461,415                --         7,503,563
Exercise of common stock
   warrants ......................                  5,366                --             5,388
Net loss .........................                     --        (5,264,462)       (5,264,462)
                                             ------------      ------------      ------------
Balance at December 31, 1999 .....             54,470,252       (75,079,275)        7,556,948
Accretion and dividends on
   series B preferred stock ......               (442,661)       (1,869,895)               --
Conversion of series B
   preferred stock to common
   stock .........................              6,581,697                --               (20)
Dividends on series B preferred
   stock paid in common stock ....                199,420                --                --
Dividends on series B preferred
   stock paid in cash ............                     --                --          (115,522)
Common Stock issued to
   consultant ....................                 84,872                --            85,000
Issuance of common stock and
   warrants, net .................             12,425,853                --        12,445,853
Exercise of common stock
   warrants and options ..........                307,241                --           308,396
Net loss .........................                     --        (6,023,540)       (6,023,540)
                                             ------------      ------------      ------------
Balance at December 31, 2000 .....           $ 73,626,674      $(82,972,710)     $ 14,257,115
                                             ============      ============      ============
</TABLE>

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


                                      F-4
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                              ----------------------------------------------
                                                                  1998             1999             2000
                                                              -----------      -----------      ------------
<S>                                                           <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                  $(8,845,367)     $(5,264,462)     $ (6,023,540)
    Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                             1,243,100        1,015,754           750,351
      Issuance of common stock for services                         6,751            6,000            85,000
      Research and development expense recorded for
          warrant issuance                                        404,500               --                --
      Net loss on disposal of fixed assets                         33,855          139,641            43,311
    Changes in assets and liabilities:
      Decrease (increase) in prepaid expenses and other
          assets                                                  501,385          369,472          (384,977)
      Increase (decrease) in accounts payable and accrued
          liabilities                                            (351,001)        (186,523)          217,686
      Increase in deferred revenue                                     --               --           550,000
                                                              -----------      -----------      ------------

         Net cash used in operating activities                 (7,006,777)      (3,920,118)       (4,762,169)
                                                              -----------      -----------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                         (208,691)        (152,157)         (134,595)
    Patent expenditures                                          (290,496)        (164,282)         (285,407)
    Sale of fixed assets                                               --           14,263                --
    Sale (purchase) of investments held to maturity               693,279       (3,445,199)       (2,311,417)
                                                              -----------      -----------      ------------
      Net cash provided by (used in) investing activities         194,092       (3,747,375)       (2,731,419)
                                                              -----------      -----------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on note payable                                      (91,993)        (126,613)         (118,087)
    Payments on capital lease obligations                          (3,556)              --           (13,135)
    Proceeds from exercise of stock options and warrants           42,353            5,388           308,396
    Dividends paid                                                     --               --          (115,522)
    Issuance of common stock                                           --        7,503,563        12,445,853
                                                              -----------      -----------      ------------

      Net cash provided by (used in) financing activities         (53,196)       7,382,338        12,507,505
                                                              -----------      -----------      ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           (6,865,881)        (285,155)        5,013,917
                                                              -----------      -----------      ------------

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                  9,661,310        2,795,429         2,510,274
                                                              -----------      -----------      ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                      $ 2,795,429      $ 2,510,274      $  7,524,191
                                                              ===========      ===========      ============

Supplemental information of noncash financing
    activities:
    Note payable issued for prepaid insurance                 $   126,613      $        --      $    255,867
                                                              ===========      ===========      ============
</TABLE>

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


                                      F-5
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 2000

1.    Description of the Company

      Enchira Biotechnology Corporation ("Enchira" or the "Company"), formerly
Energy BioSystems Corporation, was incorporated in the State of Delaware on
December 20, 1989, and commenced operations in January 1990. EBC is a
biotechnology company incorporating genetic recombination, high throughput
screening and bioprocessing in an integrated, directed evolution technology
platform. The Company believes that its proprietary platform technology can be
used to generate libraries of novel genes for the creation of improved enzymes
for a broad range of applications, such as protein-based pharmaceuticals,
agricultural crop enhancement and protection products, and industrial enzymes
for the manufacture of specialty chemicals, fine chemicals and pharmaceutical
intermediates.

