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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008

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 number 000-29173





VERENIUM CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-3297375                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|55 Cambridge Parkway, Cambridge, MA                            |  | 02142                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(617) 674-5300

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See
definitions of large accelerated filer, and large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                                            |  |                             
|-------------------------- |  | -------------------- |  | ------------------------------------------ |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈                   |  | Smaller reporting company   ̈
|                           |  |                      |  | (do not check if smallerreporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

The number of shares of the registrants Common Stock outstanding as of November 3, 2008 was 67,483,852.









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VERENIUM CORPORATION

INDEX



|                               |  |                                                                                       |  |         
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --------
|                               |  |                                                                                       |  | Page No.
|PART I  FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Condensed Consolidated Financial Statements:                                          |  |         
|                               |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|                               |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|                               |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|                               |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 25      
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 44      
|Item 4.                        |  | Controls and Procedures                                                               |  | 44      
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 46      
|Item 1A.                       |  | Risk Factors                                                                          |  | 46      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 70      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 70      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 70      
|Item 5.                        |  | Other Information                                                                     |  | 70      
|Item 6.                        |  | Exhibits                                                                              |  | 70      
|                               | 
|SIGNATURES                     |  | 74                                                                                   



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VERENIUM CORPORATION

PART IFINANCIAL INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
|------- | --------------------------------------------

VERENIUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                       |  | September 30,2008 |          |   | December 31,2007 |  
|                                                                                                                                                                                                       |  | (Unaudited)       |          |   | (Note)           |  
|ASSETS                                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                              |  | $                 | 19,011   |   |                  | $ | 48,743   |  
|Short-term investments                                                                                                                                                                                 |  |                   | 3,082    |   |                  |   | 9,234    |  
|Accounts receivable (net of allowance of $1,000 and $74 at September 30, 2008 and December 31, 2007, and including $2,000 and $2,218 from a
related party at September 30, 2008 and December 31, 2007) |  |                   | 11,645   |   |                  |   | 11,118   |  
|Inventories, net                                                                                                                                                                                       |  |                   | 2,314    |   |                  |   | 5,904    |  
|Prepaid expenses and other current assets                                                                                                                                                              |  |                   | 4,043    |   |                  |   | 1,408    |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                   |  |                   | 40,095   |   |                  |   | 76,407   |  
|Restricted cash                                                                                                                                                                                        |  |                   | 10,040   |   |                  |   |         |  
|Property, plant and equipment, net                                                                                                                                                                     |  |                   | 114,936  |   |                  |   | 76,663   |  
|Goodwill                                                                                                                                                                                               |  |                   |         |   |                  |   | 106,134  |  
|Derivative asset  convertible hedge transaction, net                                                                                                                                                  |  |                   | 237      |   |                  |   |         |  
|Other assets                                                                                                                                                                                           |  |                   | 7,115    |   |                  |   | 5,575    |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                           |  | $                 | 172,423  |   |                  | $ | 264,779  |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                   |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                       |  | $                 | 10,062   |   |                  | $ | 16,412   |  
|Accrued expenses                                                                                                                                                                                       |  |                   | 15,390   |   |                  |   | 14,812   |  
|Deferred revenue (including $3,626 and $4,142 from a related party at September 30, 2008 and December 31, 2007)                                                                                        |  |                   | 5,425    |   |                  |   | 5,478    |  
|Accrued interest on convertible senior notes                                                                                                                                                           |  |                   | 3,999    |   |                  |   | 1,649    |  
|Derivative liability  warrants                                                                                                                                                                        |  |                   | 496      |   |                  |   |         |  
|Convertible senior notes conversion rights, current portion                                                                                                                                            |  |                   | 10,005   |   |                  |   |         |  
|Equipment loans payable, current portion                                                                                                                                                               |  |                   | 1,521    |   |                  |   | 2,712    |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                              |  |                   | 46,898   |   |                  |   | 41,063   |  
|Convertible senior notes, at carrying value, net of discounts (face amount of $160.6 million and $120 million at September 30, 2008 and
December 31, 2007 )                                            |  |                   | 128,964  |   |                  |   | 120,000  |  
|Equipment loans payable, less current portion                                                                                                                                                          |  |                   | 216      |   |                  |   | 1,160    |  
|Restructuring reserve, less current portion                                                                                                                                                            |  |                   | 4,883    |   |                  |   | 5,496    |  
|Other long term liabilities                                                                                                                                                                            |  |                   | 1,027    |   |                  |   | 1,845    |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                                      |  |                   | 181,988  |   |                  |   | 169,564  |  
|Noncontrolling interest in Galaxy Biofuels LLC                                                                                                                                                         |  |                   | 19,500   |   |                  |   |         |  
|Stockholders (deficit) equity:                                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Preferred stock$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at September 30, 2008 and
December 31, 2007                                                                |  |                   |         |   |                  |   |         |  
|Common stock$0.001 par value; 250,000 and 170,000 shares authorized, 67,384 and 63,092 shares issued and outstanding, at
September 30, 2008 and December 31, 2007                                     |  |                   | 67       |   |                  |   | 63       |  
|Additional paid-in capital                                                                                                                                                                             |  |                   | 580,922  |   |                  |   | 532,173  |  
|Accumulated deficit                                                                                                                                                                                    |  |                   | (610,044 | ) |                  |   | (437,071 | )
|Accumulated other comprehensive (loss) gain                                                                                                                                                            |  |                   | (10      | ) |                  |   | 50       |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Total stockholders (deficit) equity                                                                                                                                                                   |  |                   | (29,065  | ) |                  |   | 95,215   |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Total liabilities, noncontrolling interest and stockholders (deficit) equity                                                                                                                          |  | $                 | 172,423  |   |                  | $ | 264,779  |  
|                                                                                                                                                                                                       |  |                   |          |   |                  |   |          |  

Note: The condensed consolidated balance sheet data at December 31, 2007 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.



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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                                                                                                                                                                      |  | Three Months EndedSeptember 30, |          |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                                                                                      |  | 2008                            |          |   | 2007                           |   |         | 2008 |  |   | 2007     |  
|Revenue                                                                                                                                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Product (including related-party revenues of $16 and $871 for the three months ended September 30, 2008 and 2007; $668 and $2,480 for the
nine months ended September 30, 2008 and 2007)              |  | $                               | 12,377   |   |                                | $ | 6,331   |      |  | $ | 36,953   |   |  | $ | 17,727  |  
|Collaborative (including related-party revenues of $1,971 and $2,653 for the three months ended September 30, 2008 and 2007; $6,515 and
$7,233 for the nine months ended September 30, 2008 and 2007) |  |                                 | 2,828    |   |                                |   | 4,075   |      |  |   | 10,244   |   |  |   | 13,202  |  
|Grant                                                                                                                                                                                                 |  |                                 | 1,171    |   |                                |   | 455     |      |  |   | 2,717    |   |  |   | 2,374   |  
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total revenue                                                                                                                                                                                         |  |                                 | 16,376   |   |                                |   | 10,861  |      |  |   | 49,914   |   |  |   | 33,303  |  
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Operating expenses:                                                                                                                                                                                   |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Cost of product revenue (including related-party costs of $0 and $918 for the three months ended September 30, 2008 and 2007; $189 and
$2,554 for the nine months ended September 30, 2008 and 2007)  |  |                                 | 9,569    |   |                                |   | 4,751   |      |  |   | 27,022   |   |  |   | 13,889  |  
|Research and development                                                                                                                                                                              |  |                                 | 15,267   |   |                                |   | 14,723  |      |  |   | 45,048   |   |  |   | 37,509  |  
|Selling, general and administrative                                                                                                                                                                   |  |                                 | 13,720   |   |                                |   | 11,269  |      |  |   | 32,468   |   |  |   | 24,520  |  
|Goodwill impairment charge                                                                                                                                                                            |  |                                 | 106,134  |   |                                |   |        |      |  |   | 106,134  |   |  |   |        |  
|Acquired in-process research and development                                                                                                                                                          |  |                                 |         |   |                                |   |        |      |  |   |         |   |  |   | 42,400  |  
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total operating expenses                                                                                                                                                                              |  |                                 | 144,690  |   |                                |   | 30,743  |      |  |   | 210,672  |   |  |   | 118,318 |  
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Loss from operations                                                                                                                                                                                  |  |                                 | (128,314 | ) |                                |   | (19,882 | )    |  |   | (160,758 | ) |  |   | (85,015 | )
|Other income (expense):                                                                                                                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Interest expense, net (including non-cash accretion of debt discounts)                                                                                                                                |  |                                 | (9,500   | ) |                                |   | (611    | )    |  |   | (14,898  | ) |  |   | (996    | )
|Loss on exchange of convertible notes                                                                                                                                                                 |  |                                 |         |   |                                |   |        |      |  |   | (3,599   | ) |  |   |        |  
|Gain (loss) on net change in fair value of derivative assets and liabilities                                                                                                                          |  |                                 | (428     | ) |                                |   |        |      |  |   | 1,282    |   |  |   |        |  
|Loss attributed to noncontrolling interest in Galaxy Biofuels LLC                                                                                                                                     |  |                                 | 5,000    |   |                                |   |        |      |  |   | 5,000    |   |  |   |        |  
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net loss                                                                                                                                                                                              |  | $                               | (133,242 | ) |                                | $ | (20,493 | )    |  | $ | (172,973 | ) |  | $ | (86,011 | )
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Basic and diluted net loss per share                                                                                                                                                                  |  | $                               | (2.02    | ) |                                | $ | (0.34   | )    |  | $ | (2.74    | ) |  | $ | (1.64   | )
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Weighted average shares used in computing basic and diluted net loss per share                                                                                                                        |  |                                 | 65,889   |   |                                |   | 60,483  |      |  |   | 63,164   |   |  |   | 52,334  |  
|                                                                                                                                                                                                      |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                                                              |  |                                |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                              |  | Nine Months EndedSeptember 30, |         
|                                                                                                                                              |  | 2008                           |          |   | 2007 |  
|Operating activities:                                                                                                                         |  |                                |          |   |      |   |          |  
|Net loss                                                                                                                                      |  | $                              | (172,973 | ) |      | $ | (86,011  | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                                                   |  |                                |          |   |      |   |          |  
|Goodwill impairment charge                                                                                                                    |  |                                | 106,134  |   |      |   |         |  
|Acquired in-process research and development                                                                                                  |  |                                |         |   |      |   | 42,400   |  
|Depreciation and amortization                                                                                                                 |  |                                | 6,921    |   |      |   | 6,439    |  
|Non-cash share-based compensation                                                                                                             |  |                                | 9,430    |   |      |   | 8,390    |  
|Loss on exchange of convertible notes                                                                                                         |  |                                | 3,599    |   |      |   |         |  
|Gain on net change in fair value of derivative assets and liabilities                                                                         |  |                                | (1,282   | ) |      |   |         |  
|Accretion of debt discount                                                                                                                    |  |                                | 9,366    |   |      |   |         |  
|Changes in operating assets and liabilities:                                                                                                  |  |                                |          |   |      |   |          |  
|Accounts receivable                                                                                                                           |  |                                | (527     | ) |      |   | (312     | )
|Inventory                                                                                                                                     |  |                                | 3,590    |   |      |   | (1,328   | )
|Other assets                                                                                                                                  |  |                                | (850     | ) |      |   | 911      |  
|Accounts payable and accrued expenses                                                                                                         |  |                                | (3,670   | ) |      |   | 3,554    |  
|Restructuring reserve                                                                                                                         |  |                                | (1,183   | ) |      |   | (1,635   | )
|Deferred revenue                                                                                                                              |  |                                | (53      | ) |      |   | (1,676   | )
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Net cash used in operating activities                                                                                                         |  |                                | (41,498  | ) |      |   | (29,268  | )
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Investing activities:                                                                                                                         |  |                                |          |   |      |   |          |  
|Purchases of short-term investments                                                                                                           |  |                                | (131,877 | ) |      |   | (228,781 | )
|Sales and maturities of short-term investments                                                                                                |  |                                | 137,969  |   |      |   | 235,873  |  
|Purchases of property, plant and equipment, net                                                                                               |  |                                | (45,194  | ) |      |   | (20,445  | )
|Cash acquired in merger with Celunol Corp., net of transaction costs                                                                          |  |                                |         |   |      |   | 957      |  
|Restricted cash                                                                                                                               |  |                                | (10,040  | ) |      |   |         |  
|Advances made to Celunol Corp.                                                                                                                |  |                                |         |   |      |   | (27,500  | )
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Net cash used in investing activities                                                                                                         |  |                                | (49,142  | ) |      |   | (39,896  | )
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Financing activities:                                                                                                                         |  |                                |          |   |      |   |          |  
|Proceeds from issuance of convertible notes, net of issuance costs of $3,984 and $5,246 for the nine months ended September 30, 2008 and
2007 |  |                                | 50,365   |   |      |   | 114,754  |  
|Net cash paid for convertible hedge transaction                                                                                               |  |                                | (6,194   | ) |      |   |         |  
|Cash paid to settle make-whole obligations upon conversion of 2008 Notes                                                                    |  |                                | (2,066   | ) |      |   |         |  
|Principal payments on debt obligations                                                                                                        |  |                                | (2,135   | ) |      |   | (4,194   | )
|Proceeds from capital contributions in Galaxy Biofuels LLC                                                                                    |  |                                | 19,500   |   |      |   |         |  
|Proceeds from sale of common stock                                                                                                            |  |                                | 1,438    |   |      |   | 1,795    |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Net cash provided by financing activities                                                                                                     |  |                                | 60,908   |   |      |   | 112,355  |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Net (decrease) increase in cash and cash equivalents                                                                                          |  |                                | (29,732  | ) |      |   | 43,191   |  
|Cash and cash equivalents at beginning of period                                                                                              |  |                                | 48,743   |   |      |   | 38,541   |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                                                                                    |  | $                              | 19,011   |   |      | $ | 81,732   |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                                                                             |  |                                |          |   |      |   |          |  
|Interest paid                                                                                                                                 |  | $                              | 4,926    |   |      | $ | 3,810    |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Supplemental disclosure of non-cash operating and financing activities:                                                                       |  |                                |          |   |      |   |          |  
|Value of common shares issued in connection with the Celunol merger                                                                           |  | $                              |         |   |      | $ | 142,900  |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Fair value of warrants and options issued in connection with the Celunol merger                                                               |  | $                              |         |   |      | $ | 4,110    |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  
|Conversion of convertible senior notes to common stock                                                                                        |  | $                              | 11,917   |   |      | $ |         |  
|                                                                                                                                              |  |                                |          |   |      |   |          |  

See accompanying notes to condensed consolidated financial statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Summary of
Significant Accounting Policies

The Company

Verenium Corporation (Verenium or the Company), formerly known as Diversa Corporation, was incorporated in Delaware in 1992. The Company operates in two business segments, biofuels and
specialty enzymes. Its biofuels business segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. Its specialty
enzymes business segment develops customized enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

In June 2007, the Company completed a merger with Celunol Corp. (Celunol), a Delaware corporation that prior to the merger
directed its integrated technologies to the production of low-cost cellulosic ethanol from an array of biomass sources. Following the merger, Diversa was renamed Verenium Corporation, and Celunol was renamed Verenium Biofuels Corporation, a
wholly-owned subsidiary of Verenium Corporation. References to the Companys business include the business of both Verenium Corporation and Verenium Biofuels Corporation, unless otherwise noted.

Recent Developments

As more fully described
in Note 5, on August 6, 2008, the Company entered into a strategic partnership with BP Biofuels North America LLC, a member of the BP family of companies (BP) to accelerate the development and commercialization of cellulosic
ethanol, specifically in the field of conversion of biomass to fermentable sugars for the production of ethanol. During the initial 18-month phase of the joint development program the Company expects to receive $90 million in connection with the
transaction, of which $24.5 million has been received as of September 30, 2008. In connection with this strategic partnership, we formed a special purpose entity, Galaxy Biofuels LLC.

As more fully described in Note 3, the Company recorded a goodwill impairment charge of $106.1 million during the quarter ended September 30,
2008, which represented the entirety of the Companys goodwill balance.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted
accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily
indicative of results to be expected for any other interim period or for the year as a whole. These unaudited condensed consolidated financial statements and footnotes thereto should be read in conjunction with the audited financial statements and
footnotes thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission (SEC) on March 17, 2008.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Companys assets and the satisfaction of liabilities in the normal course of business.

Based on the Companys 2008 operating plan, its working capital at December 31, 2007 was not sufficient to meet the cash requirements to fund the Companys planned operating expenses, capital expenditures, and working capital
requirements through December 31, 2008 without additional sources of cash and/or the deferral, reduction or elimination of significant planned expenditures. These factors raised substantial doubt about the Companys ability to continue as
a going concern. As more fully described in Note 5, the Company completed a transaction with BP for funding of approximately $90 million, including an up-front payment of $24.5 million, which the Company expects to substantially fund its
working capital requirements into 2009.



6



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##### Table of Contents

The Company has incurred net losses of $173.0 million for the nine months ended September 30, 2008
and $89.7 million, $39.3 million, and $107.6 million for the years ended December 31, 2005, 2006 and 2007, respectively, and has a net asset deficiency and stockholders deficit of $29.1 million and an accumulated deficit of $610.0 million
as of September 30, 2008. The Company will require additional capital to fund its operations, and plans to address the expected shortfall of working capital through a combination of additional corporate partnerships and collaborations, federal
and state grant funding, incremental product sales, selling or financing assets, and, if necessary and available, the sale of equity or debt securities. If the Company is unsuccessful in raising additional capital from any of these sources, it will
defer, reduce, or eliminate certain planned expenditures. The Company will continue to consider other financing alternatives including but not limited to, a divesture of all or part of its business. There can be no assurance that the Company will be
able to obtain any sources of financing on acceptable terms, or at all. If the Company cannot obtain sufficient additional financing in the short-term, it may be forced to restructure or significantly curtail its operations, file for bankruptcy or
cease operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should
the Company be forced to take any such actions.

Reclassification

Certain reclassifications to prior period information have been made to conform to current presentation. For the three and nine months ended
September 30, 2008, the Company recorded $1.0 million and $3.2 million, respectively, of expenses related to the administration of the Companys patent portfolio and regulatory affairs in selling, general and administrative on the
condensed consolidated statement of operations. Expenses related to the administration of the Companys patent portfolio and regulatory affairs of $1.4 million and $3.7 million for the three and nine months ended September 30, 2007 were
reclassified from research and development expenses to selling, general and administrative expenses to conform to current year presentation.

Basis
of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, including Verenium Biofuels Corporation (formerly Celunol Corp.), since its acquisition effective June 20, 2007, as well as Galaxy Biofuels LLC, a variable interest entity of which the Company is the primary beneficiary as defined
by Financial Interpretation No. 46R (FIN 46R) Consolidation of Variable Interest Entities. All intercompany accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and related footnotes. Actual results could differ from those estimates.

Derivative Financial Instruments

The
Companys 8% Senior Convertible notes (See Note 2) have been accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and Emerging Issue Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially settled in a Companys own Stock (EITF
00-19).

For derivative instruments that are required to be accounted for as assets or liabilities, the instrument is initially
recorded at its fair value and then at each reporting date, the change in fair value is recorded in the statement of operations.

If the
embedded derivative instrument is bifurcated and accounted for as an asset or liability, the proceeds from an issuance are first allocated to the fair value of the bifurcated derivative instruments. If there are also options or warrants that are
required to be recorded as a liability, the proceeds are next allocated to the fair value of those instruments. The remaining proceeds, if any, are allocated to the convertible instrument itself, usually resulting in that instrument being recorded
at a discount from the face amount.

Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, (SFAS 157) which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The Company adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year.



7



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##### Table of Contents

SFAS No. 157 establishes a three-level valuation hierarchy of valuation techniques based on
observable and unobservable inputs, which may be used to measure fair value and include the following:

Level 1Quoted prices in
active markets for identical assets or liabilities.

Level 2Inputs other than Level 1 that are observable, either directly
or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities.

Classification within the hierarchy is determined based on the lowest level of input that is
significant to the fair value measurement.

As of September 30, 2008, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis, including its available-for-sale investments and its derivative instruments related to its 2008 Notes. The fair value of these assets and liabilities was determined using the following
inputs in accordance with SFAS 157 at September 30, 2008 (in thousands):



|                                                          |  |                                               |        |                                         |   |                                             |  |                                         |   |  |   |       
|--------------------------------------------------------- |  | --------------------------------------------- | ------ | --------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | - |  | - | ------
|                                                          |  | Fair Value Measurements at September 30, 2008
|                                                          |  | Balance atSeptember 30,2008                   |        | Quoted Prices inActive Markets(Level 1) |   | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3)
|Cash equivalents (1)                                      |  | $                                             | 15,362 |                                         | $ | 15,362                                      |  | $                                       |  |  | $ |      
|Short term investments (2)                                |  | $                                             | 3,082  |                                         | $ | 3,082                                       |  | $                                       |  |  | $ |      
|Derivative liability  warrants (3)                       |  | $                                             | 496    |                                         | $ |                                            |  | $                                       |  |  | $ | 496   
|Derivative liability  conversion rights (4)              |  | $                                             | 10,005 |                                         | $ |                                            |  | $                                       |  |  | $ | 10,005
|Derivative asset, net  convertible hedge transaction (5) |  | $                                             | 237    |                                         | $ |                                            |  | $                                       |  |  | $ | 237   



|(1) | Included in cash and cash equivalents on the accompanying condensed consolidated balance sheet.
|--- | -----------------------------------------------------------------------------------------------



|(2) | Included in short-term investments on the accompanying condensed consolidated balance sheet.
|--- | --------------------------------------------------------------------------------------------



|(3) | Represents warrants issued in conjunction with the Companys 2008 Notes (See Note 2). Included in current liabilities on the accompanying condensed consolidated balance
sheet.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents the conversion rights included in the Companys 2008 Notes (See Note 2). Included in current liabilities on the accompanying condensed consolidated balance
sheet.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Represents the net fair value of the purchased call option and written call option entered into in connection with the issuance of the Companys 2008 Notes (See Note 2).
Included in non-current assets on the accompanying condensed consolidated balance sheet.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents a
reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2008 to September 30, 2008 (in thousands):



|                                                                                   |  |                              |        |   |                                       |   |         |                                              |  |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ------------------------------------- | - | ------- | -------------------------------------------- |  | - | ------ | -
|                                                                                   |  | DerivativeLiability-Warrants |        |   | DerivativeLiability -ConversionRights |   |         | DerivativeAsset ConvertibleHedgeTransaction | 
|Balance at January 1, 2008                                                         |  | $                            |       |   |                                       | $ |        |                                              |  | $ |       |  
|Issuance of derivative instruments (1)                                             |  |                              | 4,700  |   |                                       |   | 31,135  |                                              |  |   | 6,194  |  
|Adjustment to fair value included in earnings (2)                                  |  |                              | (4,204 | ) |                                       |   | (3,035  | )                                            |  |   | (5,957 | )
|Adjustment for change in classification from liability to stockholders equity (3) |  |                              |       |   |                                       |   | (14,678 | )                                            |  |   |       |  
|Other adjustments (4)                                                              |  |                              |       |   |                                       |   | (3,417  | )                                            |  |   |       |  
|                                                                                   |  |                              |        |   |                                       |   |         |                                              |  |   |        |  
|Balance at September 30, 2008                                                      |  | $                            | 496    |   |                                       | $ | 10,005  |                                              |  | $ | 237    |  
|                                                                                   |  |                              |        |   |                                       |   |         |                                              |  |   |        |  



|(1) | Represents the derivative instruments related to the 2008 Notes offering in February 2008 (See Note 2).
|--- | -------------------------------------------------------------------------------------------------------



|(2) | The derivative warrants, conversion option and convertible hedge transaction are revalued at the end of each reporting period and the resulting difference is included in the results
of operations. For the nine months ended September 30, 2008, the net adjustment to fair value resulted in a gain of $1.3 million and is included in gain on net change in fair value of derivative assets and liabilities on the
accompanying condensed consolidated statement of operations (See Note 2).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(3) | Represents the portion of the embedded conversion rights reclassified into stockholders equity following shareholder approval of issuance of shares under the 2008 Notes in
excess of certain Nasdaq limits that required shareholder approval (the Exchange Cap) before shares in excess of such limits could be issued. The Company received such shareholder approval on June 4, 2008 (See Note 2).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents decrease in derivative liability related to conversion of $11.9 million in face value of the 2008 Notes (See Note 2).
|--- | --------------------------------------------------------------------------------------------------------------------------------

Revenue Recognition

The Company recognizes
revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104,Revenue Recognition and EITF 00-21,Accounting for Revenue Arrangements with Multiple
Deliverables.

Under SAB No. 104, revenue is recognized when the following criteria have been met: i) persuasive evidence of
an arrangement exists; ii) services have been rendered or product has been delivered; iii) price to the customer is fixed and determinable; and iv) collection of the underlying receivable is reasonably assured.

Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria
are met. As of September 30, 2008, the Company had $5.4 million in deferred revenue, of which $4.8 million was related to funding from collaborative partners and $0.6 million was related to product sales.

Product Revenue

The Company
recognizes product revenue at the time of shipment to the customer provided all other revenue recognition criteria have been met. The Company generates some of its product sales through third-party distribution agreements. If the distributor has a
right of return, revenue is recognized in accordance with the provisions set forth in SFAS No. 48, Revenue Recognition When Right of Return Exists. Under SFAS No. 48, the Company recognizes product revenues upon shipment
to distributors, provided that (i) the price is substantially fixed and determinable at the time of sale; (ii) the distributors obligation to pay the Company is not contingent upon resale of the products; (iii) title and risk of
loss passes to the distributor at time of shipment; (iv) the distributor has economic substance apart from that provided by the Company; (v) the Company has no significant obligation to the distributor to bring about resale of the
products; and (vi) future returns can be reasonably estimated. For any sales that do not meet all of the above criteria, revenue is deferred until all such criteria have been met.

The Company recognizes product profit-sharing revenue during the quarter in which such revenue is earned, generally upon shipment of product to the end
user, based on information provided by the Companys profit-sharing partner. Profit-sharing revenue is included in product revenue in the statement of operations.

Collaborative Revenue

The Company recognizes revenue from research funding under collaboration
agreements when earned on a proportional performance basis as research hours are incurred. The Company performs services as specified in each respective agreement on a best-efforts basis, and is reimbursed based on labor hours incurred
on each contract. The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed and recognizes revenue pursuant to the related pattern of performance, based on total labor hours incurred
relative to total labor hours estimated under the contract.

The Company recognizes up-front fees, exclusivity fees or other fees received
to initiate research projects over the contractual term of the project or its estimated period of performance relating to the term of the contractual arrangements, whichever is longer. Occasionally, the Company may be required to estimate its period
of performance when the agreements it enters into do not clearly define such information. Should different estimates prevail, revenue recognized could be materially different.

The Company recognizes milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the
milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and
(iv) the Companys past research and development services, as well as its ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees that the Company
customarily charges for similar research and development services.

Grant Revenue

The Company recognizes revenue from grants as related costs are incurred, as long as such costs are within the funding limits specified by the underlying
grant agreements.



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##### Table of Contents

Revenue Arrangements with Multiple Deliverables

The Company sometimes enters into revenue arrangements that contain multiple deliverables in accordance with EITF No. 00-21. This issue addresses the
timing and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. In these cases, the Company recognizes revenue from each element of the arrangement as long as separate value for each
element can be determined, the Company has completed its obligation to deliver or perform on that element, and collection of the resulting receivable is reasonably assured.

Variable Interest Entities

The Company has implemented the provisions of FIN 46R, which
addresses consolidation by business enterprises of variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or
(2) in which the equity investors lack an essential characteristic of a controlling financial interest. Effective August 6, 2008, the Company has a joint investment with BP in a special purpose entity, Galaxy, that is deemed to be a VIE
under FIN 46R, and subject to consolidation. The Company has also determined, pursuant to FIN 46R, that Verenium is the primary beneficiary of Galaxy. Because the Company is the primary beneficiary of Galaxy under FIN 46R, Galaxy is therefore
subject to consolidation by the Company. BPs capital contributions are recorded as a Noncontrolling interest in Galaxy Biofuels LLC on the Companys condensed consolidated balance sheet. The Company consolidates the operating results of
Galaxy, and records an adjustment to the Noncontrolling interest in Galaxy Biofuels LLC for BPs share of Galaxys profits and/or losses.

Computation of Net Loss per Share

Basic and diluted net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during the period. The Company had 0.3 million unvested restricted shares outstanding as of September 30, 2008. As of September 30, 2007, there were approximately and 0.9 million
unvested restricted shares outstanding and 1.5 million shares held in escrow pursuant to the merger agreement with Celunol. The escrow shares were placed in an escrow account until June 20, 2008 to satisfy the indemnification obligations
of Celunol for breaches of the representations and warranties contained in the merger agreement or any legal proceedings related thereto. On June 20, 2008, these shares were released to the former Celunol stockholders.

For purposes of the computation of net loss per share, the unvested restricted shares and the shares held in escrow are considered contingently
returnable shares under SFAS No. 128, Earnings Per Share, and are not considered outstanding common shares for purposes of computing net loss per share. The escrow shares were considered outstanding common shares on
June 20, 2008, when all necessary conditions were met that no longer caused the escrow shares to be contingently returnable. The impact of these unvested shares on weighted average shares outstanding has been excluded for purposes of computing
net loss per share (in thousands, except per share data).



|                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------- | -------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                                               |  | Three MonthsEnded September 30, |          |   | Nine MonthsEnded September 30, |  
|                                                                               |  | 2008                            |          |   | 2007                           |   |         | 2008 |  |   | 2007     |  
|Weighted average shares outstanding during the period                          |  |                                 | 66,140   |   |                                |   | 62,888  |      |  |   | 64,367   |   |  |   | 53,753  |  
|Less: Weighted average contingently returnable shares outstanding              |  |                                 | (251     | ) |                                |   | (2,405  | )    |  |   | (1,203   | ) |  |   | (1,419  | )
|                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Weighted average shares used in computing basic and diluted net loss per share |  |                                 | 65,889   |   |                                |   | 60,483  |      |  |   | 63,164   |   |  |   | 52,334  |  
|                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net loss                                                                       |  | $                               | (133,242 | ) |                                | $ | (20,493 | )    |  | $ | (172,973 | ) |  | $ | (86,011 | )
|                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net loss per share, basic and diluted                                          |  | $                               | (2.02    | ) |                                | $ | (0.34   | )    |  | $ | (2.74    | ) |  | $ | (1.64   | )
|                                                                               |  |                                 |          |   |                                |   |         |      |  |   |          |   |  |   |         |  

The Company has excluded all common stock equivalent shares issuable upon exercise or conversion
of outstanding stock options, warrants and convertible debt from the calculation of diluted net loss per share because all such securities are anti-dilutive for all applicable periods presented.



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##### Table of Contents

2. Convertible Debt

Carrying value of the Companys convertible debt is set forth below (in thousands):



|                                                                                                                                  |  |                   |         |   |                  |   |        
|--------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | -------
|                                                                                                                                  |  | September 30,2008 |         |   | December 31,2007
|5.5% Convertible Senior Notes, issued in 2007                                                                                     |  | $                 | 101,500 |   |                  | $ | 120,000
|8% Senior Convertible Notes, issued in 2008 (principal face amount of $59.1 million)                                              |  |                   | 37,965  |   |                  |   |       
|                                                                                                                                  |  |                   |         |   |                  |   |        
|Total carrying value                                                                                                              |  |                   | 139,465 |   |                  |   | 120,000
|Less: Current portion (representing certain conversion right features and warrants being accounted for as derivative
liabilities) |  |                   | (10,501 | ) |                  |   |       
|                                                                                                                                  |  |                   |         |   |                  |   |        
|Carrying value, non current portion                                                                                               |  | $                 | 128,964 |   |                  | $ | 120,000
|                                                                                                                                  |  |                   |         |   |                  |   |        

2007 Convertible Notes Offering

In March 2007, the Company completed an offering of $100 million aggregate principal amount of 5.50% Convertible Senior Notes due April 1, 2027
(2007 Notes) in a private placement, generating net cash proceeds to the Company of approximately $95.5 million. In April 2007, the initial purchasers exercised in full their over-allotment option to purchase an additional $20 million
aggregate principal amount of 2007 Notes, generating additional net cash proceeds to the Company of approximately $19.3 million. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the
2007 Notes and of the Verenium common stock issuable upon conversion of the 2007 Notes. As more fully described below, $18.5 million in face value of the 2007 Notes were exchanged for new debt pursuant to the Companys issuance of its 2008
Notes. As of September 30, 2008 the Company had $101.5 million in face value outstanding under the 2007 Notes.

