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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

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Form 10-Q

(Mark One)

|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |                                                                                         
|  | For the quarterly period ended March 31, 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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x  Yes    o  No

x  Yes    o  No

The number of shares of the Registrant's Common
Stock outstanding as of May 6, 2003 was 41,929,429.

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DIVERSA CORPORATION INDEX

|                                  |                                                                                       |         
|--------------------------------- | ------------------------------------------------------------------------------------- | --------
|                                  |                                                                                       | Page No.
|                                  |                                                                                       |         
|PART I  -  
FINANCIAL INFORMATION |                                                                                      
|                                  |                                                                                       |         
|Item 1.                           | Financial Statements (Unaudited)                                                      |         
|                                  |                                                                                       |         
|                                  | Condensed Balance Sheets as of March 31, 2003 and December 31, 2002                   | 3       
|                                  | Condensed Statements of Operations for the three months ended March 31, 2003 and 2002 | 4       
|                                  | Condensed Statements of Cash Flows for the three months ended March 31, 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                            | 31      
|                                  |                                                                                       |         
|Item 4.                           | Controls and Procedures                                                               | 31      
|                                  |                                                                                       |         
|PART II   -  
OTHER INFORMATION   |                                                                                      
|                                  |                                                                                       |         
|Item 1.                           | Legal Proceedings                                                                     | 32      
|Item 2.                           | Changes in Securities and Use of Proceeds                                             | 33      
|Item 3.                           | Defaults Upon Senior Securities                                                       | 33      
|Item 4.                           | Submission of Matters to a Vote of Securities Holders                                 | 33      
|Item 5.                           | Other Information                                                                     | 33      
|Item 6.                           | Exhibits and Reports on Form 8-K                                                      | 33      
|                                  |                                                                                       |         
|SIGNATURES                        | 36                                                                                   
|CERTIFICATIONS                    | 36                                                                                   

2



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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)

|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                   |         | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------- | ------- |  | -------- | ----------------- | ------- | 
|                                                |                                                                                                                                                                             |                                            | MARCH 31, 2003 |         |  |          | DECEMBER 31, 2002 |        
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                | (Unaudited)                                                                                                                                                                 |                                            |                | (Note)  | 
|ASSETS                                          |                                                                                                                                                                             |                                            |                |         |  |          |                  
|Current assets:                                 |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                | Cash and cash equivalents                                                                                                                                                   | $                                          | 15,765         |         |  | $        | 20,113            |        
|                                                | Short-term investments                                                                                                                                                      |                                            | 139,021        |         |  |          | 142,983           |        
|                                                | Accounts receivable                                                                                                                                                         |                                            | 772            |         |  |          | 1,992             |        
|                                                | Other current assets                                                                                                                                                        |                                            | 2,233          |         |  |          | 822               |        
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                |                                                                                                                                                                             | Total current assets                       |                | 157,791 |  |          |                   | 165,910 | 
|Property and equipment, net                     |                                                                                                                                                                             | 34,103                                     |                |         |  | 27,427   |                  
|Acquired intangible assets, net                 |                                                                                                                                                                             | 56,280                                     |                |         |  | 2,018    |                  
|Other assets                                    |                                                                                                                                                                             | 1,258                                      |                |         |  | 1,842    |                  
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                |                                                                                                                                                                             | Total assets                               | $              | 249,432 |  |          | $                 | 197,197 | 
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                                                                                                             |                                            |                |         |  |          |                  
|Current liabilities:                            |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                | Accounts payable                                                                                                                                                            | $                                          | 1,898          |         |  | $        | 4,133             |        
|                                                | Accrued liabilities                                                                                                                                                         |                                            | 3,210          |         |  |          | 4,397             |        
|                                                | Deferred revenue                                                                                                                                                            |                                            | 12,674         |         |  |          | 7,863             |        
|                                                | Current portion of capital lease obligations                                                                                                                                |                                            | 838            |         |  |          | 953               |        
|                                                | Current portion of notes payable                                                                                                                                            |                                            | 6,642          |         |  |          | 6,170             |        
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                |                                                                                                                                                                             | Total current liabilities                  |                | 25,262  |  |          |                   | 23,516  | 
|Capital lease obligations, less current portion |                                                                                                                                                                             | 560                                        |                |         |  | 703      |                  
|Notes payable, less current portion             |                                                                                                                                                                             | 10,677                                     |                |         |  | 11,181   |                  
|Deposit from sublessee                          |                                                                                                                                                                             | 270                                        |                |         |  | 270      |                  
|Long-term deferred revenue                      |                                                                                                                                                                             | 3,109                                      |                |         |  | 4,212    |                  
|Stockholders equity:                           |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                | Common stock, $0.001 par value, 65,000,000 shares authorized, 41,927,823 and 35,769,455 shares issued and outstanding at March 31, 2003 and
December 31, 2002, respectively |                                            | 42             |         |  |          | 36                |        
|Additional paid-in capital                      |                                                                                                                                                                             | 338,480                                    |                |         |  | 265,150  |                  
|Deferred compensation                           |                                                                                                                                                                             | (64                                        | )              |         |  | (131     | )                
|Accumulated deficit                             |                                                                                                                                                                             | (130,356                                   | )              |         |  | (109,376 | )                
|Accumulated other comprehensive income          |                                                                                                                                                                             | 1,452                                      |                |         |  | 1,636    |                  
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                |                                                                                                                                                                             | Total stockholders equity                 |                | 209,554 |  |          |                   | 157,315 | 
|                                                |                                                                                                                                                                             |                                            |                |         |  |          |                  
|                                                |                                                                                                                                                                             | Total liabilities and stockholders equity | $              | 249,432 |  |          | $                 | 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.