      On April 27, 2000, Enchira received notice from Maxygen Inc. ("Maxygen")
that they had elected to seek arbitration under the Collaboration Agreement
between Enchira and Maxygen. Maxygen claims that Enchira used their confidential
information to develop the RACHITT(TM) technology, which they allege was
provided to Enchira under the Collaboration Agreement. Enchira continues to deny
all of Maxygen's allegations and believes that its technology was independently
developed after the collaboration terminated. The arbitration was held in
November 2000.

      On March 6, 2001, Enchira received an unfavorable ruling from the
arbitrator in its arbitration proceeding with Maxygen. The arbitrator's opinion
found that Enchira breached several provisions of the Collaboration Agreement
with Maxygen with respect to Enchira's RACHITT(TM) and HTS technologies, but
remedies for such breaches were not specified in the ruling. The arbitrator
directed that the parties attempt to arrive at an agreement for an appropriate
remedy. If the parties cannot reach an agreement, they will again appear before
the arbitrator who will issue a decision on damages or some other remedy. While
Enchira will work with Maxygen and the arbitrator to reach a conclusion to this
proceeding, it also intends to investigate alternative actions that will permit
Enchira to continue to develop the RACHITT(TM) technology that Enchira continues
to believe is its independent technology. The ultimate resolution of the
arbitrator's ruling could require Enchira to pay costly licensing or royalty
fees or result in an outright prohibition of Enchira's use of such technology.

      Enchira has devoted substantially all of its efforts to research and
development. There have been no revenues from operations other than sponsored
research revenues and one site license fee in 1998 and there is no assurance of
future revenues. During 2000, Enchira used $4,762,169 in cash for operating
activities. As of December 31, 2000, Enchira had $11,999,870 in cash, cash
equivalents and short-term investments and $1,600,998 in liabilities. Enchira
has an accumulated deficit since inception of approximately $83 million and
expects that its existing financial resources, exclusive of any financial
settlement that may be a remedy in the Maxygen arbitration case, will fund
operations through 2002. Enchira may seek additional financing through various
alternatives that include: an equity financing, government funding and alliances
with pharmaceutical companies and corporate partners. Adequate funds for these
purposes, whether obtained through financial markets or collaborative or other
arrangements with corporate partners or from other resources, may not be
available when needed or on terms acceptable to Enchira. Enchira's inability to
raise funds when needed may require Enchira to delay, scale back or eliminate
some or all of its research and product development programs. Enchira shall also
have increased expenses as a result of its ongoing arbitration with Maxygen.
These expenses and any fees associated with any license, cross licenses or other
remedies that Enchira may be required to enter into with Maxygen may
significantly deplete our existing capital and cause Enchira to seek additional
capital, which may not be available on favorable terms, if at all.


                                      F-6
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

2.    Accounting Policies

      Cash, Cash Equivalents and Short-Term Investments

      Enchira considers short-term investments with original maturities of 90
days or less to be cash equivalents. Debt and equity securities that Enchira has
the intent and ability to hold to maturity are classified as "held to maturity"
and reported at amortized cost, which approximates fair value.

      At December 31, 1999 and 2000, Enchira held cash and cash equivalents in
excess of the federally insured amounts.

      Furniture, Equipment and Leasehold Improvements

      Furniture and equipment consists of office furniture and equipment,
computers and laboratory equipment and are carried at cost, which approximates
fair value. Depreciation is calculated on the straight-line method using a
five-year estimated useful life. Leasehold improvements are amortized on the
straight-line method over the term of the lease or over the useful life of the
assets whichever is shorter.

      Maintenance and repairs that do not improve or extend the life of assets
and expenditures for research and development equipment for which there is no
future alternative use are expensed as incurred. Expenditures that improve or
extend the life of assets are capitalized.

      Intangible and Other Assets

      Intangible and other assets mainly consist of patent costs, which are
primarily legal fees. These costs are being amortized over 20 years. Accumulated
amortization at December 31, 1999 and 2000 amounted to $684,997 and $973,135,
respectively.

      Note Payable

      Enchira has recorded a note payable in the accompanying balance sheet for
insurance premiums financed pursuant to a promissory note as of December 31,
2000. The note has an outstanding balance of $255,867 at December 31, 2000,
matures in 9 months and is subject to interest at 7.55 percent.

      Revenue Recognition

      The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), as
its method of accounting for revenue recognition. Revenue from non-refundable
sponsored research and development payments is recognized as services are
performed, provided a contractual arrangement exists, the contract price is
fixed or determinable, and the collection of the resulting receivable is
probable. Sponsored research and development and licensing payments received
that are refundable or for which service obligations remain are reflected as
deferred revenue.