The 2007 Notes bear
interest at 5.5% per year, payable in cash semi-annually, and are convertible at the option of the holders at any time prior to maturity, redemption or repurchase into shares of Verenium common stock at an initial conversion rate of 122.5490
shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain circumstances), which represents an initial conversion price of $8.16 per share. On April 1, 2008, in accordance with the 2007 Notes agreement, the conversion
rate of the 2007 Notes was increased to 156.25 shares per $1,000 principal amount, which represents a conversion price of $6.40 per share, which was the closing price per share of the Companys common stock on the date of the offering. As a
result of the change in the conversion price, total common shares that would be issued assuming conversion of the entire $101.5 million in 2007 Notes increased from 12.4 million shares to 15.9 million shares.

On or after April 5, 2012, the Company may, at its option, redeem the 2007 Notes, in whole or in part, for cash at a redemption price equal to 100%
of the principal amount of the 2007 Notes to be redeemed plus any accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and April 1, 2022, holders may require the Company to purchase all or a
portion of their 2007 Notes at a purchase price in cash equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to the purchase date. Holders may also require the Company to repurchase all or a portion
of their 2007 Notes upon a fundamental change at a repurchase price in cash equal to 100% of the principal amount of 2007 Notes to be repurchased plus any accrued and unpaid interest to the repurchase date. Pursuant to the terms of the
2007 Notes, a fundamental change is broadly defined as 1) a change in control, or 2) a termination of trading of the Companys common stock.

In connection with the 2007 Notes offering, the Company paid $5.2 million in financing charges, which is reflected in other long term assets on the accompanying condensed balance sheet, and is being amortized to
interest expense over the initial five-year term of the 2007 Notes using the effective interest method.

2008 Convertible Notes Offering

On February 22, 2008, the Company completed a private placement of its 8% Senior Convertible notes due April 1, 2012 and warrants
to purchase its common stock (2008 Notes). Concurrently with entering into the purchase agreement, the Company also entered into senior notes exchange agreements with certain existing noteholders of the 2007 Notes pursuant to which such
noteholders exchanged approximately $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and for warrants to purchase common stock. Including the 2008 Notes
issued in exchange for the 2007 Notes, the Company issued $71 million in aggregate principal amount of the 2008 Notes and warrants to purchase approximately 8 million shares of common stock. Gross proceeds from new investment were approximately
$54 million and net proceeds from new investment, after giving effect to payment of certain transaction-related expenses and the cash cost of the convertible hedge transaction described below, were approximately $44 million.

The 2008 Notes are convertible at the noteholders option on the date of their issuance. Their initial conversion price is equal to $4.09 per share.
The conversion price is subject to full ratchet anti-dilution protection and a reset provision whereby, to the extent the volume weighted average price of the Companys common stock during the seven trading days prior to the one-year
anniversary of the issuance of the 2008 Notes is less than $3.55 per share, the conversion price will reset to the greater of $2.13 per share or 115%



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##### Table of Contents

of the volume weighted average price of the common stock at that time. The 2008 Notes are subject to automatic conversion at the Companys option if the
Companys closing stock price exceeds $8.18 per share over a 30-trading day period ending prior to the date the Company provides notice of the automatic conversion to investors, the average daily trading volume of its stock over that 30-trading
day period equals or exceeds $3 million, and certain other conditions are met. In addition, the 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the 2008 Notes for common stock, the Company is
obligated to pay such holder an amount in cash or, subject to the satisfaction of certain conditions, shares of the Companys common stock equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back
to the date of conversion using an agreed-upon discount rate and, if applicable, valuing the shares of stock at a 5% discount to the stock price at the time of conversion. The registration statement filed by the Company with the Securities and
Exchange Commission to register the resale of the shares issuable upon conversion of the 2008 Notes, along with shares issuable upon exercise of the warrants and shares issuable for payment of interest under the 2008 Notes, only registers a limited
number of conversion shares due to applicable Securities and Exchange Commission guidelines, and the Companys ability to pay make-whole payments under the 2008 Notes using shares is accordingly limited to a payment amount equal to
the value of such shares, valued as described in the preceding sentence.

The warrants are exercisable six months after their issuance. The
initial exercise price of the warrants is $4.44 per share. The exercise price is subject to weighted average anti-dilution protection.

In
connection with the transactions described above, the Company entered into a convertible hedge transaction, which is intended to reduce the potential dilution upon conversion of the 2008 Notes. The convertible hedge transaction is composed of two
separate call options. Under the first call option (the Lower Call), on April 1, 2012 (or earlier upon conversion of the 2008 Notes), the Company will be entitled to purchase 13,288,509 shares of its own common stock from the
counterparty at a price per share equal to the initial conversion price (or a proportion of such number of shares based on the proportion of the 2008 Notes being converted). Under the second call option (the Upper Call), on three
exercise dates staggered in six month intervals beginning on October 1, 2013, the counterparty will be entitled to purchase 13,288,509 shares of the Companys common stock at a price per share of $5.16. The net cash cost of the convertible
hedge transaction was approximately $6.2 million.

Periodic interest payments on the 2008 Notes are approximately $1.2 million every three
months, assuming an outstanding balance of $59.1 million, and are payable on January 1, April 1, July 1 and October 1, of each year. Subject to the satisfaction of certain conditions, interest payments on the 2008 Notes
may be made, at the Companys option, in shares of common stock, valued at a 5% discount to the stock price at the time of payment of the interest. The registration statement filed by the Company with the Securities and Exchange Commission to
register the resale of the interest shares, along with the shares issuable upon conversion of the 2008 Notes and shares issuable upon exercise of the warrants, only registers a limited number of interest shares due to applicable Securities and
Exchange Commission guidelines, and the Companys ability to pay interest under the 2008 Notes using shares is accordingly limited to an interest amount equal to the value of such shares, valued as described in the preceding sentence.

The Company is subject to certain restrictive covenants under the 2008 Notes, including the following:



| |  |  | If the Company sells, transfers or disposes of any part of its specialty enzymes business unit (other than sales or licenses in the ordinary course of business and
other than any sales, dispositions or other transfers, in one or a series of related transactions, providing for gross proceeds of $1 million or less), it is required to deposit cash in a restricted cash account for the benefit of the holders of the
2008 Notes in an amount equal to the lesser of 50% of the total consideration received for such sale, transfer or disposition and 50% of the then outstanding principal amount of the 2008 Notes. The obligation to make such a deposit terminates when
the closing sale price of the Companys common stock exceeds $7.00 per share for 30 consecutive trading days, the average daily trading volume for such period is at least $2 million and all shares issuable upon conversion of the 2008 Notes are
registered for resale pursuant to effective registration statements or freely saleable during such period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company is not permitted to incur indebtedness, other than certain project financing debt or up to $15 million in principal amount of debt, provided that if the
closing sale price of the Companys common stock exceeds $8.00 per share for 30 consecutive trading days, the limit on additional indebtedness increases to $30 million and if the closing sale price of the common stock exceeds $12.00 per share
for 30 consecutive trading days, the limit on additional indebtedness increases to $50 million. In addition, the Company is restricted from incurring or permitting to exist any secured debt or debt that is senior to the 2008 Notes other than certain
project financing debt or $15 million principal amount of debt, subject to increase as described above.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company is not permitted to repay, restructure, amend, redeem, exchange or repurchase all or any portion of the outstanding 2007 Notes, except for repayments or
redemptions required by the terms of such notes.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Allocation of Cash Proceeds to 2008 Notes and Valuation of Embedded Features

The Company has allocated the proceeds received from the 2008 Notes among the underlying debt instruments, conversion rights, and the detachable warrants,
as follows (in thousands):



|                                |  |   |       
|------------------------------- |  | - | ------
|Fair value of conversion rights |  | $ | 31,135
|Fair value of warrants          |  |   | 4,700 
|Debt host instrument            |  |   | 35,165
|                                |  |   |       
|Face Value of 2008 Notes        |  | $ | 71,000
|                                |  |   |       

At inception, the fair value of the conversion rights of $31.1 million and the detachable warrants
of $4.7 million were separated from the debt host contract and recorded as derivative liabilities which resulted in a reduction of the initial notional carrying amount of the 2008 Notes as unamortized discount, which is being accreted over the term
of the 2008 Notes using the effective interest method.

The derivative liability arising from the conversion rights could require cash
settlement within one year of any balance sheet date under certain conditions outside of the Companys control, including, but not limited to, payments in connection with a conversion at the option of the noteholder. Furthermore, the amount of
the make-whole payment upon conversion is not indexed to the Companys stock, and therefore would not qualify as an equity instrument under EITF 00-19. Based upon this, the Company initially recorded the derivative liability related
to the embedded conversion rights as current portion of convertible debt on its condensed consolidated balance sheet. On June 4, 2008, in connection with shareholder approval of shares in excess of the Exchange Cap, $14.7 million of the
embedded conversion option value was reclassified into stockholders equity. The remaining derivative liability attributed to the conversion rights will be marked-to-market at the end of each reporting period, with any change in value reported
as a non-operating expense or income in the consolidated statement of operations. The fair value of the embedded conversion rights was determined using a lattice valuation methodology.

The derivative liability attributed to the warrants could require cash settlement within one year from the balance sheet date since the warrants became
exercisable in August 2008. Based upon this, the Company has reported the derivative liability related to the warrants as a current liability on its condensed consolidated balance sheet. The derivative liability will be marked-to-market at the end
of each reporting period, with any change in value reported as a non-operating expense or income in the consolidated statement of operations. The fair value of the warrants was determined using the Black-Scholes Merton methodology.

Beneficial Conversion Feature

The
Company recorded an additional debt discount of $7.3 million related to a beneficial conversion feature resulting from the issuance of the 2008 Notes. The beneficial conversion feature was determined by calculating the difference between the
effective conversion price resulting from the carrying value of the 2008 Notes and the fair value of the Companys common stock at the date of issuance. The discount attributed to the beneficial conversion feature is being accreted over the
term of the 2008 Notes using the effective interest method.

Valuation of Convertible Hedge Transaction

The Company recorded a derivative asset of $6.2 million, representing the net cash paid by the Company to the counterparty of the Lower and Upper Call.
The convertible hedge transaction does not qualify for equity classification under EITF No. 00-19, as there are potential circumstances, though remote, where cash settlement may be required. As such, the net fair value of the convertible hedge
transaction has been reported as a noncurrent derivative asset on the condensed consolidated balance sheet and is marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the
consolidated statement of operations. The Company has determined that the initial cash paid for each of the Lower and Upper Calls approximated fair value. The fair values of the Lower and Upper Call options subsequent to the initial issuance date
were determined using the Black-Scholes Merton methodology.

Impact of Fair Value Remeasurements

The fair value of the conversion rights, warrants, and the Lower and Upper Calls are recorded as a derivative asset or liability and marked-to-market each
balance sheet date. The change in fair value is recorded in the statement of operations as non-operating expense or income. Upon conversion or exercise of a derivative instrument, the instrument will be marked to fair value at the conversion date
and then that fair value will be reclassified to equity.

The fair value of the conversion rights, warrants and convertible hedge
transaction are primarily affected by the Companys stock price, but are also affected by the Companys stock price volatility, expected life and interest rates.



13



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##### Table of Contents

The following table sets forth the fair value re-measurements impacting all derivative assets and
liabilities for the nine months ended September 30, 2008 (in thousands):



|                                                |  |                                       |       |                               |   |                                   |  |   |                 |   |  |   |       |  
|----------------------------------------------- |  | ------------------------------------- | ----- | ----------------------------- | - | --------------------------------- |  | - | --------------- | - |  | - | ----- | -
|                                                |  | DerivativeLiability ConversionRights |       | DerivativeLiability -Warrants |   | DerivativeAsset ConvertibleHedge |  |   | TotalGain(Loss) |  
|Fair value re-measurement at March 31, 2008     |  | $                                     | 460   |                               | $ | 100                               |  | $ | (1,124          | ) |  | $ | (564  | )
|Fair value re-measurement at June 30, 2008      |  |                                       | 2,262 |                               |   | 3,201                             |  |   | (3,189          | ) |  |   | 2,274 |  
|Fair value re-measurement at September 30, 2008 |  |                                       | 313   |                               |   | 903                               |  |   | (1,644          | ) |  |   | (428  | )
|                                                |  |                                       |       |                               |   |                                   |  |   |                 |   |  |   |       |  
|Total fair value re-measurement gain (loss)     |  | $                                     | 3,035 |                               |   | 4,204                             |  |   | (5,957          | ) |  | $ | 1,282 |  
|                                                |  |                                       |       |                               |   |                                   |  |   |                 |   |  |   |       |  

Loss on Exchange of Notes

In connection with the issuance of the 2008 Notes, the Company exchanged $18.5 million in aggregate principal amount of the 2007 Notes for approximately
$16.7 million in aggregate principal amount of the 2008 Notes. Pursuant to EITF 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments, an exchange of debt instruments with substantially different terms
is a debt extinguishment and requires the recognition of a gain or loss on exchange. The Company determined that the exchange qualified as a debt extinguishment under EITF No, 96-19, and recorded a loss on the exchange of $3.6 million, equal to the
difference between the carrying value of the 2007 Notes and the fair value of the 2008 Notes and Warrants issued. In connection with the exchange, and pursuant to the EITF 96-19, the $16.7 million in face value 2008 Notes issued in the exchange was
recorded at their derived fair value of approximately $21.4 million on the date of exchange. This resulted in a debt premium of approximately $4.8 million, of which $2.1 million is being amortized as an offset to interest expense using the effective
interest method over the approximately 4year term of the 2008 Notes, and $2.7 million was recorded as additional paid-in-capital.

The fair value of the 2008 Notes issued in the exchange was determined using a lattice model, consistent with the methodology used to derive the fair value of the embedded conversion rights.

Interest Expense on 2008 Notes

For
the three and nine months ended September 30, 2008, the Company recorded interest expense related to the 2008 Notes of $9.8 million and $13.7 million, as follows (in thousands):



|                                                                                      |  |                                      |       |                                     |   |       
|------------------------------------------------------------------------------------- |  | ------------------------------------ | ----- | ----------------------------------- | - | ------
|                                                                                      |  | Three Months EndedSeptember 30, 2008 |       | Nine Months EndedSeptember 30, 2008
|8% coupon interest, payable in cash                                                   |  | $                                    | 1,301 |                                     | $ | 3,233 
|Non-cash accretion of debt discount, net of premium amortization                      |  |                                      | 1,162 |                                     |   | 2,758 
|Non-cash amortization of debt issuance costs                                          |  |                                      | 229   |                                     |   | 546   
|Write-off of unamortized debt issuance costs and discounts related to converted notes |  |                                      | 7,060 |                                     |   | 7,181 
|                                                                                      |  |                                      |       |                                     |   |       
|                                                                                      |  | $                                    | 9,752 |                                     | $ | 13,718
|                                                                                      |  |                                      |       |                                     |   |       

The initial debt discount related to the embedded conversion rights, detachable warrants, and
beneficial conversion feature and premium related to the fair value adjustment for exchanged notes total $41 million. The unamortized value of the debt discount is included in the carrying value of the 2008 Notes on the accompanying condensed
balance sheet. Debt issuance costs at inception totaled $4.0 million, and are reflected in other long term assets on the accompanying condensed balance sheet. The debt discounts and debt issuance costs are being amortized into interest expense over
the term of the 2008 Notes, or approximately 4 years.

Conversion of 2008 Notes

As of September 30, 2008, six noteholders of the Companys 2008 Notes had converted principal in the amount of $11.9 million into approximately
2.9 million shares of the Companys common stock. The conversion price was equal to the initial conversion price of $4.09 per share. The Company also made make-whole payments to the noteholders in the amount of $3.4 million related to the
unpaid interest from the time of the conversion through the maturity of the 2008 Notes, April 1, 2012, in accordance with the 2008 Notes agreement. The make-whole payments to three of the noteholders were paid in cash in the amount of $2.1
million while the remaining $1.3 million were settled, at the noteholders elections, with an aggregate of 0.7 million shares of the Companys common stock in lieu of cash.



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##### Table of Contents

3. Goodwill

As a result of the merger with Celunol on June 20, 2007, the Company recorded $106.1 million of goodwill on its balance sheet, all of which was allocated to the Companys biofuels reporting unit.

The Company recorded goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.The purchase method of
accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. The Company used the discounted cash flow method to
estimate the value of intangible assets acquired. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that the Company uses to manage its business and are based on available historical information
and industry estimates and averages. These judgments can significantly affect the Companys net operating results.

SFAS No. 142 requires that goodwill and certain intangible assets be assessed for impairment
on an annual basis, or more frequently if indicators of impairment exist, using fair value measurement techniques. If the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount
of the impairment loss, if any. The goodwill impairment test, which the Company typically performs annually as of October 1st, compares the
implied fair value of the reporting units goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined primarily through a market-based approach, based upon the market value of the Companys common
stock and convertible debt.

During the second quarter of 2008, the Company initiated an evaluation to determine if current
company-specific or market conditions would give rise to potential impairment of its goodwill carrying value as of June 30, 2008, including, but not limited to, the following:



| |  |  | the significant decline in the market value of the Companys invested capital, including the market value of its common stock and convertible debt;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sustained operating losses and demonstration plant cost overages; and
| | - |  | ---------------------------------------------------------------------



| |  |  | significant cash shortfalls and working capital deficiencies.
| | - |  | -------------------------------------------------------------

The Company concluded that, given the authoritative guidance as set forth by SFAS No. 142, and additional qualitative considerations, while there appeared to be some potential indicators of impairment as of
June 30, 2008, such potential indicators were reflective of temporary conditions, based upon the following considerations:



| |  |  | a substantial increase in venture funding in the biofuels industry, further supporting the overall financial support for the Companys industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recent legislation enacted at the federal, state and local levels in support of the biofuels industry;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the Companys strategic partnership with BP for funding of approximately $90 million, which is expected to substantially fund its working capital requirements
into 2009. The Company believes this funding will enable it to start-up, commission and complete its demonstration plant, validate its cellulosic ethanol process technology in the demonstration plant, and validate process economics for
commercial-scale cellulosic ethanol production. The Company also believed that this transaction would have a positive impact on the market value of its stock and convertible debt, such that it would have recovered to levels to support the carrying
value of the assets attributed to its biofuels segment, including goodwill.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Subsequent to the second quarter of 2008,
despite continued progress against its business plan to commercialize cellulosic ethanol, the Company continued to experience a decline in the market value of its stock and convertible debt. The Company believes this decline was due in large part to
overall global economic and market conditions. During the third quarter of 2008, the Companys average stock price declined an additional 28%, a major factor in the Companys conclusion that indicators of impairment existed as of
September 30, 2008.

Based upon the foregoing, the Company initiated a Step 1 and Step 2 analysis for impairment as prescribed by SFAS
142, with the assistance of a third party valuation firm. The first step of the two-step impairment test compares the fair value of the reporting unit to its carrying value to determine if an impairment indicator exists. If an impairment indicator
exists, then the second step of the impairment test must be performed to determine the amount of impairment, if any.



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##### Table of Contents

Under the first step, in assessing the fair value of its biofuels reporting unit, the Company primarily
considered the market approach under which the implied fair value of the reporting unit is based on quoted market prices and the number of shares outstanding for the Companys common stock, and the fair value of the Companys convertible
debt. The Company determined that the implied fair value of the biofuels reporting unit was less than the carrying value of the net assets of the reporting unit and that step two of the impairment test was required. Under the second step, the
Company determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. The Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been
acquired in a business combination and the fair value of the biofuels reporting unit was the price paid to acquire the reporting unit. Under this analysis, the excess of the fair value of the reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of goodwill. The Companys step two analysis resulted in no implied fair value of goodwill. As a result, the Company recognized a non-cash charge of $106.1 million in the third quarter of 2008,
representing full impairment of the carrying value of its goodwill.

4. Balance Sheet Details

Inventory

Inventory is recorded at
standard cost on a first-in, first-out (FIFO) basis. Inventory consists of the following (in thousands) as of:



|                 |  |                   |       |   |                  |   |       |  
|---------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                 |  | September 30,2008 |       |   | December 31,2007 |  
|Raw materials    |  | $                 | 609   |   |                  | $ | 621   |  
|Work in progress |  |                   | 201   |   |                  |   | 115   |  
|Finished goods   |  |                   | 1,664 |   |                  |   | 5,518 |  
|                 |  |                   |       |   |                  |   |       |  
|                 |  |                   | 2,474 |   |                  |   | 6,254 |  
|Reserve          |  |                   | (160  | ) |                  |   | (350  | )
|                 |  |                   |       |   |                  |   |       |  
|Net inventory    |  | $                 | 2,314 |   |                  | $ | 5,904 |  
|                 |  |                   |       |   |                  |   |       |  

The Company reviews inventory periodically and reduces the carrying value of items considered to
be slow moving or obsolete to their estimated net realizable value. The Company considers several factors in estimating the net realizable value, including shelf life of raw materials, demand for its enzyme products and historical write-offs. The
Company recorded a reduction of $190,000 in the reserve during the third quarter of 2008 due to the disposal of previously reserved inventory.

Property and equipment

Property and equipment is stated at cost and depreciated over the estimated useful lives of the
assets (generally three to ten years) using the straight-line method.

Property and equipment consist of the following (in thousands) as
of:



|                                            |  |                   |         |   |                  |   |         |  
|------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                            |  | September 30,2008 |         |   | December 31,2007 |  
|Laboratory, machinery and equipment         |  | $                 | 53,190  |   |                  | $ | 50,654  |  
|Computer equipment                          |  |                   | 12,922  |   |                  |   | 12,177  |  
|Furniture and fixtures                      |  |                   | 5,805   |   |                  |   | 5,549   |  
|Leasehold improvements                      |  |                   | 9,303   |   |                  |   | 9,755   |  
|Land                                        |  |                   | 1,580   |   |                  |   | 1,580   |  
|Pilot facility                              |  |                   | 19,468  |   |                  |   | 17,726  |  
|Assets to be placed in service:             |  |                   |         |   |                  |   |         |  
|Demonstration facility                      |  |                   | 86,321  |   |                  |   | 45,913  |  
|                                            |  |                   |         |   |                  |   |         |  
|Property and equipment, gross               |  |                   | 188,589 |   |                  |   | 143,354 |  
|Less: Accumulated depreciation and reserves |  |                   | (73,653 | ) |                  |   | (66,691 | )
|                                            |  |                   |         |   |                  |   |         |  
|Property and equipment, net                 |  | $                 | 114,936 |   |                  | $ | 76,663  |  
|                                            |  |                   |         |   |                  |   |         |  

Pursuant to SFAS No. 34, Capitalization of Interest Cost, the Company
capitalizes interest on capital projects. Capitalization commences with the first expenditure for the project and continues until the project is substantially complete and ready for its intended use. The Company amortizes the capitalized interest to
depreciation expense using the straight-line method over the same lives as the related assets once the project is complete and ready for its intended use. Included in the costs of its demonstration facility as of September 30, 2008 and
December 31, 2007 is $3.9 million and $0.7 in capitalized interest, which was determined by applying the Companys effective interest rate to the average amount of accumulated expenditures for its demonstration facility.



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##### Table of Contents

During the second quarter of 2008, the Company began the transition to the start-up phase of the
demonstration facility in Jennings, Louisiana. During the start-up phase, the site is electronically energized and the functional capabilities of each system are tested. In total, more than forty separate systems will be evaluated to ensure that the
equipment functions properly per the design and operates safely. Once start-up is complete, biomass can be processed through the system. Following the start-up phase, the demonstration facility will move into a commissioning phase, geared toward
validating the implementation of the Companys technology and process at scale, including the ability to produce ethanol within predefined performance criteria. This will include introducing enzymes and ethanologens into the process and running
biomass through the system to produce ethanol. Once the commissioning phase is completed the demonstration facility will be placed in service and depreciation will begin. The Company expects to complete the commissioning phase in the first quarter
of 2009.

Depreciation of property and equipment is provided on the straight-line method over estimated useful lives as follows:



|                                    |  |         
|----------------------------------- |  | --------
|Laboratory, machinery and equipment |  | 5 years 
|Computer equipment                  |  | 3 years 
|Furniture and fixtures              |  | 5 years 
|Machinery and equipment             |  | 5 years 
|Pilot facility                      |  | 10 years

Leasehold improvements are amortized using the shorter of the estimated useful life or remaining
lease term.

Depreciation related to the pilot facility and demonstration facility assets begins in the period that such assets are placed
in service. The pilot facility was placed in service in January 2007, and is being depreciated over a 10-year life. Subsequent modifications to the pilot facility which do not extend its useful life but meet the criteria for capitalization, are
considered immediately placed in service when incurred, and depreciated over the remainder of the pilot facilitys useful life. The Company expects that its demonstration facility will be placed in service during the first quarter of 2009, and
has not yet determined its useful life.

The Company reviews long-lived assets, including leasehold improvements, property and equipment,
for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.

Accrued liabilities

Accrued liabilities consist of the following (in thousands) as of:



|                                       |  |                   |        |                  |   |       
|-------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                       |  | September 30,2008 |        | December 31,2007
|Employee compensation-related          |  | $                 | 4,996  |                  | $ | 8,078 
|Professional and outside services      |  |                   | 4,470  |                  |   | 2,456 
|Sales and use tax payable              |  |                   | 2,071  |                  |   | 1,572 
|Restructuring reserve, current portion |  |                   | 948    |                  |   | 1,518 
|Other                                  |  |                   | 2,905  |                  |   | 1,188 
|                                       |  |                   |        |                  |   |       
|Total accrued expenses                 |  | $                 | 15,390 |                  | $ | 14,812
|                                       |  |                   |        |                  |   |       

5. Strategic Partnership with BP Biofuels North America LLC

On August 1, 2008, the Company entered into a Joint Development and License Agreement (JDA) with BP focused on the development and
commercialization of cellulosic ethanol technologies. As part of the transaction, Galaxy, a special purpose entity, equally owned by the Company and BP, was formed to serve as a technology repository which will house new intellectual property
developed through collaboration between the two parties relating to cellulosic ethanol production. All intellectual property held by the parties prior to the formation of the JDA will be retained by each respective company; however, pursuant to the
JDA, the Company granted to Galaxy a worldwide, royalty-free license and sublicense to Vereniums existing background technology related to the production of cellulosic ethanol. Galaxy will serve as a licensing entity to enable all cellulosic
ethanol production projects. Future profits and losses related to the licensing of these technologies will be shared equally by the Company and BP. The Company accounts for its investment in Galaxy pursuant to FIN 46R, and has determined that Galaxy
is subject to consolidation by Verenium.

The financial terms of the JDA include a transaction fee of $45 million payable to the Company by
BP on behalf of Galaxy, in exchange for broad access to the Companys cellulosic ethanol technology platform, production facilities, and employee scientific knowledge and expertise. The transaction fee is payable in three installments: $24.5
million within ten days of the August 1, 2008 closing; $6.5 million on January 2, 2009; and $14.0 million on July 1, 2009.

The joint
development efforts within the cellulosic ethanol field will be directed by the JDA, the initial term of which is 18 months. Pursuant to the JDA, BP will pay the Company $45 million in non refundable joint development fees to co-fund the
Companys various scientific and technical initiations within the field. The joint development fees represent approximately 50% of the estimated costs of these initiatives through January 2010, and are payable as follows: $15 million to be paid
on January 2, 2009, plus $2.5 million per month from February 2009 through and including January 2010.

The Company is responsible for
performance of substantially all of the activities under the joint development program. If the Company is not successful in achieving the objectives of the joint development program, BP may terminate the joint development program, and the Company
would no longer be entitled to receive any payments from BP for performance of the joint development program.

The transaction fees and
joint development fees are accounted for as follows:



| |  |  | The license to technology granted by Verenium and ongoing joint development performed by Verenium are considered capital contributions to Galaxy;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction fees and joint development fees paid by BP are considered capital contributions to Galaxy, which are subsequently distributed to Verenium as a reduction
to Vereniums capital account;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ongoing joint development is considered a monthly expense of Galaxy.
| | - |  | --------------------------------------------------------------------

As a result, the condensed consolidated financial statements include a line item called Noncontrolling Interest in Galaxy Biofuels LLC. On
the condensed consolidated balance sheet, this line reflects BPs ownership of Galaxys equity. This line item will be reduced by BPs 50% share of Galaxys profits and losses, and increased by cash distributions made by BP to
Verenium on behalf of Galaxy. BPs share of Galaxys losses is reflected in the condensed consolidated statement of operations as Loss attributed to noncontrolling interest in Galaxy Biofuels LLC. Galaxy has incurred
approximately $10.0 million in losses through September 30, 2008, 50% of which has been allocated to BP. The Company anticipates Galaxy will continue to incur losses related to ongoing joint development through at least the initial 18 months of the
strategic partnership.



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##### Table of Contents

6. Segment Information and Concentration of Business Risk

Segment Information

Following the
merger with Celunol on June 20, 2007, the Company consisted of two segments, as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, identified as biofuels and specialty enzymes.
The biofuels segment is focused on developing unique technical and operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops
high performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

Management assesses performance and allocates resources based on discrete financial information for the biofuels and specialty enzymes business segments.
For the biofuels segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty enzymes segment, performance is assessed based on total revenues, product revenues, product gross profit and total
operating expenses and capital expenditures. For the three and nine months ended September 30, 2008, the specialty enzymes segment comprised 100% of product revenue and cost of product revenue. Operating expenses for each segment include direct
and allocated research and development and selling, general and administrative expenses. In managements evaluation of performance, certain corporate operating expenses are excluded from the business segments such as: non-cash share-based
compensation, restructuring charges, severance, depreciation and amortization, intangible impairment charges and other corporate expenses, which are not allocated to either business segment. In addition, management evaluates segment performance
based upon capital expenditures and other assets that are specifically identified to the business segment and excludes certain corporate assets like cash, short-term investments and other assets that can be attributed to, or utilized by, both
business segments, and goodwill. Expenses and assets shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in
materially different results by segment.

The results of operations for the nine months ended September 30, 2008 include nine months
of combined operations resulting from the merger with Celunol on June 20, 2007. Since the merger closed near the end of the second quarter of 2007, results of operations for the nine months ended September 30, 2007 include the historical
results of Diversa Corporation and the operating results of Celunol for the period June 21, 2007 through September 30, 2007, and are not reflective of the combined operations.



