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

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|           |                                                                                         
|---------- | ----------------------------------------------------------------------------------------
|(Mark One)
|x          | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |                                                                                         
|           | For the quarterly period ended June 30, 2003.                                           
|           |                                                                                         
|o          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File number 000-29173

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DIVERSA 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 Number)
|                                                               |  |                                        
|                                                               |  |                                        
|4955 Directors Place, San Diego, California                    |  | 92121                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number, including area code is (858) 526-5000

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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    o  No

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

The number of shares of the Registrants Common Stock outstanding as of August 1, 2003 was 42,872,787.

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DIVERSA CORPORATION INDEX

|                               |                                                                                              |         
|------------------------------ | -------------------------------------------------------------------------------------------- | --------
|                               |                                                                                              | Page No.
|                               |                                                                                              |         
|PART I - FINANCIAL INFORMATION |                                                                                             
|                               |                                                                                              |         
|Item 1.                        | Financial Statements (Unaudited)                                                             |         
|                               |                                                                                              |         
|                               | Condensed Balance Sheets as of June 30, 2003 and December 31, 2002                           | 3       
|                               | Condensed Statements of Operations for the three and six months ended June 30, 2003 and 2002 | 4       
|                               | Condensed Statements of Cash Flows for the six months ended June 30, 2003 and 2002           | 5       
|                               | Notes to Condensed Financial Statements                                                      | 6       
|                               |                                                                                              |         
|Item 2.                        | Managements Discussion and Analysis of Financial Condition and Results of Operations        | 10      
|                               |                                                                                              |         
|Item 3.                        | Quantitative and Qualitative Disclosures about Market Risk                                   | 34      
|                               |                                                                                              |         
|Item 4.                        | Controls and Procedures                                                                      | 34      
|                               |                                                                                              |         
|PART II - OTHER INFORMATION    |                                                                                             
|                               |                                                                                              |         
|Item 1.                        | Legal Proceedings                                                                            | 35      
|Item 2.                        | Changes in Securities and Use of Proceeds                                                    | 36      
|Item 3.                        | Defaults Upon Senior Securities                                                              | 36      
|Item 4.                        | Submission of Matters to a Vote of Securities Holders                                        | 36      
|Item 5.                        | Other Information                                                                            | 37      
|Item 6.                        | Exhibits and Reports on Form 8-K                                                             | 38      
|                               |                                                                                              |         
|SIGNATURES                     | 40                                                                                          

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PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

DIVERSA CORPORATION  CONDENSED BALANCE SHEETS (In thousands, except share and per share amounts)

|                                                                                                                                                                           |               |  |                   |          |   |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- |  | ----------------- | -------- | - | - | -------- | -
|                                                                                                                                                                           | JUNE 30, 2003 |  | DECEMBER 31, 2002 |         
|                                                                                                                                                                           | (Unaudited)   |  | (Note)            |         
|ASSETS                                                                                                                                                                     |               |  |                   |          |   |   |          |  
|Current assets:                                                                                                                                                            |               |  |                   |          |   |   |          |  
|Cash and cash equivalents                                                                                                                                                  |               |  | $                 | 11,233   |   | $ | 20,113   |  
|Short-term investments                                                                                                                                                     |               |  |                   | 130,616  |   |   | 142,983  |  
|Accounts receivable                                                                                                                                                        |               |  |                   | 3,399    |   |   | 1,992    |  
|Other current assets                                                                                                                                                       |               |  |                   | 3,601    |   |   | 822      |  
|                                                                                                                                                                           |               |  |                   |         
|Total current assets                                                                                                                                                       |               |  |                   | 148,849  |   |   | 165,910  |  
|Property and equipment, net                                                                                                                                                |               |  |                   | 33,187   |   |   | 27,427   |  
|Acquired intangible assets, net                                                                                                                                            |               |  |                   | 55,020   |   |   | 2,018    |  
|Other assets                                                                                                                                                               |               |  |                   | 1,248    |   |   | 1,842    |  
|                                                                                                                                                                           |               |  |                   |         
|Total assets                                                                                                                                                               |               |  | $                 | 238,304  |   | $ | 197,197  |  
|                                                                                                                                                                           |               |  |                   |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |               |  |                   |          |   |   |          |  
|Current liabilities:                                                                                                                                                       |               |  |                   |          |   |   |          |  
|Accounts payable                                                                                                                                                           |               |  | $                 | 1,957    |   | $ | 4,133    |  
|Accrued liabilities                                                                                                                                                        |               |  |                   | 4,991    |   |   | 4,397    |  
|Deferred revenue                                                                                                                                                           |               |  |                   | 14,380   |   |   | 7,863    |  
|Current portion of capital lease obligations                                                                                                                               |               |  |                   | 709      |   |   | 953      |  
|Current portion of notes payable                                                                                                                                           |               |  |                   | 7,244    |   |   | 6,170    |  
|                                                                                                                                                                           |               |  |                   |         
|Total current liabilities                                                                                                                                                  |               |  |                   | 29,281   |   |   | 23,516   |  
|Capital lease obligations, less current portion                                                                                                                            |               |  |                   | 425      |   |   | 703      |  
|Notes payable, less current portion                                                                                                                                        |               |  |                   | 9,562    |   |   | 11,181   |  
|Deposit from sublessee                                                                                                                                                     |               |  |                   | 270      |   |   | 270      |  
|Long-term deferred revenue                                                                                                                                                 |               |  |                   | 2,006    |   |   | 4,212    |  
|Stockholders equity:                                                                                                                                                      |               |  |                   |          |   |   |          |  
|Common stock, $0.001 par value, 65,000,000 shares authorized, 42,040,457 and 35,769,455 shares issued
and outstanding at June 30, 2003 and December 31, 2002, respectively |               |  |                   | 42       |   |   | 36       |  
|Additional paid-in capital                                                                                                                                                 |               |  |                   | 338,654  |   |   | 265,150  |  
|Deferred compensation                                                                                                                                                      |               |  |                   | (22      | ) |   | (131     | )
|Accumulated deficit                                                                                                                                                        |               |  |                   | (142,897 | ) |   | (109,376 | )
|Accumulated other comprehensive income                                                                                                                                     |               |  |                   | 983      |   |   | 1,636    |  
|                                                                                                                                                                           |               |  |                   |         
|Total stockholders equity                                                                                                                                                 |               |  |                   | 196,760  |   |   | 157,315  |  
|                                                                                                                                                                           |               |  |                   |         
|Total liabilities and stockholders equity                                                                                                                                 |               |  | $                 | 238,304  |   | $ | 197,197  |  
|                                                                                                                                                                           |               |  |                   |         

Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

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DIVERSA CORPORATIONCONDENSED STATEMENTS OF OPERATIONS(In thousands, except per share data)(Unaudited)

|                                                                               |                             |      |                           |         |      |   |        |   |   |         |   |   |         |  
|------------------------------------------------------------------------------ | --------------------------- | ---- | ------------------------- | ------- | ---- | - | ------ | - | - | ------- | - | - | ------- | -
|                                                                               | THREE MONTHS ENDED JUNE 30, |      | SIX MONTHS ENDED JUNE 30, |        
|                                                                               |                             |     
|                                                                               | 2003                        | 2002 |                           | 2003    | 2002 |  
|Revenue:                                                                       |                             |      |                           |         |      |   |        |   |   |         |   |   |         |  
|Collaborative                                                                  |                             |      | $                         | 9,231   |      | $ | 7,131  |   | $ | 16,522  |   | $ | 14,223  |  
|Grant and product                                                              |                             |      |                           | 1,132   |      |   | 93     |   |   | 1,852   |   |   | 189     |  
|                                                                               |                             |      |                           |         |      |   |        |  
|Total revenue                                                                  |                             |      |                           | 10,363  |      |   | 7,224  |   |   | 18,374  |   |   | 14,412  |  
|                                                                               |                             |      |                           |         |      |   |        |  
|Operating expenses:                                                            |                             |      |                           |         |      |   |        |   |   |         |   |   |         |  
|Research and development                                                       |                             |      |                           | 19,502  |      |   | 12,484 |   |   | 34,471  |   |   | 24,792  |  
|Selling, general and administrative                                            |                             |      |                           | 3,105   |      |   | 2,712  |   |   | 5,876   |   |   | 5,252   |  
|Amortization of acquired intangible assets                                     |                             |      |                           | 650     |      |   | 39     |   |   | 950     |   |   | 78      |  
|Write-off of acquired in-process research and development                      |                             |      |                           | 8       |      |   |       |   |   | 10,766  |   |   |        |  
|Non-cash, stock-based compensation                                             |                             |      |                           | 42      |      |   | 225    |   |   | 109     |   |   | 497     |  
|                                                                               |                             |      |                           |         |      |   |        |  
|Total operating expenses                                                       |                             |      |                           | 23,307  |      |   | 15,460 |   |   | 52,172  |   |   | 30,619  |  
|                                                                               |                             |      |                           |         |      |   |        |  
|Loss from operations                                                           |                             |      |                           | (12,944 | )    |   | (8,236 | ) |   | (33,798 | ) |   | (16,207 | )
|Interest and other income, net                                                 |                             |      |                           | 829     |      |   | 637    |   |   | 1,532   |   |   | 2,195   |  
|Equity in loss of joint venture                                                |                             |      |                           | (425    | )    |   | (465   | ) |   | (1,255  | ) |   | (1,015  | )
|                                                                               |                             |      |                           |         |      |   |        |  
|Net loss                                                                       |                             |      | $                         | (12,540 | )    | $ | (8,064 | ) | $ | (33,521 | ) | $ | (15,027 | )
|                                                                               |                             |      |                           |         |      |   |        |  
|Net loss per share, basic and diluted                                          |                             |      | $                         | (0.30   | )    | $ | (0.23  | ) | $ | (0.83   | ) | $ | (0.42   | )
|Weighted average shares used in computing basic and diluted net loss per share |                             |      |                           | 41,988  |      |   | 35,610 |   |   | 40,237  |   |   | 35,570  |  

See accompanying notes to condensed financial statements.