      Research and Development

      All research and development costs, both generated internally and from
research and development contracts, are expensed as incurred. Enchira allocates
certain indirect costs to research and development expenses, which consist
primarily of overhead related to the administration of research and development
activities.


                                      F-7
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

      Net Loss Per Common Share

      Net loss per common share has been computed by dividing the net loss,
which has been increased for periodic accretion and accrued dividends on the
Series B Convertible Preferred Stock by the weighted average number of shares of
common stock outstanding during the periods. In all applicable years, common
stock equivalents were anti-dilutive and, accordingly, were not included in the
computation.

      Use of Estimates

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses and the disclosure of contingent assets and liabilities during the
reporting period. Enchira has not recorded any impairment of capitalized
intangibles related to patents on its technologies. Actual results could differ
from those estimates.

      3. Furniture, Equipment and Leasehold Improvements

      A summary of furniture, equipment and leasehold improvements is as
follows:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                           ------------
                                                                      1999              2000
                                                                   -----------      -----------
      <S>                                                          <C>              <C>
      Office furniture and equipment ..........................    $   344,537      $   344,537
      Laboratory equipment ....................................      3,846,187        3,929,569
      Computer equipment ......................................        640,887          238,445
      Leasehold improvements ..................................      1,734,011        1,734,011
      Equipment under capital lease ...........................             --           83,410
      Automobiles .............................................         23,670           23,670
                                                                   -----------      -----------
                                                                     6,589,292        6,353,642
      Less--Accumulated depreciation and amortization .........     (5,662,608)      (5,714,777)
                                                                   -----------      -----------
                                                                   $   926,684      $   638,865
                                                                   ===========      ===========
</TABLE>

4.    Stockholders' Equity

      In December 1998, Enchira declared a one-for-seven reverse stock split,
which was effective December 18, 1998. All references to earnings per share,
number of shares and share amounts prior to December 18, 1998 have been
retroactively restated to reflect the reverse stock split for all periods
presented.

      Series B Convertible Preferred Stock

      Shares of Series B Preferred Stock are convertible into shares of common
stock at an adjusted conversion price currently equal to $16.76 per share,
subject to certain adjustments. The Series B Preferred Stock may be redeemed by
the Company under certain circumstances after February 26, 1999 and is required
to be redeemed, subject to certain limitations, on February 26, 2002 at a
redemption price of $50.00 per share, plus accrued and unpaid dividends. The
redemption price is payable in cash or common stock at the option of the
Company. It is the Company's present intent, however, to redeem the Series B
Preferred Stock for common stock, subject to certain requirements. Accordingly,
the Series B Preferred Stock is included in stockholders' equity. During the
year ended December 31, 2000, 131,700 shares of Series B Preferred Stock were
converted to 328,261 shares of common stock. As of December 31, 2000, 314,400
aggregate shares of Series B Preferred Stock have been converted to 508,255
shares of common stock. The remaining 387,700 shares of Series B Preferred Stock
are convertible into 1,156,622 shares of common stock.


                                      F-8
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

            Dividends on the Series B Preferred Stock are cumulative from the
date of the initial closing, February 27, 1997, and are payable, at the
Company's election, in cash or common stock of the Company, or a combination
thereof, at an annual rate equal to (i) $4.00 per share to the extent the
dividend is paid in cash and (ii) $4.50 per share to the extent the dividend is
paid in common stock. The Company has not declared a dividend payment since
November 1998, and since that date, has not paid dividends on Series B Preferred
Stock except on conversion of Series B Preferred Stock to common stock. As of
December 31, 2000, Enchira has paid common stock dividends of 509,451 shares of
common stock and cash dividends of $115,522 on Series B Preferred Stock.

            Common Stock

            The Company completed a private placement of its common stock during
September 2000. The Company offered and sold 2,000,000 shares of its common
stock at $6.4325 per share. Net proceeds from the offering were approximately
$12.5 million. In connection with the closing, warrants to purchase 600,000
shares of the Company's common stock were issued at an exercise price of $7.44.
In addition, warrants to purchase 31,375 shares of the Company's common stock at
an exercise price of $7.44 per share were issued to The Trout Group, LLC, one of
the Company's placement agents, in partial payment of their placement fees. The
warrants expire in two years and have been recorded at an aggregate estimated
fair value of $2,522,094, which was computed using the Black-Scholes option
pricing model and the following assumptions: risk free rate of 6.19 percent;
expected dividend yield of zero; expected life of two years; and a
weighted-average expected volatility at an average weight of 125 percent.