18



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##### Table of Contents

Selected operating results for each of the Companys business segments are set forth below (in
thousands):



|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------- | - | ------ | --------- |  | - | -------- | - |  | -------- | -------- | - | ---------------- | - | ------ | --------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Three Months Ended September 30, 2008 |         |   | Three Months Ended September 30, 2007 |  
|                                                  |  | Biofuels                              |         |   | SpecialtyEnzymes                      |   |        | Corporate |  |   | Total    |   |  | Biofuels |          |   | SpecialtyEnzymes |   |        | Corporate |  |   | Total   |  
|Product revenue                                   |  | $                                     |        |   |                                       | $ | 12,377 |           |  | $ |         |   |  | $        | 12,377   |   |                  | $ |       |           |  | $ | 6,331   |   |  | $ |        |   |  | $ | 6,331   |  
|Collaborative and grant revenue                   |  |                                       | 420     |   |                                       |   | 3,579  |           |  |   |         |   |  |          | 3,999    |   |                  |   |       |           |  |   | 4,530   |   |  |   |        |   |  |   | 4,530   |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Total revenues                                    |  | $                                     | 420     |   |                                       | $ | 15,956 |           |  | $ |         |   |  | $        | 16,376   |   |                  | $ |       |           |  | $ | 10,861  |   |  | $ |        |   |  | $ | 10,861  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Product gross profit                              |  | $                                     |        |   |                                       | $ | 2,808  |           |  | $ |         |   |  | $        | 2,808    |   |                  | $ |       |           |  | $ | 1,580   |   |  | $ |        |   |  | $ | 1,580   |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) |  | $                                     | 11,490  |   |                                       | $ | 9,120  |           |  | $ | 114,511  |   |  | $        | 135,121  |   |                  | $ | 9,069  |           |  | $ | 8,634   |   |  | $ | 8,289   |   |  | $ | 25,992  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating loss                                    |  | $                                     | (11,070 | ) |                                       | $ | (2,733 | )         |  | $ | (114,511 | ) |  | $        | (128,314 | ) |                  | $ | (9,069 | )         |  | $ | (2,524  | ) |  | $ | (8,289  | ) |  | $ | (19,882 | )
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|                                                  |  |                                      
|                                                  |  | Nine Months Ended September 30, 2008  |         |   | Nine Months Ended September 30, 2007  |  
|                                                  |  | Biofuels                              |         |   | SpecialtyEnzymes                      |   |        | Corporate |  |   | Total    |   |  | Biofuels |          |   | SpecialtyEnzymes |   |        | Corporate |  |   | Total   |  
|Product revenue                                   |  | $                                     |        |   |                                       | $ | 36,953 |           |  | $ |         |   |  | $        | 36,953   |   |                  | $ |       |           |  | $ | 17,727  |   |  | $ |        |   |  | $ | 17,727  |  
|Collaborative and grant revenue                   |  |                                       | 844     |   |                                       |   | 12,117 |           |  |   |         |   |  |          | 12,961   |   |                  |   |       |           |  |   | 15,576  |   |  |   |        |   |  |   | 15,576  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Total revenues                                    |  | $                                     | 844     |   |                                       | $ | 49,070 |           |  | $ |         |   |  | $        | 49,914   |   |                  | $ |       |           |  | $ | 33,303  |   |  | $ |        |   |  | $ | 33,303  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Product gross profit                              |  | $                                     |        |   |                                       | $ | 9,931  |           |  | $ |         |   |  | $        | 9,931    |   |                  | $ |       |           |  | $ | 3,838   |   |  | $ |        |   |  | $ | 3,838   |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) |  | $                                     | 30,784  |   |                                       | $ | 25,979 |           |  | $ | 126,887  |   |  | $        | 183,650  |   |                  | $ | 9,956  |           |  | $ | 35,090  |   |  | $ | 59,383  |   |  | $ | 104,429 |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating loss                                    |  | $                                     | (29,940 | ) |                                       | $ | (3,931 | )         |  | $ | (126,887 | ) |  | $        | (160,758 | ) |                  | $ | (9,956 | )         |  | $ | (15,676 | ) |  | $ | (59,383 | ) |  | $ | (85,015 | )
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Capital expenditures                              |  | $                                     | 41,211  |   |                                       | $ | 2,082  |           |  | $ | 1,901    |   |  | $        | 45,194   |   |                  | $ | 17,006 |           |  | $ | 1,893   |   |  | $ | 1,546   |   |  | $ | 20,445  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  

Identifiable assets by operating segment are set forth below (in thousands):



|                                              |  |                          |         |                  |   |           |  |       |         |  |   |        
|--------------------------------------------- |  | ------------------------ | ------- | ---------------- | - | --------- |  | ----- | ------- |  | - | -------
|                                              |  | As of September 30, 2008
|                                              |  | Biofuels                 |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant & equipment, net              |  | $                        | 105,221 |                  | $ | 4,996     |  | $     | 4,719   |  | $ | 114,936
|Cash, short-term investments and other assets |  |                          | 1,300   |                  |   | 24,856    |  |       | 31,331  |  |   | 57,487 
|                                              |  |                          |         |                  |   |           |  |       |         |  |   |        
|Total identifiable assets                     |  | $                        | 106,521 |                  | $ | 29,852    |  | $     | 36,050  |  | $ | 172,423
|                                              |  |                          |         |                  |   |           |  |       |         |  |   |        
|                                              | 
|                                              |  | As of December 31, 2007 
|                                              |  | Biofuels                 |         | SpecialtyEnzymes |   | Corporate |  | Total
|Goodwill                                      |  | $                        |        |                  | $ |          |  | $     | 106,134 |  | $ | 106,134
|Property, plant & equipment net               |  |                          | 66,380  |                  |   | 6,655     |  |       | 3,628   |  |   | 76,663 
|Cash, short-term investments and other assets |  |                          | 1,219   |                  |   | 16,971    |  |       | 63,792  |  |   | 81,982 
|                                              |  |                          |         |                  |   |           |  |       |         |  |   |        
|Total identifiable assets                     |  | $                        | 67,599  |                  | $ | 23,626    |  | $     | 173,554 |  | $ | 264,779
|                                              |  |                          |         |                  |   |           |  |       |         |  |   |        



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Concentrations of Business Risk

A relatively small number of customers and collaboration partners historically have accounted for a significant percentage of the Companys revenue.
Revenue from significant customers and/or collaboration partners as a percentage of total revenue for the three and nine months ended September 30, 2008 and 2007 was as follows:



|                         |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------ |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                         |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                         |  | 2008                            |   |  | 2007                           |   |  | 2008 |   |  | 2007 |  
|Danisco Animal Nutrition |  | 60                              | % |  | 33                             | % |  | 56   | % |  | 33   | %
|Syngenta                 |  | 12                              | % |  | 32                             | % |  | 14   | % |  | 29   | %



|(a) | Revenue during the period was less than 10% of consolidated revenue.
|--- | --------------------------------------------------------------------

Accounts receivable from these two customers comprised approximately 68% of accounts receivable at September 30, 2008 and 48% at December 31, 2007.

Revenue by geographic area was as follows (in thousands):



|              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|              |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|              |  | 2008                            |        | 2007                           |   | 2008   |  | 2007
|North America |  | $                               | 4,583  |                                | $ | 3,461  |  | $    | 14,223 |  | $ | 11,771
|South America |  |                                 | 3,035  |                                |   | 277    |  |      | 10,775 |  |   | 727   
|Europe        |  |                                 | 8,380  |                                |   | 7,123  |  |      | 23,905 |  |   | 20,805
|Asia          |  |                                 | 378    |                                |   |       |  |      | 1,011  |  |   |      
|              |  |                                 |        |                                |   |        |  |      |        |  |   |       
|              |  | $                               | 16,376 |                                | $ | 10,861 |  | $    | 49,914 |  | $ | 33,303
|              |  |                                 |        |                                |   |        |  |      |        |  |   |       

For the nine months ended September 30, 2008 and 2007, 83% of the Companys product
revenue has come from one focus area, animal nutrition and health.

7. Equity Incentive Plans and Share-based Compensation

Share-Based Compensation

The
Company recognized share-based compensation expense of $3.2 million and $5.1 million during the three months ended September 30, 2008 and 2007, and $9.4 million and $8.4 million during the nine months ended September 30, 2008 and 2007.
These charges had no impact on the Companys reported cash flows. Share-based compensation expense was allocated among the following expense categories:



|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                    |  | 2008                            |       | 2007                           |   | 2008  |  | 2007
|Research and development            |  | $                               | 1,019 |                                | $ | 1,385 |  | $    | 3,491 |  | $ | 2,403
|Selling, general and administrative |  |                                 | 2,228 |                                |   | 3,680 |  |      | 5,939 |  |   | 5,987
|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      
|                                    |  | $                               | 3,247 |                                | $ | 5,065 |  | $    | 9,430 |  | $ | 8,390
|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      

As of September 30, 2008, there was $11.7 million of total unrecognized compensation expense
related to unvested share-based compensation arrangements granted under the equity incentive plans, including the impact of options and restricted shares assumed in the merger. This expense is expected to be recognized over a weighted-average period
of 2 years as follows (in thousands):



|                                                        |  |   |       
|------------------------------------------------------- |  | - | ------
|Fiscal Year 2008 (October 1, 2008 to December 31, 2008) |  | $ | 1,759 
|Fiscal Year 2009                                        |  |   | 4,723 
|Fiscal Year 2010                                        |  |   | 2,507 
|Fiscal Year 2011                                        |  |   | 1,475 
|Fiscal Year 2012                                        |  |   | 540   
|Thereafter                                              |  |   | 667   
|                                                        |  |   |       
|                                                        |  | $ | 11,671
|                                                        |  |   |       



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##### Table of Contents

Equity Incentive Awards Activity

Information with respect to all of the Companys stock option plans is as follows (in thousands, except per share data):



|                                  |  |        |   |  |                                          |       |                          |   |    
|--------------------------------- |  | ------ | - |  | ---------------------------------------- | ----- | ------------------------ | - | ---
|                                  |  | Shares |   |  | Weighted AverageExercise Price per Share |       | Aggregate IntrinsicValue
|Outstanding at January 1, 2008    |  | 7,714  |   |  | $                                        | 8.30  |                          |   |    
|Granted                           |  | 2,667  |   |  | $                                        | 2.86  |                          |   |    
|Exercised                         |  | (37    | ) |  | $                                        | 0.08  |                          |   |    
|Cancelled                         |  | (636   | ) |  | $                                        | 11.21 |                          |   |    
|                                  |  |        |   |  |                                          |       |                          |   |    
|Outstanding at September 30, 2008 |  | 9,708  |   |  | $                                        | 6.65  |                          | $ | 325
|                                  |  |        |   |  |                                          |       |                          |   |    
|Exercisable at September 30, 2008 |  | 3,671  |   |  | $                                        | 9.57  |                          | $ | 157
|                                  |  |        |   |  |                                          |       |                          |   |    

The grant date fair value of options granted during the nine months ended September 30, 2008
was $1.66 per share. The total intrinsic value of options exercised during the nine months ended September 30, 2008 was $84,000, or $2.26 per share.

Non-Restricted and Restricted Share Awards

Information with respect to all of the Companys
non-restricted and restricted share awards is as follows (in thousands, except per share data):



|                                                    |  |        |   |  |                           |     
|--------------------------------------------------- |  | ------ | - |  | ------------------------- | ----
|                                                    |  | Shares |   |  | WeightedAverage FairValue
|Non-vested awards outstanding at January 1, 2008    |  | 751    |   |  | $                         | 7.29
|Granted                                             |  |       |   |  | $                         |    
|Vested                                              |  | (474   | ) |  | $                         | 7.58
|Forfeited and cancelled                             |  | (26    | ) |  | $                         | 7.12
|                                                    |  |        |   |  |                           |     
|Non-vested awards outstanding at September 30, 2008 |  | 251    |   |  | $                         | 6.76
|                                                    |  |        |   |  |                           |     

Warrants

In connection with the closing of a series of transactions with Syngenta Participations AG in February 2003, the Company issued to Syngenta a warrant to
purchase 1,293,000 shares of common stock at $22 per share that is exercisable for ten years starting in 2008.

In connection with the
completion of the June 20, 2007 merger transaction with Celunol, the Company assumed 340,000 warrants to purchase common stock at $1.87 per share that expire in December 2016.

In connection with the issuance of the 2008 Notes, the Company issued to the noteholders warrants to purchase 7,987,626 shares of common stock at $4.44
per share that are exercisable for five years starting August 27, 2008. Additionally, the Company entered into a convertible hedge transaction (see Note 2), whereby the Company issued warrants to purchase 13,288,509 shares of common
stock at $5.16 per share. The warrants are exercisable on three dates staggered in six month intervals beginning on October 1, 2013.

Common
Stock Reserved for Future Issuance

At September 30, 2008, the Company has reserved shares of common stock for future issuance
as follows (in thousands):



|                                                                      |  |       
|--------------------------------------------------------------------- |  | ------
|                                                                      |  | Shares
|Employee Stock Purchase Plan                                          |  | 1,147 
|Equity Incentive Plans                                                |  | 3,057 
|Warrants (including shares issuable under the Upper Call transaction) |  | 22,917
|5.5% Convertible Senior Notes                                         |  | 15,859
|8.0% Senior Convertible Notes                                         |  | 14,446
|                                                                      |  |       
|                                                                      |  | 57,426
|                                                                      |  |       



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##### Table of Contents

8. Restructuring Charges

In connection with the January 2006 decision to reorganize and refocus the Companys resources, management commenced several cost containment measures, including a reduction in workforce of 83 employees and the
consolidation of its facilities. Pursuant to SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,the Company recorded net charges of $12.0 million in 2006 related to these activities. The
following table sets forth the activity in the restructuring reserves through September 30, 2008 (in thousands):



|                              |  |                            |        |   |                         |   |        |            |  |   |       |   |  |   |        |  
|----------------------------- |  | -------------------------- | ------ | - | ----------------------- | - | ------ | ---------- |  | - | ----- | - |  | - | ------ | -
|                              |  | FacilityConsolidationCosts |        |   | EmployeeSeparationCosts |   |        | OtherCosts |  |   | Total |  
|Balance at January 1, 2006    |  | $                          |       |   |                         | $ |       |            |  | $ |      |   |  | $ |       |  
|Accrued and expensed          |  |                            | 8,356  |   |                         |   | 2,607  |            |  |   | 60    |   |  |   | 11,023 |  
|Charged against accrual       |  |                            | (1,563 | ) |                         |   | (2,607 | )          |  |   | (60   | ) |  |   | (4,230 | )
|Adjustments and revisions     |  |                            | 1,003  |   |                         |   |       |            |  |   |      |   |  |   | 1,003  |  
|                              |  |                            |        |   |                         |   |        |            |  |   |       |   |  |   |        |  
|Balance at December 31, 2006  |  | $                          | 7,796  |   |                         | $ |       |            |  | $ |      |   |  | $ | 7,796  |  
|Charged against accrual       |  |                            | (2,263 | ) |                         |   |       |            |  |   |      |   |  |   | (2,263 | )
|Adjustments and revisions     |  |                            | 1,481  |   |                         |   |       |            |  |   |      |   |  |   | 1,481  |  
|                              |  |                            |        |   |                         |   |        |            |  |   |       |   |  |   |        |  
|Balance at December 31, 2007  |  | $                          | 7,014  |   |                         | $ |       |            |  | $ |      |   |  | $ | 7,014  |  
|Charged against accrual       |  |                            | (1,258 | ) |                         |   |       |            |  |   |      |   |  |   | (1,258 | )
|Adjustments and revisions     |  |                            | 75     |   |                         |   |       |            |  |   |      |   |  |   | 75     |  
|                              |  |                            |        |   |                         |   |        |            |  |   |       |   |  |   |        |  
|Balance at September 30, 2008 |  | $                          | 5,831  |   |                         | $ |       |            |  | $ |      |   |  | $ | 5,831  |  
|                              |  |                            |        |   |                         |   |        |            |  |   |       |   |  |   |        |  

During the first quarter of 2006, the Company completed the employee termination activities under
this restructuring. The facility consolidation costs are based on estimates, representing the discounted cash flow of lease payments (net of anticipated sublease income) on the vacated space through its contractual lease term in 2016. Pursuant to
SFAS No. 146, the Company is required to re-assess these estimates on a periodic basis. Accordingly, the Company may revise these estimates in future periods, which could give rise to additional charges or adjustments.

For the three and nine months ended September 30, 2008 and 2007, the adjustments and revisions related to restructuring activities were immaterial,
and are included in selling, general and administrative expenses.

9. Related-Party Transactions

Syngenta AG

The Company has
had an ongoing research collaboration with Syngenta, a greater-than 10% owner of the Companys outstanding common stock, since 1999.

In January 2007, the Company announced a new 10-year research and development partnership with Syngenta. The new agreement, which replaced a seven-year agreement with Syngenta that started in early 2003, is focused on the discovery and
development of a range of novel enzymes to economically convert pre-treated cellulosic biomass to mixed sugars, which is a critical step in the process of biofuel production.

The Company recognized revenue from Syngenta and its affiliates of $2.0 million and $3.5 million for the three months September 30, 2008 and 2007
and $7.2 million and $9.7 million for the nine months ended September 30, 2008 and 2007. Accounts receivable due from Syngenta were $2.0 million and $2.2 million, and deferred revenue associated with Syngenta was $3.6 million and $4.1 million,
at September 30, 2008 and December 31, 2007.

Under the terms of the 10-year agreement, there is a two-year guaranteed funding
period totaling $16 million through 2008 The Company does not anticipate that it will continue to receive significant funding from Syngenta under this agreement beyond the initial guaranteed funding period, which expires December 31, 2008

In February 2008, AB Enzymes and AB Vista (collectively, AB), both subsidiaries of Associated British Foods plc, announced the
acquisition of Syngentas Quantum Phytase feed enzyme business. Prior to this transaction, the Company supplied Quantum Phytase to Syngenta pursuant to a manufacturing and supply agreement. The Company does not expect to continue to manufacture
and supply the Quantum enzyme to AB, as it has been unable to reach a manufacturing and supply agreement with AB on commercially agreeable terms.

BP

The Company recently entered into a strategic partnership with BP, pursuant to which the two parties formed a
special purpose entity, Galaxy Biofuels LLC. The Company consolidates the results of Galaxy, and reflects BPs interest as a noncontrolling interest in the consolidated financial statements. Because BP exercises significant influence over the
operations of Galaxy, BP is considered an affiliate, pursuant to SFAS No. 57, Related Party Disclosures. Refer to Note 5 for further description of the Companys partnership with BP.



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10. Commitments

Letter of Credit

Pursuant to its facilities leases for office and laboratory space in San
Diego, the Company is required to maintain a letter of credit on behalf of its landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on minimum required working capital and market capitalization, as
follows:



|                           |  |     |  |                        |  |                              
|-------------------------- |  | --- |  | ---------------------- |  | -----------------------------
|Working Capital            |  |     |  | Market Capitalization  |  | Required Letter of Credit    
|Greater than $75 million   |  |     |  | N/A                    |  | $100,000                     
|$50 million to $75 million |  | or  |  | $350 million           |  | $100,000 plus 12 months rent
|Less than $50 million      |  | and |  | Less than $350 million |  | $100,000 plus 24 months rent

As of September 30, 2008, the Company had a letter of credit in place pursuant to this
agreement for approximately $10 million, representing the $100,000 minimum and approximately 24 months current rent.

The letter of
credit is issued under an existing bank agreement. The Company is required under its bank agreement to secure this obligation with cash, which is reflected as restricted cash on its condensed consolidated balance sheet as of September 30, 2008.

11. Contingencies

Class Action
Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the plaintiffs in a class action lawsuit
filed in December 2002 in a U.S. federal district court (the Court). This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other public companies that conducted an
Initial Public Offering (IPO) of their common stock in 2000 and the late 1990s (the IPO Cases). On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary
approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive Order.
On February 24, 2006, the Court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the Plaintiffs under the settlement. On April 24, 2006, the Court held a Final Fairness Hearing to
determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Courts earlier decision certifying as class actions the six IPO Cases designated as focus
cases. The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs petition to the Second Circuit for rehearing en banc and
resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the
settlement as originally negotiated will not be finally approved. On or about August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and thereafter moved for certification of the classes and appointment of lead plaintiffs
and lead counsel in those cases. In September 2007, the Companys named officers and directors again extended the tolling agreement with plaintiffs. The six focus case issuers filed motions to dismiss the claims against them in November 2007
and an opposition to plaintiffs motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certificate motion.

The Company is covered by a claims-made liability insurance policy which it believes will satisfy any potential liability of the Company under this
settlement. Due to the inherent uncertainties of litigation and assignment of claims against the underwriters, and because the settlement has not yet been finally approved by the Court, the ultimate outcome of this matter cannot be predicted. In
accordance with SFAS No. 5, Accounting for Contingencies the Company believes any contingent liability related to this claim is not probable or estimable and therefore no amounts have been accrued in regards to this
matter.

The Company is also, from time to time, subject to legal proceedings and claims which arise in the normal course of business. In
managements opinion, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the Companys consolidated financial position, results of operations, or cash flows.



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12. Impact of Recently Issued Accounting Standards

Business Combinations

In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008 and will apply prospectively to
business combinations completed on or after that date. The impact of the adoption of SFAS No. 141(R) on the Companys consolidated results of operations and cash flows will depend on the terms and timing of future acquisitions, if any.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB
51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parents equity, and
purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the
face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retroactively. We are currently evaluating what the impact of adopting SFAS
No. 160 will have on our consolidated financial statements.

Accounting for Convertible Debt Instruments

In May 2008, FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cashupon
Conversion (Including Partial Cash Settlement), (FSP No. APB 14-1). This statement states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separate the
liability and equity components of the instruments in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP No. APB 14-1 will require that the value assigned
to the debt component be equal to the estimated fair value of a similar debt instrument without the conversion feature, which results in the debt being recorded at a discount. The resulting debt discount will be amortized over the period during
which the debt is expected to be outstanding as additional non-cash interest expense. This opinion is effective for fiscal years beginning on or after December 15, 2008, which will be effective for our fiscal year 2009, and must be applied
retrospectively to all periods presented. We are currently evaluating what the impact of adopting FSP No. APB 14-1 will have on our consolidated financial statements.

In June 2008, the EITF issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock. EITF
07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entitys own stock, which would qualify as a scope exception under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. EITF
07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008, which will be effective for our fiscal year 2009. Early adoption for an existing instrument is not permitted. We are currently evaluating
what the impact of adopting EITF 07-05 will have on our consolidated financial statements.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial
statements and the notes to those statements included elsewhere in this report.

Except for the historical information contained herein,
the following discussion contains forward-looking statements that involve risks and uncertainties. These statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement.

The results of operations for the nine months ended September 30, 2008 include nine months of combined operations resulting from the merger
with Celunol on June 20, 2007. Since the merger closed near the end of the second quarter of 2007, results of operations for the nine months ended September 30, 2007 include the historical results of Diversa Corporation and Celunol for the
period June 21, 2007 through September 30, 2007, and are not reflective of the combined operations.

Forward-looking
statements applicable to our business generally include statements related to:



| |  |  | our estimates regarding market sizes and opportunities, as well as our future revenue, product revenue, profitability and capital requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our anticipated use of proceeds from our recent financing activities;
| | - |  | ---------------------------------------------------------------------



| |  |  | the length of time that we will be able to fund our operations with existing cash;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | our expected cash needs, our ability to manage our cash and expenses and our ability to access future financing;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the expected benefits of our strategic partnership with BP, and our ability to negotiate and finalize the second phase of our partnership;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to continue as a going concern;
| | - |  | -------------------------------------------



| |  |  | our expected future research and development expenses, sales and marketing expenses, and selling, general and administrative expenses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect on our business and financial results of governmental regulation and programs;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our plans regarding future research, product development, business development, commercialization, growth, independent project development, collaboration,
licensing, intellectual property, regulatory and financing activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our results of operations, financial condition and businesses, and products and product candidates under development;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | investments in our core technologies and in our internal product candidates;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the opportunities in our target markets and our ability to exploit them;
| | - |  | ------------------------------------------------------------------------



| |  |  | our plans for managing the growth of our business;
| | - |  | --------------------------------------------------



| |  |  | the benefits to be derived from our current and future strategic alliances;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our anticipated revenues from collaborative agreements; grants and licenses granted to third parties;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | our ability to repay our outstanding debt (including in connection with any make-whole payments that may be due upon conversion of our 2008 Notes);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our exposure to market risk;
| | - |  | ----------------------------



| |  |  | the impact of litigation matters on our operations and financial results; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | the effect of critical accounting policies on our financial results.
| | - |  | --------------------------------------------------------------------

Forward-looking statements applicable to our biofuels business include statements related to:



| |  |  | potential growth in the use of ethanol, including cellulosic ethanol, the economic prospects for the ethanol industry and cellulosic ethanol and the advantages of
cellulosic ethanol versus ethanol and other fuel sources;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the start-up, commissioning and completion of our demonstration-scale facility and the continued development of our pilot facility;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financing, development and construction of commercial-scale cellulosic ethanol facilities;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our ability to use multiple feedstocks to produce cellulosic ethanol
| | - |  | --------------------------------------------------------------------



| |  |  | our expectations regarding funding amounts from the U.S. Department of Energy; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the implied value of our biofuels business model.
| | - |  | -------------------------------------------------

Forward-looking statements applicable to our specialty enzymes business include statements related to:



| |  |  | our ability to increase our product revenue and improve product gross margins; and
| | - |  | ----------------------------------------------------------------------------------



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| |  |  | our ability to maintain good relationships with the companies with whom we contract for the manufacture of certain of the products in our specialty enzymes
business.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

Factors that could cause or contribute to differences include, but are not limited to, risks related to our
ability to fund our operations and continue as a going concern, risks involved with our new and uncertain technologies, risks associated with our dependence on patents and proprietary rights, risks associated with our protection and enforcement of
our patents and proprietary rights, our dependence on existing collaborations, our ability to enter into and/or maintain collaboration and joint venture agreements, including our strategic partnership with BP, our ability to commercialize products
directly and through our collaborators, the timing of anticipated regulatory approvals and product launches, the timing of conversion of the 2008 Notes, if any, and our ability to make any required make-whole payments due upon such
conversion in cash at that time, and the development or availability of competitive products or technologies, as well as other risks and uncertainties set forth below and in the section of this report entitled Risk Factors.

Overview

We operate in two business segments,
biofuels and specialty enzymes. Our biofuels business segment operates through our wholly-owned subsidiary, Verenium Biofuels Corporation, and is focused on developing unique technical and operational capabilities designed to enable the production
and commercialization of biofuels, in particular ethanol produced from cellulosic biomass. We believe the most significant commercial opportunity for our biofuels business segment is the large-scale commercial production of cellulosic ethanol
derived from multiple biomass feedstocks. Our specialty enzymes segment develops customized enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower
costs, and improved environmental outcomes. We believe the most significant near-term commercial opportunity for our specialty enzymes business segment will be derived from continued sales growth, and related profit margin improvement, from our
existing portfolio of enzyme products.

Our biofuels and specialty enzymes businesses are both supported by a research and development team
with expertise in gene discovery and optimization, cell engineering, bioprocess development, biochemistry and microbiology. Over the past 15 years, our research and development team has developed a proprietary technology platform which has enabled
us to apply advancements in science to discovering and developing unique solutions in complex industrial or commercial applications. To date, we have dedicated substantial resources to the development of our proprietary technologies, which include
capabilities for sample collection from the worlds microbial populations, generation of DNA libraries, screening of these libraries using ultra high-throughput methods capable of analyzing more than one billion genes per day, and optimization
based on our gene evolution technologies. We have continued to shift more of our resources from technology development to commercialization efforts for our existing and future products. While our technologies have the potential to serve many large
markets, our key areas of focus for internal product development are (i) integrated solutions for the production of biofuels, such as cellulosic ethanol, and (ii) specialty enzymes for: biofuels, specialty industrial processes, and animal
nutrition and health. We have current collaborations with market leaders, such as BP, BASF, Bunge Oils, Cargill Health and Food Technologies, and Syngenta AG, each of which complement our internal product development efforts.

For the nine months ended September 30, 2008, total revenues increased 51% compared to the nine months ended September 30, 2007. The increase
in revenue was primarily attributed to more than doubling our product revenue to $37 million for the nine months ended September 30, 2008 from $17.7 million in the prior year comparable period, partially offset by a 17% decrease in grant and
collaborative revenue from $15.6 million to $13 million for the nine months ended September 30, 2008. As part of our strategic reorganization in January 2006, we began to de-emphasize grant revenue and certain collaborations that were not
strategic to our current market focus in favor of greater emphasis on sales of products. As a result, we expect that our product revenue will grow as a percentage of our total revenue in the future. Our strategic partners, including our recent
partnership with BP, have provided us with more than $300 million in funding since inception and are committed to additional funding of more than $75 million through 2016, subject to our performance under existing agreements, excluding milestone
payments, license and commercialization fees, and royalties or profit sharing. Our strategic partners often pay us before we recognize the revenue, and these payments are deferred until earned. As of September 30, 2008, we had $5.4 million in
deferred revenue, of which $4.8 million was related to funding from collaborative partners and $0.6 million was related to product sales.

We have incurred net losses since our inception. As of September 30, 2008, we had a net asset deficiency and stockholders deficit of $29.1 million and an accumulated deficit of $610 million. Our results of operations have
fluctuated from period to period and likely will continue to fluctuate substantially in the future. We expect to incur losses into the foreseeable future as a result of:



| |  |  | anticipated additional investments to implement our biofuels commercialization strategy, including capital expenditures related to enhancements to our cellulosic
ethanol pilot facility and start-up; commissioning and completion of our demonstration facility; and capital or operating costs we may incur for land acquisition, feedstock development, and design and engineering for our first commercial plants;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | our continued investment in sales and marketing infrastructure intended to strengthen our customer contact and focus;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | our continued investment in manufacturing facilities necessary to meet increased demand for our products; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | continued research and development expenses for our internal product candidates.
| | - |  | --------------------------------------------------------------------------------

Results of operations for any period may be unrelated to results of operations for any other period. In addition, we believe that our historical results
are not a good indicator of our future operating results.

Recent Developments

Strategic partnership with BP Biofuels North America LLC

On August 5, 2008, we entered into a
strategic partnership with BP Biofuels North America LLC, a member of the BP family of companies, or BP, to accelerate the development and commercialization of cellulosic ethanol, specifically in the field of conversion of biomass to fermentable
sugars for the production, or the use in production, of ethanol. The partnership combines a broad technology platform and operational capabilities in an effort to advance the development of a portfolio of low-cost, environmentally-sound cellulosic
ethanol production facilities in the United States, and potentially throughout the world. During the initial 18-month phase of the joint development program, we will receive $90 million in connection with our participation.

In connection with starting the joint development program, we formed Galaxy, a special purpose entity, which is equally owned by BP and us. Galaxy will
have access to certain intellectual property rights held by the parties prior to entering the Joint Development and License Agreement, all of which will continue to be owned by the respective contributing company. Galaxy will own new intellectual
property relating to cellulosic ethanol production developed through the joint development program and will be responsible for administering the licensing of the technology package resulting from the joint development program.

Our joint development program will be conducted under a Joint Development and License Agreement entered into by Verenium Biofuels Corporation, and BP on
August 5, 2008 and effective as of August 1, 2008. Prior to entering into this strategic partnership, we had no material relationship with BP.

We will be primarily responsible for executing the joint development program and have agreed with BP that for a limited period we will not use our existing technology in any other technology development program in the
defined field, with certain exceptions. The limited period may be extended if the joint development program between the parties is extended. In addition, we expect to negotiate with BP a second phase of the alliance focused on the development of a
joint venture to accelerate the commercial deployment of the technologies into commercial-scale cellulosic ethanol production facilities. While the primary focus of the joint venture will be to encourage the use of the technology package resulting
from the joint development program in facilities that are jointly-owned by BP and the Company in the United States, the technology and the technology package will also be licensable to us and to BP separately, as well as to third-party commercial
projects in the United States and elsewhere.

The financial terms of this phase of the strategic partnership include:



| |  |  | $45 million, payable in three installments, for broad access to the Companys cellulosic ethanol technology platform, production facilities, and employee
scientific knowledge and expertise. At closing, we received a cash payment of $24.5 million, and will receive additional cash payments of $6.5 million on January 2, 2009 and $14.0 million on July 1, 2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $15 million payable on January 2, 2009 and an additional $2.5 million per month beginning February 2009 through and including January 2010 to co-fund our
various scientific and technical initiatives within the cellulosic ethanol field.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect to negotiate and finalize
this second phase of our relationship with BP, including incremental financial terms for co-funding the joint venture, by early 2009.



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U.S. Department of Energy (DOE) Grant

In July 2008, we were awarded a grant from the DOE under a $40 million program to support the development of small-scale cellulosic ethanol biorefinery
plants. We are currently in negotiations with DOE to determine the amount of the award, and expect that the award will total $10 million, payable over a 15 month period.

Goodwill Impairment

In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets we are required to assess goodwill for impairment on an annual basis, or more frequently if indicators of impairment exist, using fair value measurement techniques. If the carrying amount of a reporting unit exceeds its fair value,
then a goodwill impairment test is performed to measure the amount of the impairment loss, if any. The goodwill impairment test, which we typically perform annually as of October 1, compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. Attributed in part to recent overall global economic and market conditions, we determined that the market value of our common stock and convertible debt was not adequate at September 30, 2008
to support the carrying value of our goodwill resulting from the June 2007 merger between Diversa and Celunol. As a result, we recorded a non-cash charge of $106.1 million during the quarter ended September 30, 2008, representing full
impairment of the carrying value of our goodwill. We believe that this impairment is reflective primarily of current market conditions, and is not indicative of a change in our business or implied value of our underlying biofuels business model
aimed toward the commercialization of cellulosic ethanol.

Results of Operations

Selected Segment Financial Data

As a
result of our merger with Celunol on June 20, 2007, our business consists of two business units, which we refer to as our biofuels segment and our specialty enzymes segment. The biofuels segment is focused on developing unique technical and
operational capabilities designed to enable the production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops high performance enzymes for use within the alternative fuels,
specialty industrial processes, and animal nutrition and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

We assess performance and allocate resources based on discrete financial information for the biofuels and specialty enzymes segments. For the biofuels segment, performance is assessed based on total operating expenses
and capital expenditures. For the specialty enzymes segment performance is assessed based on total revenues, product revenues, product gross profit, total operating expenses and capital expenditures. For the nine months ended September 30,
2008, the specialty enzyme segment comprised 100% of our product revenue and cost of product revenue. Our operating expenses for each segment include direct and allocated research and development and selling, general and administrative expenses. In
managements evaluation of performance, certain corporate operating expenses are excluded from the business segments such as: non-cash share-based compensation, restructuring charges, severance, depreciation and amortization, and other
corporate expenses, which are not allocated to either business segment. In addition, we evaluate segment performance based upon capital expenditures and other assets that are specifically identified to the business segment, excluding certain
corporate assets such as cash, short-term investments, and other assets that can be attributed to, or utilized by, both business segments, and goodwill. Expenses and assets shared by the segments require the use of judgments and estimates in
determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment.

The results of operations for the three and nine months ended September 30, 2008 include the combined operations resulting from our merger with Celunol on June 20, 2007. The results of operations for the
three and nine months ended September 30, 2007 include the historical results of Diversa Corporation and Celunol operations for the period from and including June 21, 2007 through December 31, 2007, and are not reflective of the
combined operations.