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DIVERSA CORPORATIONCONDENSED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)

|                                                                            |                            |  |      |         |   |   |          |  
|--------------------------------------------------------------------------- | -------------------------- |  | ---- | ------- | - | - | -------- | -
|                                                                            | SIX MONTHS ENDED  JUNE 30, | 
|                                                                            | 2003                       |  | 2002
|Operating activities:                                                       |                            |  |      |         |   |   |          |  
|Net loss                                                                    |                            |  | $    | (33,521 | ) | $ | (15,027  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |                            |  |      |         |   |   |          |  
|Depreciation and amortization                                               |                            |  |      | 7,331   |   |   | 4,360    |  
|Non-cash, stock based compensation charges                                  |                            |  |      | 109     |   |   | 497      |  
|Unrealized loss on warrants held by the Company                             |                            |  |      |        |   |   | 530      |  
|Write-off of acquired in-process research and development                   |                            |  |      | 10,766  |   |   |         |  
|Changes in operating assets and liabilities:                                |                            |  |      |         |   |   |          |  
|Accounts receivable                                                         |                            |  |      | (1,407  | ) |   | 1,233    |  
|Other assets                                                                |                            |  |      | (2,804  | ) |   | (722     | )
|Accounts payable and accrued expenses                                       |                            |  |      | (1,582  | ) |   | (6,333   | )
|Deferred revenue                                                            |                            |  |      | 4,311   |   |   | (1,791   | )
|                                                                            |                            |  |      |        
|Net cash used in operating activities                                       |                            |  |      | (16,797 | ) |   | (17,253  | )
|                                                                            |                            |  |      |        
|Investing activities:                                                       |                            |  |      |         |   |   |          |  
|Purchases of short-term investments                                         |                            |  |      | (83,612 | ) |   | (103,637 | )
|Sales and maturities of short-term investments                              |                            |  |      | 95,326  |   |   | 61,394   |  
|Purchases of property and equipment                                         |                            |  |      | (3,577  | ) |   | (3,535   | )
|Other                                                                       |                            |  |      |        |   |   | 135      |  
|                                                                            |                            |  |      |        
|Net cash provided by (used in) investing activities                         |                            |  |      | 8,137   |   |   | (45,643  | )
|                                                                            |                            |  |      |        
|Financing activities:                                                       |                            |  |      |         |   |   |          |  
|Net proceeds from sale of common stock                                      |                            |  |      | 847     |   |   | 785      |  
|Principal payments on capital leases                                        |                            |  |      | (522    | ) |   | (571     | )
|Principal payments on notes payable                                         |                            |  |      | (3,263  | ) |   | (1,712   | )
|Advances under notes payable                                                |                            |  |      | 2,718   |   |   | 5,000    |  
|                                                                            |                            |  |      |        
|Net cash provided by (used in) financing activities                         |                            |  |      | (220    | ) |   | 3,502    |  
|                                                                            |                            |  |      |        
|Net decrease in cash and cash equivalents                                   |                            |  |      | (8,880  | ) |   | (59,394  | )
|Cash and cash equivalents at beginning of period                            |                            |  |      | 20,113  |   |   | 69,390   |  
|                                                                            |                            |  |      |        
|Cash and cash equivalents at end of period                                  |                            |  | $    | 11,233  |   | $ | 9,996    |  
|                                                                            |                            |  |      |        

See accompanying notes to condensed financial statements.

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DIVERSA CORPORATIONNOTES TO CONDENSED FINANCIAL STATEMENTS(Unaudited)

1.     Organization and Business

Diversa Corporation (the Company) was incorporated under the laws of the State of Delaware on December 21, 1992 and received initial funding to commence its operations in May 1994. The Company is directing its
integrated portfolio of proprietary genomic technologies to the discovery, evolution, and production of commercially valuable molecules with pharmaceutical applications, such as monoclonal antibodies and orally active drugs, as well as enzymes and
small molecules with agricultural, chemical, and industrial applications.

2.     Basis of Presentation

The accompanying unaudited
condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States 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 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,
2002.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts
reported in the condensed financial statements and related footnotes. Changes in the estimates may affect amounts reported in future periods.

3.     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
following table presents the calculation of basic and diluted net loss per share:

|                                                                               |                             |  |                           |         |      |   |        |   |   |         |   |   |         |  
|------------------------------------------------------------------------------ | --------------------------- |  | ------------------------- | ------- | ---- | - | ------ | - | - | ------- | - | - | ------- | -
|(In thousands, except per share data)                                          |                            
|                                                                               | THREE MONTHS ENDED JUNE 30, |  | SIX MONTHS ENDED JUNE 30, |        
|                                                                               | 2003                        |  | 2002                      |         | 2003 |   | 2002  
|Net loss                                                                       |                             |  | $                         | (12,540 | )    | $ | (8,064 | ) | $ | (33,521 | ) | $ | (15,027 | )
|Net loss per share, basic and diluted                                          |                             |  | $                         | (0.30   | )    | $ | (0.23  | ) | $ | (0.83   | ) | $ | (0.42   | )
|Weighted average shares used in computing basic and diluted net loss per share |                             |  |                           | 41,988  |      |   | 35,610 |   |   | 40,237  |   |   | 35,570  |  

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The Company has excluded all outstanding stock options and warrants from the calculation of diluted net loss per share because all such securities are antidilutive for all periods
presented.

4.     Comprehensive Loss

Comprehensive income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities. The Company presents comprehensive income (loss) in its statements of stockholders
equity.

For the three and six months ended June 30, 2003 and 2002, the comprehensive loss consisted of:

|                                      |      |      |                            |         |                          |   |        |   |   |         |   |   |         |  
|------------------------------------- | ---- | ---- | -------------------------- | ------- | ------------------------ | - | ------ | - | - | ------- | - | - | ------- | -
|                                      |      |      | THREE MONTHS ENDEDJUNE 30, |         | SIX MONTHS ENDEDJUNE 30, |  
|                                      |      |      |                            |        
|                                      | 2003 | 2002 |                            | 2003    | 2002                     |  
|Net loss                              |      |      | $                          | (12,540 | )                        | $ | (8,064 | ) | $ | (33,521 | ) | $ | (15,027 | )
|Other comprehensive gain (loss):      |      |      |                            |         |                          |   |        |   |   |         |   |   |         |  
|Unrealized gain (loss) on investments |      |      |                            | (469    | )                        |   | 638    |   |   | (653    | ) |   | (490    | )
|                                      |      |      |                            |         |                          |   |        |  
|Comprehensive loss                    |      |      | $                          | (13,009 | )                        | $ | (7,426 | ) | $ | (34,174 | ) | $ | (15,517 | )
|                                      |      |      |                            |         |                          |   |        |  

5.     Stock-Based Compensation

The Company measures compensation expense for stock options granted to employees
using the intrinsic value method and, thus, recognizes no compensation expense for options granted with exercise prices equal to or greater than the fair value of the Companys common stock on the date of the grant.

Pro forma information regarding net loss and net loss per share has been determined as if the Company had accounted for its employee stock options and stock purchase plan under the fair value method of SFAS No. 123. For the
three months ended June 30, 2003 and 2002, the fair value of these options was estimated using the Black-Scholes model with the following assumptions: risk-free interest rates ranging from 2.26% to 2.95% and 4.14% to 4.62%, respectively; dividend
yield of 0%; volatility factor of 49% and 61%, respectively; and a weighted-average expected life of the options of 3.1 years and 3.4 years, respectively. For the six months ended June 30, 2003 and 2002, the fair value of these options was estimated
using the Black-Scholes model with the following assumptions: risk-free interest rates ranging from 2.26% to 3.07% and 4.14% to 4.65%, respectively; dividend yield of 0%; volatility factor of 61%; and a weighted-average expected life of the options
of 3.4 years.