See accompanying notes to condensed financial
statements.

3



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

|                                                                                 |                                                           |                             |        |  |      |        |        | 
|-------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------- | ------ |  | ---- | ------ | ------ | 
|                                                                                 |                                                           | THREE MONTHS ENDEDMARCH 31, |       
|                                                                                 |                                                           |                             |       
|                                                                                 |                                                           | 2003                        |        |  | 2002 |       
|                                                                                 |                                                           |                             |        |  |     
|Revenue:                                                                         |                                                           |                             |        |  |      |        |       
|                                                                                 | Collaborative                                             | $                           | 7,291  |  |      | $      | 7,092  | 
|                                                                                 | Grant and product                                         |                             | 719    |  |      |        | 96     | 
|                                                                                 |                                                           |                             |        |  |     
|Total revenue                                                                    |                                                           | 8,010                       |        |  |      | 7,188  |       
|                                                                                 |                                                           |                             |        |  |     
|Operating costs and expenses:                                                    |                                                           |                             |        |  |      |        |       
|                                                                                 | Research and development                                  |                             | 14,968 |  |      |        | 12,308 | 
|                                                                                 | Selling, general and administrative                       |                             | 2,771  |  |      |        | 2,540  | 
|                                                                                 | Amortization of acquired intangible assets                |                             | 300    |  |      |        | 39     | 
|                                                                                 | Write-off of acquired in-process research and development |                             | 10,758 |  |      |        |       | 
|                                                                                 | Non-cash, stock-based compensation                        |                             | 67     |  |      |        | 272    | 
|                                                                                 |                                                           |                             |        |  |     
|Total operating expenses                                                         |                                                           | 28,864                      |        |  |      | 15,159 |       
|                                                                                 |                                                           |                             |        |  |     
|Loss from operations                                                             |                                                           | (20,854                     | )      |  |      | (7,971 | )     
|Interest and other income, net                                                   |                                                           | 704                         |        |  |      | 1,559  |       
|Equity in loss of joint venture                                                  |                                                           | (830                        | )      |  |      | (550   | )     
|                                                                                 |                                                           |                             |        |  |     
|Net loss                                                                         | $                                                         | (20,980                     | )      |  | $    | (6,962 | )     
|                                                                                 |                                                           |                             |        |  |     
|Net loss per share, basic and diluted                                            | $                                                         | (0.54                       | )      |  | $    | (0.20  | )     
|Weighted average shares used in calculating basic and diluted net loss per share |                                                           | 38,559                      |        |  |      | 35,531 |       

See accompanying notes to condensed financial statements.