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Selected operating results for the three and nine months ended September 30, 2008 and 2007 for each
of our business segments is set forth below (in thousands):



|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------- | - | ------ | --------- |  | - | -------- | - |  | -------- | -------- | - | ---------------- | - | ------ | --------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                  |  | Three Months Ended September 30, 2008 |         |   | Three Months Ended September 30, 2007 |  
|                                                  |  | Biofuels                              |         |   | SpecialtyEnzymes                      |   |        | Corporate |  |   | Total    |   |  | Biofuels |          |   | SpecialtyEnzymes |   |        | Corporate |  |   | Total   |  
|Product revenue                                   |  | $                                     |        |   |                                       | $ | 12,377 |           |  | $ |         |   |  | $        | 12,377   |   |                  | $ |       |           |  | $ | 6,331   |   |  | $ |        |   |  | $ | 6,331   |  
|Collaborative and grant revenue                   |  |                                       | 420     |   |                                       |   | 3,579  |           |  |   |         |   |  |          | 3,999    |   |                  |   |       |           |  |   | 4,530   |   |  |   |        |   |  |   | 4,530   |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Total revenues                                    |  | $                                     | 420     |   |                                       | $ | 15,956 |           |  | $ |         |   |  | $        | 16,376   |   |                  | $ |       |           |  | $ | 10,861  |   |  | $ |        |   |  | $ | 10,861  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Product gross profit                              |  | $                                     |        |   |                                       | $ | 2,808  |           |  | $ |         |   |  | $        | 2,808    |   |                  | $ |       |           |  | $ | 1,580   |   |  | $ |        |   |  | $ | 1,580   |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) |  | $                                     | 11,490  |   |                                       | $ | 9,120  |           |  | $ | 114,511  |   |  | $        | 135,121  |   |                  | $ | 9,069  |           |  | $ | 8,634   |   |  | $ | 8,289   |   |  | $ | 25,992  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating loss                                    |  | $                                     | (11,070 | ) |                                       | $ | (2,733 | )         |  | $ | (114,511 | ) |  | $        | (128,314 | ) |                  | $ | (9,069 | )         |  | $ | (2,524  | ) |  | $ | (8,289  | ) |  | $ | (19,882 | )
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|                                                  |  |                                      
|                                                  |  | Nine Months Ended September 30, 2008  |         |   | Nine Months Ended September 30, 2007  |  
|                                                  |  | Biofuels                              |         |   | SpecialtyEnzymes                      |   |        | Corporate |  |   | Total    |   |  | Biofuels |          |   | SpecialtyEnzymes |   |        | Corporate |  |   | Total   |  
|Product revenue                                   |  | $                                     |        |   |                                       | $ | 36,953 |           |  | $ |         |   |  | $        | 36,953   |   |                  | $ |       |           |  | $ | 17,727  |   |  | $ |        |   |  | $ | 17,727  |  
|Collaborative and grant revenue                   |  |                                       | 844     |   |                                       |   | 12,117 |           |  |   |         |   |  |          | 12,961   |   |                  |   |       |           |  |   | 15,576  |   |  |   |        |   |  |   | 15,576  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Total revenues                                    |  | $                                     | 844     |   |                                       | $ | 49,070 |           |  | $ |         |   |  | $        | 49,914   |   |                  | $ |       |           |  | $ | 33,303  |   |  | $ |        |   |  | $ | 33,303  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Product gross profit                              |  | $                                     |        |   |                                       | $ | 9,931  |           |  | $ |         |   |  | $        | 9,931    |   |                  | $ |       |           |  | $ | 3,838   |   |  | $ |        |   |  | $ | 3,838   |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) |  | $                                     | 30,784  |   |                                       | $ | 25,979 |           |  | $ | 126,887  |   |  | $        | 183,650  |   |                  | $ | 9,956  |           |  | $ | 35,090  |   |  | $ | 59,383  |   |  | $ | 104,429 |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Operating loss                                    |  | $                                     | (29,940 | ) |                                       | $ | (3,931 | )         |  | $ | (126,887 | ) |  | $        | (160,758 | ) |                  | $ | (9,956 | )         |  | $ | (15,676 | ) |  | $ | (59,383 | ) |  | $ | (85,015 | )
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  
|Capital expenditures                              |  | $                                     | 41,211  |   |                                       | $ | 2,082  |           |  | $ | 1,901    |   |  | $        | 45,194   |   |                  | $ | 17,006 |           |  | $ | 1,893   |   |  | $ | 1,546   |   |  | $ | 20,445  |  
|                                                  |  |                                       |         |   |                                       |   |        |           |  |   |          |   |  |          |          |   |                  |   |        |           |  |   |         |   |  |   |         |   |  |   |         |  

Identifiable assets by operating segment are set forth below (in thousands):



|                                              |  |                          |         |                  |   |           |  |       |        |  |   |        
|--------------------------------------------- |  | ------------------------ | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                              |  | As of September 30, 2008
|                                              |  | Biofuels                 |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant & equipment, net              |  | $                        | 105,221 |                  | $ | 4,996     |  | $     | 4,719  |  | $ | 114,936
|Cash, short-term investments and other assets |  |                          | 1,300   |                  |   | 24,856    |  |       | 31,331 |  |   | 57,487 
|                                              |  |                          |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets                     |  | $                        | 106,521 |                  | $ | 29,852    |  | $     | 36,050 |  | $ | 172,423
|                                              |  |                          |         |                  |   |           |  |       |        |  |   |        



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Consolidated Results of Operations

Revenues

Revenues for the periods
ended September 30, 2008 and 2007 are as follows (in thousands):



|                   |  |                                  |        |      |   |          |                                 |     |      |  |      |        |          |   |        |  |     |   
|------------------ |  | -------------------------------- | ------ | ---- | - | -------- | ------------------------------- | --- | ---- |  | ---- | ------ | -------- | - | ------ |  | --- | --
|                   |  | Three Months Ended September 30, |        |      |   |          | Nine Months Ended September 30, |     |      | 
|                   |  | 2008                             |        | 2007 |   | % Change |                                 |     | 2008 |  | 2007 |        | % Change |  
|Revenues:          |  |                                  |        |      |   |          |                                 |     |      |  |      |        |          |   |        |  |     |   
|Phyzyme phytase    |  | $                                | 9,902  |      | $ | 3,591    |                                 | 176 | %    |  | $    | 27,819 |          | $ | 11,047 |  | 152 | % 
|All other products |  |                                  | 2,475  |      |   | 2,740    |                                 | (10 | )%   |  |      | 9,134  |          |   | 6,680  |  | 37  | % 
|                   |  |                                  |        |      |   |          |                                 |     |      |  |      |        |          |   |        |  |     |   
|Total product      |  |                                  | 12,377 |      |   | 6,331    |                                 | 95  | %    |  |      | 36,953 |          |   | 17,727 |  | 108 | % 
|Collaborative      |  |                                  | 2,828  |      |   | 4,075    |                                 | (31 | )%   |  |      | 10,244 |          |   | 13,202 |  | (22 | )%
|Grant              |  |                                  | 1,171  |      |   | 455      |                                 | 157 | %    |  |      | 2,717  |          |   | 2,374  |  | 14  | % 
|                   |  |                                  |        |      |   |          |                                 |     |      |  |      |        |          |   |        |  |     |   
|Total Revenues     |  | $                                | 16,376 |      | $ | 10,861   |                                 | 51  | %    |  | $    | 49,914 |          | $ | 33,303 |  | 50  | % 
|                   |  |                                  |        |      |   |          |                                 |     |      |  |      |        |          |   |        |  |     |   

Revenues increased 51%, or $5.5 million, to $16.4 million for the three months ended
September 30, 2008 and 50%, or $16.6 million, to $49.9 million for the nine months ended September 30, 2008. The increases in revenue for the three and nine months ended September 30, 2008 were attributed primarily to an increase in
product revenue. For the three months and nine months ended September 30, 2008, our revenue mix has shifted to a larger percentage of product revenue, consistent with our strategy to grow product sales and de-emphasize collaborations that are
not core to our strategic market focus. Product revenue represented 76% and 74% of total revenues for the three and nine months ended September 30, 2008, as compared to 58% and 53% for the three and nine months ended September 30, 2007.

Product revenues increased $6.0 million, or 95%, for the three months ended September 30, 2008 and $19.2 million, or 108%, for the
nine months ended September 30, 2008 as compared to the same periods in 2007. This increase was attributable primarily to increased revenue and profit sharing associated with Phyzyme XP phytase sold through our collaboration with Danisco. The
increase in Phyzyme revenue has been primarily related to the following factors:



| |  |  | In late 2006, the EU Commission granted permanent authorization for the use of Phyzyme XP in broiler poultry feed in Europe which has expanded the end user market
for Phyzyme XP;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In late 2006, Danisco introduced a new dry, pelletized, and thermally-stable formulation of Phyzyme XP; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Beginning in late 2007, due to an increase in the cost of phosphates (an animal feed additive), sales volumes of Phyzyme XP to Daniscos current customers have
been positively impacted, as many of these customers have increased Phyzyme dosages as a replacement for higher-cost phosphates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Non-Phyzyme related product revenue decreased $0.3 million, or 10%, for the three months ended September 30, 2008 as compared to the same period last year primarily due to the discontinuation of our Bayovac SRS and Quantum products.
Product revenue for the nine months ended September 30, 2008 includes $2.5 million of revenue from sales of these products during the first six months of fiscal 2008. These products were discontinued due to the following:



| |  |  | In late 2007, because of new entrants into the vaccine market and resulting pressure on pricing and margins, we made the strategic decision to exit the animal
health vaccine market to focus on product commercialization efforts in areas that are more strategic to our current focus, namely biofuels. In connection with this decision, we terminated our Licensing and Collaboration Agreement with Microtek, and
discontinued sales of Bayovac SRS after March 31, 2008; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In February 2008, AB Enzymes and AB Vista (collectively, AB), both subsidiaries of Associated British Foods plc, announced the acquisition of
Syngentas Quantum Phytase feed enzyme business. Prior to this transaction, we supplied Quantum Phytase to Syngenta pursuant to a manufacturing and supply agreement. We do not expect to continue to manufacture and supply the Quantum enzyme to
AB after March 31, 2008, as we have been unable to reach a manufacturing and supply agreement with AB on commercially agreeable terms.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Product revenue for the three and nine months ended September 30, 2008 includes increases in sales of our other commercial enzyme products, including Fuelzyme-LF and Purifine.

Revenue from Phyzyme represented approximately 80% and 75% of total product revenue for the three and nine months ended September 30, 2008 compared
to 57% and 62% of total product revenue for the comparable periods last year. While we anticipate an increase in revenue from our non-Phyzyme products, we expect that Phyzyme will continue to represent a significant percentage of our total product
revenue in the foreseeable future.



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We manufacture our enzyme products through a sole-source manufacturing facility in Mexico City, Fermic
S.A., or Fermic. Pursuant to our manufacturing agreement with Fermic, we are contractually committed to bring additional manufacturing capacity on line during the fourth quarter of 2008, which will allow us to meet increasing demand for our enzyme
products. However, due to current capacity constraints at Fermic, we are not able to supply adequate quantities of Phyzyme necessary to meet the increased demand from Danisco. As a result, we have contracted with Genencor, a subsidiary of Danisco,
to serve as a second-source manufacturer for Phyzyme. Pursuant to current accounting rules, revenue from Phyzyme that is supplied to us by Genencor is recognized in an amount equal to the net profit share received from Danisco, as compared to the
full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic. While this revenue recognition treatment should have little or no negative impact on the gross margin we recognize for every sale of
Phyzyme, it would have a negative impact on the gross product revenue we recognize for Phyzyme as the volume of Phyzyme manufactured by Genencor increases.

Collaborative revenue decreased 31%, or $1.2 million, to $2.8 million for the three months ended September 30, 2008 and 22%, or $3 million, to $10.2 million for the nine months ended September 30, 2008.
Collaborative revenue accounted for 17% and 21% of total revenue for the three and nine months ended September 30, 2008 compared to 38% and 40% of total revenue for the three and nine months ended September 30, 2007. We have continued to
de-emphasize collaborations that are not core to our current focus in favor of greater emphasis on sales of products. We anticipate that collaborative revenue will continue to decrease in 2008 as compared to 2007, due in large part to this
de-emphasis of non-strategic collaborations and decrease in revenue related to the expected wind-down of projects with existing strategic collaborators such as Syngenta, Bunge, and BASF. Additionally, under the terms of our 10-year agreement with
Syngenta, our two-year guaranteed funding period totaling $8 million per year will expire on December 31, 2008. We do not anticipate that we will continue to receive significant funding from Syngenta under this agreement beyond the initial
guaranteed funding period.

We will continue to pursue opportunities to expand, renew, or enter into new collaborations that we believe fit
our strategic focus and represent product commercialization opportunities in the future; however, there can be no assurance that we will be successful in renewing or expanding existing collaborations, or securing new collaboration partners.

Grant revenue increased 157%, or $0.7 million, to $1.2 million for the three months ended September 30, 2008 and 14%, or $0.3
million, to $2.7 million for the nine months ended September 30, 2008. The increase in grant revenue during the three and nine months ended September 30, 2008 was primarily attributable to a grant awarded in early 2007 from the Department
of Energy to discover and develop new enzymes and enzyme cocktails to break down various types of biomass. We continue to pursue additional opportunities to secure federal, state or local agency funding to support our biofuels initiatives. As of
September 30, 2008, we have committed funding from various governmental agencies totaling $4 million through 2012, and expect to see an increase in grant revenue during 2009 as compared to 2008.

Our revenues have historically fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the adoption
rates of our new and existing commercial products, timing and composition of funding under existing and future collaboration agreements, as well as regulatory approval timelines for new products. We anticipate that our revenue mix will continue to
shift toward a higher percentage of product-related revenue.

Product Gross Profit & Gross Margin

Product gross profit and product gross margin for the periods ended September 30, 2008 and 2007 are as follows (in thousands):



|                        |  |                                  |        |   |      |   |       |                                 |  |     |      |  |   |        |   |  |          |        |   |  |     |  
|----------------------- |  | -------------------------------- | ------ | - | ---- | - | ----- | ------------------------------- |  | --- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | --- | -
|                        |  | Three Months Ended September 30, |        |   |      |   |       | Nine Months Ended September 30, |  |     |      | 
|                        |  | 2008                             |        |   | 2007 |   |       | % Change                        |  |     | 2008 |  |   | 2007   |   |  | % Change |       
|Product revenue         |  | $                                | 12,377 |   |      | $ | 6,331 |                                 |  | 95  | %    |  | $ | 36,953 |   |  | $        | 17,727 |   |  | 108 | %
|Cost of product revenue |  |                                  | 9,569  |   |      |   | 4,751 |                                 |  | 101 | %    |  |   | 27,022 |   |  |          | 13,889 |   |  | 95  | %
|                        |  |                                  |        |   |      |   |       |                                 |  |     |      |  |   |        |   |  |          |        |   |  |     |  
|Product gross profit    |  |                                  | 2,808  |   |      |   | 1,580 |                                 |  | 78  | %    |  |   | 9,931  |   |  |          | 3,838  |   |  | 159 | %
|Product gross margin    |  |                                  | 23     | % |      |   | 25    | %                               |  |     |      |  |   | 27     | % |  |          | 22     | % |  |     |  

Product gross profit totaled $2.8 million, or 23% of product revenue, for the three months ended
September 30, 2008 compared to $1.6 million, or 25% of product revenue, for the three months ended September 30, 2007. Product gross margin during the third quarter ended September 30, 2008 was negatively impacted by lower-than
anticipated manufacturing yields for our Phyzyme and Fuelzyme.



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Product gross profit totaled $9.9 million, or 27% of product revenue, for the nine months ended
September 30, 2008 compared to $3.8 million, or 22% of product revenue, for the nine months ended September 30, 2007. Gross profit and margin improvement is reflective of higher sales volumes to absorb our fixed costs, partially offset by
the unfavorable manufacturing yield variances and, to a lesser extent, incremental zero-margin freight revenue incurred during the first half of 2008 to meet customer ship dates which negatively impacted gross profit margin by approximately one
percentage point during the nine months ended September 30, 2008.

Our product gross margins in 2008 are below our target of 30%, and
continue to be impacted by manufacturing variances related to high capacity utilization and higher raw material prices. We expect the unfavorable yield variances to continue through 2008 and into 2009 until we can better accommodate our recovery
capabilities, which may require additional investment in downstream recovery capacity at Fermic. Over time, our gross margins should be positively impacted by continued growth in sales of our enzyme products, as well as cost efficiencies we expect
to achieve as we continue to scale up production and improve our manufacturing yields. Because a large percentage of our manufacturing costs are fixed, we should realize continued margin improvements as product revenues increase; however, our
margins may be negatively impacted in the future if our product revenues do not grow in line with our increase in minimum capacity requirements at Fermic. For example, we are planning to further expand our manufacturing capabilities in the fourth
quarter of 2008, which will increase our fixed manufacturing costs by an additional $0.6 million per quarter. In addition, our gross margins are dependent upon the mix of product-related sales as the cost of product-related revenue varies from
product to product.

Because Phyzyme represents a significant percentage of our product revenue, our product gross margin is impacted to a
great degree by the gross margin achieved on sales of Phyzyme. Under our agreement with Danisco, we sell our Phyzyme inventory to Danisco at our cost and then share 50% of Daniscos profit, as defined, when the product is sold to the end user.
As a result, our total cost of product revenue for Phyzyme is incurred as we ship product to Danisco, and profit share revenue is recognized in the period in which the product is sold to the end user as reported to us by Danisco. We record our
quarterly profit share revenue based on estimates from Danisco, and the final calculation of profit share is often finalized in the subsequent quarter; accordingly, we are subject to potential adjustments to our actual profit share revenue from
quarter-to-quarter. These adjustments, while typically considered immaterial in absolute dollars, could have a significant impact on our reported product gross margin from quarter-to-quarter.

In addition, our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume
manufacturing rights for Phyzyme. If Danisco decides to exercise this right, we will likely experience excess capacity at Fermic. If we are unable to absorb this excess capacity with other products in the event that Danisco assumes all or a portion
of Phyzyme manufacturing rights, this will have a negative impact on our product gross margin.

Our product gross margin is dependent upon
the mix of product sales as the cost of product revenue varies from product to product. We believe that our product gross margin should be positively impacted as we grow sales of products we market and sell directly to end users, namely Fuelzyme-LF
and Purifine, which are expected to have higher gross margins than our Phyzyme products. Cost of product revenue includes both fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs, associated with
our product revenues. Excluded from cost of product revenue are costs associated with the scale-up of manufacturing processes for new products that have not reached commercial-scale production volumes, which we include in our research and
development expenses. Cost of product revenue increased $4.8 million, or 101%, to $9.6 million for the three months ended September 30, 2008 and $13.1 million, or 95%, to $27.0 million for the nine months ended September 30, 2008 compared
to the same periods in 2007. This increase resulted primarily from the increase in product revenues, and to a lesser extent, the increase in our fixed manufacturing costs under our contract with Fermic.

Operating Expenses

Research and
development and selling, general and administrative expenses for the periods ended September 30, 2008 and 2007 are as follows (in thousands):



|                                             |  |                                  |        |      |   |          |                                 |    |      |  |      |        |          |   |        |  |    |  
|-------------------------------------------- |  | -------------------------------- | ------ | ---- | - | -------- | ------------------------------- | -- | ---- |  | ---- | ------ | -------- | - | ------ |  | -- | -
|                                             |  | Three Months Ended September 30, |        |      |   |          | Nine Months Ended September 30, |    |      | 
|                                             |  | 2008                             |        | 2007 |   | % Change |                                 |    | 2008 |  | 2007 |        | % Change |  
|Research and development                     |  | $                                | 15,267 |      | $ | 14,723   |                                 | 4  | %    |  | $    | 45,048 |          | $ | 37,509 |  | 20 | %
|Selling, general and administrative expenses |  | $                                | 13,720 |      | $ | 11,269   |                                 | 22 | %    |  | $    | 32,468 |          | $ | 24,520 |  | 32 | %

Operating expenses for the three months ended September 30, 2008 and 2007 include the
consolidated results for our specialty enzyme and biofuels business following our June 2007 merger with Celunol. While the operating expenses for the nine months ended September 30, 2008 increased compared to the same period in 2007, related
primarily to the incremental six months of operating expenses associated with inclusion of our biofuels business since our June 2007 merger with Celunol.

Research and Development

Research and development expenses consist primarily of costs associated
with internal development of our technologies and our product candidates, manufacturing scale-up and bioprocess development for our current products, and costs associated with research activities performed on behalf of our collaborators, as well as
costs related to technology development and engineering costs associated with our pilot and demonstration-scale cellulosic ethanol facilities.



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##### Table of Contents

Total research and development costs incurred for the periods ended September 30, 2008 and 2007 were
as follows (in thousands):



|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|------------------------------ |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                               |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                               |  | 2008                            |        | 2007                           |   | 2008   |  | 2007
|Personnel-related              |  | $                               | 5,904  |                                | $ | 5,268  |  | $    | 18,396 |  | $ | 13,412
|Laboratory and supplies        |  |                                 | 1,842  |                                |   | 1,258  |  |      | 4,775  |  |   | 5,734 
|Outside services               |  |                                 | 1,329  |                                |   | 731    |  |      | 3,483  |  |   | 940   
|Equipment and depreciation     |  |                                 | 1,472  |                                |   | 1,274  |  |      | 4,301  |  |   | 3,609 
|Facilities, overhead and other |  |                                 | 3,322  |                                |   | 4,718  |  |      | 10,191 |  |   | 10,671
|Scale-up manufacturing costs   |  |                                 | 379    |                                |   | 89     |  |      | 411    |  |   | 740   
|Share-based compensation       |  |                                 | 1,019  |                                |   | 1,385  |  |      | 3,491  |  |   | 2,403 
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       
|                               |  | $                               | 15,267 |                                | $ | 14,723 |  | $    | 45,048 |  | $ | 37,509
|                               |  |                                 |        |                                |   |        |  |      |        |  |   |       

Our research and development expenses increased $0.5 million, to $15.3 million, for the three
months ended September 30, 2008 and $7.5 million, to $45.0 million, for the nine months ended September 30, 2008. This increase was attributed to a $0.6 million and $5.0 million increase in personnel-related costs for direct research and
development for the three and nine months ended September 30, 2008, primarily for biofuels technology development and engineering activities as a result of our merger with Celunol in June 2007. Our outside services increased $0.6 million and
$2.5 million for the three and nine months ended September 30, 2008 primarily related to supporting our pilot and demonstration-scale cellulosic ethanol facilities in Jennings, Louisiana, and to a lesser extent, technology and engineering
designs associated with early-stage development and design of our first planned commercial plant. Laboratory and supplies increased $0.6 million and decreased $1.0 million during the three and nine months ended September 30, 2008 compared to
the same periods in the prior year due to the timing of our collaboration and grant activities, which also impacts our related collaboration and grant revenue. Share-based compensation decreased $0.4 million and increased $1.1 million during the
three and nine months ended September 30, 2008 compared to the same periods in the prior year due to the timing of stock options granted to employees and management after the completion of the merger with Celunol in June 2007.

We have a limited history of developing commercial products. We determine which products to pursue independently based on various criteria, including:
investment required, estimated time to market, regulatory hurdles, infrastructure requirements, and industry-specific expertise necessary for successful commercialization. Successful products require significant development and investment prior to
regulatory approval and commercialization. As a result of the significant risks and uncertainties involved in developing and commercializing such products, we are unable to estimate the nature, timing, and cost of the efforts necessary to complete
each of our major projects. These risks and uncertainties include, but are not limited to, the following:



| |  |  | Our products may require more resources than we anticipate if we are technically unsuccessful in initial development or commercialization efforts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The outcome of research is unknown until each stage of testing is completed, up through and including product trials and regulatory approvals, if needed;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | It can take many years from the initial decision to perform research through development until products, if any, are ultimately marketed; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have several product candidates in various stages of development related to collaborations and grants as well as internally developed products. At any time, we
may modify our strategy and pursue additional collaborations for the development and commercialization of some products that we had intended to pursue independently.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any one of these risks and uncertainties could have a significant impact on the nature, timing, and costs to complete our product development efforts.
Accordingly, we are unable to predict which potential product candidates we may proceed with, the time and costs to complete development, and ultimately whether we will have any products approved by the appropriate regulatory bodies. The various
risks associated with our research and development activities are discussed more fully in this report under Risk Factors.

For
the three and nine months ended September 30, 2008, we estimate that approximately 27% and 28% of our research and development personnel costs, based upon hours incurred, were spent on research activities funded by our collaborators and grants,
and that approximately 73% and 72% were spent on internal product and technology development. For the three and nine months ended September 30, 2007, we estimate that approximately 26% and 49% of our research and development personnel-related
costs, based upon hours incurred, were spent on research activities funded by our collaborators and grants, and that approximately 74% and 51% were spent on internal product and technology development. The increase in time spent on internal product
and technology development from the prior year is attributed to our focus on cellulosic ethanol process development since the merger with Celunol in June 2007.



33



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##### Table of Contents

Research and development direct personnel-related costs and unallocated non-personnel costs incurred by
type of project during the periods ended September 30, 2008 and 2007 were as follows (in thousands):



|                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                          |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                          |  | 2008                             |        | 2007                            |   | 2008   |  | 2007
|Collaborations:           |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Syngenta                  |  | $                                | 869    |                                 | $ | 699    |  | $    | 3,140  |  | $ | 3,199 
|Other                     |  |                                  | 297    |                                 |   | 534    |  |      | 1,169  |  |   | 2,705 
|                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total collaborations      |  |                                  | 1,166  |                                 |   | 1,233  |  |      | 4,309  |  |   | 5,904 
|Grants                    |  |                                  | 410    |                                 |   | 141    |  |      | 852    |  |   | 648   
|Internal development      |  |                                  | 4,328  |                                 |   | 3,894  |  |      | 13,235 |  |   | 6,860 
|Unallocated non-personnel |  |                                  | 9,363  |                                 |   | 9,455  |  |      | 26,652 |  |   | 24,097
|                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|                          |  | $                                | 15,267 |                                 | $ | 14,723 |  | $    | 45,048 |  | $ | 37,509
|                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       

Our internal development costs relate primarily to research and development efforts dedicated to
our cellulosic ethanol process development activities, early-stage discovery of new enzymes, regulatory work for enzymes in mid-stage development, and bioprocess development and technical support for late-stage enzyme development. We consider
early-stage projects to be those which are experimental in nature, and are often short-lived. We consider mid-stage enzyme products to be those that are potential candidates to advance to regulatory and commercialization stages. We consider
late-stage enzyme products those that have been approved for their intended use by one or more regulatory agencies, have already been introduced commercially, or such commercial introduction is pending. Our expenses related to cellulosic ethanol
process development relate primarily to our activities to develop and commercialize cellulosic ethanol. We currently do not track our costs to develop our cellulosic ethanol process technology at a level that enables us to determine the amount of
our expenditures that relate to early-, mid-, and late-stage development.

We estimate that our allocation of internal research and
development personnel-related costs during the periods ended September 30, 2008 and 2007 were as follows (in thousands):



|                                       |  |                                  |       |                                 |   |       |  |      |        |  |   |      
|-------------------------------------- |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|                                       |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                       |  | 2008                             |       | 2007                            |   | 2008  |  | 2007
|Early-stage product development        |  | $                                | 3     |                                 | $ | 299   |  | $    | 28     |  | $ | 963  
|Mid-stage product development          |  |                                  | 69    |                                 |   | 5     |  |      | 162    |  |   | 141  
|Late-stage product development         |  |                                  | 418   |                                 |   | 912   |  |      | 1,333  |  |   | 2,396
|Cellulosic ethanol process development |  |                                  | 3,516 |                                 |   | 2,590 |  |      | 10,756 |  |   | 2,855
|R&D support activities                 |  |                                  | 322   |                                 |   | 88    |  |      | 956    |  |   | 505  
|                                       |  |                                  |       |                                 |   |       |  |      |        |  |   |      
|                                       |  | $                                | 4,328 |                                 | $ | 3,894 |  | $    | 13,235 |  | $ | 6,860
|                                       |  |                                  |       |                                 |   |       |  |      |        |  |   |      

The increase in our internal development costs was largely the result of the merger with Celunol
Corp. and our emphasis on biofuels process development. Our allocation of research and development resources varies from period to period and is largely dependent upon resources we have available over and above what is funded by our partners;
however, we believe that our internal development projects are benefited to some extent by work we perform under our funded collaborative agreements.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased
$2.5 million, or 22%, to $13.7 million (including share-based compensation of $2.2 million) for the three months ended September 30, 2008 primarily due to transaction costs incurred to complete our joint development agreement with BP, partially
offset by lower share-based compensation. Selling, general and administrative expenses increased $7.9 million, or 32%, to $32.5 million (including share-based compensation of $5.9 million) for the nine months ended September 30, 2008. This
increase is largely due to incremental personnel and overhead costs resulting from the merger, incremental legal expense, BP joint development transaction costs, and, to a lesser extent, increased personnel costs and professional services costs to
support the growth in product sales and increased complexity of our business. These increases were partially offset by charges incurred during 2007 of $4.0 million related to severance, bonus and modifications to equity awards pursuant to
transitional employment and severance agreements with certain executives after the completion of the merger with Celunol in June 2007.

We
expect that our selling, general and administrative expenses will continue to exceed 2007 levels to support both the anticipated growth in sales of our specialty enzyme products and our biofuels commercialization efforts.



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Share-Based Compensation Charges

We recognized $3.2 million, or $0.05 per share, and $5.1 million, or $0.08 per share, in share-based compensation expense for our share-based awards
during the three months ended September 30, 2008 and 2007 and $9.4 million, or $0.15 per share, and $8.4 million, or $0.16 per share, during the nine months ended September 30, 2008 and 2007. These charges had no impact on our reported
cash flows. Share-based compensation expense was allocated among the following expense categories (in thousands):



|                                    |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|----------------------------------- |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ----- |  | - | -----
|                                    |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                    |  | 2008                             |       | 2007                            |   | 2008  |  | 2007
|Research and development            |  | $                                | 1,019 |                                 | $ | 1,385 |  | $    | 3,491 |  | $ | 2,403
|Selling, general and administrative |  |                                  | 2,228 |                                 |   | 3,680 |  |      | 5,939 |  |   | 5,987
|                                    |  |                                  |       |                                 |   |       |  |      |       |  |   |      
|                                    |  | $                                | 3,247 |                                 | $ | 5,065 |  | $    | 9,430 |  | $ | 8,390
|                                    |  |                                  |       |                                 |   |       |  |      |       |  |   |      

Share-based compensation decreased $1.8 million for the three months ended September 30, 2008
as compared to the same period in 2007, primarily related to additional expense recognized in 2007 for 1) modification of vesting for restricted stock awards for certain executives in connection with separation agreements relating to the merger with
Celunol in June 2007 and 2) options and awards granted to our new executive team in connection with the merger in June 2007. This decrease was offset in part by non-recurring charges of $1.1 million related to the acceleration of vesting of 700,000
stock options for certain executives as a result of satisfying performance conditions upon the completion of the BP joint development agreement in August 2008.

Share-based compensation increased $1.0 million for the nine months ended September 30, 2008 compared to the same period in 2007 primarily due the acceleration of vesting for certain executives, described above.

Goodwill Impairment

During the third quarter of 2008, we determined that the market value of our common stock and convertible debt was not adequate at September 30, 2008 to support the carrying value of our goodwill resulting from the June 2007 merger
between Diversa and Celunol. As a result, pursuant to SFAS No. 142, Goodwill and Other Intangible Assets,we recorded a non-cash charge of $106.1 million during the quarter ended September 30, 2008, representing
full impairment of the carrying value of our goodwill. We believe that this impairment is reflective primarily of current market conditions, and is not indicative of a change in our business or implied value of our underlying biofuels business model
aimed toward the commercialization of cellulosic ethanol.

Acquired in-process Research and Development

We allocated $42.4 million of the purchase price in connection with our merger with Celunol in June 2007 to acquired in-process research and
development projects. Acquired in-process research and development (IPR&D) represents the valuation of acquired, to-be-completed research projects. Celunols ongoing research and development initiatives have primarily involved
the development of its patented and proprietary biotechnology to enable production of fuel-grade ethanol from cellulosic biomass materials. As of the merger date, pursuant to authoritative guidance under SFAS No. 2, Accounting
for Research and Development Costs, these projects were not determined to have reached technological feasibility and have no alternative future use. Accordingly, the amounts allocated to those projects were written off in the second
quarter of 2007, the period the merger was consummated.