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For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period. The Companys pro forma information is as
follows:

|                                                                                                                |      |  |                            |         |                          |   |         |   |   |         |   |   |         |  
|--------------------------------------------------------------------------------------------------------------- | ---- |  | -------------------------- | ------- | ------------------------ | - | ------- | - | - | ------- | - | - | ------- | -
|                                                                                                                |      |  | THREE MONTHS ENDEDJUNE 30, |         | SIX MONTHS ENDEDJUNE 30, |  
|                                                                                                                |      |  |                            |        
|                                                                                                                | 2003 |  | 2002                       |         | 2003                     |   | 2002    |  
|Net loss, as reported                                                                                           |      |  | $                          | (12,540 | )                        | $ | (8,064  | ) | $ | (33,521 | ) | $ | (15,027 | )
|Add: Stock-based employee compensation expense included in reported net loss                                    |      |  |                            | 42      |                          |   | 225     |   |   | 109     |   |   | 497     |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |      |  |                            | (2,355  | )                        |   | (2,893  | ) |   | (4,403  | ) |   | (5,818  | )
|                                                                                                                |      |  |                            |         |                          |   |         |  
|Pro forma net loss                                                                                              |      |  | $                          | (14,853 | )                        | $ | (10,732 | ) | $ | (37,815 | ) | $ | (20,348 | )
|                                                                                                                |      |  |                            |         |                          |   |         |  
|Basic and diluted net loss per share, as reported                                                               |      |  | $                          | (0.30   | )                        | $ | (0.23   | ) | $ | (0.83   | ) | $ | (0.42   | )
|Pro forma basic and diluted net loss per share                                                                  |      |  | $                          | (0.35   | )                        | $ | (0.30   | ) | $ | (0.94   | ) | $ | (0.57   | )

In connection with the grant of certain stock options to employees, the Company recorded deferred stock compensation, representing the
difference between the exercise price and the fair value of the Companys common stock as estimated by the Companys management for financial reporting purposes on the date such stock options were granted. Deferred compensation is included
as a reduction of stockholders equity and is being amortized to expense over the vesting period of the options in accordance with FASB Interpretation No. 28, which permits an accelerated amortization methodology.

6.     Acquisition

On February 20, 2003, the Company completed a series of transactions with Syngenta Participations AG (Syngenta) and its
wholly-owned subsidiary, Torrey Mesa Research Institute (TMRI). Under the transactions, the companies formed an extensive research collaboration whereby the Company is entitled to receive a minimum of $118 million in research and
development funding over the initial seven-year term of the related research collaboration agreement and will be eligible to receive certain milestone payments and royalties upon product development and commercialization. Additionally, the Company
acquired certain intellectual property rights licenses from Syngenta used in activities conducted at TMRI that primarily involve tools, technologies and methods relating to proteomics, metabolomics, RNA dynamics, and bioinformatics and methods to
analyze and link these components of genomics or that primarily relate to TMRIs fungal program, for use outside of Syngentas exclusive field as defined in the research collaboration agreement. The Company also purchased certain property
and equipment from TMRI.

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Upon closing, the Company issued to Syngenta and TMRI a total of 6,034,983 shares of common stock and a warrant to purchase 1,293,211 shares of common stock at $22 per share that is
exercisable for ten years starting in 2008. The total value of the acquisition was (in thousands):

|                                     |  |  |   |       
|------------------------------------ |  |  | - | ------
|Fair value of Diversa shares issued  |  |  | $ | 69,016
|Fair value of Diversa warrant issued |  |  |   | 3,647 
|Transaction costs                    |  |  |   | 1,196 
|                                     | 
|Total                                |  |  | $ | 73,859
|                                     | 

The value of the Companys shares used in determining the purchase price
was $11.44 per share based on the average of the closing prices of its common stock for a range of five trading days -- two days prior to, two days subsequent to, and the announcement date for the transactions of December 4, 2002. The value of the
warrant issued was determined by a valuation performed by a third party. The transaction has been accounted for as an asset purchase under accounting principles generally accepted in the United States.

The
following table summarizes the estimated fair values and useful lives of the assets acquired as of the acquisition date (in thousands):

|                                    |        |  |                       |        |  |            
|----------------------------------- | ------ |  | --------------------- | ------ |  | -----------
|                                    | Amount |  | Estimated Useful Life
|Property and equipment              |        |  | $                     | 8,211  |  | 3  5 years
|In-process research and development |        |  |                       | 10,766 |  | See below  
|Identifiable intangible assets:     |        |  |                       |        |  |            
|Core technology                     |        |  |                       | 36,632 |  | 15 years   
|Research collaboration              |        |  |                       | 18,250 |  | 7 years    
|                                    |        |  |                      
|Net assets                          |        |  | $                     | 73,859 |  |            
|                                    |        |  |                      

Approximately $10.8 million of the purchase price represents the estimated fair value of projects that, as of the acquisition date, had not reached
technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in February 2003.

The following unaudited pro forma information presents a summary of the
Companys results of operations as if the Syngenta acquisition had taken place at the beginning of each period presented (in thousands, except per share information):

|                              |      |  |                            |         |                          |   |        |   |   |         |   |   |         |  
|----------------------------- | ---- |  | -------------------------- | ------- | ------------------------ | - | ------ | - | - | ------- | - | - | ------- | -
|                              |      |  | THREE MONTHS ENDEDJUNE 30, |         | SIX MONTHS ENDEDJUNE 30, |  
|                              |      |  |                            |        
|                              | 2003 |  | 2002                       |         | 2003                     |   | 2002   |  
|                              |      |  |                            |         |                          |  
|                              |      |  |                            |         |                          |   |        |   |   |         |   |   |         |  
|Pro forma net loss            |      |  | $                          | (12,540 | )                        | $ | (9,752 | ) | $ | (23,704 | ) | $ | (18,395 | )
|Pro forma net loss per share: |      |  |                            |         |                          |   |        |   |   |         |   |   |         |  
|Basic and diluted             |      |  | $                          | (0.30   | )                        | $ | (0.23  | ) | $ | (0.57   | ) | $ | (0.44   | )

The pro forma net loss above does not include the write-off of acquired in-process research and development described above.
The pro forma information is not necessarily indicative of results

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that would have occurred had the acquisition been in effect for the periods presented or indicative of results that may be achieved in the future.

7.     Subsequent Events

In July 2003, the Company acquired an antifungal program consisting of preclinical compounds from Glaxo Wellcome, S.A. In
consideration for the antifungal program, the Company issued an aggregate of 806,873 shares of its Common Stock to Glaxo Group Limited, an affiliate of Glaxo Wellcome, S.A. Under the terms of the agreement, the Company received worldwide rights to
the program, which consists of preclinical antifungal compounds and lead candidates for development, marketing, and distribution. Based upon the closing price of the Companys Common Stock immediately preceding consummation of the transaction,
the fair value of the compounds and lead candidates was estimated to be $8.7 million, which will be recorded as research and development expense in the third quarter of 2003.

Also in July 2003, the Company
and The Dow Chemical Company (Dow) agreed in principle to terms regarding the restructuring of their Innovase joint venture and other licensing matters. As a result, the Company and Dow have signed a non-binding term sheet agreeing to
restructure Innovase and make modifications to certain other agreements between the parties. The Company and Dow will continue to collaborate on specific projects in the industrial enzyme field as well as on other projects of mutual interest. The
restructuring of Innovase LLC and the modifications to the other agreements between the parties are subject to the Company and Dow entering into binding agreements consistent with the non-binding term sheet. Under the proposed restructuring, Dow has
agreed to make payments totaling $5.0 million to the Company, of which $2.0 million was received in July 2003.

|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations

The statements in this quarterly report that are not descriptions
of historical facts may be forward-looking statements that are subject to risks and uncertainties. These include statements related to investments in our core technologies, the discovery, development, and/or optimization of novel genes, enzymes, and
other biologically active compounds, the development and commercialization of products and product candidates, the benefits to be derived from our current and future strategic alliances, and our estimates regarding future revenue, profitability, and
capital requirements, all of which are prospective. Such statements are only predictions and reflect our expectations and assumptions as of the date of this report based on currently available operating, financial, and competitive information. The
actual events or results may differ materially from those projected in such forward-looking statements due to a number of factors, including 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, our
ability to commercialize products directly and through our collaborators, the timing of anticipated product

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launches, and the development or availability of competitive products or technologies as well as other risks and uncertainties identified below and in the section of this report
entitled Risk Factors Related to Our Business and in our other publicly available documents. These forward-looking statements speak only as of the date of this report. We expressly disclaim any intent or obligation to update any of these
forward-looking statements after the filing of this quarterly report to reflect actual results, changes in our expectations, or otherwise.

The following information should be read in conjunction with the
condensed financial statements and the notes thereto included in Item 1 of this quarterly report. We also urge readers to review and consider our disclosures describing various factors that affect our business set forth in the section of this report
entitled Risk Factors Related to Our Business, as well as in our Annual Report on Form 10-K for the year ended December 31, 2002, including the disclosures under the captions Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk Factors Related to Our Business, as well as the audited financial statements and notes thereto contained in such report.