4



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DIVERSA CORPORATION CONDENSED STATEMENTS OF CASH FLOWS(In thousands) (Unaudited)

|                                                 |                                                                             |                                                     |                                       |                              |        |         |         |         |        |  
|------------------------------------------------ | --------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------- | ---------------------------- | ------ | ------- | ------- | ------- | ------ | -
|                                                 |                                                                             |                                                     |                                       | THREE MONTHS ENDED MARCH 31, |       
|                                                 |                                                                             |                                                     |                                       |                              |       
|                                                 |                                                                             |                                                     |                                       | 2003                         |        |         | 2002    |        
|                                                 |                                                                             |                                                     |                                       |                              |        |         |         |        
|Operating activities:                            |                                                                             |                                                     |                                       |                              |        |         |        
|                                                 | Net loss                                                                    | $                                                   | (20,980                               | )                            |        | $       | (6,962  | )      
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                     |                                       |                              |        |         |         |        
|                                                 |                                                                             | Depreciation and amortization                       |                                       | 3,014                        |        |         |         | 1,947   |       
|                                                 |                                                                             | Non-cash, stock based compensation charges          |                                       | 67                           |        |         |         | 272     |       
|                                                 |                                                                             | Unrealized gain on warrants held by the Company     |                                       |                             |        |         |         | (193    | )     
|                                                 |                                                                             | Write-off of in-process research and development    |                                       | 10,758                       |        |         |         |        |       
|                                                 |                                                                             | Changes in operating assets and liabilities:        |                                       |                              |        |         |         |         |       
|                                                 |                                                                             |                                                     | Accounts receivable                   |                              | 1,220  |         |         |         | 664    |  
|                                                 |                                                                             |                                                     | Other assets                          |                              | (1,447 | )       |         |         | (498   | )
|                                                 |                                                                             |                                                     | Accounts payable and accrued expenses |                              | (3,422 | )       |         |         | (6,548 | )
|                                                 |                                                                             |                                                     | Deferred revenue                      |                              | 3,708  |         |         |         | (2,224 | )
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|                                                 |                                                                             | Net cash used in operating activities               |                                       | (7,082                       | )      |         |         | (13,542 | )     
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|Investing activities:                            |                                                                             |                                                     |                                       |                              |        |         |        
|                                                 | Purchases of short-term investments                                         |                                                     | (29,771                               | )                            |        |         | (78,094 | )      
|                                                 | Sales and maturities of short-term investments                              |                                                     | 33,548                                |                              |        |         | 45,906  |        
|                                                 | Purchases of property and equipment                                         |                                                     | (1,426                                | )                            |        |         | (1,496  | )      
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|                                                 |                                                                             | Net cash provided by (used in) investing activities |                                       | 2,351                        |        |         |         | (33,684 | )     
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|Financing activities:                            |                                                                             |                                                     |                                       |                              |        |         |        
|                                                 | Net proceeds from sale of common stock                                      |                                                     | 673                                   |                              |        |         | 829     |        
|                                                 | Principal payments on capital leases                                        |                                                     | (258                                  | )                            |        |         | (238    | )      
|                                                 | Principal payments on notes payable                                         |                                                     | (1,465                                | )                            |        |         | (878    | )      
|                                                 | Advances under notes payable                                                |                                                     | 1,433                                 |                              |        |         |        |        
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|                                                 |                                                                             | Net cash provided by (used in) financing activities |                                       | 383                          |        |         |         | (287    | )     
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|Net decrease in cash and cash equivalents        |                                                                             | (4,348                                              | )                                     |                              |        | (47,513 | )      
|Cash and cash equivalents at beginning of period |                                                                             | 20,113                                              |                                       |                              |        | 69,390  |        
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        
|Cash and cash equivalents at end of period       | $                                                                           | 15,765                                              |                                       |                              | $      | 21,877  |        
|                                                 |                                                                             |                                                     |                                       |                              |        |         |        

See accompanying notes to condensed financial statements.