Interest expense, net

Interest expense was $9.7 million, net of $1.7 million in capitalized interest for the demonstration facility, for the three months ended
September 30, 2008 compared to $1.8 million, net of $0.3 million in capitalized interest for the demonstration facility, for the three months ended September 30, 2007. Interest expense was $15.7 million, net of $3.9 million in capitalized
interest for the demonstration facility, for the nine months ended September 30, 2008 compared to $4.1 million, net of $0.3 million in capitalized interest for the demonstration facility, for the nine months ended September 30, 2007. The
increase was attributed to interest on the 2007 Notes we issued in March and April 2007 combined with the 2008 Notes issued in February 2008. We recorded aggregate interest expense related to the 2008 Notes of $9.8 million and $13.7 million for the
three and nine months ended September 30, 2008, representing the following (in thousands):



|                                                                                     |  |                                  |       |                                 |   |      |  |      |        |  |   |  
|------------------------------------------------------------------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ---- |  | ---- | ------ |  | - | -
|                                                                                     |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                                                                     |  | 2008                             |       | 2007                            |   | 2008 |  | 2007
|8% coupon interest, payable in cash                                                  |  | $                                | 1,301 |                                 | $ |     |  | $    | 3,233  |  | $ | 
|Non-cash accretion of debt discount, net of premium amortization                     |  |                                  | 1,162 |                                 |   |     |  |      | 2,758  |  |   | 
|Non-cash amortization of debt issuance costs                                         |  |                                  | 229   |                                 |   |     |  |      | 546    |  |   | 
|Wire-off of unamortized debt issuance costs and discounts related to converted notes |  |                                  | 7,060 |                                 |   |     |  |      | 7,181  |  |   | 
|                                                                                     |  |                                  |       |                                 |   |      |  |      |        |  |   |  
|                                                                                     |  | $                                | 9,752 |                                 | $ |     |  | $    | 13,718 |  | $ | 
|                                                                                     |  |                                  |       |                                 |   |      |  |      |        |  |   |  



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Aggregate debt discount costs of $41 million and financing costs of $4.0 million are being accreted into
interest expense over the term of the debt, or approximately four years.

Interest income on cash and short term investments decreased to
$0.2 million and $0.8 million for the three and nine months ended September 30, 2008 compared to $1.2 million and $3.1 million for the three and nine months ended September 30, 2007. The decrease was attributed to lower average cash and
investment balances during fiscal 2008.

Loss on exchange of convertible notes

In connection with the issuance of the 2008 Notes, we exchanged $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7
million in aggregate principal amount of the 2008 Notes. Pursuant to current accounting rules, we recorded a non-cash loss on the exchange of $3.6 million, equal to the difference between the carrying value of the 2007 Notes and the fair value of
the 2008 Notes and warrants issued.

Gain (loss) on net change in fair value of derivative assets and liabilities

The fair value of the conversion rights, warrants, and the convertible hedge transaction in connection with our 2008 Notes are recorded as a derivative
asset or liability and marked-to-market each balance sheet date. The change in fair value is recorded in the statement of operations as Change in fair value of derivative assets and liabilities. During the three and nine months ended
September 30, 2008, we recorded a net loss of $0.4 million and a net gain of $1.3 million related to the change in fair value of our recorded derivative asset and liabilities between the closing date of February 22, 2008 and September 30, 2008.

Loss attributed to noncontrolling interest in Galaxy Biofuels LLC

In connection with our strategic partnership with BP, we formed a special purpose entity, Galaxy Biofuels LLC (Galaxy). We are considered the
primary beneficiary of Galaxy and consolidate its financial results. Pursuant to current accounting rules, the transaction fees and joint development fees are accounted for as follows:



| |  |  | The license to technology granted by Verenium and ongoing joint development performed by Verenium are considered capital contributions to Galaxy;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction fees and joint development fees paid by BP are considered capital contributions to Galaxy, which are subsequently distributed to Verenium as a reduction
to Vereniums capital account;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ongoing joint development is considered a monthly expense of Galaxy.
| | - |  | --------------------------------------------------------------------

As a result, our condensed consolidated financial statements include a line item called Noncontrolling Interest in Galaxy Biofuels LLC. On
our condensed consolidated balance sheet, this line reflects BPs ownership of Galaxys equity. This line item will be reduced by BPs 50% share of Galaxys profits and losses, and increased by cash distributions made by BP to us
on behalf of Galaxy. BPs share of Galaxys losses is reflected in our condensed consolidated statement of operations as Loss attributed to noncontrolling interest in Galaxy Biofuels LLC. Galaxy has incurred approximately $10.0
million in losses through September 30, 2008, 50% of which has been allocated to BP. We anticipate Galaxy will continue to incur losses related to ongoing joint development through at least the initial 18 months of the strategic partnership.

Liquidity and Capital Resources

Since
inception, we have financed our business primarily through the sale of common and preferred stock, funding from strategic partners and government grants, the issuance of convertible debt, and product sales. Our strategic partners, including our
recent partnership with BP, have provided us with more than $300 million in funding since inception and are committed to additional funding of more than $75 million through 2016, subject to our performance under existing agreements, excluding
milestone payments, license and commercialization fees, and royalties or profit sharing.

Our future committed funding is subject to our
performance under existing agreements, and is concentrated within a limited number of collaborators. Our failure to successfully maintain our relationships with these collaborators could have a material adverse impact on our operating results and
financial condition.

Capital Requirements

As of September 30, 2008, we had available cash, cash equivalents, and short-term investments of approximately $22.1 million, excluding approximately $10.0 million in restricted cash. Our short-term investments
as of such date consisted primarily of U.S. Treasury and government agency obligations and investment-grade corporate obligations. Historically, we have funded our capital equipment purchases through available cash, capital leases and equipment
financing line of credit agreements. Since we announced our merger with Celunol in February 2007, we have issued $172.5 million of convertible debt to fund our cellulosic ethanol pilot and demonstration-scale facilities and other working capital
requirements.

Our independent registered public accounting firm included an explanatory paragraph in its report on our 2007 financial
statements related to the uncertainty of our ability to continue as a going concern. As of December 31, 2007 our cash was not sufficient to meet the cash requirements to fund our operating expenses, capital expenditures, and working capital
beyond December 2008 without additional sources of cash.

As more fully described above under the caption Recent
Developments, in August 2008, we entered into a partnership with BP that will provide us funding of approximately $90 million, payable in increments over the next 18 months. This additional capital is expected to substantially fund our
capital requirements into 2009.

We will require additional capital to fund our operations. We believe that we will be successful in
generating additional cash to fund these requirements through a combination of additional corporate partnerships and collaborations, federal and state grant funding, incremental product sales, selling or financing assets, and, if necessary and
available, the sale of equity or debt securities. If we are unsuccessful in raising additional capital from any of these sources, we may need to defer, reduce or eliminate certain planned expenditures. There can be no assurance that we will be able
to obtain any sources of financing on acceptable terms, or at all. If we are not able to defer, reduce or eliminate our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may need to restructure or
significantly curtail our operations, divest all or a portion of our business, file for bankruptcy or cease operations.



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Completion of 2007 Convertible Notes Offering

In late March 2007 and early April 2007, we completed an offering of $120 million aggregate principal amount of 2007 Notes in a private placement,
generating net cash proceeds to the Company of approximately $114.7 million. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the 2007 Notes and of our common stock issuable upon
conversion of the 2007 Notes.

The 2007 Notes bear interest at 5.5% per year, payable in cash semi-annually, and are convertible at
the option of the holders at any time prior to maturity, redemption or repurchase into shares of Verenium common stock at an initial conversion rate of 122.5490 shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain
circumstances), which represents an initial conversion price of $8.16 per share. On April 1, 2008, in accordance with the 2007 Notes agreement, the conversion rate of the 2007 Notes was increased to 156.25 shares per $1,000 principal amount,
which represents a conversion price of $6.40 per share, which was the closing price per share of our common stock on the date of the offering. As a result of the change in the conversion price, total common shares that would be issued assuming
conversion of the entire $101.5 million in 2007 Notes outstanding as of September 30, 2008 increased from 12.4 million shares to 15.9 million shares.

On or after April 5, 2012, the Company may, at its option, redeem the 2007 Notes, in whole or in part, for cash at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus any
accrued and unpaid interest to the redemption date. On each of April 1, 2012, April 1, 2017 and April 1, 2022, holders may require the Company to purchase all or a portion of their 2007 Notes at a purchase price in cash equal to
100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to the purchase date. Holders may also require the Company to repurchase all or a portion of their 2007 Notes upon a fundamental change at a repurchase
price in cash equal to 100% of the principal amount of the 2007 Notes to be repurchased plus any accrued and unpaid interest to the repurchase date. Pursuant to the terms of the Notes, a fundamental change is broadly defined as 1) a
change in control, or 2) a termination of trading of our common stock.

We have used a significant portion of the proceeds of this offering
to make enhancements to our pilot facility and to fund the construction and development of our demonstration-scale facility in Jennings, Louisiana, to commercialize our specialty enzymes products, to continue our research and development efforts in
both specialty enzymes and biofuels, and for expenses related to our merger with Celunol, all of which have impacted, and will continue to impact, our operating results until revenues from our specialty enzymes business and our biofuels business
reach levels at which we can fully support our operating and capital expenditures. As described below, in connection with our private placement of convertible notes in 2008, we entered into exchange agreements with certain noteholders, representing
$18.5 million in aggregate principal of the existing 2007 Notes.

Completion of 2008 Convertible Notes Offering

On February 22, 2008, we completed a private placement of 2008 Notes and warrants to purchase our common stock. Concurrent with entering into the
purchase agreement, we also entered into senior notes exchange agreements with certain existing holders of our 2007 Notes pursuant to which such noteholders exchanged approximately $18.5 million in aggregate principal amount of the 2007 Notes for
approximately $16.7 million in aggregate principal amount of the 2008 Notes and for warrants to purchase common stock. Including the 2008 Notes issued in exchange for the 2007 Notes, we issued $71 million in aggregate principal amount of the 2008
Notes and warrants to purchase approximately 8 million shares of our common stock. Gross proceeds from new investment were approximately $54 million and net proceeds from new investment, after giving effect to payment of certain
transaction-related expenses and the cash cost of the convertible hedge transaction described below, were approximately $44 million.

The
2008 Notes are convertible on the date of their issuance. Their initial conversion price is equal to $4.09 per share. The conversion price is subject to full ratchet anti-dilution protection and a reset provision whereby, to the extent the volume
weighted average price of our common stock during the seven trading days prior to the one-year anniversary of the issuance of the 2008 Notes s is less than $3.55 per share, the conversion price will reset to the greater of $2.13 per share or 115% of
the volume weighted average price of the common stock at that time. In addition, subject to the satisfaction of certain conditions, interest payments on the 2008 Notes may be made, at our option, in shares of common stock, valued at a 5% discount to
the stock price at the time of payment of the interest. The registration statement that we filed with the Securities and Exchange Commission to register the resale of the interest shares, along with the shares issuable upon conversion of the 2008
Notes and shares issuable upon exercise of the warrants, only registers a limited number of interest shares due to applicable Securities and Exchange Commission guidelines, and our ability to pay interest under the 2008 Notes using shares is
accordingly limited to an interest amount equal to the value of such shares, valued as described in the preceding sentence. The 2008 Notes are subject to automatic conversion at our option if our closing stock price exceeds $8.18 per share over a
30-trading day period ending prior to the date we provides notice of the automatic conversion to investors, the average daily trading volume of our stock over that 30-trading day period equals or exceeds $3 million, and certain other conditions are
met. In addition, the 2008 Notes also include a make-whole provision whereby, upon any holders conversion



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##### Table of Contents

of the 2008 Notes for common stock, we are obligated to pay such holder an amount in cash or, subject to the satisfaction of certain conditions, shares of
our common stock equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using an agreed-upon discount rate and, if applicable, valuing the shares of stock at a 5% discount
to the stock price at the time of conversion. The registration statement that we filed with the Securities and Exchange Commission to register the resale of the shares issuable upon conversion of the 2008 Notes, along with shares issuable upon
exercise of the warrants and shares issuable for payment of interest under the 2008 Notes, only registers a limited number of conversion shares due to applicable Securities and Exchange Commission guidelines, and our ability to pay
make-whole payments under the 2008 Notes using shares is accordingly limited to a payment amount equal to the value of such shares, valued as described in the preceding sentence.

The warrants are exercisable for shares of our common stock six months after their issuance. The initial exercise price of the warrants is $4.44 per
share. The exercise price is subject to weighted average anti-dilution protection.

In connection with the transactions described above, we
entered into a convertible hedge transaction with a counterparty, which is intended to reduce the potential dilution upon conversion of the 2008 Notes. The convertible hedge transaction is composed of two separate call options. Under the first call
option, on April 1, 2012 (or earlier upon conversion of the 2008 Notes), we are entitled to purchase 13,288,509 shares of our common stock from the counterparty at a price per share equal to the initial conversion price (or a proportion of such
number of shares based on the proportion of the 2008 Notes being converted). Under the second call option, on three exercise dates staggered in six month intervals beginning on October 1, 2013, the counterparty is entitled to purchase an
aggregate of 13,288,509 shares of our common stock at a price per share of $5.16. The cash cost of the convertible hedge transaction was approximately $6.2 million.

During the nine months ended September 30, 2008, six noteholders of our 2008 Notes converted principal in the amount of $11.9 million into approximately 2.9 million shares of the Companys common stock.
The conversion price was equal to the initial conversion price of $4.09 per share. We also made make-whole payments to the noteholders in the amount of $3.4 million related to the unpaid interest from the time of the conversion through the maturity
of the 2008 Notes, April 1, 2012, in accordance with the 2008 Notes agreement. The make-whole payments to three of the noteholders were paid in cash in the amount of $2.1 million, while the remaining $1.3 million were settled, at the
noteholders elections, with an aggregate of 0.7 million shares of the Companys common stock in lieu of cash.

We intend to
use the remaining net proceeds from the sale of our 2008 Notes and warrants for general corporate and working capital purposes, including the start-up, commissioning and completion of our cellulosic ethanol demonstration facility.

The following table summarizes our principal and interest obligations for the 2007 and 2008 Notes as of September 30, 2008 (in thousands):



|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        
|---------------------------------------- |  | ----- | ------- | ---------------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | ------ |  | - | -------
|                                         |  |       |         | Payments due by Period
|                                         |  | Total |         | Less than1 Year        |   | 1 - 3 Years |  | 3 - 5 Years |        | More than5 Years
|2007 Notes                               |  | $     | 207,568 |                        | $ | 5,583       |  | $           | 11,165 |                  | $ | 11,165 |  | $ | 179,655
|2008 Notes (1)                           |  |       | 76,807  |                        |   | 3,545       |  |             | 9,453  |                  |   | 63,809 |  |   |       
|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        
|Total Principal and Interest Obligations |  | $     | 284,375 |                        | $ | 9,128       |  | $           | 20,618 |                  | $ | 74,974 |  | $ | 179,655
|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        



|(1) | Total obligations under the 2008 Notes include approximately $17.7 million in interest through maturity of the notes. Interest payments on the notes may be made, at our option and
subject to the satisfaction of certain conditions, in shares of common stock, or interest shares, valued at a 5% discount to the average of the volume weighted stock price during a measurement period prior to the applicable interest payment date, as
long as such shares have been registered with the Securities and Exchange Commission. Due to Securities and Exchange Commission limitations on the amount of shares we were permitted to register in the resale registration statement we filed with the
Securities and Exchange Commission to register the resale of the interest shares, along with the shares issuable upon conversion of the 2008 Notes and shares issuable upon exercise of the warrants, we only registered a limited number of interest
shares, and as a result we intend to continue paying a significant portion of our quarterly interest payments in cash.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash Flows Related to Operating, Investing and Financing Activities

Our operating activities used cash of $41.5 million for
the nine months ended September 30, 2008. Our cash used by operating activities consisted primarily of cash used to fund our net loss of $173 million, which includes a non-cash goodwill impairment charge of $106.1 million.



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Our investing activities used cash of $49.1 million for the nine months ended September 30, 2008.
Our investing activities included purchases of property, plant and equipment of $45.2 million primarily for the ongoing construction, start-up and commissioning of our demonstration plant, partially offset by cash generated through net maturities of
short-term investments of $6.1 million to fund operations. During the second quarter of 2008 we were required under our bank agreement to secure our $10 million outstanding letter of credit issued to our landlord with cash, which is reflected as
restricted cash on our condensed consolidated balance sheet as of September 30, 2008 and is reported as cash used in investing activities.

We recently achieved a key development milestone with our demonstration-scale cellulosic ethanol facility in Jennings, Louisiana with commencement of the transition to startup phase. With this phase of the project now effective,
the site has been electronically energized and the turnover of individual systems to start-up and operating teams has begun so that the functional capabilities of each system can be tested. In total, more than forty separate systems will be
evaluated over the remainder of 2008. Following the start-up phase, the project will move into a commissioning phase geared toward validating the implementation of our technology and process at scale, including the ability to produce ethanol within
predefined performance criteria. This will include introducing enzymes and ethanologens into the process and running biomass through the system to produce ethanol. Subsequently, work to optimize the facility and make process improvements will
commence as we seek to ensure reliable and cost-effective operation. As of September 30, 2008, we were approximately 90% complete with start-up and 20% complete with commissioning of the demonstration plant.

During 2007 and the nine months ended September 30, 2008, Celunol and Verenium spent in excess of $100 million on further modifications and
improvements to our pilot facility and constructing our demonstration-scale cellulosic ethanol facility in Jennings, Louisiana. We estimate that the total additional capital and operating expenditures required to complete these projects will be in
the range of $3 million to $4 million through mechanical completion, start-up and commissioning of our demonstration facility for the remainder of 2008. We do not have fixed-priced arrangements with our major engineering and construction firms; as
such, most of our engineering and construction costs related to our demonstration-facility are incurred and paid on a time and materials basis. During 2007 and early 2008, we have incurred costs in excess of our projected expenditures for the
improvements to our pilot plant and construction of our demonstration plant. We may continue to experience such cost overruns during the remainder of 2008.

Our financing activities generated net cash of $60.9 million for the nine months ended September 30, 2008, consisting primarily of net proceeds from our 2008 Notes offering in February 2008 and capital
contributions from Galaxy in August 2008.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2008, excluding our Convertible Notes principal and interest payments
shown above (in thousands):



|                                                    |  |       |        |                        |   |             |  |             |        |                  |   |        |  |   |       
|--------------------------------------------------- |  | ----- | ------ | ---------------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | ------ |  | - | ------
|                                                    |  |       |        | Payments due by Period
|                                                    |  | Total |        | Less than1 Year        |   | 1 - 3 Years |  | 3 - 5 Years |        | More than5 Years
|Contractual Obligations                             |  |       |        |                        |   |             |  |             |        |                  |   |        |  |   |       
|Long-term equipment loans, including capital leases |  | $     | 1,830  |                        | $ | 1,601       |  | $           | 229    |                  | $ |       |  | $ |      
|Operating leases (1)                                |  |       | 42,299 |                        |   | 5,497       |  |             | 10,339 |                  |   | 11,059 |  |   | 15,404
|Manufacturing costs to Fermic (2)                   |  |       | 36,005 |                        |   | 12,733      |  |             | 23,272 |                  |   |       |  |   |      
|Purchase commitment (3)                             |  |       | 597    |                        |   | 597         |  |             |       |                  |   |       |  |   |      
|License and research agreements                     |  |       | 2,503  |                        |   | 763         |  |             | 490    |                  |   | 490    |  |   | 760   
|                                                    |  |       |        |                        |   |             |  |             |        |                  |   |        |  |   |       
|Total Contractual Obligations                       |  | $     | 83,234 |                        | $ | 21,191      |  | $           | 34,330 |                  | $ | 11,549 |  | $ | 16,164
|                                                    |  |       |        |                        |   |             |  |             |        |                  |   |        |  |   |       



|1 | Operating lease obligations are shown net of $6.7 million in sublease rental income that we expect to receive through February 28, 2015, pursuant to a facilities sublease
agreement we entered into during the fourth quarter of 2007.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Pursuant to our manufacturing agreement with Fermic, we are obligated to reimburse monthly costs related to manufacturing activities. These costs scale up as our projected
manufacturing volume increases. As of September 30, 2008, under this agreement we have made minimum commitments to Fermic of approximately $36 million, over the next three years.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3 | In August 2006, Celunol Corp. entered into a commitment to purchase a piece of equipment for the demonstration plant in the amount of $2.2 million, of which $0.5 million was paid
upon signing the agreement and an additional $0.5 million upon shipment which occurred in September 2007. The remaining balance of $1.3 million is to be paid ratably over the 24 month period beginning October 2007 and is included in liabilities on
our condensed consolidated balance sheets as of September 30, 2008.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Manufacturing and Supply Agreements

During 2002, we entered into a manufacturing agreement with Fermic to provide us with the capacity to produce commercial quantities of certain enzyme
products. Based on actual and projected increased product requirements, the agreement was amended in 2006 to provide for additional capacity to be installed over the next two years. Under the terms of the agreement, we can cancel the committed
purchases with thirty months notice provided that the term of the agreement, including the termination notice period, aggregates four years. Pursuant to our agreement with Fermic, we are also obligated to reimburse monthly costs related to
manufacturing activities. These costs scale up as our projected manufacturing volume increases. As of September 30, 2008, under this agreement we have made minimum commitments to Fermic of approximately $36 million, over the next three years.
In addition, under the terms of the agreement, we are required to purchase certain equipment required for fermentation and downstream processing of the products. Through September 30, 2008, we had incurred costs of approximately $18.1 million
for equipment related to this agreement.

For the remainder of 2008, we anticipate funding as much as $0.5 million in additional equipment
costs related to our manufacturing agreement with Fermic. As we continue to develop our commercial manufacturing platforms, we will be required to purchase additional capital equipment under this agreement.

Our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume of the right to
manufacture Phyzyme. If Danisco were to exercise this right, we would likely experience significant excess capacity at Fermic. If Danisco assumed the right to manufacture Phyzyme and we were unable to absorb the excess capacity at Fermic with other
products, our results of operations and financial condition would be adversely affected.

Bank Debt

On September 30, 2005, we entered into a $14.6 million Loan and Security Agreement (the Bank Agreement) with a commercial bank (the
Bank). The Bank Agreement provided for a one-year credit facility for up to $10.0 million in financing for qualified equipment purchases in the United States and Mexico (the Equipment Advances) and a $4.6 million letter
of credit sub-facility (the Letter of Credit Sublimit). The Bank Agreement was amended in October 2006 to increase the Letter of Credit Sublimit to $4.7 million. Borrowings under the Equipment Advances are structured as promissory notes
which are secured by qualified equipment purchases and repaid over 36 to 48 months, depending on the location of the equipment financed. Borrowings bear interest at the Banks prime rate (5.00% at September 30, 2008) plus 0.75%. On
September 30, 2006, our draw-down period under the Equipment Advances expired.

The Bank Agreement contains standard affirmative and
negative covenants and restrictions on actions by us including, but not limited to, activity related to common stock repurchases, liens, investments, indebtedness, and fundamental changes in, or dispositions of, our assets. We may take certain of
these actions with the consent of the Bank.

On February 22, 2008, we executed an amendment to the Bank Agreement. Pursuant to the
amendment, in exchange for the Banks consent to the private placement of our 2008 Notes and warrants, we agreed to expand the scope of the security interest under the loan and security agreement to include substantially all of our assets
excluding our intellectual property. In return, the Bank modified our minimum cash covenant to reduce the required minimum liquidity from $25 million to an amount equal to 150% of the total amount of our obligations to the Bank under the Bank
Agreement.

At September 30, 2008, there was approximately $1.2 million in outstanding borrowings under the Equipment Advances and a
letter of credit for approximately $10 million under the Letter of Credit Sublimit, as required under our facilities leases. As of May 2008, as further discussed below we have been required to cash secure the letter of credit with the Bank.

As of September 30, 2008, we were in compliance with all debt covenants under our various financing agreements.

Letter of Credit

Pursuant to our
facilities leases for our office and laboratory space in San Diego, we are required to maintain a letter of credit on behalf of our landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on minimum required
working capital and market capitalization, as follows:



|                           |  |     |  |                        |  |                              
|-------------------------- |  | --- |  | ---------------------- |  | -----------------------------
|Working Capital            |  |     |  | Market Capitalization  |  | Required Letter of Credit    
|Greater than $75 million   |  |     |  | N/A                    |  | $100,000                     
|$50 million to $75 million |  | or  |  | $350 million           |  | $100,000 plus 12 months rent
|Less than $50 million      |  | and |  | Less than $350 million |  | $100,000 plus 24 months rent

As of September 30, 2008, we had a letter of credit in place pursuant to this agreement for
approximately $10 million, representing the $100,000 minimum and approximately 24 months current rent. The letter of credit is issued under our existing Bank Agreement as described above. We are required by the Bank to secure this obligation
with cash, which is reflected as restricted cash on our condensed consolidated balance sheet as of September 30, 2008.



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Off-Balance Sheet Arrangements

Except as described above, we do not have any off-balance sheet arrangements that would give rise to additional material contractual obligations as of September 30, 2008.

Critical Accounting Policies

Our discussion and
analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these
condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates,
including those related to revenue recognition, long-lived assets, accrued liabilities, and income taxes. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.

We believe the following critical accounting policies affect the significant judgments and
estimates used in the preparation of our condensed consolidated financial statements.

Goodwill

As a result of the merger with Celunol on June 20, 2007, we recorded $106.1 million of goodwill on our balance sheet, all of which was allocated to our
biofuels reporting unit.

We recorded goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets.The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. We used
the discounted cash flow method to estimate the value of intangible assets acquired. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and were based on
available historical information and industry estimates and averages. These judgments can significantly affect our net operating results.

SFAS No. 142 requires that goodwill and certain intangible assets be assessed for impairment on an annual basis, or more frequently if indicators of impairment exist, using fair value measurement techniques. If the carrying amount of a
reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount of the impairment loss, if any. The goodwill impairment test, which we typically perform annually as of October 1st, compares the implied fair
value of the reporting units goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined primarily through a market-based approach, based upon the market value of our common stock and convertible debt.

During the second quarter of 2008, we initiated an evaluation to determine if current company-specific or market conditions would give
rise to potential impairment of our goodwill carrying value as of June 30, 2008, including, but not limited to, the following:



| |  |  | the significant decline in the market value of our invested capital, including the market value of our common stock and convertible debt;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sustained operating losses and demonstration plant cost overages; and
| | - |  | ---------------------------------------------------------------------



| |  |  | significant cash shortfalls and working capital deficiencies.
| | - |  | -------------------------------------------------------------

We concluded that, given the authoritative guidance as set forth by SFAS No. 142, and additional qualitative considerations, while there appeared to be some potential indicators of impairment as of June 30, 2008, such
potential indicators were reflective of temporary conditions, based upon the following considerations:



| |  |  | a substantial increase in venture funding in the biofuels industry, further supporting the overall financial support for our industry;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recent legislation enacted at the federal, state and local levels in support of the biofuels industry;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Our strategic partnership with BP for funding of approximately $90 million, which is expected to substantially fund our working capital requirements into 2009. We
believe this funding will enable us to start-up, commission and complete our demonstration plant, validate our cellulosic ethanol process technology in the demonstration plant, and validate process economics for commercial-scale cellulosic ethanol
production. We also believed that this transaction would have a positive impact on the market value of our stock and convertible debt, such that it would have recovered to levels to support the carrying value of the assets attributed to our biofuels
segment, including goodwill.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Subsequent to the second quarter of 2008, despite continued progress against our business plan to
commercialize cellulosic ethanol, we continued to experience a decline in the market value of our stock and convertible debt. We believe this decline was due in large part to overall global economic and market conditions. During the third quarter of
2008, our average stock price declined an additional 28%, a major factor in our conclusion that indicators of impairment existed as of September 30, 2008. We believe this decline was due in large part to overall global economic and market
conditions.

Based upon the foregoing, we initiated a Step 1 and Step 2 analysis for impairment as prescribed by SFAS 142, with the
assistance of a third party valuation firm. The first step of the two-step impairment test compares the fair value of the reporting unit to its carrying value to determine if an impairment indicator exists. If an impairment indicator exists, then
the second step of the impairment test must be performed to determine the amount of impairment, if any.

Under the first step, in assessing
the fair value of its biofuels reporting unit, we primarily considered the market approach under which the implied fair value of the reporting unit is based on quoted market prices and the number of shares outstanding for our common stock, and the
fair value of our convertible debt. We determined that the implied fair value of the biofuels reporting unit was less than the carrying value of the net assets of the reporting unit and that step two of the impairment test was required. Under the
second step, we determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. We allocated the fair value of the reporting unit to all of our assets and liabilities as if the reporting unit had been
acquired in a business combination and the fair value of the biofuels reporting unit was the price paid to acquire the reporting unit. Under this analysis, the excess of the fair value of the reporting unit over the amounts assigned to our assets
and liabilities is the implied fair value of goodwill. Our step two analysis resulted in no implied fair value of goodwill. As a result, we recognized a non-cash charge of $106.1 million in the third quarter of 2008, representing full impairment of
the carrying value of our goodwill.

Revenue Recognition

We follow the provisions as set forth by current accounting rules, which primarily include the Securities and Exchange Commissions Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition

We generally recognize revenue when we have satisfied all
contractual obligations and we are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue under current accounting rules. In
those instances where we have billed our customers or received payment from our customers in advance of recognizing revenue, we include the amounts in deferred revenue on the balance sheet.

We generate revenue from research collaborations generally through funded research, up-front fees to initiate research projects, fees for exclusivity in
a field, and milestones. We recognize revenue from research funding on a proportional performance basis, as research hours are incurred under each agreement. We recognize fees to initiate research over the life of the project. We
recognize revenue from exclusivity fees over the period of exclusivity. Our collaborations often include contractual milestones. When we achieve these milestones, we are entitled to payment, as defined by the underlying agreements. We recognize
revenue for milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement,
(ii) the milestone represents the culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) our past research and development services, as well as our ongoing commitment to provide research and
development services under the collaboration, are charged at fees that are comparable to the fees that the we customarily charges for similar research and development services.

We recognize revenue from grants as related costs are incurred, as long as such costs are within the funding limits specified by the underlying grant
agreements.

We recognize revenue related to the sale of our inventory as we ship or deliver products, provided all other revenue
recognition criteria have been met. We recognize revenue from products sold through distributors or other third-party arrangements upon shipment of the products, if the distributor has a right of return, provided that (a) the price is
substantially fixed and determinable at the time of sale; (b) the distributors obligation to pay us is not contingent upon resale of the products; (c) title and risk of loss passes to the distributor at time of shipment; (d) the
distributor has economic substance apart from that provided by us; (e) we have no significant obligation to the distributor to bring about resale of the products; and (f) future returns can be reasonably estimated. For any sales that do
not meet all of the above criteria, revenue is deferred until all such criteria have been met. We include our profit-sharing revenues in product revenues on the statement of operations. We recognize profit-sharing revenues during the quarter in
which such profit sharing revenues are earned based on calculations provided by our profit-sharing partner. To date, we have generated a substantial portion of our product revenues, including profit-sharing revenues, through our agreements with
Danisco.

We sometimes enter into revenue arrangements that include the delivery of more than one product or service. In these cases, we
recognize revenue from each element of the arrangement as long as we are able to determine a separate value for each element, we have completed our obligation to deliver or perform on that element and we are reasonably assured of collecting the
resulting receivable.

Share-based Compensation

Effective January 1, 2006, we calculate the fair value of all share-based payments to employees and non-employee directors, including grants of stock options, non-restricted and restricted shares, and awards
issued under the employee stock purchase plan, and amortize these fair values to share-based compensation in the income statement over the respective vesting periods of the underlying awards.

Share-based compensation related to stock options includes both the amortization of the fair value of options at the date of grant determined using
Black-Scholes Merton (BSM) valuation model. We amortize the fair value of options to expense over the vesting periods of the underlying options.

Share-based compensation related to awards issued under the employee stock purchase plan (ESPP) after December 31, 2005 are based on calculations of fair value under the BSM valuation model which are
similar to how stock option valuations are made. We amortize the fair value of ESPP awards to expense over the vesting periods of the underlying awards.



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We estimate the fair value of stock option awards and awards under the ESPP on the date of grant using
assumptions about volatility, expected life of the awards, risk-free interest rate, and dividend yield rate. The expected volatility in this model is based on the historical volatility of our common stock. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time awards are granted, based on maturities which approximate the expected life of the options. The expected life of the options granted is estimated using the historical exercise behavior of employees.
The expected dividend rate takes into account the absence of any historical payments and managements intention to retain all earnings for future operations and expansion.

We estimate the fair value of non-restricted and restricted stock awards based upon the closing market price of our common stock at the date of grant. We
charge the fair value of non-restricted awards to share-based compensation upon grant. We amortize the fair value of restricted awards to share-based compensation expense over the vesting period of the underlying awards.