Overview

We were incorporated in December 1992 and began operations in May 1994. We are a leader in applying proprietary genomic technologies for the rapid discovery and
optimization of novel products from genes and gene pathways. We are directing our integrated portfolio of technologies to the discovery, evolution, and production of commercially valuable molecules with pharmaceutical applications, such as
monoclonal antibodies and orally active drugs, as well as enzymes and small molecules with agricultural, chemical, and industrial applications. To date, we have formed alliances with market leaders, such as The Dow Chemical Company, DuPont Bio-Based
Materials, GlaxoSmithKline plc, Invitrogen Corporation, and affiliates of Syngenta AG. Our product-related revenues to date are comprised of research kits, enzymes used in oil and gas recovery, a phytase feed enzyme, and royalties from sales of
licensed products.

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 environmental libraries and human antibody gene 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.

For the quarter ended June 30, 2003, revenue increased 43% compared to the quarter ended June 30, 2002. This increase was primarily attributable to additional research funding as a result of
our latest collaboration agreement with Syngenta as well as additional grant and product revenue.

Our revenues have historically fluctuated from period to period and likely will continue to fluctuate
substantially in the future based upon the timing and composition of funding under existing and future collaboration agreements and grants. Our strategic partners often pay us before we recognize the revenue, and these payments are deferred until
earned. As of June 30, 2003, we had current and long-term deferred revenue totaling $16.4 million.

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We have incurred net losses since our inception. As of June 30, 2003, our accumulated deficit was $142.9 million. We expect to incur additional losses at least through 2005 as we
continue to develop independent products and as a result of our anticipated investment in additional preclinical and clinical infrastructure, as well as added research and manufacturing development expenses for several Innovase product candidates.
Our results of operations have fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the factors affecting our revenue described above, as well as the initiation and expansion of research and
development programs and the acquisition of new technologies and proprietary rights. 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.

Results of Operations

Three Months Ended June 30, 2003 and 2002

Revenue

Revenue increased $3.2 million to $10.4 million for the quarter ended June 30, 2003 from $7.2 million for the same period in 2002. This increase
was primarily due to our latest collaboration with Syngenta, the addition of new grants awarded in 2002 and 2003, and additional product revenue as a result of the launch of PhyzymeTM XP through our partner, Danisco Animal Nutrition.
Revenues have historically fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon the timing and composition of funding under existing and future collaboration agreements. Revenue from
collaborations accounted for 89% and 99% of total revenue for the quarters ended June 30, 2003 and 2002, respectively.

Research and Development Expenses

Research and development expenses consist primarily of costs associated with internal development of our technologies and our product candidates and costs associated with research activities performed on behalf of our
collaborators. We track our researchers time by project. However, we generally do not track our other research and development costs by project; rather, we track such costs by the type of cost incurred.

For the quarter ended June 30, 2003, we estimate that 45% of our research and development expenditures were related to research activities funded by our collaborators and that approximately 55% were associated with internal
product and technology development. Our research and development expenses increased $7.0 million to $19.5 million for the quarter ended June 30, 2003 from $12.5 million for the quarter ended June 30, 2002. The increase was primarily due to costs
associated with the following:

Personnel Costs.Costs for research and development personnel for the quarter ended June 30, 2003 increased by $2.8 million over the quarter ended June 30, 2002. Our
research staff increased from 225 at June 30, 2002 to 304 at June 30, 2003. The increase in research staff was

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primarily related to us hiring 71 additional researchers in conjunction with the recent Syngenta transactions.

Facility Costs.Facility
costs for the quarter ended June 30, 2003 increased $2.1 million over the quarter ended June 30, 2002. The increase was primarily attributable to higher depreciation and maintenance costs as a result of increased capital equipment to support our
additional researchers and internal product and technology development.

Outside Services Costs.Outside services costs for the quarter ended June 30, 2003 increased $1.0 million over the quarter
ended June 30, 2002. The increase was primarily attributable to increased legal costs associated with our intellectual property portfolio.

Research Supplies Costs.Costs for research supplies for the
quarter ended June 30, 2003 increased by $0.9 million over the quarter ended June 30, 2002. The increase was primarily attributable to an increase in the amount of supplies required to support the additional 71 researchers we hired in conjunction
with the recent Syngenta transactions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.4
million to $3.1 million for the quarter ended June 30, 2003 from $2.7 million for the same period in 2002. This increase was primarily attributable to measures undertaken by us to comply with recent laws, regulations, and corporate governance
initiatives affecting public companies.

Amortization of Acquired Intangible Assets

For the quarter ended June 30, 2003, we recorded
amortization of acquired intangible assets of approximately $0.7 million, compared to $39,000 for the quarter ended June 30, 2002. The increase was associated with the February 2003 acquisition of intellectual property rights licenses from
Syngenta.

Interest and Other Income, Net

Interest and other income, net for the quarter ended June 30, 2003 was $0.8 million, compared to $0.6
million for the same period in 2002. The increase was primarily due to $0.7 million of expense recorded in 2002 related to the decrease in value of warrants we hold to purchase 58,333 shares of stock of IntraBiotics Pharmaceuticals, Inc., following
a 1-for-12 reverse stock split by IntraBiotics. We subsequently wrote-off the remaining balance of our investment associated with these warrants in the third quarter of 2002. Interest income decreased for the quarter ended June 30, 2003, compared to
the same period in 2002, as a result of the maturity of interest earning investments that were reinvested at the current lower rates, as well as lower cash balances.

Six Months Ended June
30, 2003 and 2002

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Revenue

Revenue increased $4.0 million to $18.4 million for the six months ended June 30, 2003 from $14.4 million for the
same period in 2002. This increase was primarily due to our latest collaboration with Syngenta, the addition of new grants awarded in 2002 and 2003, and additional product revenue as a result of the launch of PhyzymeTM XP through our
partner, Danisco Animal Nutrition. Revenue from collaborations accounted for 90% and 99% of total revenue for the six months ended June 30, 2003 and 2002, respectively.

Research and
Development Expenses

For the six months ended June 30, 2003, we estimate that approximately 45% of our research and development expenditures were associated with research activities funded by our
collaborators and that 55% were related to internal product and technology development. Our research and development expenses increased $9.7 million to $34.5 million for the six months ended June 30, 2003 from $24.8 million for the six months ended
June 30, 2002. The increase was primarily due to costs associated with the following:

Personnel Costs.Costs for research and development personnel for the six months ended June 30, 2003 increased by
$3.9 million over the six months ended June 30, 2002. Our research staff increased from 225 at June 30, 2002 to 304 at June 30, 2003. The increase in research staff was primarily related to us hiring 71 additional researchers in conjunction with the
recent Syngenta transactions.

Facility Costs.Facility costs for the six months ended June 30, 2003 increased $3.9 million over the six months ended June 30, 2002. The increase was primarily
attributable to higher depreciation and maintenance costs as a result of increased capital equipment to support our headcount growth and our internal product and technology developments, as well as costs related to our second research and
development facility, which we began to occupy in April 2002.

Outside Services Costs.Outside services costs for the six months ended June 30, 2003 increased $1.0 million over the six months ended
June 30, 2002. The increase was primarily attributable to increased legal costs associated with our intellectual property portfolio.

Research Supplies Costs.Costs for research supplies for the six
months ended June 30, 2003 increased by $0.9 million over the six months ended June 20, 2002. The increase was primarily attributable to an increase in the amount of supplies required to support the additional 71 researchers we hired in conjunction
with the recent Syngenta transactions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.6
million to $5.9 million for the six months ended June 30, 2003 from $5.3 million for the same period in 2002. This increase was primarily attributable to measures undertaken by us to comply with recent laws, regulations, and corporate governance
initiatives affecting public companies.

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Amortization of Acquired Intangible Assets

For the six months ended June 30, 2003, we recorded amortization of acquired intangible
assets of approximately $1.0 million, compared to $78,000 for the six months ended June 30, 2002. The increase was associated with the February 2003 acquisition of intellectual property rights licenses from Syngenta.

Write-off of Acquired In-Process Research and Development

For the six months ended June 30, 2003, in connection with our February 2003 acquisition of intellectual property
rights licenses from Syngenta and property and equipment from TMRI, we recorded a write-off of acquired in-process research and development of approximately $10.8 million related to the estimated fair value of certain projects that, as of the
acquisition date, had not reached technological feasibility and had no alternative future use.

Interest and Other Income, Net

Interest and other income, net
for the six months ended June 30, 2003 was $1.5 million, compared to $2.2 million for the same period in 2002. This decrease was primarily due to lower interest income as a result of the maturity of interest earning investments that were reinvested
at the current lower rates, as well as lower cash balances. Additionally, during the six months ended June 30, 2002, the Company recorded $0.5 million of other expense related to the decrease in value of warrants the Company holds to purchase 58,333
shares of stock of IntraBiotics Pharmaceuticals, Inc., following a 1-for-12 reverse stock split by IntraBiotics. The Company subsequently wrote-off the remaining balance of its investment associated with these warrants in the third quarter of
2002.