      During March 1998, Enchira issued a warrant in connection with a license
agreement (see Note 7). The warrant entitles the purchaser to purchase 28,571
shares of common stock at an exercise price of $21.77 per share over a four-year
term.

      In March 1995, Enchira adopted a Stockholder Rights Plan (the "Rights
Plan") in which Preferred Stock Purchase Rights (the "Rights") were distributed
for each share of common stock held as of the close of business on March 27,
1995 and are distributed to each share of common stock issued thereafter until
the earlier of (i) the Distribution Date (as defined in the Rights Plan), (ii)
the date Rights are redeemed or (iii) March 8, 2005. The Rights Plan is designed
to deter coercive takeover tactics and to prevent an acquirer from gaining
control of Enchira without offering a fair price to all of Enchira's
stockholders. The Rights Plan was amended in June 2000. The Rights will expire
on March 8, 2005.

      Each Right entitles stockholders to buy one-hundredth of a share of a new
series of Junior Preferred Stock of Enchira at an exercise price of $50.00 per
one-hundredth of a share. The Rights are exercisable only if a person acquires
beneficial ownership of 20percent or more of Enchira's outstanding common stock.
The Rights Plan grandfathers certain stockholders who beneficially owned more
than 20percent of the outstanding shares of Enchira's common stock on the
effective date of the Rights Plan from triggering the exercisability of the
Rights. The amendment excludes persons who are registered investment companies
or advisers from triggering the exercisability of the Rights.

      In 1999 and 2000, the Company paid consultants 1,549 and 12,820 shares of
common stock, respectively, at a fair market value on the date of issuance
between $3.00 and $4.38 per share in 1999 and between $5.56 and $12.32 per share
in 2000.

5.    Stock Options

      In January 1997, Enchira's Board of Directors adopted the 1997 Stock
Option Plan (the "1997 Plan"). Under the 1997 Plan, Enchira may issue options
for and sell up to 14,285 shares of Common Stock to employees and consultants of
Enchira. The options granted under this plan may not have an exercise price per
share less than the fair market value on the date of grant and are limited to a
term not to exceed ten years. In May 1999, the 1997 Plan was amended to increase
the number of shares available for grant to 1,200,000.


                                      F-9
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

      Enchira maintains a Stock Compensation Plan (the "1992 Plan"), which is
composed of non-qualified stock options, incentive stock options, year-end stock
bonuses and restricted and non-restricted stock grants. Under the 1992 Plan,
290,147 shares of common stock are reserved for issuance upon the exercise of
stock options.

      Under a 1994 Non-Employee Director Option Plan, composed of non-qualified
stock options, 25,000 shares of common stock are reserved for issuance upon the
exercise of stock options. In May 1999, the Non-Employee Director Option Plan
was amended to increase the number of shares available for grant to 200,000.

      At December 31, 2000, options to purchase 705,383 shares of common
stock were outstanding pursuant to the 1992 and 1997 Plans. Additionally, as
of December 31, 2000 consultants and directors had outstanding options to
purchase 226,860 shares of common stock that were not issued under the 1992
or 1997 Plans (35,617 options were not issued under any plan). Options
generally vest over a three-year period and upon the earlier of the
completion of the specified performance milestones, or over a four-year
period, or nine years and ten months from the date of grant. The options
expire ten years from the date of grant. The following table summarizes
information about fixed-price stock options outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                        Options Outstanding                              Options Exercisable
----------------------------------------------------------------    ----------------------------
                                     Weighted
                                     Average
                                    Remaining
                                   Contractual       Weighted                       Weighted
    Range of        Outstanding        Life          Average        Exercisable      Average
Exercise Prices       Shares        (In Years)    Exercise Price      Shares      Exercise Price
---------------       ------        ----------    --------------      ------      --------------
<S>                   <C>              <C>             <C>            <C>                 <C>
$2.06 - $7.25         814,323          8.0             $ 3.60         338,651             $ 3.52
$9.63 - $35.88         70,707          6.5             $25.21          36,592             $24.96
$40.25 - $84.00        47,213          4.0             $58.97          30,470             $59.22
</TABLE>