Convertible Debt and Derivative Accounting

We perform an assessment of all embedded features of a debt instrument to determine if 1) such features should be bifurcated and separately accounted for, and, 2) if bifurcation requirements are met, whether such features should be
classified and accounted for as equity or liability. Under equity accounting, the fair value of the embedded feature is measured initially and included in stockholders equity, and remeasurement is not required. Under liability accounting, the
fair value of the embedded feature is measured initially, included as a liability on the balance sheet, and remeasured each reporting period. Any changes in fair value are recorded in the statement of operations. We monitor, on an on ongoing basis,
whether events or circumstances could give rise to a change in our classification of embedded features.

Variable Interest Entities

We have implemented the provisions of FASB Interpretation No. 46-R (FIN46-R), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51,as amended. FIN 46R addresses consolidation by business enterprises of variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to
finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In connection with its collaboration with BP, we formed a
special purpose entity, Galaxy Biofuels LLC for purposes of maintaining and licensing cellulosic ethanol process technologies. We and BP share equally in the rights and obligations of Galaxy. We have determined that the SPE is a variable interest
entity under FIN 46R, and therefore is subject to consolidation.

We have also determined, pursuant to FIN 46R, that Verenium is the
primary beneficiary of Galaxy; accordingly, the results of operations of Galaxy should be included in our consolidated statement of operations.

As a result, our condensed consolidated financial statements include a line item called Noncontrolling Interest in Galaxy Biofuels LLC. On our condensed consolidated balance sheet, this line reflects BPs ownership of
Galaxys equity. This line item will be reduced by BPs 50% share of Galaxys profits and losses, and increased by cash distributions made by BP to us on behalf of Galaxy. BPs share of Galaxys losses is reflected in our
condensed consolidated statement of operations as Loss attributed to noncontrolling interest in Galaxy Biofuels LLC. Galaxy has incurred approximately $10.0 million in losses through September 30, 2008, 50% of which has been allocated to
BP. We anticipate Galaxy will continue to incur losses related to ongoing joint development through at least the initial 18 months of the strategic partnership.

Long-Lived Assets

We review long-lived assets, including leasehold improvements, property and
equipment, and acquired intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. This requires us to estimate future cash flows related to
these assets. Actual results could differ from those estimates, which may affect the carrying amount of assets and the related amortization expense.

Income Taxes

Effective in 2007, we account for income taxes pursuant FASB issued Interpretation
No. 48,Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109,or FIN 48. FIN 48 prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on our tax return. Under FIN 48, we do not recognize an uncertain tax position as a deferred tax asset if it has less than a 50% likelihood of being sustained.

We adopted the provisions of FIN 48 on January 1, 2007, and commenced analyzing filing positions in all of the federal and state jurisdictions where
we are required to file income tax returns, as well as all open tax years in these jurisdictions. As a result of adoption, we have recorded no additional tax liability. As of September 30, 2008 we have not yet completed our analysis
of our deferred tax assets for net operating losses of $91.9 million and research and development credits of $2.7 million generated in years prior to 2007 and net operating losses of $27.6 million and research and development credits of $0.2
generated in 2007. As such, we have removed these amounts and the offsetting valuation allowance has been removed from our deferred tax assets. We are in the process of completing a Section 382 analysis regarding the limitation of the
net operating loss and research and development credits.

We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our
deferred tax assets in the future in excess of their net recorded amounts, an adjustment to the deferred tax assets would increase our income in the period such determination was made. Likewise, should we determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. As of December 31, 2007, we had $36.9 million in gross deferred tax
assets, excluding any estimated deferred tax assets related to our net operating losses and research and development credits. Our deferred tax assets at December 31, 2007 were fully offset by a valuation allowance.



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Inventories

We value inventory at the lower of cost (first in, first out) or market value and, if necessary, reduce the value by an estimated allowance for excess and obsolete inventories. The determination of the need for an
allowance is based on our review of inventories on hand compared to estimated future usage and sales, as well as, judgments, quality control testing data, and assumptions about the likelihood of obsolescence.

Capitalized Interest

We capitalize
interest on capital projects, namely our cellulosic ethanol demonstration facility, commencing with the first expenditure for the project and continuing until the project is substantially complete and ready for its intended use. We amortize the
capitalized interest to depreciation expense using the straight-line method over the same lives as the related assets.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Our exposure to market risk is limited to interest rate risk and, to a lesser extent, foreign currency risk.

Interest Rate Exposure

Our investment portfolio consists primarily of high-grade commercial paper, certificates of deposit and debt obligations of various
governmental agencies. We manage our investment portfolio in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain a high degree of liquidity to meet operating needs and obtain
competitive returns subject to prevailing market conditions. These investments are subject to risk of default, changes in credit rating and changes in market value. These investments are also subject to interest rate risk and will decrease in value
if market interest rates increase. Due to the conservative nature of our investments and relatively short effective maturities of the debt instruments, we believe interest rate risk is mitigated. Our investment policy specifies the credit quality
standards for our investments and limits the amount of exposure from any single issue, issuer or type of investment.

As of
September 30, 2008, we had outstanding debt obligations at face value of $160.6 million, including $101.5 million of 5.5% convertible senior notes and $59.1 million of 8% convertible senior notes. As of September 30, 2008, the fair
value of our 5.5% convertible senior notes was approximately $31.5 million and the fair value of our 8% convertible senior notes was approximately $30 million.

Foreign Currency Exposure

We engage third parties, including Fermic, our contract manufacturing partner in Mexico City, to
provide various services. From time to time certain of these services result in obligations that are denominated in other than U.S. dollars. Foreign currency risk is minimized because the amount of such obligations is not material.



|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports
filed pursuant to the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the timelines specified in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out
an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e)) as of September 30, 2008. Based on such evaluation, such officers have concluded that, as of
September 30, 2008, our disclosure controls and procedures were effective.

Prior Quarter Remediation of Material Weakness

Upon completion of our merger with Celunol in June 2007 and our subsequent integration efforts, we consolidated the accounting and financial reporting
process into our San Diego office and made various personnel changes. This integration effort and resulting staffing changes were in process at December 31, 2007 and during our year end close process. This incomplete transitioning resulted in a
material weakness in our internal control at December 31, 2007 relating to inadequate management oversight of the financial statement close process and an insufficient number of staff accountants with a sufficient level of knowledge, as described in
Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

As a result of the
material weakness in our internal control over financial reporting, during the first quarter of 2008 we implemented significant changes relating to management oversight of the financial close process and personnel needed to apply the Companys
accounting policies in accordance with U.S. GAAP. These changes have improved the effectiveness of our internal control over financial reporting. We began implementing these changes during the first quarter of fiscal 2008 and management believes we
have remediated the aforementioned material weakness as of June 30, 2008.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended, we conducted an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on that evaluation our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of September 30, 2008.



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There were no changes in our internal controls over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Management continues to improve the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting
and intends to continue to implement improvements in its internal control over financial reporting and hire additional finance and accounting personnel as necessary to prevent or detect deficiencies, and to timely address any deficiencies that we
may identify in the future.



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PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

Class Action Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the plaintiffs in a class action lawsuit filed in December 2002
in a U.S. federal district court (the Court). This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other public companies that conducted an Initial Public Offering
(IPO) of their common stock in 2000 and the late 1990s (the IPO Cases). On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the
settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive Order. On
February 24, 2006, the Court dismissed litigation filed against certain underwriters in connection with the claims to be assigned to the Plaintiffs under the settlement. On April 24, 2006, the Court held a Final Fairness Hearing to
determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Courts earlier decision certifying as class actions the six IPO Cases designated as focus
cases. The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of plaintiffs petition to the Second Circuit for rehearing en banc and
resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the
settlement as originally negotiated will not be finally approved. On or about August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and thereafter moved for certification of the classes and appointment of lead plaintiffs
and lead counsel in those cases. In September 2007, the Companys named officers and directors again extended the tolling agreement with plaintiffs. The six focus case issuers filed motions to dismiss the claims against them in November 2007
and an opposition to plaintiffs motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certificate motion.

The Company is covered by a claims-made liability insurance policy which it believes will satisfy any potential liability of the Company under this
settlement. Due to the inherent uncertainties of litigation and assignment of claims against the underwriters, and because the settlement has not yet been finally approved by the Court, the ultimate outcome of this matter cannot be predicted. In
accordance with SFAS No. 5, Accounting for Contingencies the Company believes any contingent liability related to this claim is not probable or estimable and therefore no amounts have been accrued in regards to this
matter.

The Company is also, from time to time, subject to legal proceedings and claims which arise in the normal course of business. In
managements opinion, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the Companys consolidated financial position, results of operations, or cash flows.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Except for the historical
information contained herein, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed here. Factors that could cause or contribute to
differences in our actual results include those discussed in the following section, as well as those discussed in Part I, Item 2 entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere throughout this quarterly report on Form 10-Q and the Companys annual report on Form 10-K. You should consider carefully the following risk factors, together with all of the other information included in this quarterly report on Form
10-Q. Each of these risk factors could adversely affect our business, operating results, and financial condition, as well as adversely affect the value of an investment in our common stock.

We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors previously discussed in our Form 10-K for
the year ended December 31, 2007.

Risks Applicable to Our Business Generally

We should be viewed as an early stage company with new and unproven technologies.

You must evaluate our business in light of the uncertainties and complexities affecting an early
stage biotechnology company or cellulosic ethanol manufacturing company. Our existing proprietary technologies are new and in the early stage of development for both biofuels and specialty enzymes. We may not be successful in the commercial
development of these or any further technologies, products or processes. Successful products and processes require significant development and investment, including testing, to demonstrate their cost- effectiveness prior to regulatory approval and
commercialization. To date, we have commercialized nine of our own products, all in the specialty enzymes area, Fuelzyme-LF enzyme, Pyrolase 160 enzyme, Pyrolase 200 enzyme, Cottonase enzyme, Luminase PB-100 enzyme,
Luminase PB-200 enzyme, Bayovac® SRS, and blue and green fluorescent proteins. In addition, four of our collaborative partners, Invitrogen Corporation, Danisco Animal Nutrition,
Givaudan Flavors Corporation, and Syngenta Animal Nutrition (formerly known as Zymetrics, Inc.), have incorporated our technologies



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or inventions into their own commercial products from which we have generated and/or can generate royalties. We have not yet commercialized any products or
processes in our integrated strategy within biofuels. Our specialty enzyme products and technologies have generated only modest revenues to date. Because of these uncertainties, our discovery process may not result in the identification of product
candidates or biofuels production processes that we or our collaborative partners will successfully commercialize. If we are not able to use our technologies to discover new materials, products, or processes with significant commercial potential, or
if we are unable to sell our cellulosic ethanol or an integrated solution for the production of cellulosic ethanol, we could have significant losses in the future due to ongoing expenses for research, development and commercialization efforts and we
may be unable to obtain additional funding in connection with such efforts.

*We have a history of net losses, we expect to continue to incur net
losses, and we may not achieve or maintain profitability.

We have incurred net losses since our inception, including a net loss of
approximately $173 million for the nine months ended September 30, 2008. As of September 30, 2008, we had an accumulated deficit of approximately $610 million. Through June 20, 2007, the date of the closing of our merger with Celunol
Corp., our losses were attributable to our specialty enzymes business. We expect to continue to incur additional losses for the foreseeable future in our specialty enzymes business as we continue to develop specialty enzyme products, and as a result
of our continued investment in our sales and marketing infrastructure to support anticipated growth in product sales. Beginning with the closing of our merger with Celunol Corp. on June 20, 2007, we began to incur additional losses as we pursue
our vertical integration strategy within biofuels.

To date, a significant portion of our revenue has been derived from collaborations and
grants related to our specialty enzymes business. Future revenue from collaborations is uncertain and will depend upon our ability to maintain our current collaborations, successfully achieve development, commercialization and other milestones under
these collaborations, enter into new collaborations and to meet research, development, and commercialization objectives under new and existing agreements. As product revenue increases, we expect sales and marketing expenses to increase in support of
increased volume. Additionally, as our business model develops, we expect other selling, general and administrative expenses to increase based on broadening our infrastructure to support continued growth in the business. In addition, the amounts we
spend will impact our ability to become profitable and this will depend, in part, on:



| |  |  | the progress of our research and development programs for the production of ethanol from various sources of cellulosic biomass;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of building, operating and maintaining research and production facilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the number of production facilities that we ultimately attempt to develop;
| | - |  | --------------------------------------------------------------------------



| |  |  | the time and expense required to prosecute, enforce and/or challenge patent and other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | how competing technological and market developments affect our proposed activities; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the cost of obtaining licenses required to use technology owned by others for proprietary products and otherwise.
| | - |  | -----------------------------------------------------------------------------------------------------------------

We may not achieve any or all of our goals and, thus, we cannot provide assurances that we will ever be profitable or achieve significant revenues. If we
fail to achieve profitability or significant revenues, the market price of our common stock will likely decrease.

Even if we generate
significant additional revenue in our specialty enzymes business, we do not expect to achieve overall profitability for the foreseeable future, as we make additional investments to implement our vertical integration strategy within biofuels. In
order for us to generate revenue, we must not only retain our existing collaborations and/or attract new ones and achieve milestones under them, but we must also develop products or technologies that we or our partners choose to commercialize and
that are commercially successful and from which we can derive revenue through sales or royalties. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

*We continue to experience losses from operations, and we may not be able to fund our operations and continue as a going concern.

We incurred net losses of $173 for the nine months ended September 30, 2008 and $89.7 million, $39.3 million, and $107.6 million for the years ended
December 31, 2005, 2006 and 2007, and have an accumulated deficit of $610 million as of September 30, 2008. The report of our independent registered public accounting firm for the fiscal year ended December 31, 2007, contains an
explanatory paragraph which states that we have incurred recurring losses from operations and, based on our operating plan and existing working capital, this raised substantial doubt about our ability to continue as a going concern. While we believe
that the cash we expect to generate from our strategic partnership with BP will substantially fund our working capital requirements into 2009, we will require additional capital to fund our operations.



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We have used a significant portion of the proceeds received from sales of our 2007 Notes in April 2007
and 2008 Notes in February 2008 to make enhancements to our pilot facility and continue construction and development of our demonstration-scale facility in Jennings, Louisiana, to commercialize our specialty enzymes products, to continue our
research and development efforts in both specialty enzymes and biofuels, and for expenses related to our merger with Celunol, all of which have adversely affected, and will continue to adversely affect, our operating results until revenues from our
specialty enzymes business and our biofuels business reach levels at which we can fully support our operating and capital expenditures.

We
will require additional capital to fund our operations. We believe that we will be successful in generating additional cash through to fund these requirements through a combination of additional corporate partnerships and collaborations, federal and
state grant funding, incremental product sales, selling or financing assets, and, if necessary and available, the sale of equity or debt securities. There can be no assurance that we will be able to obtain any sources of financing on acceptable
terms, or at all. If we are unsuccessful in raising additional capital from any of these sources, we may need to defer, reduce or eliminate certain planned expenditures.

If we are not able to reduce or defer our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may be unable to continue as a going concern, and we may be forced to restructure
or significantly curtail our operations, file for bankruptcy or cease operations.

We will need additional capital in the future. If additional capital
is not available, we may have to curtail or cease operations.

We will need to raise more money to continue to fund our business in 2009
and beyond. Our capital requirements will depend on several factors, including:



| |  |  | expenditures and investments to implement our biofuels business strategy, including increased capital expenditures in relation to such strategy, for example, to
build pilot, demonstration, and commercial-scale facilities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of research and development investment required to maintain our technology leadership position;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | our ability to enter into new agreements with collaborative partners or to extend the terms of our existing collaborative agreements, and the terms of any agreement
of this type;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the success rate of our discovery efforts associated with milestones and royalties;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our ability to successfully commercialize products developed independently and the demand for such products;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the timing and willingness of strategic partners and collaborators to commercialize our products that would result in royalties;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs of recruiting and retaining qualified personnel; and
| | - |  | ----------------------------------------------------------



| |  |  | our possible acquisition or licensing of complementary technologies or acquisition of complementary businesses.
| | - |  | ---------------------------------------------------------------------------------------------------------------

We may seek additional funds through public and private securities offerings, arrangements with corporate partners, borrowings under lease lines of
credit or other sources. In addition, we expect to attempt to raise funds in the non-recourse, project-finance capital markets to finance growth of our project portfolio. Such funds may not be available to us or may be available on terms not
satisfactory to us. We will also pursue federal, state and local financial incentives such as loan guarantee programs and grants as appropriate. We currently have applications pending for a number of such programs; however, such funds may not be
available to us in adequate amounts, if at all. Our inability to raise adequate funds to support the growth of our project portfolio will materially adversely affect our business.

If we can not raise more money, we will have to implement one or more of the following remedies:



| |  |  | reduce our capital expenditures,
| | - |  | --------------------------------



| |  |  | scale back our development of new enzyme products,
| | - |  | --------------------------------------------------



| |  |  | scale back our efforts to commercialize cellulosic ethanol,
| | - |  | -----------------------------------------------------------



| |  |  | significantly reduce our workforce,
| | - |  | -----------------------------------



| |  |  | sell some or all of our assets,
| | - |  | -------------------------------



| |  |  | seek to license to others products or technologies that we otherwise would seek to commercialize ourselves, and/or
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | curtail or cease operations
| | - |  | ---------------------------

* If the recent
volatility in the United States and global equity and credit markets and the decline in the general world economy continue for an extended period of time, it may become more difficult to raise money in the public and private markets and harm our
financial condition and results of operations.

The United States and global equity markets have recently been extremely volatile and
unpredictable, reflecting in part a general concern regarding the global economy. This volatility in the market affects not just our stock price, but also the stock prices of our collaborators. In addition, this volatility has also affected the
ability of businesses to obtain credit and to raise money in the capital markets. If we or our collaborators are unable to obtain credit or raise money in the capital markets, we may not be able to continue to fund our current research projects,
fund our current products, raise project finance capital for the development of commercial celllulosic ethanol plants, or otherwise continue to maintain or grow our business.

*We may not have adequate funds to pay interest on our 2007 Notes or to purchase the 2007 Notes on required purchase dates or upon a fundamental change.

In April 2007, we completed the sale of $120 million of 2007 Notes, the terms of which include provisions whereby on each of April 1,
2012, April 1, 2017 and April 1, 2022, holders of the Notes may require us to purchase, for cash, all or a portion of their 2007 Notes at 100% of their principal amount, plus any accrued and unpaid interest to, but excluding, that
date. Currently, $101.5 million of the 2007 Notes remains outstanding. The 2007 Notes also require us to pay interest at the rate of 5.5% per year in cash.



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If a fundamental change, which is defined in the indenture related to the 2007 Notes, occurs, holders of the 2007 Notes may require us to
repurchase, for cash, all or a portion of their 2007 Notes. We may not have sufficient funds to pay the interest, purchase price or repurchase price of the 2007 Notes when due. In addition, the terms of any borrowing agreements which we may enter
into from time to time may require early repayment of borrowings under circumstances similar to those constituting a fundamental change. For example, the holders of the 2008 Notes may require us to redeem the 2008 Notes under such
circumstances. Those agreements may also make our repurchase of 2007 Notes an event of default under the agreements. If we fail to pay interest on the 2007 Notes or to purchase or repurchase the 2007 Notes when required, we will be in default under
the indenture for the 2007 Notes, which would also cause an event of default under the 2008 Notes and may also cause an event of default under the terms of other borrowing arrangements that we may enter into from time to time.

*We may not have adequate funds to pay interest or make-whole payments on our 2008 Notes or to purchase the 2008 Notes at required times.

In February 2008, we completed a private placement at $71 million of 2008 Notes and warrants to purchase our common stock. Currently, approximately
$59.1 million of the 2008 Notes remains outstanding.

We are required to pay interest on the 2008 Notes at the rate of 8% per year,
and the 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the 2008 Notes for common stock, we are obligated to pay such holder an amount equal to the interest foregone over the life of the 2008
Notes based on such conversion. While the 2008 Notes provide that we may, subject to the satisfaction of certain conditions, pay interest or make-whole amounts with shares of our common stock, the registration statement that we filed
with the Securities and Exchange Commission to register the resale of the shares issuable upon conversion of the 2008 Notes, along with interest shares and shares issuable upon exercise of the warrants, only registers a limited number of conversion
shares and interest shares, and our ability to pay make-whole payments and interest payments under the 2008 Notes using shares is accordingly limited. The holders of the 2008 Notes may also require us to redeem their 2008 Notes in
connection with certain change of control events. We may not have sufficient funds to pay the interest, make-whole payments or redemption amounts of the 2008 Notes when due. For example, were many holders of our 2008 Notes to
convert their 2008 Notes, our cash resources at that time could be insufficient to make the required make-whole payments. In addition, the terms of any borrowing agreements which we may enter into from time to time may require early
repayment of borrowings under circumstances similar to those constituting a change of control under the terms of the 2008 Notes. For example, the holders of the 2007 Notes may require us to repurchase, for cash, all or a portion of the
2007 Notes in such circumstances. Those agreements may also make our repurchase of 2008 Notes an event of default under the agreements. If we fail to pay interest or make-whole payments on the 2008 Notes or to purchase or repurchase the
2008 Notes when required, we will be in default under the 2008 Notes, which would also cause an event of default under the 2007 Notes and may also cause an event of default under the terms of other borrowing arrangements that we may enter into from
time to time.

*Conversion of the 2007 Notes, 2008 Notes, and exercise of related warrants and issuance of shares of common stock in payment of interest
on the 2008 Notes will dilute the ownership interest of existing stockholders.

The conversion or exercise of some or all of the 2007
Notes, 2008 Notes and related warrants, respectively, and the issuance of shares of common stock in payment of interest on the 2008 Notes, could significantly dilute the ownership interests of existing stockholders. The conversion rate of the 2007
Notes recently increased to 156.25 shares per $1,000 principal amount from 122.5490 shares per $1,000 principal amount, based on a re-set provision contained in the terms of the 2007 Notes. In addition, the conversion price of the 2008 Notes is
subject to full ratchet anti-dilution protection and a reset provision, whereby, if the volume weighted average price of our common stock during the 7 trading days prior to the one-year anniversary of the issuance of the notes is less than $3.55 per
share, the conversion price will reset to the greater of $2.13 per share or 115% of the volume weighted average price of the common stock at that time, and the related warrants are subject to weighted-average anti-dilution protection. Any sales in
the public market of the common stock issuable upon such conversion or exercise could adversely affect prevailing market prices of our common stock. In addition, the existence of the 2007 Notes and 2008 Notes may encourage short selling by market
participants because the conversion of the 2007 Notes and 2008 Notes could be used to satisfy short positions, or the anticipated conversion of the 2007 Notes or 2008 Notes into shares of our common stock could depress the price of our common stock.

*The covenants in the 2008 Notes restrict our financial and operational flexibility.

We are subject to certain covenants under the 2008 Notes that restrict our financial and operational flexibility. For example, we are restricted from
incurring additional indebtedness (other than certain project financing debt and up to $15 million principal amount of additional indebtedness, subject to increase in certain circumstances based on the closing sale price of our common stock). In
addition, if we sell, transfer or dispose of any part of our specialty enzymes business unit (other than sales or licenses in the ordinary course of business and other than any sales, dispositions or other transfers, in one or a series of related
transactions, providing for gross proceeds of $1 million or less), we are required to deposit cash in a restricted cash account for the benefit of the holders of the 2008 Notes in an amount equal to the lesser of 50% of the total consideration
received for such sale, transfer or disposition and 50% of the then outstanding principal amount of the 2008 Notes. The obligation to make such a deposit terminates when the



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closing sale price of our common stock exceeds $7 per share for 30 consecutive trading days, the average daily trading volume for such period is at least $2
million and all shares issuable upon conversion of the notes are registered for resale pursuant to effective registration statements or freely saleable during such period. As a result of these covenants, our ability to finance our operations through
the incurrence of additional debt or the sale of our specialty enzymes business unit is limited. The 2008 Notes also include a covenant prohibiting us from repaying, redeeming, restructuring or modifying our 2007 Notes. As a result of this covenant,
we will likely be unable to refinance the 2007 Notes without a concurrent refinancing of the 2008 Notes.

*Our high level of debt limits our ability to
fund general corporate requirements, limits our flexibility in responding to competitive developments, increases our vulnerability to adverse economic and industry conditions, and may harm our financial condition and results of operations.

The face value of our total consolidated long-term debt as of September 30, 2008, which includes our 2007 Notes, the 2008 Notes and debt under our
secured credit facility with Comerica Bank, was approximately $162.3 million and represented approximately 122% of our total capitalization as of that date.

Our level of indebtedness could have important adverse consequences on our future operations, including:



| |  |  | making it more difficult for us to meet our payment and other obligations under the 2007 Notes, 2008 Notes and our other outstanding debt;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our
ability to obtain additional financing for these purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which could result in all
of our debt becoming immediately due and payable;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate and the
general economy; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.
| | - |  | ---------------------------------------------------------------------------------------------------------------

Moreover, if we fail to make any required payments under our debt, or otherwise breach the terms of our debt, a substantial potion of our debt could be
subject to acceleration. In such a situation, it is unlikely we would be able to repay the accelerated debt, which would have a material adverse impact on our business and ability to continue to operate as a going concern.

*We are dependent on our collaborative partners, and our failure to successfully manage our existing and future collaboration relationships could prevent us from
developing and commercializing cellulosic ethanol and /or our specialty enzyme products, and achieving or sustaining profitability.

We
currently have license agreements, strategic alliance agreements, collaboration agreements, supply agreements, and/or distribution agreements relating with BP, Syngenta AG, BASF, Bayer Animal Health, Bunge Oils, Cargill Health and Food Technologies,
DSM Pharma Chemicals, DuPont Bio-Based Materials, Givaudan Flavors Corporation, and Xoma. For the nine months ended September 30, 2008, approximately 14% of our revenue was from Syngenta. While we expect our product revenue to continue to
account for a greater proportion of our total revenue, we expect that a significant portion of our 2008 revenue in our specialty enzymes business will be derived from our collaboration agreements. Since we do not currently possess the resources
necessary to independently fund the development and commercialization of cellulosic ethanol, or all of the potential specialty enzyme products that may result from our technologies, we expect to continue to enter into, and in the near-term derive
additional revenue from, strategic alliance and collaboration agreements to develop and commercialize specialty enzyme products. We will have limited or no control over the resources that any strategic partner or collaborator may devote to our
partnered specialty enzyme products. Any of our present or future strategic partners or collaborators may fail to perform their obligations as expected. These strategic partners or 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 strategic partners or collaborators may not develop technologies or products arising out of our collaborative arrangements or devote
sufficient resources to the development, manufacture, marketing, or sale of these technologies and products. If any of these events occur, or we fail to enter into or maintain strategic alliance or collaboration agreements, we may not be able to
commercialize our technologies and products, grow our business, or generate sufficient revenue to support our operations.

Our present or
future strategic alliance and collaboration opportunities could be harmed if:



| |  |  | We do not achieve our research and development objectives under our strategic alliance and collaboration agreements;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | We are unable to fund our obligations under our joint development agreement with BP or any of our other strategic partners or collaborators;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are unable to obtain funding to build commercial cellulosic ethanol plants;
| | - |  | ------------------------------------------------------------------------------



| |  |  | We develop technologies or products and processes or enter into additional strategic alliances or collaborations that conflict with the business objectives of our
strategic partners or collaborators;
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| |  |  | We disagree with our strategic partners or collaborators as to rights to intellectual property we develop, or their research programs or commercialization
activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are unable to manage multiple simultaneous strategic alliances or collaborations;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Our strategic partners or collaborators become competitors of ours or enter into agreements with our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Our strategic partners or collaborators become less willing to expend their resources on research and development due to general market conditions or other
circumstances beyond our control;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Consolidation in our target markets limits the number of potential strategic partners or collaborators; or
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | We are unable to negotiate additional agreements having terms satisfactory to us.
| | - |  | ---------------------------------------------------------------------------------

*We do not expect funding under our collaboration with Syngenta to continue past 2008, which could negatively impact our business.

Our two-year guaranteed funding period totaling $8 million per year through 2008 under our 10-year agreement with Syngenta expires on December 31, 2008. While Syngenta has the option to continue funding joint
development beyond 2008, we do not anticipate that we will continue to receive significant funding under this agreement beyond the initial guaranteed funding period. If we are unable to generate funding from other sources, this decreased funding may
materially adversely affect our business and financial condition.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely
on stock appreciation for any return on their investment in us.

We anticipate that we will retain our earnings, if any, for future
growth and therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common
stock.

We may encounter difficulties managing our growth, which could adversely affect our results of operations.

Our strategy includes entering into and working on simultaneous projects, frequently across multiple industries, in both our specialty enzymes and
biofuels businesses. This strategy places increased demands on our limited human resources and requires us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified
management, technicians, scientists and other personnel, especially with respect to our vertical integration strategy within biofuels. Our ability to effectively manage our operations, growth, and various projects requires us to continue to improve
our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees, which we may be unable to do. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner. In addition, we may discover deficiencies in existing systems and controls.

If we engage in any acquisitions, we will incur a variety of costs, may dilute existing stockholders, and may not be able to successfully integrate acquired businesses.

If appropriate opportunities become available, we may consider acquiring businesses, assets, technologies, or products that we believe are a strategic fit
with our business. As of September 30, 2008, we have no commitments or agreements with respect to any material acquisitions. If we further pursue such a strategy, we could:



| |  |  | issue additional equity securities which would dilute current stockholders percentage ownership;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | incur substantial additional debt; or
| | - |  | -------------------------------------



| |  |  | assume additional liabilities.
| | - |  | ------------------------------

We
may not be able to successfully integrate any businesses, assets, products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial, and management resources, if at all. In addition,
future acquisitions might negatively impact our business relations with our current and/or prospective collaborative partners and/or customers. Any of these adverse consequences could harm our business.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud and as a result,
investors may be misled and lose confidence in our financial reporting and disclosures, and the price of our common stock may be negatively affected.

The Sarbanes-Oxley Act of 2002 requires that we report annually on the effectiveness of our internal control over financial reporting. A significant deficiency means a deficiency or a combination of
deficiencies, in internal control over financial reporting that is less severe than a material weakness yet important enough to merit attention by those responsible for oversight of the Companys financial reporting. A material
weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis.



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In connection with the assessment of our internal control over financial reporting for the Annual Report
on Form 10-K, as further described in Item 9A, we and our independent registered public accounting firm determined that as of December 31, 2007 our internal controls over financial reporting were ineffective due to a material weakness in
the financial statement close process. This material weakness was caused primarily by the following:



| |  |  | inadequate management oversight of the financial statement close process; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | an insufficient number of staff accountants with a sufficient level of knowledge.
| | - |  | ---------------------------------------------------------------------------------

In addition, in the future our continued assessment, or subsequent assessment by our independent registered public accounting firm, may reveal additional
deficiencies in our internal controls, some of which may require disclosure in future reports.

We have in the past discussed material
weaknesses with our financial statement close process that we have remediated as of June 30, 2008. Although we have made and are continuing to make improvements in our internal controls, if we discover other deficiencies or material weaknesses, it
may adversely impact our ability to report accurately and in a timely manner our financial condition and results of operations in the future, which may cause investors to lose confidence in our financial reporting and may negatively affect the price
of our common stock. Moreover, effective internal controls are necessary to produce accurate, reliable financial reports and to prevent fraud. If we continue to have deficiencies in our internal controls over financial reporting, these deficiencies
may negatively impact our business and operations.

Our ability to compete may decline if we do not adequately protect our proprietary technologies or
if we lose some of our intellectual property rights due to becoming involved in expensive lawsuits or administrative proceedings.

Our
success depends 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. In addition, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring and preventing unauthorized use of our intellectual property is difficult and expensive, and we cannot be certain that the steps we have taken will prevent unauthorized use of
our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. Although we
have adopted a strategy of seeking patent protection in the United States and in foreign countries with respect to certain of the technologies used in or relating to our products, as well as anticipated production capabilities and processes, others
may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies and we may not be able to obtain licenses on reasonable terms, if at all,
which could cause great harm to our business.

Our commercial success depends in part on not infringing patents and proprietary rights of
third parties, and not breaching any licenses or other agreements that we have entered into with regard to our technologies, products, and business. The patent positions of companies whose businesses are based on biotechnology, including our patent
position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. We intend to apply for patents relating to our technologies, processes and products as we deem appropriate. Patents, if issued,
may be challenged, invalidated, or circumvented. We cannot be sure that patents have not been issued that could block our ability to obtain patents or to operate as we would like. Others may develop similar technologies or duplicate technologies
developed by us. There may be patents in some countries that, if valid, may block our ability to commercialize products in these countries if we are unsuccessful in circumventing or acquiring the rights to these patents. There also may be claims in
published patent applications in some countries that, if granted and valid, may also block our ability to commercialize processes or products in these countries if we are unable to circumvent or license them.