Equity in Loss of Joint Venture

Equity in the loss of Innovase LLC, our joint venture with Dow, increased to $1.3 million for the six months ended
June 30, 2003 from $1.0 million for the same period in 2002, primarily due to increased marketing and administrative costs incurred by Innovase LLC. As discussed below, we recently signed a non-binding term sheet with Dow agreeing, in principle, to
restructure our Innovase joint venture.

Liquidity and Capital Resources

Since inception, we have financed our business primarily through the sale of common
and preferred stock and funding from strategic partners and government grants. Our strategic partners have provided us with $131.3 million in funding from our inception through June 30, 2003, and are also committed to fund at least an additional
$133.2 million through 2010, giving effect to the Innovase restructuring discussed below and subject to our performance under existing agreements, and excluding milestone payments, license and commercialization fees, and royalties or profit sharing.
As discussed in our Annual Report on Form 10-K for the year ended

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December 31, 2002, we had initiated informal dispute resolutions with Dow under our Innovase joint venture agreements due to differing views regarding product development activities,
commercial opportunities, and funding obligations under such agreements. In July 2003, we signed a non-binding term sheet with Dow agreeing, in principle, to restructure Innovase and make modifications to certain other agreements between the
parties. We will continue to collaborate with Dow on specific projects in the industrial enzyme field as well as on other projects of mutual interest. The restructuring of Innovase LLC and the modifications to the other agreements between the
parties are subject to our entering into binding agreements with Dow consistent with the non-binding term sheet. Under the proposed restructuring, we will continue to develop several enzymes in Innovases current pipeline. We expect to
commercialize at least one of these industrial enzyme product candidates in 2004. As part of the restructuring, Dow has agreed to make payments to us totaling $5.0 million, of which $2.0 million was received in July 2003.

As of June 30, 2003, we had cash, cash equivalents, and short-term investments of approximately $141.8 million. Our short-term investments as of such date consisted 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. In December 2002, we entered into a new equipment
financing line of credit with a lender to finance up to $6.0 million in equipment purchases through June 2003. As of June 30, 2003, we had utilized approximately $5.0 million under the existing arrangement.

During 2002, we entered into a manufacturing agreement with a company to provide us with commercial quantities of certain enzyme products. Under the terms of the agreement, we are required to fund certain equipment required
for fermentation and downstream processing of the products. As of June 30, 2003, we had incurred costs of approximately $2.2 million for equipment related to the manufacturing agreement. During the remainder of 2003, we anticipate funding
approximately $0.3 million in additional equipment costs related to the manufacturing agreement. Additionally, as we continue to develop our pharmaceutical platforms, we will be required to purchase additional capital equipment. During the remainder
of 2003, we anticipate that we will purchase approximately $2.3 million of equipment related to the development of our pharmaceutical platforms.

In February 2003, in conjunction with a series of
transactions entered into with Syngenta and its affiliates, we hired an additional 77 employees. We anticipate the capital equipment required to integrate these employees, as well as the equipment required to support the ongoing needs of our
existing employees, will be approximately $4.0 million for the remainder of 2003.

We anticipate funding our capital requirements for the remainder of 2003 with new financing arrangements, if available on
satisfactory terms, and with available cash.

In July 2003, we acquired an antifungal program consisting of preclinical compounds from Glaxo Wellcome, S.A. In consideration for the antifungal program, we
issued approximately $8.7 million of our common stock to Glaxo Group Limited, an affiliate of Glaxo Wellcome, S.A.

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Under the terms of the agreement, we received worldwide rights to the program, which consists of preclinical antifungal compounds and lead candidates for development, marketing, and
distribution. In order to successfully develop these pharmaceutical candidates, we expect our investment in research and development, as well as the clinical infrastructure associated with these compounds, to increase over the next few
years.

Our operating activities used cash of $16.8 million for the six months ended June 30, 2003. Our cash used by operating activities consisted primarily of cash used to fund our internal research and
development programs.

Our investing activities provided cash of $8.1 million for the six months ended June 30, 2003. Our investing activities consisted primarily of sales and maturities of short-term
investments, offset by purchases of short-term investments and property and equipment.

Our financing activities provided cash of $0.2 million for the six months ended June 30, 2003. Our financing activities
consisted primarily of borrowings under notes payable and proceeds from the sale of common stock under our Employee Stock Purchase Plan and from the exercise of stock options, offset by payments on notes payable and capital leases.

The following table summarizes our contractual obligations at June 30, 2003 (in thousands).

|                                |       |  |                  |        |           |   |           |  |               |        |  |   |        |  |   |       
|------------------------------- | ----- |  | ---------------- | ------ | --------- | - | --------- |  | ------------- | ------ |  | - | ------ |  | - | ------
|                                | Total |  | Less Than 1 Year |        | 1-3 Years |   | 3-5 Years |  | After 5 Years
|                                |       |  |                  |        |           |   |           |  |               |        | 
|Contractual Obligations         |       |  |                  |        |           |   |           |  |               |        |  |   |        |  |   |       
|Long-term debt                  |       |  | $                | 15,727 |           | $ | 6,988     |  | $             | 8,227  |  | $ | 512    |  | $ |      
|Capital lease obligations       |       |  |                  | 1,244  |           |   | 796       |  |               | 448    |  |   |       |  |   |      
|Operating leases                |       |  |                  | 66,598 |           |   | 4,678     |  |               | 8,595  |  |   | 9,176  |  |   | 44,149
|License and research agreements |       |  |                  | 2,526  |           |   | 628       |  |               | 792    |  |   | 431    |  |   | 675   
|                                |       |  |                  |        |           |   |           |  |               |        | 
|Total Contractual Obligations   |       |  | $                | 86,095 |           | $ | 13,090    |  | $             | 18,062 |  | $ | 10,119 |  | $ | 44,824
|                                |       |  |                  |        |           |   |           |  |               |        | 

We expect that our current cash and cash equivalents, short-term investments, and funding from existing
collaborations and grants will be sufficient to fund our working and other capital requirements for the foreseeable future, including amounts required to fund internal research and development and enhancements of our core technologies as well as the
potential costs of acquiring businesses, technologies, or products that we believe are a strategic fit with our business. This estimate is a forward-looking statement that involves risks and uncertainties. Our future capital requirements and the
adequacy of our available funds will depend on many factors, including scientific progress in our research and development programs, the magnitude of those programs, our ability to maintain our collaborations and achieve milestones under them and
our ability to establish new collaborative relationships, our ability, alone or with our collaborative partners, to commercialize products, successfully, and competing technological and market developments. Therefore, it is possible that we may seek
additional financing in the future, whether through private or public equity offerings, debt financings, or collaborations, which may

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not be available on terms favorable to us, if at all. In addition, if we enter into financing arrangements in the future, such arrangements could dilute our stockholders ownership
interests and adversely affect their rights.

Summary of Critical Accounting Policies

Our discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these 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 financial statements.

Revenue Recognition

Revenue from research funding under our collaboration agreements is earned and recognized on a percentage of completion basis as research hours are incurred
in accordance with the provisions of each agreement. Fees received to initiate research projects are deferred and recognized over the project period. Fees received for exclusivity in a field are deferred and recognized over the period of
exclusivity. Milestone payments are recognized when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievement was not reasonably assured at the inception of
the agreement, and (ii) our performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to the level before the milestone achievement. Revenue from exclusivity fees, technology
development fees, milestone payments, and research activities performed on behalf of our joint ventures is included in Collaborative revenue in our Statements of Operations. The percentage of completion basis of accounting requires us to
estimate the number of hours remaining to complete each of our research projects under our collaborative agreements. Actual results could differ from those estimates, which may affect the timing of the revenue we record from period to
period.

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

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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. In February 2003, we acquired intellectual property rights licenses from Syngenta and property and equipment from TMRI. As a result of these transactions, we recorded approximately $8.2 million of property and equipment and approximately
$54.8 million of acquired intangible assets. As of June 30, 2003, we had long-lived assets with a net book value of $88.2 million.

Income Taxes

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 decrease our income in the period such determination was
made.

Purchase Price Allocation

The purchase price for certain intellectual property rights licenses acquired from Syngenta and certain property and
equipment acquired from TMRI was allocated to the tangible and identifiable intangible assets acquired based on their estimated fair values at the acquisition date. An independent third-party valuation firm was engaged to assist in determining the
fair values of in-process research and development, identifiable intangible assets, and certain property, plant, and equipment. Such a valuation requires significant estimates and assumptions, including but not limited to: determining the timing and
expected costs to complete the in-process projects, estimating future cash flows from product sales resulting from in-process projects, and developing appropriate discount rates and probability rates by project. We believe the fair values assigned
to the assets acquired and liabilities assumed are based on reasonable assumptions.