5



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DIVERSA CORPORATION NOTES 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 March 31, |        
|                                                                               |                              |        
|                                                                               | 2003                         |         |   | 2002 |  
|                                                                               |                              |        
|Net loss                                                                       | $                            | (20,980 | ) |      | $ | (6,962 | )
|Net loss per share, basic and diluted                                          | $                            | (0.54   | ) |      | $ | (0.20  | )
|Weighted average shares used in computing basic and diluted net loss per share |                              | 38,559  |   |      |   | 35,531 |  

6



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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 months ended March 31, 2003 and 2002, the comprehensive loss consisted of:

|                                 |                                |   |         |      |   |      |        |       
|-------------------------------- | ------------------------------ | - | ------- | ---- | - | ---- | ------ | ------
|(in thousands)                   |                                |   |         |      |   |      |        |       
|                                 |                                |   | 2003    |      |   | 2002 |       
|                                 |                                |   |         |      |   |      |       
|Net loss                         |                                | $ | (20,980 | )    |   | $    | (6,962 | )     
|Other comprehensive gain (loss): |                                |   |         |      |   |      |        |       
|                                 | Unrealized loss on investments |   |         | (184 | ) |      |        | (1,128
|                                 |                                |   |         |      |   |      |       
|Comprehensive loss               |                                | $ | (21,164 | )    |   | $    | (8,090 | )     
|                                 |                                |   |         |      |   |      |       

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 March 31, 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 2.66%
to 3.11% and 4.16% to 4.65%, respectively; dividend yield of 0%; volatility factor of 61% and 60%, respectively; and a weighted-average expected life of the options of 3.2 years.

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:

7



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|                                                                                                                |                              |         |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------- | - | ---- | - | ------ | -
|(in thousands, except per share data)                                                                           | Three Months Ended March 31, |        
|                                                                                                                |                              |        
|                                                                                                                | 2003                         |         |   | 2002 |  
|                                                                                                                |                              |         |   |      |  
|Net loss, as reported                                                                                           | $                            | (20,980 | ) |      | $ | (6,962 | )
|Add: Stock-based employee compensation expense included in reported net loss                                    |                              | 67      |   |      |   | 272    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |                              | (1,892  | ) |      |   | (2,588 | )
|                                                                                                                |                              |         |   |      |  
|Pro forma net loss                                                                                              |                              | (22,805 | ) |      |   | (9,278 | )
|                                                                                                                |                              |         |   |      |  
|Basic and diluted net loss per share, as reported                                                               | $                            | (0.54   | ) |      | $ | (0.20  | )
|Pro forma basic and diluted net loss per share                                                                  | $                            | (0.59   | ) |      | $ | (0.26  | )

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.
During the three months ended March 31, 2003 and 2002, the Company recorded amortization of deferred stock compensation expense of approximately $0.1 million and $0.3 million, respectively.

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.

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):

8



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|                                     |       |        |       
|------------------------------------ | ----- | ------ | ------
|Fair value of Diversa shares issued  | $     | 69,016
|Fair value of Diversa warrant issued |       | 3,647 
|Transaction costs, net               |       | 1,146 
|                                     |       |       
|                                     | Total | $      | 73,809
|                                     |       |       

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 |                        | 10,758     |        | See below  
|Identifiable intangible assets:     |                        |            |        |            
|                                    | Core technology        |            | 36,604 |             | 15 years             
|                                    | Research collaboration |            | 18,236 |             | 7 years              
|                                    |                        |            |        |             |                      
|                                    |                        | Net assets | $      | 73,809      |                       | 
|                                    |                        |            |        |             |                      

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 the condensed statement of operations for the three months ended March 31, 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 endedMarch 31, |      
|                              |                   |                             |      
|                              |                   | 2003                        |       |   | 2002 |        
|                              |                   |                             |       |   |      |        
|                              |                   |                             |       |   |      |         |       |  
|Net loss                      | $                 | (21,992                     | )     |   | $    | (19,408 | )    
|Pro forma earnings per share: |                   |                             |       |   |      |         |      
|                              | Basic and diluted | $                           | (0.53 | ) |      | $       | (0.47 | )

The pro forma information is not necessarily indicative of results 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.     Recently Issued Accounting Standards

9



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In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative consensus on EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables, which
provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company is reviewing EITF 00-21 and has not yet determined the impact this issue will have on its future operating results and financial position.

|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|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 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

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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. 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 March 31, 2003, revenue increased 11% compared to the quarter ended March 31, 2002. This increase was primarily attributable to additional grants, product sales, and research funding as a result of our
recently signed research collaboration agreement with Syngenta Participations AG. We began to receive funding under our research collaboration agreement with Syngenta Participations AG in February 2003.