Our intellectual property rights may be challenged by others. For example, in February 2007, an interference proceeding was declared in the United
States Patent and Trademark Office between a United States patent assigned to us and a pending United States patent application owned by Maxygen, Inc., or Maxygen, with allowable claims directed to our GeneReassembly technology. On February 25,
2008 the Board of Patent Appeals and Interferences ruled in favor of Maxygen and the claims in our issued patent were cancelled. Other than this interference proceeding, we are not currently a party to any litigation with regard to our patent
position. However, the biotechnology industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to
gain a competitive advantage. If we became involved in litigation or interference proceedings declared by the United States Patent and Trademark Office, or oppositions or other intellectual property proceedings outside of the United States, to
defend our intellectual property rights or as a result of alleged infringement of the rights of others, we might have to spend significant amounts of money. Any potential intellectual property litigation also could force us to do one or more of the
following:



| |  |  | stop selling, incorporating or using our products that use the challenged intellectual property;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | stop production of cellulosic ethanol at our production facilities;
| | - |  | -------------------------------------------------------------------



| |  |  | obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign those products, facilities or processes that use any allegedly infringing technology, which may result in significant cost or delay to us, or which could
be technically infeasible.
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We are aware of a significant number of patents and patent applications relating to aspects of our
technologies filed by, and issued to, third parties. We cannot assure you that if we are sued on these patents we would prevail.

Should
any third party have filed, or file in the future, patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to
determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding, like the one described above, could result in substantial cost to us even if the outcome is favorable. Even if successful,
an interference may result in loss of claims. The litigation or proceedings could divert our managements time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management time, and
disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we also rely in part on trade secret protection for our confidential and proprietary information. We have taken measures to protect our trade secrets and
proprietary information, but these measures may not be effective. Our policy is to execute confidentiality agreements with our employees and consultants upon the commencement of an employment or consulting arrangement with us. These agreements
generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individuals relationship with us be kept confidential and not disclosed to third parties. These
agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, our proprietary information may be disclosed, and others may independently develop
substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our competitive business position.

If we are unable to continue to collect genetic
material from diverse natural environments, our research and development efforts and our product and process development programs could be harmed.

We collect genetic material from organisms found in diverse environments. We collect material from government-owned land in foreign countries and in areas of the United States under formal resource access agreements
and from private lands under individual agreements with private landowners. We also collect samples from other environments where agreements are currently not required, such as the deep sea. If our access to materials under biodiversity access
agreements or other arrangements, or where agreements are not currently required, is reduced or terminates, it could harm our internal and our collaborative research and development efforts. For example, we have voluntarily ceased collections of
further samples in Yellowstone National Park pending the parks resolution of collection guidelines.

Ethical, legal, and social concerns about
genetically engineered products and processes could limit or prevent the use of our products, processes, and technologies and limit our revenue.

Some of our anticipated products and processes are genetically engineered or involve the use of genetically engineered products or genetic engineering technologies. If we and/or our collaborators are not able to overcome the ethical, legal,
and social concerns relating to genetic engineering, our products and processes 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 and processes dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:



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



| |  |  | Public attitudes 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 collaborative partners from supporting, developing, or commercializing our products, processes and technologies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 in the United States and other countries. This adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically altered products.



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Compliance with stringent laws and obtaining required government approvals may be time consuming and costly, and could
delay our introduction of products.

All phases, especially the field testing, production, and marketing, of our potential products and
processes 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.

In the United States, specialty enzyme products for our target markets are regulated
based on their use, by either the FDA, the EPA, or, in the case of plants and animals, the 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. While substantially all of our current specialty enzyme projects to date have focused on non-human applications and specialty enzyme products outside of the FDAs review, in the future we may pursue collaborations
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 drug product candidates must also be approved by the regulatory agencies of foreign
governments before any product can be sold in those countries. Under current FDA policy, our products, or products of our collaborative 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, our
collaborators may not obtain regulatory approval for any drug products that incorporate our technologies or inventions. Our collaborators have not submitted an investigational new drug application for any product candidate that incorporates our
technologies or inventions, and no drug 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. Our future products may not be exempted by the USDA.

In order to achieve and maintain market acceptance, our biofuels business will need to meet a significant number of environmental and other regulations
and standards established by various federal, state and local regulatory agencies. As these regulations and standards evolve, and if new regulations or standards are implemented, we may be required to modify our proposed facilities and processes or
develop and support new facilities or processes and this will increase our costs. Any failure to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay our production of
ethanol and the provision of related services including plant operation and engineering services in support of anticipated licenses of our technology, which could harm our biofuels business. Market uncertainty regarding future policies may also
affect our ability to develop new ethanol production facilities or license our technologies to third parties. Any inability to address these requirements and any regulatory changes could have a material adverse effect on our biofuels business,
financial condition and operating results.

Our results of operations may be adversely affected by environmental, health and safety laws, regulations
and liabilities.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the
discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require
our contemplated facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts
to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

Furthermore, as we operate our business, we may become liable for the investigation and cleanup of environmental contamination at each of the properties
that we own or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory
agencies, we may be responsible under Comprehensive Environmental Response, Compensation and Liability Act, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may
also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for
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In addition, new laws, new interpretations of existing laws, increased governmental enforcement of
environmental laws, or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental
controls at ethanol production facilities. Present and future environmental laws and regulations, and interpretations thereof, applicable to ethanol operations, more vigorous enforcement policies and discovery of currently unknown conditions may
require substantial expenditures that could have a material adverse effect on our results of operations and financial position.

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 and could adversely affect our business and results of operations.

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.

Many competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may
use their greater resources to gain market share at our expense.

The biotechnology industry is characterized by rapid technological
change, and the area of biomolecule discovery and optimization from biodiversity is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Technological
development by others may result in our products and technologies becoming obsolete.

We face, and will continue to face, intense
competition in our specialty enzymes business. There are a number of companies who compete with us in various steps throughout our technology process. For example, Codexis, Maxygen, Inc., Evotec, and Xencor have alternative evolution technologies.
Integrated Genomics Inc., Myriad Genetics, Inc., and ArQule, Inc. perform screening, sequencing, and/or bioinformatics services. Novozymes A/S, Genencor International Inc., and Dyadic International are involved in development, overexpression,
fermentation, and purification of enzymes. There are also a number of academic institutions involved in various phases of 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 technologies for modifying DNA to develop commercial products.

The ethanol production and marketing industry is extremely competitive. In addition to cellulosic ethanol producers using different technology platforms,
our competitors will be grain ethanol producers as well as other providers of alternative and renewable fuels. Significant competitors in the grain ethanol production and marketing industry include Archer Daniels Midland Company, Cargill, Inc.,
VeraSun Energy Corporation, and Aventine Renewable Energy, Inc. Many companies are engaged in research and development activities in the emerging cellulosic ethanol industry, and companies with announced pilot facility and/or demonstration facility
development activities in the cellulosic ethanol space include Abengoa Bioenergy Corp., BlueFire, Genencor, Iogen Corporation, Losonoco, Mascoma, Range Fuels, and Xethanol. Larger industrial companies with announced cellulosic strategies include
Archer Daniels Midland, DONG Energy (Elsam), DuPont/POET (formerly known as Broin), Tate & Lyle, and Novozymes. Cellulosic gasification technologies are being pursued by companies including ClearFuels and BRI-Infinium. Some or all of these
competitors or other competitors, as well as academic, research and government institutions, are developing or may develop technologies for, and are competing or may compete with us in, the production of ethanol from cellulosic biomass or other
feedstocks, such as municipal or construction waste, production of cellulosic ethanol or other fuels employing different steps within the production process, such as acid hydrolysis and/or gasification, and/or the production of other alternative
fuels or biofuels, such as biobutanol. Some of our competitors have substantially greater production, financial, research and development, personnel and marketing resources than we do. As a result, our competitors may be able to develop competing
and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our lack of resources relative to many of our significant competitors may cause us to fail to
anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and prevent us from achieving any market share, sales and/or profitability, adversely affect our results of
operations and financial position.



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Our ability to compete successfully will depend on our ability to develop proprietary products that reach
the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Current competitors or other companies may develop technologies and products that are more effective than ours. Our
technologies and products may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. The existing approaches of our competitors or new approaches or technology
developed by our competitors may be more effective than those developed by us.

If we lose key personnel or are unable to attract and retain additional
personnel, it could delay our product development programs, harm our research and development efforts, and we may be unable to pursue collaborations or develop our own products.

The loss of any key members of our senior management, or business development or scientific staff, or failure to attract or retain other key management,
business development or scientific employees, could prevent us from developing and commercializing biofuels and cellulosic ethanol and other new products and entering into collaborations or licensing arrangements to execute on our business strategy.
We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the San Diego and New England areas, or due
to competition for, or availability of, personnel with the qualifications or experience necessary for our biofuels business, particularly in the Jennings, Louisiana area. If we are not able to attract and retain the necessary personnel to accomplish
our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our collaborative partners in a timely fashion or to support our internal research and development programs. In particular, our
product and process development programs are dependent on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, and engineers. Competition for experienced scientists and other technical personnel
from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the employee or we may terminate their employment at any
time.

Several members of our senior management team are also new and have not worked together for a significant length of time and they
may not be able to work together effectively to develop and implement our business strategies and achieve our business objectives. Management will need to devote significant attention and resources to preserve and strengthen relationships with
employees, customers and others. If our management team is unable to develop successful business strategies, achieve our business objectives, or maintain positive relationships with employees, customers, suppliers or other key constituencies, our
ability to grow our business and successfully meet operational challenges could be impaired.

Our planned activities will require
additional expertise in specific industries and areas applicable to the products and processes developed through our technologies or acquired through strategic or other transactions, especially in our biofuels business. These activities will require
the addition of new personnel, including management, and the development of additional expertise by existing management personnel. The inability to acquire these services or to develop this expertise could impair the growth, if any, of our business.



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We may be sued for product liability.

We may be held liable if any product or process we develop, or any product which is made or process which is performed 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 limited product liability insurance covering claims up to $5 million that may not fully cover our potential
liabilities. In addition, if we attempt to obtain additional product liability insurance coverage, this additional 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 or processes developed by us or our collaborative partners. If we are sued for any injury
caused by our products, our liability could exceed our total assets.

Risks Specific to Our Vertically-Integrated Biofuels Business

We may not be successful in the development of individual steps in, or an integrated process for, the production of ethanol from cellulosic
biomass at commercial scale in a timely or economic manner or at all.

The production of ethanol from cellulosic biomass requires multiple integrated
steps, including:



| |  |  | obtaining the cellulosic raw material;
| | - |  | --------------------------------------



| |  |  | pretreatment of the biomass to make its constituent fibers accessible to enzymes;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | treatment with enzymes to produce fermentable sugars;
| | - |  | -----------------------------------------------------



| |  |  | fermentation by organisms to produce ethanol from the fermentable sugars;
| | - |  | -------------------------------------------------------------------------



| |  |  | distillation of the ethanol to concentrate it and separate it from other materials;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | purification of the ethanol; and
| | - |  | --------------------------------



| |  |  | storage and distribution of the ethanol.
| | - |  | ----------------------------------------

We are currently focused on the pilot-scale research and development of such processes in our pilot facility in Jennings, Louisiana, as well as the start-up, commissioning and completion of our demonstration-scale facility located at the
same site that is intended to demonstrate the economics of cellulosic ethanol production using our proprietary processes. We have limited experience with sourcing cellulosic feedstocks and distilling ethanol produced from biomass, and we have no
experience storing and/or distributing significant volumes of ethanol produced from biomass sources. To date, we have focused the majority of our research and development efforts on producing ethanol from corn stover, sugarcane bagasse, and
wood. The technological and logistical challenges associated with each one of these processes are extraordinary, and we may not be able to resolve such difficulties in a timely or cost effective fashion, or at all. Even if we are successful in
developing an economical commercial-scale process for converting a particular cellulosic biomass to cellulosic ethanol, we may not be able to adapt such process to other biomass raw materials.

While we have a pilot-scale cellulosic ethanol facility and have begun the start-up and commissioning phases of our demonstration-scale cellulosic
ethanol facility to demonstrate the economics of cellulosic ethanol production using our proprietary processes, we have yet to begin construction of a large-scale commercial cellulosic ethanol facility. While we have estimated the construction
and operating costs for our initial large-scale commercial cellulosic ethanol facilities, these assumptions may prove to be incorrect. Accordingly, we cannot be sure that we can manufacture cellulosic ethanol in an economical manner at large
scale. If we fail to commence large-scale production in a timely manner or to develop large-scale manufacturing capacity and experience, or fail to manufacture cellulosic ethanol economically on a commercial scale or in commercial volumes, our
commercialization of cellulosic ethanol and our business, financial condition, and results of operations will be materially adversely affected.

We may
not be able to implement our planned expansion strategy to build, own and operate commercial-scale cellulosic ethanol facilities, including as a result of our failure to successfully manage our growth, which would prevent us from achieving our
goals.

Our strategy currently includes the development of a pilot-scale facility for process development, a demonstration plant to
validate the economics of our processes at commercial-scale volumes of cellulosic ethanol production, and commercial scale plants for the production of large quantities of ethanol for commercial distribution and sale. We plan to grow our business by
investing in new facilities and/or acquiring existing facilities, as well as pursuing other business opportunities such as the production of other renewable fuels to the extent we deem those opportunities advisable. If recent volatility in the
credit and public and private finance markets continue, we may not be able to obtain project financing to build our commercial-scale plants. We believe that there is increasing competition for suitable production sites. We may not find suitable
sites for construction of new facilities, suitable acquisition candidates or other suitable expansion opportunities.



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We must also obtain numerous regulatory approvals and permits in order to construct and operate
facilities. These requirements may not be satisfied in a timely manner or at all. Federal and state governmental requirements may substantially increase our costs, which could have a material adverse effect on our results of operations and financial
position. Our expansion plans may also result in other unanticipated adverse consequences, such as the diversion of managements attention from our existing operations and products.

Our construction costs may also increase to levels that would make a new facility too expensive to complete or, for demonstration and commercial-scale
plants, unprofitable to operate. Contractors, engineering firms, construction firms and equipment suppliers also receive requests and orders from other ethanol companies and, therefore, we may not be able to secure their services or products on a
timely basis or on acceptable financial terms. Contractors, engineering firms, construction firms and equipment suppliers may lack the expertise in cellulosic ethanol. We may suffer significant delays or cost overruns as a result of a variety of
factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen difficulties or labor issues, any of which could prevent us from commencing operations as expected at our facilities.

Rapid growth, resulting from our operation or other involvement with cellulosic ethanol facilities or otherwise, may impose a significant burden on our
administrative and operational resources. Our ability to effectively manage our growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified
management, technicians and other personnel. We may be unable to do so.

We may not find additional appropriate sites for new facilities,
or development partners with whom we can implement our growth strategy, and we may not be able to finance, construct, develop or operate these new facilities successfully. We also may be unable to find suitable acquisition candidates. Accordingly,
we may fail to implement our planned expansion strategy, including as a result of our failure to successfully manage our growth, and as a result, we may fail to achieve our goals.

We have experienced, and may continue to experience, significant delays or cost overruns related to our cellulosic ethanol plant construction projects.

We have recently experienced cost overruns for our demonstration plant. We may continue to experience significant delays or cost overruns as a result of a
variety of factors, such as shortages of workers or materials, transportation constraints, adverse weather, unforeseen difficulties or labor issues, any of which could prevent us from commencing operations as expected at our facilities.

Our construction costs may also increase to levels that would make a new facility too expensive to complete or, for demonstration and commercial-scale
plants, unprofitable to operate. Contractors, engineering firms, construction firms and equipment suppliers may lack the expertise in cellulosic ethanol, which may result in delays or cost overruns. Contractors, engineering firms, construction firms
and equipment suppliers also receive requests and orders from other clients, including other ethanol companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms.

If we are unable to successfully commercialize our technology, our business may fail to generate sufficient revenue, if any, which would adversely affect our
operating results.

We expect to derive a significant portion of our revenue from the commercialization of our proprietary technology
for producing fuel-grade cellulosic ethanol by developing, either alone or with partners, cellulosic ethanol production plants and by licensing our proprietary technology. In order to develop a viable cellulosic ethanol business, we will need to:



| |  |  | successfully start-up, commission and complete our demonstration facility;
| | - |  | --------------------------------------------------------------------------



| |  |  | successfully design, finance and construct commercial-scale cellulosic ethanol facilities; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | prove that we can operate commercial-scale ethanol facilities at costs that are competitive with grain-based ethanol facilities, other cellulosic ethanol
technologies that may be developed and other alternative fuel technologies that may be developed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Currently, there are no
commercial-scale cellulosic ethanol production plants in operation in the United States, and we have no previous experience developing, constructing or operating commercial-scale cellulosic ethanol production plants. We are in the start-up and
commissioning phases of our first demonstration-scale cellulosic ethanol facility. There can be no assurance that we will be able to develop and operate cellulosic ethanol production plants on a commercial scale, that we will be able to successfully
license our technology to third parties, or that any cellulosic ethanol facilities developed by us or our licensees will be profitable.



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*We are dependent on BP under our recently completed strategic partnership in cellulosic ethanol, and our failure to
successfully develop our cellulosic ethanol processes and technology would adversely affect our ability to achieve the benefits under that strategic partnership, and could prevent us from successfully developing and commercializing cellulosic
ethanol and achieving or sustaining profitability.

We recently completed the creation of a strategic partnership with BP to accelerate
the development and commercialization of cellulosic ethanol in the field of conversion of biomass to fermentable sugars for the production of ethanol, or the Field. The partnership combines a broad technology platform and operational capabilities in
an effort to advance the development of a portfolio of low-cost, environmentally-sound cellulosic ethanol production facilities in the United States, and potentially throughout the world.

Substantially all of our efforts in our biofuels business over the near term will be focused upon the joint development program with BP. We have agreed
with BP that for a limited period, we will not use our existing technology in any other technology development program in the Field, with limited exceptions. The limited period may be extended if our joint development program with BP is extended. We
are responsible for performance of substantially all of the activities under the joint development program. If we are not successful in achieving the objectives of the joint development program, BP may terminate the joint development program, and we
will no longer be entitled to receive any payments from BP for performance of the joint development program, which would have a material adverse impact on our business, financial condition, and results of operations. The technology in the Field that
we develop in the course of the joint development program will be owned by Galaxy Biofuels LLC, a special purpose entity which is equally owned by BP and us. We will only have access to the technology owned by Galaxy Biofuels through any license
that Galaxy Biofuels grants to us. In addition, the license to our existing technology that we granted to Galaxy Biofuels in the Field will continue in effect on a non-exclusive basis even if the joint development program terminates, unless the
termination is caused by BPs failure to make payments to us when due. If BP terminates the joint development program, we may not be successful in entering into an agreement with another strategic partner or otherwise economically exploiting
our technology in the Field, and the continuing rights of Galaxy Biofuels to exploit our existing technology and technology developed during the joint development program may adversely affect our ability to do so.

*If we are unable to agree on the terms of a joint venture company with BP, or unable to co-develop commercial plant production projects with BP, we may not achieve
the anticipated benefits of our relationship with BP.

We expect to negotiate with BP a second phase focused on the development of a
joint venture to accelerate and facilitate the commercial deployment of the technologies into commercial-scale cellulosic ethanol production facilities. While the primary focus of the joint venture will be to encourage the use of the technology
package developed by the joint development program in facilities that are jointly-owned by BP and Verenium in the United States, the technology and the technology package will also be licensable to us and to BP separately, as well as to third-party
commercial projects in the United States and elsewhere. We intend to negotiate and finalize this second phase of our relationship with BP, including incremental financial terms for co-funding the joint venture, by early 2009. If we are unsuccessful
in forming the joint venture company, or are unable to fund our portion of commercial plant facilities projects, we may not achieve the anticipated benefits of our relationship with BP, which could have a material adverse impact on our business,
financial condition, and results of operations.

*If we are unable to perform our obligations under our joint development program with BP, including
funding our portion of its costs, we may lose certain voting rights in the management of Galaxy Biofuels, the special purpose entity formed to exploit the technology developed through our relationship with BP, and the anticipated economic benefits
resulting from the joint development program may be delayed or may not occur.

We are co-funding our joint development program with BP
and have an equal vote with BP in decisions regarding the management of Galaxy Biofuels, including decisions regarding future funding, the commercial use of the technology package that we anticipate will result from the joint development program and
the timing of monetary distributions to the owners of Galaxy Biofuels. However, if we are unable to fund our portion of the joint development program costs, or are unable to fulfil certain of our other obligations under the joint development
program, we may lose our ability to participate in certain aspects of the decision-making process, including decisions about how and when funding occurs. If we are unable to fulfil our funding commitments, BP may chose to fund our portion of the
joint development program and to receive its contributions back before we receive any additional distributions from license fees, royalties or other revenue, which could result in the delay of distributions to us or in our receiving no
distributions. A delay or failure to receive distributions could have a material adverse impact on our future revenues and could have a material adverse impact on our business, financial condition and results of operations.

*Our recent goodwill impairment could have a negative impact on our stock price, our business and our ability to raise adequate funds to support our business.

As a result of the merger with Celunol on June 20, 2007, we recorded $106.1 million of goodwill on our balance sheet, all of which was
allocated to our biofuels reporting unit. Each year we test for impairment of our goodwill and intangible assets. We performed our annual impairment test as of September 30, 2008. After engaging in the analysis required under SFAS No. 142,
Goodwill and Other Intangible Assets,we recognized a non-cash charge of $106.1 million in the third quarter of 2008, representing full impairment of the carrying value of our goodwill. The immediate effect of the full impairment
of our goodwill is to reduce our assets by the amount of the impairment, which then lessens the amount of our stockholders equity. Our impairment may also impact existing or potential equityholders or debtholders perceptions of our
company and reduce the price of our stock, which could have a material adverse effect of our ability to raise additional funds in the capital markets.



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We may not realize the economic return expected from our acquired in-process research and development.

We allocated $42.4 million of the purchase price to acquired in-process research and development projects. Acquired in-process research and
development, or IPR&D, represents the valuation of acquired, to-be-completed research projects. Prior to the merger, Celunols ongoing research and development initiatives primarily involved the development of its patented and proprietary
biotechnology to enable production of fuel-grade ethanol from cellulosic biomass materials. As of the merger date, pursuant to authoritative guidance under SFAS No. 2, Accounting for Research and Development Costs, these
projects were not determined to have reached technological feasibility and have no alternative future use. Accordingly, the amounts allocated to those projects were expensed in the accompanying statements of operations in June 2007, the period in
which the merger was consummated.

The values of the research projects, namely, our Generation 1 or Gen 1
technology, were determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. These
cash flows were estimated by forecasting total revenue expected from these products and then deducting appropriate operating expenses, cash flow adjustments and contributory asset returns to establish a forecast of net cash flows arising from the
acquired in-process technology. These cash flows were substantially reduced to take into account the time value of money and the risks associated with the inherent difficulties and uncertainties given the projected stage of development of these
projects at closing. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, discount rates of 40% were considered appropriate for valuation of the IPR&D. We believe
that these discount rates were commensurate with the projects stage of development and the uncertainties in the economic estimates described above.

Since our IPR&D represents costs for technology that has not yet reached technological feasibility, we have, and will continue to, require substantial investment in the future development and commercialization of
our Gen 1 technology. While we expect to deploy this technology at a commercial scale as early as 2010, we can not assure you that we will ever be successful in commercializing this technology. If these projects are not successfully developed, our
sales and profitability will be adversely affected in future periods.

If we are unable to successfully operate our pilot cellulosic ethanol production
facility or to successfully start-up, commission, complete and operate our demonstration-scale cellulosic ethanol production facility, we may be unable to proceed with the development of cellulosic facilities on a commercial-scale, which would have
a material adverse effect on our business.

To date, we have not operated demonstration-scale cellulosic ethanol facilities or built or
operated commercial-scale cellulosic ethanol facilities. The development of a portfolio of ethanol production facilities is dependent on the performance of our pilot facility, which we continue to upgrade, as well as our demonstration facility,
which is now in the start-up and commissioning phases. The operation of our pilot facility and the start-up, commissioning and completion of our demonstration facility might be subject to significant interruption and delay in case of a major
accident or damage from severe weather or other natural disasters, or due to supply shortages of necessary materials and services which we, along with other participants in the ethanol industry, have experienced. For these and other reasons, the
operation of our pilot facility and the start-up, commissioning and completion of our demonstration facility may be subject to significant cost overruns from our budgeted amounts. If we are unable to fund these expenditures, our progress at the
pilot facility and demonstration facility could be significantly delayed or curtailed until such financing is available. In addition, our demonstration facility, once operational, may not produce ethanol in sufficient quantities or the operating
costs for the facility may be significantly higher than we have expected. If we are unable to produce ethanol in the demonstration facility at competitive variable and/or total costs, we may be unable to proceed with the development of
commercial-scale facilities.

In order to successfully develop commercial-scale facilities, we will need to address siting, construction and other
issues, and if we fail to successfully overcome these issues, we will not be able to commercialize our technology.

Even if we can
demonstrate that our technology can be deployed on a commercial-scale to produce cellulosic ethanol on a cost-competitive basis, in order to be successful we must develop a number of commercial-scale projects. In order to successfully develop
commercial-scale projects, we must overcome a number of risks and uncertainties including the following:



| |  |  | Sites. In order to develop commercial facilities, we will need to identify and obtain rights to appropriate sites. In evaluating and obtaining sites, we will
need to address a number of issues, including the proximity to potential feedstocks and proximity to transportation infrastructure and end-user markets. Competition for suitable cellulosic ethanol production sites may increase as the market evolves.
We may not find suitable additional sites for the construction of new facilities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Joint Venture Partners. In addition to identifying sites for projects we develop on our own or with BP, we may seek to develop commercial facilities through
other joint venture partners. We may not find suitable joint venture partners for construction of new facilities. As the market for cellulosic ethanol projects evolves, competition may increase for potential joint venture partners with favorable
sites.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Supply of Cellulosic Feedstock. Operation of commercial facilities requires a continuous long-term supply of feedstocks that are generally located in
geographic proximity to the facility. We may not be successful in obtaining long-term supply agreements, or our supply of feedstocks could be disrupted by weather, climate, natural disasters, or other factors. In addition, prices and competition for
feedstocks could increase, adversely affecting our ability to operate economically or at all.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Off-Take Arrangements. In order to successfully develop a commercial-scale facility, we will need to enter into off-take arrangements for the sale of ethanol
to be produced at that facility. If we are unable to enter into appropriate off-take arrangements, we may be unable to obtain project financing for the particular facility.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Construction. We will need to identify and retain a significant number of contractors, engineering firms, construction firms and equipment suppliers on
satisfactory terms in order to be able to develop and construct multiple commercial-scale cellulosic ethanol facilities. These vendors also receive requests and orders from other companies in the ethanol and other industries and, therefore, we may
not be able to secure their services or products on a timely basis or on acceptable financial terms. If we are unable to enter into construction and supply contracts on satisfactory terms, we will not be able to obtain financing for our commercial
scale projects. In addition, our construction costs may also increase to levels that would make a new facility too expensive to develop or unprofitable to operate.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Risks. If we are able to build commercial scale ethanol facilities, our operation of these facilities may be subject to labor disruptions and
unscheduled downtime, or other operational hazards inherent in the ethanol industry, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some of these
operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our
insurance may not be adequate to fully cover the potential operational hazards described above. Any delay in development or interruption due to these potential operational risks could result in substantial losses and material adverse effects on our
results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We will rely heavily on future strategic partners to support our biofuels business.

An important component of our current business plan is to enter into strategic partnerships:



| |  |  | to provide capital, equipment and facilities, including significant capital for the construction of cellulosic ethanol research and production facilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to provide expertise in performing certain process development, production and logistical activities;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | to provide funding for research and development programs, process development programs and commercialization activities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | to provide access to cellulosic feedstocks; and
| | - |  | -----------------------------------------------



| |  |  | to support or provide sales, marketing and distribution services.
| | - |  | -----------------------------------------------------------------

These arrangements with collaborative partners are, and will continue to be, critical to our success in implementing our vertical integration biofuels strategy and manufacturing and selling cellulosic ethanol
profitably. We cannot guarantee that any collaborative relationship(s) will be entered into, or if entered into, will continue or be successful. Failure to make or maintain these arrangements or a delay or failure in a collaborative partners
performance under any such arrangements would materially adversely affect our business and financial condition.

We cannot control our
collaborative partners performance or the resources they devote to our programs. We may not always agree with our partners nor will we have control of our partners activities on behalf of any alliance. The performance of our programs may
be adversely affected and programs may be delayed or terminated or we may have to use funds, personnel, equipment, facilities and other resources that we have not budgeted to undertake certain activities on our own as a result of these
disagreements. Performance issues, program delays or termination or unbudgeted use of our resources may materially adversely affect our business and financial condition.

Disputes may arise between us and a collaborative partner and may involve the issue of which of us owns the technology and other intellectual property that is developed during a collaboration or other issues arising
out of the collaborative agreements. Such a dispute could delay the program on which we are working or could prevent us from obtaining the right to commercially exploit such developments. It could also result in expensive arbitration or litigation,
which may not be resolved in our favor. Our collaborative partners could merge with or be acquired by another company or experience financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us.



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In order to gain broad acceptance of our technology, we will need to enter into licensing arrangements with third
parties. If we fail to successfully identify and enter into licenses with qualified third parties or to successfully manage existing and future licensing relationships, we may not be able to successfully commercialize our technology.

We currently have a technology transfer agreement in place with Marubeni Corporation and Tsukishima Kikai Co., Ltd. We also expect that a significant
portion of our future revenue will be derived from licensing agreements that we, or our special purpose entity, Galaxy Biofuels LLC (Galaxy) will enter into in the future. If we or Galaxy, fail to enter into and maintain license
agreements, we may not be able to gain broad acceptance for our technology, grow a business or generate sufficient revenues to support our operations. Our future license opportunities could be harmed if:



| |  |  | we do not successfully operate our pilot facility or successfully construct and operate our demonstration facility;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | we are unable to successfully develop commercial-scale facilities;
| | - |  | ------------------------------------------------------------------



| |  |  | we or Galaxy develop processes or enter into licenses that conflict with the business objectives of our existing licensees;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | we or Galaxy disagree with our licensees as to rights to intellectual property we develop or our licensees research programs or commercialization activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we or Galaxy are unable to manage multiple licensee relationships;
| | - |  | ------------------------------------------------------------------



| |  |  | our licensees become our competitors or enter into agreements with our competitors;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our licensees become less willing to expend their resources on research or development due to general market conditions or other circumstances beyond our control;
or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | consolidation in our target markets limits the number of potential strategic licensees or we or Galaxy are unable to negotiate additional license agreements having
terms satisfactory to us.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may not be able to develop manufacturing capacity sufficient to meet demand in an economical manner or
at all.

If demand for cellulosic ethanol increases beyond the scope of our production facilities, we may incur significant expenses in
the expansion and/or construction of production facilities and increases in personnel in order to increase production capacity. To finance the expansion of a commercial-scale production facility is complex and expensive. We cannot assure you that we
will have the necessary funds to finance the development of production facilities, or that we will be able to develop this infrastructure in a timely or economical manner, or at all.



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The feedstocks, raw materials and energy necessary to produce ethanol may be unavailable or may increase in price,
adversely affecting our sales and profitability.

We intend to use various sources of cellulosic biomass, such as sugarcane bagasse,
dedicated energy crops, agricultural residues (which may include corn stover), switchgrass and wood, to make cellulosic ethanol. However, rising prices for any or all of these feedstocks would produce lower profit margins and, therefore, represent
unfavorable market conditions. This is especially true since market conditions generally would not allow us to pass along increased costs to customers, because the price of ethanol is primarily determined by other factors, such as the price of oil
and gasoline. Additionally, once we elect to use a particular feedstock in the ethanol production process, it may be technically or economically impractical to change to a different feedstock. At certain levels, feedstock prices may make ethanol
uneconomical to use in markets where the use of fuel oxygenates is not mandated.

Weather conditions and other factors affecting crop
yields, farmer planting decisions, and general economic, market and regulatory factors may influence the availability, transportation costs and price of biomass feedstocks used in our pilot facility and to be used in our demonstration- and
commercial-scale production facilities. There can be no guarantee that feedstock costs to us may not increase over time. Government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply,
also impact the price and transportation costs of agricultural products. The significance and relative effects of these factors on the potential cost of feedstocks are difficult to predict. Any increase in the cost of feedstocks will result in
increased costs, and negative effects on our operating results. Other inputs to our cellulosic-ethanol production process will also be subject to price variation. These include chemicals, nutrients, enzymes, acid and lime, among others. Increases in
the costs of these materials, or our failure to achieve reductions in the use of such materials, could increase our operating costs and have negative effects on our operating results. The gross margin of our anticipated ethanol production business
depends principally on the spread between the price for ethanol and our production costs. Any increase in production costs or decrease in the demand or price of ethanol will negatively affect our business.