RISK FACTORS RELATED TO OUR BUSINESS

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. 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.

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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 $12.5 million for the quarter ended June 30, 2003. As of June 30, 2003, we had an accumulated deficit of approximately $142.9 million. We expect to incur additional
losses at least through 2005 as we continue to develop independent products and as a result of our anticipated investment in additional preclinical and clinical infrastructure, as well as added research and manufacturing development expenses for
several Innovase product candidates. The extent of our future losses will depend, in part, on the rate of growth, if any, in our contract revenue and on the level of our expenses. To date, substantially all of our revenue has been derived from
collaborations and grants, and we expect that substantially all of our revenue for 2003 will result from payments from collaborations and grants.

Future revenue from collaborations is uncertain because our
ability to generate revenue will depend upon our ability to enter into new collaborations and to meet research, development, and commercialization objectives under new and existing agreements. We expect to spend significant amounts to fund research
and development and enhance our core technologies. As a result, we expect that our operating expenses will increase in the near term, and, consequently, we will need to generate significant additional revenue to achieve profitability. 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 our partners choose to commercialize and from which we can
derive revenue through royalties. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Because we are an early stage company
developing and deploying new technologies, we may not be able to commercialize our technologies or products, which could cause us to be unprofitable or cease operations.

You must evaluate our business
in light of the uncertainties and complexities affecting an early stage biotechnology company. Our existing proprietary technologies are new and in the early stage of development. We may not be successful in the commercial development of these or
any further technologies or products. Successful products require significant development and investment, including testing, to demonstrate their cost-effectiveness prior to regulatory approval and commercialization. To date, we have commercialized
only two products ourselves, Pyrolase 160 enzyme and Pyrolase 200 enzyme, and only two of our collaborative partners, Invitrogen Corporation and Danisco Animal Nutrition, have incorporated our technologies or inventions into their own
commercial products from which we can generate royalties. Because of these uncertainties, our discovery process may not result in the identification of product candidates that we or our collaborative partners will successfully commercialize. If we
are not able to use our technologies to discover new materials or products with significant commercial potential, we will not be able to achieve our objectives or build a sustainable or profitable business.

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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 many of our products and achieving or sustaining profitability.

We currently have strategic alliance agreements and/or collaboration agreements with Dow , DuPont Bio-Based Materials,
Givaudan Flavors Corporation, GlaxoSmithKline plc, Invitrogen Corporation, and affiliates of Syngenta AG. We have also formed a joint venture with Syngenta Seeds AG (named Zymetrics, Inc.). We expect to derive significant future revenue from these
agreements and the joint venture. Since we do not currently possess the resources necessary to independently develop and commercialize all of the potential 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 products. We will have limited or no control over the resources that any strategic partner or collaborator may devote to our
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. As discussed in our Annual Report on Form 10-K for the year ended December 31, 2002, we had initiated informal dispute resolutions with Dow under our Innovase joint venture
agreements due to differing views regarding product development activities, commercial opportunities, and funding obligations under such agreements. We recently signed a non-binding term sheet with Dow agreeing, in principle, to restructure Innovase
and make modifications to certain other agreements between the parties. The restructuring of Innovase LLC and the modifications to the other agreements between the parties are subject to our entering into binding agreements with Dow consistent with
the non-binding term sheet. There can be no assurance that we will enter into binding agreements on terms consistent with the non-binding term sheet or other terms that are acceptable to us that provide for resolution of the settlement discussions
between us and Dow involving Innovase and other licensing matters. Further, our strategic partners or collaborators may not develop products arising out of our collaborative arrangements or devote sufficient resources to the development,
manufacture, marketing, or sale of these products. If we fail to enter into or maintain strategic alliance or collaboration agreements, or if any of these events occur, we may not be able to commercialize our 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 develop products and processes or enter into additional strategic alliances or collaborations that conflict with the business objectives of our strategic partners or collaborators;

| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;

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| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | 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.

If we are not successful in developing a commercial
pharmaceutical product related to our recent acquisition of an antifungal program from Glaxo Wellcome, S.A., some of the anticipated benefits of the acquisition may not be realized.

The process of
developing a commercial pharmaceutical product from the antifungal compounds we recently acquired from Glaxo Wellcome, S.A. requires additional preclinical testing and clinical trials, all of which are significantly expensive and time-consuming and
may not result in a commercial product. We may experience numerous unforeseen events during or as a result of the testing process that could delay or prevent testing or commercialization of any product, including the following:

| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The results of additional preclinical studies that we intend to undertake may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;

| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We, our collaborators, if any, or regulators may suspend or terminate clinical trials if the participating subjects or patients are being exposed to unacceptable health risks;

| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may have to delay clinical trials as a result of scheduling conflicts with participating clinicians and clinical institutions, or difficulties in identifying and enrolling patients who meet trial eligibility
criteria;

| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Safety and efficacy results attained in early human clinical trials may not be indicative of results that are obtained in later clinical trials; and

| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The effects our antifungal compounds have may not be the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit their commercial use if ever
approved.



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Failure to retain former employees of TMRI or attract and retain other key employees could diminish the benefits we expect to realize from our recent transactions with Syngenta and
TMRI.

As part of the transactions among Syngenta, TMRI, and us that were consummated on February 20, 2003, we hired 77 employees of TMRI. The success of our collaboration with Syngenta and the benefits
that we otherwise expect to realize from our transactions with Syngenta and TMRI will depend significantly on our ability to retain these employees. If we are unable to retain these employees, or if we are otherwise unable to attract and retain
other employees who may be critical to our collaboration with Syngenta or otherwise in connection with our transactions with Syngenta and TMRI, we could lose key information, expertise or know-how related to the collaboration, incur unanticipated
additional recruiting and training costs and otherwise not realize the benefits we expect from those transactions.

If we are not successful in integrating TMRIs intellectual property rights and
related assets, some of the anticipated benefits to us of our recent transactions with Syngenta and TMRI may not be realized.

If we and our stockholders are to realize the anticipated benefits of our
transactions with Syngenta and TMRI that were consummated on February 20, 2003, the intellectual property rights and related assets we licensed and acquired from Syngenta and TMRI must be integrated and combined efficiently with our own assets and
operations. We cannot assure you that the integration will be successful or that we will realize the anticipated benefits of our transactions with Syngenta and TMRI. Similarly, we cannot assure you that our stockholders will realize greater value
through our transactions with Syngenta and TMRI than they would have realized without them.

The difficulties of integration may be increased by the need to integrate personnel with disparate scientific,
technical and business backgrounds and combine different corporate cultures and approaches. We cannot assure you that there will not be substantial costs associated with the integration process, that integration activities will not negatively impact
our operating results or result in a decrease in the value of our common stock, or that there will not be other material adverse effects to our business or operations from our integration efforts.

We do
not have 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 capacity to manufacture products on a commercial scale. We expect to be dependent to a significant extent on
third parties for commercial scale manufacturing of our products. We have

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arrangements with third parties that have the required large-scale manufacturing equipment and available capacity to manufacture Pyrolase 160 enzyme, Pyrolase 200 enzyme,
and Phyzyme XP under our direction and oversight. While we have our own pilot development facility, we continue to depend on third parties for large-scale commercial manufacturing. 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 products, and harm our relationships with our strategic partners, collaborators or customers.

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

We intend to pursue some product
opportunities independently. We currently have only limited resources and capability to develop, manufacture, market, sell, or distribute products on a commercial scale. We will 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. At any time, we may modify our strategy and pursue
collaborations for the development and commercialization of some products that we had intended to pursue independently. We may pursue products that ultimately require more resources than we anticipate or which may be technically unsuccessful. In
order for us to commercialize these products directly, we would need to establish or obtain through outsourcing arrangements the capability to develop, manufacture, market, sell, and distribute products. If we are unable to successfully
commercialize products resulting from our internal product development efforts, we will continue to incur losses. Even if we successfully develop a commercial product, we may not generate significant sales and achieve profitability.

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

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

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

| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 and technologies; and

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

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

If we are unable to continue to collect genetic material from diverse natural environments, our research and development efforts and our
product 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. If our access to materials under biodiversity access agreements or other arrangements is reduced or terminates,
it could harm our internal and our collaborative research and development efforts. We also collect samples from other environments where agreements are currently not required, such as the deep sea. All of our agreements with foreign countries expire
in 2007 or earlier, and they are all subject to earlier termination. We have voluntarily ceased collections of further samples in Yellowstone National Park pending the parks resolution of collection guidelines.

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. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights in these
foreign countries. These problems can be caused by, for example, a lack of rules and methods for defending intellectual property rights.

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 biotechnology companies, including our patent
position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. We will apply for patents covering both our technologies and products as we deem appropriate. Patents, if issued, may be
challenged, invalidated, or circumvented. We cannot be sure that relevant 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

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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 products in these countries if we are unable to circumvent or license them.