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 March 31, 2003, we had current and long-term deferred revenue totaling $15.8 million.

We
have incurred net losses since our inception. As of March 31, 2003, our accumulated deficit was $130.4 million. We expect to incur additional losses under generally accepted accounting principles over at least the next two years as we continue to
develop our technologies and fund internal research and development efforts. 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 March 31, 2003 and 2002

Revenue

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Revenue increased $0.8 million to $8.0 million for the quarter ended March 31, 2003 from $7.2 million for the same period in 2002. This increase was primarily due to the addition of
several new grants awarded after the first quarter in 2002 and in 2003, additional product revenue as a result of the launch of Phyzyme XP through our partner, Danisco Animal Nutrition, and additional research funding from our recent research
collaboration signed with Syngenta Participations AG. We began to receive funding under our research collaboration agreement with Syngenta Participations AG in February 2003. 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 91% and 99% of total revenue for the quarters ended
March 31, 2003 and 2002, respectively. We expect our revenue to continue to increase in 2003 as a result of our recent research collaboration with Syngenta under which we are 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.

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 March 31, 2003, we estimate that approximately 55% of our research and development expenditures were associated with internal product
and technology development and that 45% were related to research activities funded by our collaborators. Our research and development expenses increased $2.7 million to $15.0 million for the quarter ended March 31, 2003 from $12.3 million for the
quarter ended March 31, 2002. The increase was primarily due to costs associated with the following:

Personnel Costs.     Costs for research and development personnel for the
quarter ended March 31, 2003 increased by $1.1 million over the quarter ended March 31, 2002. Our research staff increased from 226 at March 31, 2002 to 308 at March 31, 2003. The increase in staff was primarily related to us hiring 71 additional
researchers in conjunction with the recent Syngenta transactions.

Facility Costs.     Facility costs for the quarter ended March 31, 2003 increased $1.8 million over the
quarter ended March 31, 2002. The increase was primarily attributable to higher depreciation and maintenance costs as a result of increased capital equipment to support our internal product and technology development, as well as costs related to our
second research and development facility, which we occupied in April 2002.

Selling, General and Administrative Expenses

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Selling, general and administrative expenses increased $0.3 million to $2.8 million for the quarter ended March 31, 2003 from $2.5 million for the same period in 2002. This increase was
primarily attributable to professional service costs as a result of additional legal and regulatory requirements for public companies.

Amortization of Acquired Intangible Assets

For the quarter ended March 31, 2003, we recorded amortization of acquired intangible assets of approximately $0.3 million, compared to $39,000 for the quarter ended March 31, 2002. The increase was associated with the
February 2003 acquisition of intellectual property rights licenses from Syngenta Participations AG.

Write-off of Acquired In-Process Research and Development

For the quarter ended March 31, 2003, in connection with our February 2003 acquisition of intellectual property rights licenses from Syngenta Participations AG and property and equipment from Syngentas wholly-owned
subsidiary, the Torrey Mesa Research Institute, 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 for the quarter ended March
31, 2003 was $0.7 million, compared to $1.6 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 quarter ended March 31, 2002, the Company recorded $0.2 million of other income related to the increase in value of warrants the Company holds to purchase 700,000 shares of stock of IntraBiotics
Pharmaceuticals, Inc. 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 net loss of Innovase LLC, our joint venture with The Dow Chemical Company, was $0.8 million for the quarter ended March 31, 2003 compared to $0.6 million for the same period in
2002. The increase was related to administrative and marketing costs incurred by Innovase LLC.

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 $123.7 million in funding from our inception through March 31,
2003, and are also committed to fund at least an additional $142.3 million through 2010 subject

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to our performance under existing agreements, 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 December 31, 2002, we have initiated informal dispute resolutions with The Dow Chemical Company under our Innovase joint venture agreements due to differing views regarding product development activities, commercial
opportunities, and funding obligations under such agreements. In particular, Dow has indicated that it is unlikely to continue to provide research and development funding to us under the joint venture pending approval of further product development
projects. We believe such funding is required by the terms of the Innovase agreements. Dow has paid all amounts due for work performed through the first calendar quarter of 2003. The minimum total amounts that we believe Dow has committed to paying
us for the balance of 2003, 2004, and through June 2005 under the Innovase agreements represent less than ten percent of the total of at least $142.3 million that our strategic partners, including Dow, have committed to fund through 2010. Such
committed funding excludes contingent or performance-based payments, such as milestone payments, license and commercialization fees, and royalties or profit sharing. To date, neither party has declared a breach under the Innovase agreements or
provided notice of termination of any of the agreements.