      A summary of the status of Enchira's stock options at December 31, 1998,
1999 and 2000, and changes during the years then ended is presented in the table
and narrative below:

<TABLE>
<CAPTION>
                                                     1992 and 1997 Plans            Options not issued under Plan
                                                     -------------------            -----------------------------
                                                  Number      Weighted Average      Number          Weighted Average
                                                of Options     Exercise Price     of Options         Exercise Price
                                                ----------    ----------------    ----------        ---------------
<S>                                              <C>               <C>              <C>                  <C>
Balance at December 31, 1997                      231,029           35.84           35,617                26.11
    Granted ............................           49,956           18.52               --                   --
    Exercised ..........................           (4,286)           9.94               --                   --
    Forfeited ..........................         (110,118)          35.99               --                   --
                                                 --------                           ------
Balance at December 31, 1998                      166,581           31.21           35,617                26.11
    Granted ............................          453,200            2.11               --                   --
    Exercised ..........................               --              --               --                   --
    Forfeited ..........................          (51,384)          36.05               --                   --
                                                 --------                           ------
Balance at December 31, 1999                      568,397            7.80           35,617                26.11
    Granted ............................          176,200            6.01               --                   --
    Exercised ..........................          (13,813)           4.67               --                   --
    Forfeited ..........................          (25,401)           9.22               --                   --
                                                 --------                           ------
Balance at December 31, 2000                      705,383            7.20           35,617                26.11
                                                 ========                           ======

Exercisable at December 31, 1998                   97,158          $27.86           35,617               $26.11
Exercisable at December 31, 1999                  120,977          $19.04           35,617               $26.11
Exercisable at December 31, 2000                  204,567          $11.66           35,617               $26.11
</TABLE>


                                      F-10
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

      The weighted average fair value of the options issued under the 1992 and
1997 Plans for the years ended December 31, 1998, 1999 and 2000 was $9.09, $1.92
and $5.72, respectively.

      During the years ended December 31, 1998, 1999 and 2000, Enchira granted
17,714, 83,100 and 88,000 options respectively, under the Non-Employee Director
Option Plan. These options are fully vested upon issuance. The weighted average
exercise price per share on these grants was $13.15, $2.29 and $6.66,
respectively. As of December 31, 1998, 1999 and 2000, Enchira had 67,045,
150,128 and 191,243 options exercisable, respectively, under this plan with a
weighted-average exercise price of $26.26, $12.99 and $7.86, respectively. The
weighted average fair market value of the options issued under this plan during
the years ended December 31, 1998, 1999 and 2000 was $7.13, $1.89 and $6.38,
respectively.

      Enchira accounts for its stock options under APB Opinion No. 25. Enchira
records deferred compensation for the difference between the exercise price and
the fair market value on the measurement date. During 1998, 1999 and 2000,
Enchira issued all options at fair market value and no compensation cost has
been recognized. Had compensation cost for these options been determined
consistent with SFAS. 123, Enchira's net loss and loss per share would have been
increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                             1998                1999                2000
                                                             ----                ----                ----
          <S>                                          <C>                 <C>                <C>
           Net Loss:                   As Reported     $   (8,845,367)     $   (5,264,462)    $   (6,023,540)
                                                       --------------      --------------     --------------
                                       Pro Forma          (10,183,481)         (8,562,311)        (9,106,624)
                                                       --------------      --------------     --------------

           Net Loss Per Common Share:  As Reported     $        (5.20)     $        (1.78)    $        (1.10)
                                                       --------------      --------------     --------------
                                       Pro Forma                (5.43)              (1.85)             (1.20)
                                                       --------------      --------------     --------------
</TABLE>

      Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that expected in future years.

      The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1998, 1999 and 2000,
respectively: risk-free interest rates of 5.8, 6.4 and 6.1 percent for all the
Plans; expected dividend yields of zero for all the Plans; expected lives of
nine years and ten months for all options; and expected volatility of 71.4,
100.8 and 112.7 percent for all the Plans.