We are not currently a party to any litigation with regard to our patent position.
However, the biotechnology industry is characterized by 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. 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. Should any of our competitors have filed 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 could result in substantial cost to us even if the outcome is favorable. Even if successful on
priority grounds, an interference may result in loss of claims based on patentability grounds raised in the interference. 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.

An adverse ruling arising out of any intellectual property dispute, including an adverse decision as to the priority of our inventions, would undercut or invalidate our intellectual property position. An adverse
ruling could also subject us to significant liability for damages, prevent us from using processes or products, or require us to negotiate licenses to disputed rights from third parties. Although patent and intellectual property disputes in the
biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, necessary licenses may not be available to us on
satisfactory terms, if at all.

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 across multiple industries. We increased the number of our full-time employees from 277 at June 30, 2002 to 360 at June 30, 2003. We expect to continue to increase our headcount to meet our
strategic objectives. If our growth continues, it may continue to place a strain on us. 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. We may not be able to successfully implement improvements to our management information and control systems in an

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efficient or timely manner. In addition, we may discover deficiencies in existing systems and controls.

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 security measures to protect our trade secrets and proprietary information. These measures may not provide adequate protection for our trade secrets or other
proprietary information. 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. There can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to our trade secrets, or that we can meaningfully protect 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.

Many potential competitors who have greater resources and
experience than we do may develop products and technologies that make ours obsolete.

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

We face, and will continue to face, intense competition. We are not aware of another company that has the scope and integration of technologies and processes that we have. There are, however, a
number of companies who compete with us in various steps throughout our technology process. For example, Cubist Pharmaceuticals, Inc. is involved in accessing organisms from diverse environments for pharmaceutical applications. A number of companies
are performing high-throughput screening of molecules. Maxygen, Inc., Applied Molecular Evolution, Inc., and Evotech have alternative evolution technologies. Integrated Genomics, Inc., Myriad Genetics, Inc., ArQule, Inc., and Vertex Pharmaceuticals
(San Diego) LLC, formerly known as Aurora Biosciences Corporation, a subsidiary of Vertex Pharmaceuticals Inc., perform screening, sequencing, and/or bioinformatics services. Novozymes A/S and Genencor International, Inc. are involved in the
development, overexpression, fermentation, and purification of enzymes. Abgenix, Inc. and Medarex, Inc. are involved in the development of human monoclonal antibodies. There are also a number of academic institutions involved in various phases of
our technology process. Many of these competitors have significantly greater

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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.

Any products that we develop through our technologies will compete in multiple, highly competitive markets. Many of our
potential competitors in these markets have substantially greater financial, technical, and marketing resources than we do and may succeed in developing products that would render our products or those of our collaborators obsolete or
noncompetitive. In addition, many of these competitors have significantly greater experience than we do in their respective fields. 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.

Stringent laws and required government approvals could delay our introduction of products.

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

In the United States, products for our target
markets are regulated based on their application, by either the Food and Drug Administration, or FDA, the Environmental Protection Agency, or EPA, or, in the case of plants and animals, the United States Department of Agriculture, or USDA. The FDA
regulates drugs, food, and feed, as well as food additives, feed additives, and substances generally recognized as safe that are used in the processing of food or feed. While substantially all of our projects to date have focused on non-human
applications of our technologies and products outside of the FDAs review, we are now conducting 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, we may not obtain regulatory approval for any drug products. We have not submitted an investigational new drug application for any product candidate, and no
drug product candidate

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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.

The European regulatory process for these classes of biologically derived products has been in a state of flux in the recent past, as the EU attempts to replace country by country regulatory procedures with a consistent EU
regulatory standard in each case. Some country-by-country regulatory oversight remains. Other than Japan, most regions of the world generally find adequate either a United States or a European clearance together with associated data and information
for a new biologically derived product.

If we require additional capital to fund our operations, we may need to enter into financing arrangements with unfavorable terms or which could adversely affect
the ownership interest and rights of our common stockholders as compared to our other stockholders. If such financing is not available, we may need to cease operations.

We currently anticipate that our
available cash resources, short-term investments, receivables, and committed funding from collaborative partners will be sufficient to meet our capital requirements for the foreseeable future.

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

| |  | 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 need to acquire or license complementary technologies or acquire complementary businesses.

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

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

We 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. For example, our revenue for the quarter ended June 30, 2003 was $10.4 million, as compared to $7.2 million for the quarter
ended June 30, 2002. Revenue in future periods may be greater or less than revenue 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:

| |  | 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 royalty-bearing products on expected timelines;

| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to enter into new agreements with 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 ability to successfully satisfy all pertinent regulatory requirements;

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

| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | General and industry specific economic conditions, which may affect our collaborative partners research and development expenditures.

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If revenue declines or does not grow as anticipated due to the expiration of strategic alliance or collaboration agreements, failure to obtain new agreements or grants, lower than
expected royalty payments, or other factors, we may not be able to correspondingly reduce our operating expenses. A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. In addition, we plan
to continue to increase operating expenses during 2003. 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.

If we lose our key personnel or are unable to attract and retain qualified
personnel as necessary, it could delay our product development programs and harm our research and development efforts.

Our success depends to a significant degree upon the continued contributions of our
executive officers, management, and scientific staff. If we lose the services of one or more of these people, we may be unable to achieve our business objectives or our stock price could decline. 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 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 development programs depend on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, and engineers. Although we believe we will be successful in attracting and retaining
qualified personnel, 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.

Our planned activities will require additional expertise in specific industries and areas applicable to the
products developed through our technologies. 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.

If we engage in any additional acquisitions, we will incur a variety of costs and may potentially face numerous
other risks that could adversely affect our business operations.

In July 2003, we acquired an antifungal program consisting of preclinical compounds from Glaxo Wellcome S.A., and in February 2003, we
consummated a series of transactions with Syngenta and TMRI that involved, in part, our acquiring certain property and equipment from TMRI. If appropriate

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opportunities become available, we may consider acquiring additional businesses, assets, technologies, or products that we believe are a strategic fit with our business. We currently
have no commitments or agreements with respect to any material acquisitions. If we do pursue such a strategy, we could

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

| |   |                           
| | - | --------------------------
| |  | Incur substantial debt; or

| |   |                    
| | - | -------------------
| |  | Assume 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 collaborative partners. Further, recent accounting
changes could result in a negative impact on our results of operations as well as the resulting cost of the acquisition. Any of these adverse consequences could harm our business.

We may be
sued for product liability.

We may be held liable if any product we develop, or any product which is made with the use of any of our technologies, causes injury or is found otherwise unsuitable during
product testing, manufacturing, marketing, or sale. We currently have limited product liability insurance 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 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.

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 take-over 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.

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Our stock price has been and may continue to be particularly volatile because of the industry we are in.

The stock
market, from time to time, has experienced significant price and volume fluctuations that are unrelated to the operating performance of companies. The market prices of technology companies, particularly life science companies, have been highly
volatile. Our stock has been and may continue to be affected by this type of market volatility, as well as by our own performance. The following factors, among other risk factors, may have a significant effect on the market price of our common
stock:

| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | Developments in our relationships with current or future strategic partners and collaborators;            
| |   |                                                                                                           
| |  | Announcements of technological innovations or new products by us or our competitors;                      
| |   |                                                                                                           
| |  | Developments in patent or other proprietary rights;                                                       
| |   |                                                                                                           
| |  | Our ability to access genetic material from diverse ecological environments and practice our technologies;
| |   |                                                                                                           
| |  | Future royalties from product sales, if any, by our collaborative partners;                               
| |   |                                                                                                           
| |  | Fluctuations in our operating results;                                                                    
| |   |                                                                                                           
| |  | Litigation;                                                                                               
| |   |                                                                                                           
| |  | Developments in domestic and international governmental policy or regulation; and                         
| |   |                                                                                                           
| |  | Economic and other external factors or other disaster or crisis.                                          

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 44.5% of our outstanding common stock as of August 1, 2003. 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 over matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. In addition, as of August 1, 2003, Syngenta and its affiliates controlled
approximately 18.6% 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

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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.

We use hazardous materials in our business. Any claims relating to improper handling, storage, or
disposal of these materials could be time consuming and costly.

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk is limited to interest rate risk. Our exposure to changes in interest
rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt
instruments. Our risk associated with fluctuating interest expense is limited to our future financings, including our equipment financing line of credit agreements, the interest rates under which are expected to be closely tied to market rates. Our
risk associated with fluctuating interest income is limited to our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate
changes. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in short-term investment grade securities and limiting the amount
invested in any single security. We mitigate market risk by maintaining an average maturity of less than one year for our investments. We mitigate reinvestment risk by investing in securities with varying maturity dates. A hypothetical 100 basis
point adverse move in interest rates along the entire interest rate yield curve would have decreased the fair value of our interest sensitive financial instruments at June 30, 2003 and December 31, 2002 by $1.1 million and $1.4 million,
respectively. Declines in interest rates over time will reduce our interest income, while increases in interest rates over time will increase our interest expense.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this report
(the

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Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in alerting
them on a timely basis to material information relating to us that is required to be included in our reports filed or submitted under the Exchange Act.