The production of ethanol also requires a significant amount of other raw materials and energy, primarily water, electricity and natural gas. We plan to
utilize the lignin remaining after the pretreatment of cellulosic biomass as a source of energy to power our cellulosic ethanol production facilities, however we may not be successful in using lignin as a source of energy and, if so, we may have to
use electricity and supplemental fuels such as natural gas. The prices of electricity and supplemental fuels such as natural gas have fluctuated significantly in the past and may fluctuate significantly in the future. Local water, electricity and
gas utilities may not be able to reliably supply the water, electricity and supplemental fuels that our facilities will need or may not be able to supply such resources on acceptable terms. In addition, if there is an interruption in the supply of
water or energy for any reason, we may be required to halt ethanol production.

The high concentration of our efforts towards developing processes for
the production of cellulosic ethanol could increase our losses, especially if demand for ethanol declines.

If we are successful in
producing and marketing cellulosic ethanol, our revenue will be derived primarily from sales of ethanol. Ethanol competes with several other existing products and other alternative products could also be developed for use as fuel additives. An
industry shift away from ethanol or the emergence of new competing products may reduce the demand for ethanol. A downturn in the demand for ethanol would significantly and adversely affect any sales and/or profitability.

The market price of ethanol is volatile and subject to significant fluctuations, which may cause our profitability from the production of cellulosic ethanol to
fluctuate significantly.

The market price of ethanol is dependent upon many factors, including the price of gasoline, which is in turn
dependent upon the price of petroleum. Petroleum prices are highly volatile and difficult to forecast due to frequent changes in global politics and the world economy. The distribution of petroleum throughout the world is affected by incidents in
unstable political environments, such as Iraq, Iran, Kuwait, Saudi Arabia, Nigeria, Venezuela, the former U.S.S.R. and other countries and regions. The industrialized world depends critically upon oil from these areas, and any disruption or other
reduction in oil supply can cause significant fluctuations in the prices of oil and gasoline. We cannot predict the future price of oil or gasoline and may establish unprofitable prices for the sale of ethanol due to significant fluctuations in
market prices. In recent years, the prices of gasoline, petroleum and ethanol have all reached historically unprecedented high levels. If the prices of gasoline and petroleum decline, we believe that the demand for and price of ethanol may be
adversely affected. Fluctuations in the market price of ethanol may cause our profitability to fluctuate significantly quarter-to-quarter and year-to-year.

We believe that the production of ethanol is expanding rapidly. There are a number of new plants under construction and planned for construction throughout the United States. We expect existing ethanol plants to
expand by increasing production capacity and actual production. Increases in the demand for ethanol may not be commensurate with increasing supplies of ethanol. Thus, increased production of ethanol may lead to lower ethanol prices. Also, the
increased production of ethanol could result in increased demand for feedstocks for the production of ethanol. This could result in higher prices for feedstocks and cause higher ethanol production costs and, in the event that we are unable to pass
increases in the price of feedstocks on to our customers, will result in lower profits. We cannot predict the future price of ethanol or feedstocks. Any material decline in the price of ethanol, or any material increase in the price of feedstocks,
will adversely affect any sales and/or profitability.



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If ethanol demand does not increase, or decreases, there may be excess capacity in our industry which would likely
cause a decline in ethanol prices, adversely impacting our results of operations, cash flows and financial condition.

Domestic fuel
ethanol production has increased steadily from 1.5 billion gallons per year in 1999 to 6.5 billion gallons per year in 2007, according to the RFA. In addition, there is a significant amount of capacity being added to the fuel ethanol industry,
including capacity that may be added as a result of government programs and/or incentives, and capacity added to address anticipated increases in demand. However, demand for ethanol may not increase as quickly as expected, or at all. If the ethanol
industry has excess capacity, a fall in prices will likely occur which will have an adverse impact on the viability of our vertical integration strategy within biofuels, as well as our results of operations, cash flows and financial condition if we
proceed to market ethanol. Demand for ethanol could be impaired due to a number of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption could occur as a result of increased gasoline
or oil prices. For example, price increases could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage capabilities.

The United States ethanol industry is highly dependent upon a myriad of federal and state legislation and regulation and any changes in such legislation or regulation could materially adversely affect our results
of operations and financial condition.

The elimination or significant reduction in the Federal Excise Tax Credit could have a
material adverse effect on our results of operations.

The production of ethanol is made significantly more competitive by federal tax
incentives. The Volumetric Ethanol Excise Tax Credit, or VEETC, program, which is scheduled to expire on December 31, 2010, allows gasoline distributors who blend ethanol with gasoline to receive a federal excise tax rate reduction for each
blended gallon they sell regardless of the blend rate. The current federal excise tax on gasoline is $0.184 per gallon, and is paid at the terminal by refiners and marketers. If the fuel is blended with ethanol, the blender may claim a $0.51 tax
credit for each gallon of ethanol used in the mixture. The VEETC may not be renewed prior to its expiration in 2010, or if renewed, it may be renewed on terms significantly less favorable than current tax incentives. In addition, the blenders
credits, as well as other federal and state programs benefiting ethanol (such as tariffs), generally are subject to U.S. government obligations under international trade agreements, including those under the World Trade Organization Agreement on
Subsidies and Countervailing Measures, and might be the subject of challenges thereunder, in whole or in part. The elimination or significant reduction in the VEETC could have a material adverse effect on our results of operations.

Waivers of the Renewable Fuels Standard minimum levels of renewable fuels included in gasoline, or the lapse of the increased weight given for the use
of cellulosic ethanol for compliance with the Renewable Fuels Standard, could have a material adverse affect on our results of operations.

Under the Energy Policy Act of 2005, the Department of Energy, in consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the Renewable Fuels Standard, or RFS, mandate with respect to one or more states if the
Administrator determines that implementing the requirements would severely harm the economy or the environment of a state, a region or the United States, or that there is inadequate supply to meet the requirement. Additionally, under the RFS,
through 2013, one gallon of cellulosic ethanol is credited as 2.5 gallons for compliance with the RFS. Any waiver of the RFS with respect to one or more states or with respect to a particular year, or the lapse or alteration of the extra weight
cellulosic ethanol is given in complying with the RFS, could adversely affect demand for ethanol and could have a material adverse effect on our results of operations and financial condition.

While the Energy Policy Act of 2005 imposes the RFS, it does not mandate the use of ethanol and eliminates the oxygenate requirement for reformulated
gasoline in the Reformulated Gasoline Program included in the Clean Air Act.

The Reformulated Gasoline, or RFG, programs
oxygenate requirements contained in the Clean Air Act, was completely eliminated on May 5, 2006 by the Energy Policy Act of 2005. While the RFA expects that ethanol should account for the largest share of renewable fuels produced and consumed
under the RFS, the RFS is not limited to ethanol and also includes biodiesel and any other liquid fuel produced from biomass or biogas. The elimination of the oxygenate requirement for reformulated gasoline in the RFG program included in the Clean
Air Act may result in a decline in ethanol consumption in favor of other alternative fuels, which in turn could have a material adverse effect on our results of operations and financial condition.



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The elimination or alteration of the special depreciation allowances for cellulosic ethanol facilities
could have a material adverse effect on our results of operations.

Under the Tax Relief and Health Care Act of 2006, a special first
year depreciation allowance for qualified cellulosic biomass ethanol plant property was created. Under this allowance, a qualifying facility would be eligible for a depreciation deduction of up to 50% of its adjusted basis in the year the facility
is placed in service. The elimination or alteration of this depreciation allowance could have a material adverse effect on our results of operations and financial condition.

Changes in enacted federal, state or local legislation, or the enaction of new legislation, may adversely impact our business.

Federal, state and local legislators may enact legislation, or modify or amend currently enacted legislation, that could adversely affect the industries in which we currently operate. For example, several federal laws
encourage the development of the ethanol and/or biofuels industry in the United States. If those laws are repealed or are not renewed, it could adversely impact the ethanol and/or biofuels industries as a whole, which would have an adverse effect on
our financial results. In addition, legislation could be enacted that might not negatively impact our industry as a whole, but could negatively impact that portion of the industry in which we operate or our particular business. For example, in the
future we may consider the effect of state or local incentives, such as grants or tax abatements, in formulating our internal projections and budgets and when choosing to where to locate and operate commercial-scale plants for the production of
cellulosic ethanol. If those incentives should be repealed or no longer become available, the profitability of any commercial-scale plants which are reliant on such incentives could be negatively affected, which in turn would negatively affect our
operating results.

Certain countries can export ethanol to the United States duty-free, which may undermine the ethanol production industry in the
United States.

Imported ethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valorem tax that was designed to offset
the $0.51 per gallon ethanol subsidy available under the federal excise tax incentive program for refineries that blend ethanol in their fuel. There is a special exemption from the tariff for ethanol imported from certain countries in Central
America and the Caribbean islands, which is limited to a total of 7.0% of United States production per year (with additional exemptions for ethanol produced from feedstock in the Caribbean region over the 7.0% limit). We do not know the extent to
which the volume of imports would increase or the effect on United States prices for ethanol if the tariff is not renewed beyond its current expiration in December 2007. In addition The North America Free Trade Agreement countries, Canada and
Mexico, are exempt from duty. Imports from the exempted countries have increased in recent years and are expected to increase further as a result of new plants under development. In particular, the ethanol industry has expressed concern with respect
to a new plant under development by Cargill, Inc., one of the largest ethanol producers in the United States, in El Salvador that would take the water out of Brazilian ethanol and then ship the dehydrated ethanol from El Salvador to the United
States duty-free. Since production costs for ethanol in Brazil are estimated to be significantly less than what they are in the United States, the import of the Brazilian ethanol duty-free through El Salvador, or the import of ethanol duty-free from
any country not exempted from the tariff, may negatively impact the demand for domestic ethanol and the price at which we sell our ethanol.

Our
competitive position, financial position and results of operations may be adversely affected by technological advances.

Even if we are
able to execute our business plan and develop commercial-scale cellulosic ethanol production plants and successfully license our proprietary technology, the development and implementation of new technologies may result in a significant reduction in
the costs of ethanol production by others. For example, any technological advances by others in the efficiency or cost to produce ethanol from corn or other biomass could have an adverse effect on our competitiveness. We cannot predict when new
technologies may become available, the rate of acceptance of new technologies by our competitors or the costs associated with new technologies. In addition, advances in the development of alternatives to ethanol could significantly reduce demand for
or eliminate the need for ethanol. Any advances in technology which require significant capital expenditures to remain competitive or which reduce demand or prices for ethanol would have a material adverse effect on the results of our operations and
financial position.

The termination or loss of our exclusive license from the University of Florida Research Foundation, Inc., would have a material
adverse effect on our business.

We have an exclusive worldwide license to use, develop and commercially exploit the ethanol production
patent estate of the University of Florida Research Foundation, Inc., or UFRFI, which consists of 16 United States patents, 6 pending United States patent applications, 57 foreign patents, 56 foreign patent applications and other related proprietary
ethanol technology, and any extensions and improvements thereof for the production of ethanol, all of which is referred to herein as the UFRFI technology. The UFRFI license agreement expires on the later of October 2015 or the expiration of the last
patent related to the UFRFI licensed technology. Based on the latest to expire of the current granted United States patents, the UFRFI license agreement will extend into 2022. Pending and future patent applications related to the UFRFI licensed
technology, if granted, would extend the expiration date of the UFRFI license agreement beyond 2026. Loss of the rights to the UFRFI technology licensed to us, for example, due to our inability to comply with the terms and conditions or otherwise,
of the UFRFI license agreement, would have a material adverse effect on our business.



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Growth in the sale and distribution of ethanol is dependent on the changes to and expansion of related infrastructure
which may not occur on a timely basis, if at all, and our contemplated operations could be adversely affected by infrastructure disruptions.

Substantial development of infrastructure will be required by persons and entities outside our control for our contemplated licensing and cellulosic ethanol production operations, and the ethanol industry generally, to grow. Areas requiring
expansion include, but are not limited to:



| |  |  | the automobile industrys of manufacture of flexible fuel vehicles;
| | - |  | -------------------------------------------------------------------



| |  |  | additional rail capacity affecting distribution of ethanol;
| | - |  | -----------------------------------------------------------



| |  |  | additional storage facilities for ethanol;
| | - |  | ------------------------------------------



| |  |  | increases in truck fleets capable of transporting ethanol within localized markets;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | expansion of refining and blending facilities to handle ethanol; and
| | - |  | --------------------------------------------------------------------



| |  |  | growth in service stations equipped to handle ethanol fuels.
| | - |  | ------------------------------------------------------------

Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure
could hurt the demand for our proprietary technology or the production of cellulosic ethanol, impede our delivery of cellulosic ethanol, impose additional costs on us, or otherwise have a material adverse effect on its results of operations or
financial position. Our contemplated business will be dependent on the continuing availability of infrastructure and any infrastructure disruptions could have a material adverse effect on our business.

New ethanol plants under construction or decreases in the demand for ethanol may result in excess United States production capacity.

A number of our competitors are divisions of substantially larger enterprises and have substantially greater financial resources than we have. Smaller
competitors also pose a threat. Farmer-owned cooperatives and independent firms consisting of groups of individual farmers and investors have been able to compete successfully in the ethanol industry. These smaller competitors operate smaller
facilities which do not affect the local price of corn grown in proximity to the facility as much as larger facilities. In addition, many of these smaller competitors are farmer-owned and often require their farmer-owners to commit to selling them a
certain amount of corn as a requirement of ownership. A significant portion of production capacity in the ethanol industry consists of smaller-sized facilities. In addition, institutional investors and high net worth individuals could heavily invest
in ethanol production facilities and oversupply the demand for ethanol, resulting in lower ethanol price levels that might adversely affect the results of our contemplated cellulosic ethanol production operations and financial position.

Risks Specific to Our Specialty Enzymes Business

*We
have relied, and will continue to rely, heavily on strategic partners to support our specialty enzymes business.

Historically, we have
relied upon a number of collaborations, including those with Syngenta, Danisco, Bunge, Cargill, and BASF, to enhance and support our development and commercialization efforts for our specialty enzymes. An important component of our business plan is
to enter into strategic partnerships:



| |  |  | to provide capital, equipment and facilities, including significant capital to develop and expand our enzyme manufacturing capabilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to provide funding for research and development programs, process development programs and commercialization activities for our specialty enzyme products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to support or provide sales, marketing and distribution services for our specialty enzyme products.
| | - |  | ---------------------------------------------------------------------------------------------------

These arrangements with collaborative partners are, and will continue to be, critical to the success of our specialty enzymes business. We cannot
guarantee that any collaborative relationship(s) will be entered into, or if entered into, will continue or be successful. Failure to make or maintain these arrangements or a delay or failure in a collaborative partners performance under any
such arrangements would materially adversely affect our business and financial condition.

We cannot control our collaborative
partners performance or the resources they devote to our programs. We may not always agree with our partners nor will we have control of our partners activities on behalf of any alliance. The performance of our programs may be adversely
affected and programs may be delayed or terminated or we may have to use funds, personnel, equipment, facilities and other resources that we have not budgeted to undertake certain activities on our own as a result of these disagreements. Performance
issues, program delays or termination or unbudgeted use of our resources may materially adversely affect our business and financial condition.



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Disputes may arise between us and a collaborative partner and may involve the issue of which of us owns
the technology and other intellectual property that is developed during a collaboration or other issues arising out of the collaborative agreements. Such a dispute could delay the program on which we are working or could prevent us from obtaining
the right to commercially exploit such developments. It could also result in expensive arbitration or litigation, which may not be resolved in our favor. Our collaborative partners could merge with or be acquired by another company or experience
financial or other setbacks unrelated to our collaboration that could, nevertheless, adversely affect us.

We do not own equipment with the capacity to
manufacture products on a commercial scale. If we are unable to access the capacity to manufacture products in sufficient quantity, we may not be able to commercialize our products or generate significant sales.

We have only limited experience in enzyme manufacturing, and we do not have our own internal capacity to manufacture specialty enzyme products on a
commercial scale. We expect to be dependent to a significant extent on third parties for commercial scale manufacturing of our specialty enzyme products. We have arrangements with third parties that have the required manufacturing equipment and
available capacity to manufacture Fuelzyme-LF enzyme, Phyzyme XP, Bayovac SRS, Quantum phytase, Luminase PB-100 enzyme, Luminase PB-200 enzyme, Pyrolase 160 enzyme, Pyrolase 200 enzyme, and Cottonase enzyme. While we have our own pilot development
facility, we continue to depend on third parties for large-scale commercial manufacturing. Additionally, one of our third party manufacturers is located in a foreign country, and is our sole-source supplier for most of our commercial enzyme
products. Any difficulties or interruptions of service with our third party manufacturers or our own pilot manufacturing facility could disrupt our research and development efforts, delay our commercialization of specialty enzyme products, and harm
our relationships with our specialty enzyme strategic partners, collaborators, or customers.

*We have recently experienced inventory losses and
decreased manufacturing yields related our manufacturing processes for Phyzyme and Fuelzyme, which negatively impacted our product gross margins.

During the first half of 2008, we experienced inventory losses and decreased manufacturing yields related to contamination and manufacturing issues for Phyzyme and Fuelzyme. While we believe we have adequately
resolved our contamination issues and have recovered a substantial portion of such losses from Fermic, there can be no assurance that such losses will not occur in the future or that any amount of future losses will be reimbursed by Fermic. If such
contamination issues continue in future periods, or we are not able to otherwise improve our manufacturing yields, our results of operations and financial condition would be adversely affected.

*If Danisco or its parent company, Genencor, assumes all or a part of our Phyzyme manufacturing, our gross product revenues will be adversely impacted and our product
gross margins could decline.

We manufacture our enzyme products through a sole-source manufacturing facility in Mexico City, Fermic
S.A., or Fermic. Pursuant to our manufacturing agreement with Fermic, we are contractually committed to bring additional manufacturing capacity on line during the fourth quarter of 2008, which will allow us to meet increasing demand for our enzyme
products. However, due to current capacity constraints at Fermic, we are not able to supply adequate quantities of Phyzyme necessary to meet the increased demand from Danisco. As a result, we have contracted with Genencor, a subsidiary of Danisco,
to serve as a second-source manufacturer for Phyzyme. Pursuant to current accounting rules, revenue from Phyzyme that is supplied to us by Genencor is recognized in an amount equal to the net profit share received from Danisco, as compared to the
full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic. While this revenue recognition treatment should have little or no negative impact on the gross margin we recognize for every sale of
Phyzyme, it would have a negative impact on the gross product revenue we recognize for Phyzyme as the volume of Phyzyme manufactured by Genencor increases.

In addition, our supply agreement with Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume manufacturing rights of Phyzyme. If Danisco were to exercise this right, we
would likely experience significant excess capacity at our third party manufacturing facility. If we were unable to absorb this excess capacity with other products in the event that Danisco assumed manufacturing rights of Phyzyme, our results of
operations and financial condition would be adversely effected.

We have only limited experience in independently developing, manufacturing, marketing,
selling, and distributing commercial specialty enzyme products.

We intend to pursue some specialty enzyme product opportunities
independent of strategic partners and collaborators. We currently have only limited resources and capability to develop, manufacture, market, sell, or distribute specialty enzyme products on a commercial scale. We will determine which specialty
enzyme products to pursue independently based on various criteria, including: investment required, estimated time to market, regulatory hurdles, infrastructure requirements, and industry-specific expertise necessary for successful commercialization.
At any time, we may modify our strategy and pursue collaborations for



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the development and commercialization of some specialty enzyme products that we had intended to pursue independently. We may pursue specialty enzyme products
that ultimately require more resources than we anticipate or which may be technically unsuccessful. In order for us to commercialize more specialty enzyme products directly, we would need to establish or obtain through outsourcing arrangements
additional capability to develop, manufacture, market, sell, and distribute such products. If we are unable to successfully commercialize specialty enzyme products resulting from our internal product development efforts, we will continue to incur
losses in our specialty enzymes business, as well as in our business as a whole. Even if we successfully develop a commercial specialty enzyme product, we may not generate significant sales and achieve profitability in our specialty enzymes
business, or in our business as a whole.

*We may not be able to realize any future benefits from the products and programs that we discontinued and/or
de-emphasized in connection with the strategic reorganization that we announced in January 2006.

In January 2006, we announced a
strategic reorganization designed to focus our resources on specialty enzymes programs and products that have the greatest opportunity for success. Accordingly, we elected to discontinue or to exit certain products and programs, many of which we had
spent significant amounts of research funds on up to the point of their discontinuation and/or de-emphasis. We have sold and/or out-licensed to third parties some of these products and programs, and such efforts have generated insignificant fees and
related cash flows. We will continue to pursue opportunities to sell or out license certain of the remaining products and/or programs including, but not limited to, our sordarins anti-fungal program; however, it is possible that we could be
unsuccessful in our attempts to do so. In the event that we are successful in selling or out-licensing any of these products and/or programs, the structure of such transactions may provide for only future compensation in the event that the third
party is ultimately successful in development of the products and/or programs. Accordingly, it is possible that we may not receive any financial benefit from any sale or out license of these products and/or programs.

Risks Related to Owning Our Common Stock

We are subject to
anti-takeover provisions in our certificate of incorporation, bylaws, and Delaware law and have adopted a shareholder rights plan that could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our
stockholders.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our stockholders. In addition, we adopted a share purchase rights plan that has anti-takeover effects. The rights under the plan will cause substantial dilution to a person or group that
attempts to acquire us on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by our board, since the rights may be amended to permit such an acquisition or may be
redeemed by us. These provisions in our charter documents, under Delaware law, and in our rights plan could discourage potential takeover attempts and could adversely affect the market price of our common stock. Because of these provisions, our
common stockholders might not be able to receive a premium on their investment.

We expect that our quarterly results of operations will fluctuate, and
this fluctuation could cause our stock price to decline, causing investor losses.

Our quarterly operating results have fluctuated in
the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Revenue and expenses in future periods may be greater or less than in the immediately preceding period or in the
comparable period of the prior year. Some of the factors that could cause our operating results to fluctuate include:



| |  |  | commencement or termination of strategic alliances and collaborations;
| | - |  | ----------------------------------------------------------------------



| |  |  | the success rate of our discovery efforts associated with milestones and royalties;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the ability and willingness of strategic partners and collaborators to commercialize, market, and sell royalty-bearing products or processes on expected timelines;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to enter into new agreements with potential strategic partners and collaborators or to extend the terms of our existing strategic alliance agreements
and collaborations, and the terms of any agreement of this type;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our need to continuously recruit and retain qualified personnel;
| | - |  | ----------------------------------------------------------------



| |  |  | our ability to successfully satisfy all pertinent regulatory requirements;
| | - |  | --------------------------------------------------------------------------



| |  |  | our ability to successfully commercialize products or processes developed independently and the demand and prices for such products or processes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost and timing of completion and start-up of our demonstration facility;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the extent, cost and timing of any new projects for the development of commercial-scale facilities;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | general and industry specific economic conditions, which may affect our, and our collaborative partners, research and development expenditures; and
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| |  |  | increased expenses related to the implementation of our vertical integration strategy within biofuels.
| | - |  | ------------------------------------------------------------------------------------------------------

If revenue declines or does not grow as anticipated, we may not be able to correspondingly reduce our operating expenses, and our operating capital
expenses could increase. A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Failure to achieve anticipated levels of revenue could therefore significantly harm our operating results for
a particular fiscal period.

Due to the possibility of fluctuations in our revenue and expenses, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably
decline.

Our stock price has been and may continue to be particularly volatile.

The market price of our common stock has in the past been and is likely to continue to be subject to significant fluctuations. Between January 1,
2006 and September 30, 2008, the closing market price of our common stock has ranged from a low of $0.90 to a high of $11.58. Since the completion of our merger with Celunol on June 20, 2007, the closing market price of our common stock
has ranged from $0.90 to $6.83. The closing market price of our common stock on September 30, 2008 was $0.94. Some of the factors that may cause the market price of our common stock to fluctuate include:



| |  |  | the entry into, or termination of, key agreements, including key collaboration agreements and licensing agreements;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | interruption or delay in the start-up, commissioning and completion of our demonstration facility;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | risks and uncertainties related to siting, permitting, construction, materials and equipment procurement, and other issues related to development of
commercial-scale facilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any inability to obtain additional financing on favorable terms to fund our operations and pursue our business plan;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | reductions in the price of gasoline or increases in the prices for biomass feedstocks;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | future royalties from product sales, if any, by our collaborative partners;
| | - |  | ---------------------------------------------------------------------------



| |  |  | future royalties and fees for use of our proprietary processes, if any, by our licensees;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the initiation of material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights or otherwise;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general and industry-specific economic and regulatory conditions that may affect our ability to successfully develop and commercialize biofuels and cellulosic
ethanol and other products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | significant accidents, damage from severe weather or other natural disasters affecting our pilot facility;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the loss of key employees;
| | - |  | --------------------------



| |  |  | our ability to access genetic material from diverse ecological environments and practice our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the introduction of technological innovations or alternative energy sources or other products by our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | decreases in the market for ethanol, and cellulosic ethanol;
| | - |  | ------------------------------------------------------------



| |  |  | changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | future sales of our common stock or other capital-raising activities; and
| | - |  | -------------------------------------------------------------------------



| |  |  | period-to-period fluctuations in our financial results.
| | - |  | -------------------------------------------------------

Moreover, the stock markets in general are currently experiencing substantial volatility related to general economic conditions and may continue to experience volatility for some time. The stock markets have
experienced in the past substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.

In the past, following periods of volatility in the market price of a companys securities, stockholders have often instituted class action
securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant corporate
decisions and depress our stock price.

Our officers, directors, and stockholders with at least 5% of our stock together controlled
approximately 61% of our outstanding common stock as of November 3, 2008. If these officers, directors, and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and
control matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. In addition, Syngenta and



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its affiliates controlled approximately 11.8% of our outstanding common stock, and by themselves will be able to exert a significant degree of influence over
our management and affairs and over matters requiring stockholder approval. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and
principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of
our company otherwise favored by our other stockholders. This concentration of ownership could depress our stock price.

Future sales of our stock by
large stockholders could cause the price of our stock to decline.

A number of our stockholders hold significant amounts of our stock.
For example, as of November 3, 2008, Syngenta, our largest stockholder, owned 7,963,593 shares of our common stock, or approximately 11.8% of our outstanding shares. All of our shares owned by Syngenta are eligible for sale in the public market
subject to compliance with the applicable securities laws. We have agreed that, upon Syngentas request, we will file one or more registration statements under the Securities Act in order to permit Syngenta to offer and sell shares of our
common stock. Sales of a substantial number of shares of our stock by our large stockholders, including Syngenta, in the public market.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None.



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

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



|ITEM 6. | EXHIBITS.
|------- | ---------

(a)



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed with the
Securities and Exchange Commission on May 12, 2000, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                          
|              | 
|3.2           |  | Certificate of Amendment of Restated Certificate of Incorporation - filed as an exhibit to the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on
March 16, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                
|              | 
|3.3           |  | Amended and Restated Bylaws - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed with the Securities and Exchange Commission
on May 12, 2000, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                
|              | 
|3.4           |  | Amendment to Bylaws of Verenium Corporation - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 27, 2007, and
incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|3.5           |  | Certificate of Amendment of Restated Certificate of Incorporation, filed June 26, 2007 - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on June 26, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                            
|              | 
|4.1           |  | Form of Common Stock Certificate of the Company - filed as an exhibit to the Companys Registration Statement on Form S-1 (No. 333-92853) filed with the Securities and Exchange
Commission, as amended, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                 
|              | 
|4.2           |  | Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 13, 2000 (including the Form of Certificate of Designation of
Series A Junior Participating Preferred Stock attached thereto as Exhibit A, the Form of Right Certificate attached thereto as Exhibit B, and the Summary of Rights to Purchase Preferred Shares attached thereto as Exhibit C) - filed as an exhibit to
the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.



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|              |  |                                                                                                                                                                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                             
|4.3           |  | Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 2, 2002 - filed as an exhibit to the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 4, 2002, and incorporated herein by reference.                                              
|              | 
|4.4           |  | Certificate of Designation of Series A Junior Participating Preferred Stock - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange
Commission on December 15, 2000, and incorporated herein by reference.                                                                                                                       
|              | 
|4.5           |  | Form of Warrant issued by the Company to Syngenta Participations AG - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission
on January 6, 2003, and incorporated herein by reference.                                                                                                                                 
|              | 
|4.6           |  | Registration Rights Agreement dated as of December 3, 2002 among Syngenta Participations AG, Torrey Mesa Research Institute, Syngenta Seeds AG and the Company - filed as an exhibit to the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 6, 2003, and incorporated herein by reference.                                      
|              | 
|4.7          |  | Registration Rights Agreement, dated as of July 18, 2003, by and between GlaxoGroup Limited and the Company - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, filed with the Securities and Exchange Commission on August 14, 2003, and incorporated herein by reference.                                             
|              | 
|4.8           |  | Second Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of February 12, 2007 - filed as an exhibit to the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 12, 2007, and incorporated herein by reference.                                     
|              | 
|4.9           |  | Reference is made to Exhibits 3.1, 3.2 and 3.5.                                                                                                                                                                                                                                                                                                                                    
|              | 
|4.10          |  | Indenture, dated March 28, 2007, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee, including Form of 5.50% Convertible Senior Note
due 2027 - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 28, 2007, and incorporated herein by reference.
|              | 
|4.11          |  | Registration Rights Agreement, dated March 28, 2007, among the Company and the Initial Purchasers identified therein - filed as an exhibit to the Companys Current Report on Form 8-K,
filed with the Securities and Exchange Commission on March 28, 2007, and incorporated herein by reference.                                                                                 
|              | 
|4.12          |  | Form of Common Stock Warrant Agreement and Warrant Certificate - filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and
Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                            
|              | 
|4.13          |  | Form of Preferred Stock Warrant Agreement and Warrant Certificate - filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and
Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                         
|              | 
|4.14          |  | Form of Debt Securities Warrant Agreement and Warrant Certificate - filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and
Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                         
|              | 
|4.15          |  | Senior Debt Indenture, dated November 14, 2007, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee - filed as an exhibit to the
Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and Exchange Commission on November 15, 2007, and incorporated herein by reference.                
|              | 
|4.16          |  | Subordinated Debt Indenture, dated November 14, 2007, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee - filed as an exhibit to the
Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and Exchange Commission on November 15, 2007, and incorporated herein by reference.          
|              | 
|4.17          |  | Form of Registration Rights Agreement  filed as an exhibit to the registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2008,
and incorporated herein by reference.                                                                                                                                                          



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|              |  |                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                
|4.18          |  | Form of Senior Convertible Note  filed as an exhibit to the registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2008, and
incorporated herein by reference.   
|              | 
|4.19          |  | Form of Warrant  filed as an exhibit to the registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2008, and incorporated herein
by reference.                   
|              | 
|4.20          |  | Notice of Adjustment dated April 1, 2008, filed as an exhibit to the registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 1, 2008 and
incorporated by reference herein.
|              | 
|10.1*         |  | Employment Agreement, dated September 24, 2008, by and between the Company and Carlos A. Riva  filed herewith                                                                                                        
|              | 
|10.2          |  | Employment Agreement, dated September 24, 2008, by and between the Company and William H. Baum  filed herewith                                                                                                       
|              | 
|10.3          |  | Employment Agreement, dated September 24, 2008, by and between the Company and Gerald M. Haines II  filed herewith                                                                                                   
|              | 
|10.4          |  | Employment Agreement, dated September 24, 2008, by and between the Company and Mary Ellen Jones  filed herewith                                                                                                      
|              | 
|10.5          |  | Employment Agreement, dated September 24, 2008, by and between the Company and John R. Malloy, Jr.  filed herewith                                                                                                   
|              | 
|10.6          |  | Employment Agreement, dated September 24, 2008, by and between the Company and Janet Roemer  filed herewith                                                                                                          
|              | 
|10.7          |  | Employment Agreement, dated September 4, 2008, by and between the Company and Gregory L. Powers  filed herewith                                                                                                      
|              | 
|10.8        |  | Joint Development and License Agreement, dated as of August 1, 2008, by and among Verenium Biofuels Corporation, BP Biofuels North America LLC and Galaxy Biofuels LLC  filed herewith                               
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed herewith.                                            
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed herewith.                                            
|              | 
|32            |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - filed
herewith.                      



| | Confidential treatment has been granted with respect to portions of this exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the
Securities and Exchange Commission.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Confidential treatment has been requested with respect to portions of this exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with
the Securities and Exchange Commission.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Indicates management or compensatory plan or arrangement
|- | --------------------------------------------------------



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SIGNATURES

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



|                        |  |  |  |                                                                                   
|----------------------- |  |  |  | ----------------------------------------------------------------------------------
|                        |  |  |  | VERENIUM CORPORATION                                                              
|                        |  | 
|Date: November 10, 2008 |  |  |  | /s/ JOHN A. MCCARTHY, JR.                                                         
|                        |  |  |  | John A. McCarthy, Jr.                                                             
|                        |  |  |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)



73