6.    Federal Income Taxes

      Enchira has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 2000, Enchira had
accumulated net operating losses ("NOL") and research and development tax credit
carryforwards for income tax purposes of approximately $69.1 million and $1.8
million, respectively. These carryforwards begin to expire in 2005. The Tax
Reform Act of 1986 provided for an annual limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that limit Enchira's
ability to utilize these carryforwards. In April 1991, October 1994 and July
2000, Enchira underwent a "more than 50 percent change in ownership" as defined
by Internal Revenue Code Section 382. Additionally, because U.S. tax laws limit
the time during which NOL and tax credit carry forwards may be applied against
future taxable income and tax liabilities, Enchira may not be able to take full
advantage of its NOL and tax credits for federal income tax purposes.


                                      F-11
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

      Significant components of Enchira's net deferred tax asset at December 31,
1999 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                   1999              2000
                                                               ------------      ------------
<S>                                                            <C>               <C>
Deferred tax assets relating to:
Federal net operating loss carryforwards .................     $ 21,402,906      $ 23,512,630
Research and development credit carryforwards ............        1,707,190         1,815,159
Capital and Texas business loss carryforwards ............          950,282         1,107,717
Book/tax differences on depreciable, amortizable and other
      assets and accrued liabilities .....................          175,573            (3,296)
Deferred revenue and unrealized gains ....................           61,200           248,200

Deferred tax valuation allowance .........................      (24,297,151)      (26,680,410)
                                                               ------------      ------------
Net deferred tax asset ...................................     $         --      $         --
                                                               ============      ============
</TABLE>

      Beginning January 1, 1993, Enchira adopted SFAS 109, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns. Since Enchira has incurred losses since inception and there is no
assurance of future taxable income, a valuation allowance has been established
to fully offset the deferred tax assets. Enchira's effective income tax rate
differs from the statutory federal income tax rate because of the increase in
the deferred tax valuation allowance.

7.    License and Research Agreements

      To finance its research and development budgets, Enchira intends to seek
additional collaborative research and development agreements with corporate
partners.

      In August 2000, the Company entered into a collaboration agreement with
Genencor International, Inc. ("Genencor") for research and development work on
improved industrial proteins. Under the agreement, Genencor will provide $1
million of funding over the next two years. In May 2000, the Company entered
into a licensing agreement with Genencor involving Enchira's proprietary gene
shuffling technology for directed evolution. Under the agreement, Genencor will
use the Company's proprietary RACHITT(TM) technology to develop gene-based
products for the cleaning, textiles, grain processing, animal feed and food
ingredients industries. Genencor paid an initial licensing fee and an additional
fee for an option to expand the licensing field in June 2000. In the event that
Genencor's rights to the RACHITT(TM) technology are materially and adversely
affected as a result of the arbitration with Maxygen, the payments received from
Genencor are refundable. Payments received under the licensing and collaboration
agreements during 2000 have been recorded as deferred revenue on the balance
sheet

      In October 2000, the Company established a joint collaboration with The
University of Texas M. D. Anderson Cancer Center to apply its directed evolution
technologies to the development of more effective cancer therapies targeted
toward epidermal growth factor receptors. In this collaboration, Enchira will
provide directed evolution and robotic screening research and has retained
rights to developments that come out of the relationship. The agreement may be
terminated by either party with 30 days advanced written notice.

      In March 1998, Enchira entered into a site license agreement with Petro
Star Inc. ("Petro Star") regarding the design and installation of a BDS unit at
Petro Star's Valdez, Alaska refinery. The agreement involves several stages of
work, the first of which, involving the completion of scoping economics, is
completed. In addition, the agreement provides Enchira with certain rights to
conduct development work and demonstrations of its BDS technology at Petro
Star's refinery. The agreement calls for the payment of staged license fees and
royalties to Enchira, including a $200,000 initial site license fee upon
execution of the agreement. As is customary in such arrangements in the
petroleum refining industry, the agreement provides certain approval and
termination rights to Petro Star at the completion of each stage prior to
commercialization. In connection with the execution of the agreement, Enchira
issued a four-year warrant entitling Petro Star to purchase 28,571 shares of
Enchira Common Stock at an exercise


                                      F-12
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

price of $21.77 per share. The warrant was recorded as research and development
expense at an estimated fair value of $404,500, which was computed using the
Black-Scholes option-pricing model. The successful implementation of a
commercial BDS unit will be dependent upon Enchira's ability to achieve
additional improvements in the productivity of the biocatalyst (e.g., reaction
rates, specificity and stability) and process technology (e.g., bioreactor and
separations technology). In September 2000, Enchira notified Petro Star that it
will not continue to pursue development of BDS technology at the Petro Star
refinery. The parties are in discussions concerning a licensing arrangement and
termination of the relationship.