Changes in Internal Control over Financial
Reporting. Our chief executive officer and chief financial officer also evaluated whether a change had occurred in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on such evaluation, such officers have concluded that there was no change in our internal
control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

On or about December 6, 2002, a lawsuit was filed in the U.S. District Court for the Southern District of New York against us, two of our
executive officers and the chairman of our board of directors (collectively, the Diversa Defendants), and the underwriters of our initial public offering (IPO). The complaint was purportedly filed on behalf of purchasers of
our common stock between February 14, 2000, and December 6, 2000, and is captioned Muller v. Diversa Corp., et al., Case No. 02-CV-9699. In the complaint, the plaintiffs allege that the Diversa Defendants and the underwriters of our IPO violated
Sections 11 and 15 of the Securities Act of 1933 based on allegations that our registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO
underwriters. The complaint also contains claims for violation of sections 10(b) and 20 of the Securities Exchange Act of 1934 based on allegations that this omission constituted a deceit on investors. The plaintiffs seek unspecified monetary
damages and other relief. This action is related to In re Initial Public Offering Securities Litigation, Case No. 21 MC 92, in which similar complaints were filed against hundreds of other public companies (Issuers) that conducted IPOs
of their common stock in the late 1990s and 2000 (the IPO Cases). On January 7, 2003, this case was assigned to United States Judge Shira Scheindlin of the Southern District of New York, before whom the IPO Cases have been consolidated
for pretrial purposes.

In February 2003, the Court issued a decision on the motion to dismiss filed by the Issuers (among others). In this decision, the Court denied the motion to dismiss the Section 11 and
15 claims against the Diversa Defendants and almost all of the other Issuers, and granted the motion to dismiss the Section 10(b) claim against us. The Court dismissed the Section 10(b) claim against us without leave to amend. The Court similarly
dismissed the Section 10(b) and 20 claims against one of our officers and the Chairman of our board of directors without leave to amend, but denied the motion to dismiss these claims against one of our officers.

In June 2003, Issuers and Plaintiffs reached a tentative settlement agreement that would, among other things, result in the dismissal with prejudice of all claims against the Issuers

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and their officers and directors in the IPO Lawsuits. In addition, the tentative settlement guarantees that, in the event that the Plaintiffs recover less than $1 billion in settlement
or judgment against the Underwriter defendants in the IPO Lawsuits, the Plaintiffs will be entitled to recover the difference between the actual recovery and $1 billion from the insurers for the Issuers. Over 250 Issuers have indicated that they
will enter into the settlement proposal. In the event, for example, the Plaintiffs recover nothing in judgment against the Underwriter defendants in the IPO Lawsuits and the Issuers insurers therefore become liable to the Plaintiffs for an
aggregate of $1 billion pursuant to the settlement proposal, the pro rata liability of our insurers, with respect to us, would be $4 million, assuming that 250 Issuers which approved the settlement proposal, and their insurers, were operating and
financially viable as of the settlement date. We currently carry liability insurance which would cover our insurers pro rata liability described in this hypothetical. Although we have approved this settlement proposal in principle, it remains
subject to a number of procedural conditions, as well as formal approval by the Court.

Item 2.  Changes in Securities and Use of Proceeds

Our Registration Statements on Form S-1 (File Nos. 333-92853 and 333-30290) relating to the initial public offering
of our common stock were declared effective by the Securities and Exchange Commission on February 11 and February 14, 2000, respectively. Upon completion of our initial public offering, we received net proceeds of $184.7 million after underwriting
discounts and expenses. Of the net offering proceeds, through June 30, 2003, approximately $18.6 million of the net proceeds had been used to purchase property and equipment and approximately $24.2 million had been used for general corporate
purposes. The balance is invested in cash equivalents and short-term investments.

Item 3.  Defaults Upon Senior Securities

None.

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

We held our 2003 Annual Meeting of Stockholders on May 14, 2003. The following is a brief description
of each matter voted upon at the meeting and the number of votes cast for, withheld, or against and the number of abstentions and broker non-votes with respect to each matter. Each nominee for director was elected to hold office until the 2006
Annual Meeting of Stockholders, and the two management proposals were approved by the stockholders.

a)       The stockholders elected the three nominees for the board of
directors to hold office until the 2006 Annual Meeting of Stockholders:

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|                       |       |            |  |          
|---------------------- | ----- | ---------- |  | ---------
|                       | Votes
|Nominee                |       | For        |  | Withheld 
|Dr. James H. Cavanaugh |       | 38,549,806 |  | 335,536  
|Dr. Jay M. Short       |       | 38,525,057 |  | 360,285  
|Dr. Melvin I. Simon    |       | 32,564,351 |  | 6,320,991

In addition to the above nominees for director, the following directors terms of office continued after the 2003 Annual Meeting
of Stockholders: Mr. Mark Leschly, Dr. Wayne T. Hockmeyer, Mr. Peter Johnson, and Mr. Donald D. Johnston.

b)          The stockholders approved our 1997
Equity Incentive Plan, as amended, to increase the aggregate number of shares of common stock authorized for issuance under the plan to 12,982,633 shares:

|           |  |            |  |        
|---------- |  | ---------- |  | -------
|Votes     
|For        |  | Against    |  | Abstain
|19,582,652 |  | 13,799,921 |  | 12,967 

There were 5,489,802 broker non-votes.

c)          The stockholders approved our 1999 Non-Employee Directors Stock Option Plan, as amended, to (i) increase the initial grant to non-employee directors of shares
of common stock subject to options by 5,000 to 25,000 shares, (ii) increase the annual grant of shares of common stock subject to options by 20,000 to 25,000 shares, (iii) grant annually an additional option to purchase 10,000 shares of common stock
to the Chairman of the Board, and (iv) increase the shares of common stock available for issuance under the plan by 300,000 to 577,719* shares.

|           |  |           |  |        
|---------- |  | --------- |  | -------
|Votes     
|For        |  | Against   |  | Abstain
|30,007,854 |  | 3,380,255 |  | 10,430 

There were 5,486,803 broker non-votes.

*     The proxy card filed
with our Definitive Proxy Statement on Schedule 14A for our 2003 Annual Meeting of Stockholders incorrectly references 577,791 as the number of shares of common stock available for issuance under the plan.

d)          The stockholders ratified the selection of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2003:

|           |  |         |  |        
|---------- |  | ------- |  | -------
|Votes     
|For        |  | Against |  | Abstain
|38,350,184 |  | 523,024 |  | 12,134 

There were no broker non-votes.

Item 5.  Other Information

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None.

Item 6.  Exhibits and Reports on Form 8-K

(a)

|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                            
|3.1            | Amended and Restated Certificate of Incorporation.(1)                                                                                                                                                                                                                                                                                                                                                                             
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|3.2            | Amended and Restated Bylaws.(1)                                                                                                                                                                                                                                                                                                                                                                                                   
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.1            | Form of Common Stock Certificate of the Company.(2)                                                                                                                                                                                                                                                                                                                                                                               
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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).(3)
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.3            | First 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.(5)                                                                                                                                                                                                                                                                   
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.4            | The Companys Certificate of Designation of Series A Junior Participating Preferred Stock.(3)                                                                                                                                                                                                                                                                                                                                     
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.5            | Warrant issued by the Company to Syngenta Participations AG.(4)                                                                                                                                                                                                                                                                                                                                                                   
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.(4)                                                                                                                                                                                                                                                                
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.7           | Registration Rights Agreement dated as of July 18, 2003 by and between Glaxo Group Limited and Diversa Corporation.                                                                                                                                                                                                                                                                                                               
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.1          | Asset Sale Agreement made as of July 18, 2003 by and between Glaxo Wellcome, S.A. and the Company.                                                                                                                                                                                                                                                                                                                                
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                                         
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                                         
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                    
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   

|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.
|(2) | Filed as an exhibit to the Companys Registration Statement on Form S-1 (No. 333-92853) originally filed with                                                                                                    

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|    |                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | the Securities and Exchange Commission on December 21, 1999, as amended, and incorporated herein by reference.                                                                                                            
|(3) | 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) | 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.                                              
|(5) | 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                                              
|   | 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.

|    |                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | We filed a Current Report on Form 8-K on April 23, 2003 to file as an exhibit the Companys press release announcing financial results for the quarter ended March 31, 2003 pursuant to Item 12.
Results of Operations and Financial Condition of Form 8-K in accordance with SEC Release Nos. 33-8216 and 34-47583.

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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.

|                      |                                                                                                                 
|--------------------- | ----------------------------------------------------------------------------------------------------------------
|                      | DIVERSA CORPORATION                                                                                             
|                      |                                                                                                                 
|Date: August 11, 2003 | /s/ KARIN EASTHAM                                                                                               
|                      |                                                                                                                 
|                      | Karin Eastham                                                                                                   
|                      | Senior Vice President, Finance,Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)

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