      In August 1997, Enchira was awarded funding by the U.S. Department of
Energy ("DOE") for a $2.9 million, as amended and extended to May 2001, program
dedicated to the development of a BDS application for gasoline. Through December
31, 2000, Enchira had recognized $2,604,380 in sponsored research revenue from
the grant. Enchira continues to pursue the development of this technology and
expects to receive the remaining grant funds in 2001.

      In December 1994, Enchira was awarded a $2 million federal grant under the
Advanced Technology Programs administered by the National Institute of Standards
and Technology ("NIST"). The three-year program funded by this grant was
dedicated to the development of a biotechnology-based method of removing sulfur
from crude oil. During 1998, the final year of the program, Enchira recognized
$34,000 in sponsored research revenue relating to this grant.

8.    Commitments and Contingencies

      Enchira is currently pursuing remedies for the arbitration ruling
relating to its arbitration with Maxygen. Additionally, Enchira is subject to
other legal proceedings and claims, which arise in the ordinary course of its
business. Management believes, based on discussions with its legal counsel,
that the outcome of these other legal actions and claims will not have a
material adverse effect upon the financial position and results of operations
of Enchira.

      Enchira maintains a Simplified Employee Pension Plan (the "Plan") for all
employees. Under the terms of the Plan, employees are eligible to participate
after completion of six months of service. Enchira contributes an amount equal
to 8percent of the employees' annual compensation to the Plan. Employees are
vested immediately and there is presently no employee contribution. Total
expenses under the Plan were approximately $284,000, $195,000 and $159,000 for
the years ended December 31, 1998, 1999 and 2000, respectively.

      Enchira has recorded a capital in the accompanying balance sheet for
laboratory equipment financed pursuant to a promissory note as of January 1,
1999. The note has an outstanding balance of $70,295 at December 31, 2000,
matures in 4 years and is subject to interest at 10.38 percent.

      Future minimum payments under a non-cancelable operating lease consist of
the following at December 31, 2000:

<TABLE>
<CAPTION>

                 Fiscal Year

<S>                                                        <C>
                 2001..................................    $  409,617
                 2002..................................       436,998
                 2003..................................       364,165
                                                           ----------

                       Total minimum lease payments....    $1,210,780
                                                           ==========
</TABLE>


                                      F-13
<PAGE>

                        ENCHIRA BIOTECHNOLOGY CORPORATION
                    Notes to Financial Statements (Continued)

      Enchira incurred rent expense of $399,724, $382,829 and $308,056 during
1998, 1999 and 2000, respectively. Rent expense in 2000 is net of sublease
income of approximately $84,000.

9.    Quarterly Information (Unaudited)

<TABLE>
<CAPTION>
                                                                  Fiscal Year Quarters
                                                                  --------------------
                                       First           Second            Third           Fourth           Total
                                       -----           ------            -----           ------           -----
<S>                                 <C>              <C>              <C>              <C>              <C>
Year ended December 31, 2000
Revenues ......................     $   287,697      $    70,468      $   135,157      $   347,230      $   840,552
Costs and expenses ............       1,478,051        1,522,741        1,780,661        2,347,740        7,129,193
                                    -----------      -----------      -----------      -----------      -----------

Net loss ......................     $(1,119,378)     $(1,397,810)     $(1,577,064)     $(1,929,288)     $(6,023,540)
                                    ===========      ===========      ===========      ===========      ===========

Loss per common share --
    Basic and diluted .........     $     (0.27)     $     (0.28)     $     (0.28)     $     (0.27)     $     (1.10)
                                    ===========      ===========      ===========      ===========      ===========
Year ended December 31, 1999
Revenues ......................     $   510,873      $   514,063      $   390,241      $        --      $ 1,415,177
Costs and expenses ............       2,148,424        1,533,277        1,437,294        1,634,461        6,753,456
                                    -----------      -----------      -----------      -----------      -----------

Net loss ......................     $(1,616,405)     $  (999,017)     $  (957,216)     $(1,691,824)     $(5,264,462)
                                    ===========      ===========      ===========      ===========      ===========

Loss per common share --
    Basic and diluted .........     $     (1.15)     $     (0.56)     $     (0.25)     $     (0.36)     $     (1.78)
                                    ===========      ===========      ===========      ===========      ===========
</TABLE>


                                      F-14