As of March 31, 2003, we had cash, cash equivalents, and short-term investments of approximately $154.8 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 March 31, 2003, we had $2.1 million available 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 March 31, 2003, we had incurred costs of approximately $1.5 million for equipment related to the manufacturing agreement. During the
remainder of 2003, we anticipate funding approximately $0.5 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 $3.0 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, 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 $5.0 million for the remainder of 2003.

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

Our operating activities used cash of $7.1 million for the three months ended March 31, 2003. Our cash used by operating activities consisted primarily of cash used to fund
operations.

Our investing activities provided cash of $2.4 million for the three months ended March 31, 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 $0.4 million for the three months ended March 31, 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, partially offset by payments on notes payable and capital leases.

The following table summarizes our contractual obligations at March 31, 2003 (in thousands).

|                        |                                 |                               |        |        |   |       |                  |   |       |           |   |       |           |   |        |              
|----------------------- | ------------------------------- | ----------------------------- | ------ | ------ | - | ----- | ---------------- | - | ----- | --------- | - | ----- | --------- | - | ------ | -------------
|                        |                                 |                               |        | Total  |   |       | Less Than 1 Year |   |       | 1-3 Years |   |       | 3-5 Years |   |        | After 5 Years
|Contractual Obligations |                                 |                               |        |        |   |       |                  |   |       |           |   |       |           |  
|                        | Long-term debt                  | $                             | 17,319 |        | $ | 6,642 |                  | $ | 9,974 |           | $ | 703   |           | $ |      
|                        | Capital lease obligations       |                               | 1,548  |        |   | 946   |                  |   | 602   |           |   |      |           |   |      
|                        | Operating leases                |                               | 68,033 |        |   | 4,806 |                  |   | 8,682 |           |   | 9,175 |           |   | 45,370
|                        | License and research agreements |                               | 2,664  |        |   | 651   |                  |   | 804   |           |   | 496   |           |   | 713   
|                        |                                 |                               |        |        |   |       |                  |   |       |           |  
|                        |                                 | Total Contractual Obligations | $      | 89,564 |   | $     | 13,045           |   | $     | 20,062    |   | $     | 10,374    |   | $      | 46,083       
|                        |                                 |                               |        |        |   |       |                  |   |       |           |  

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 not be available on terms favorable to us, if at all. In addition, if we enter into financing

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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 estimate future cash flows related to these assets. Actual results could differ from those

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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
Participations AG and property and equipment from Syngentas wholly-owned subsidiary, the Torrey Mesa Research Institute. 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 March 31, 2003, we had long-lived assets with a net book value of $90.4 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 be charged to income in the period such determination
was made.

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.

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 $21.0 million for the quarter ended March 31, 2003. As of March 31, 2003, we had an accumulated deficit of
approximately $130.4 million. We expect to incur additional losses under generally accepted accounting principles for at least the next two years as we continue to develop our technologies and fund internal product research and development. 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.

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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.

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 The Dow Chemical Company, 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

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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. We recently initiated informal dispute resolution proceedings with The Dow Chemical Company under our Innovase joint venture agreements. While we are
seeking to enforce the terms of the Innovase joint venture agreements, including continuation of the related funding, there can be no assurances of the actual outcome of our informal dispute resolution procedures with Dow under the Innovase
agreements or any arbitration that may occur and an adverse result, including a result awarding an amount less than what we believe we are entitled to receive in committed funding under the Innovase agreements, could have an adverse affect on our
business. 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;                                                                                                         
| |   |                                                                                                                                                                                              
| |  | 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.                                                                                                            

Failure to retain former employees of Torrey Mesa Research
Institute or attract and retain other key employees could diminish the benefits we expect to realize from our recent transactions with Syngenta Participations AG and Torrey Mesa Research Institute.

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As part of the transactions among Syngenta Participations AG, or Syngenta, Torrey Mesa Research Institute, or 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 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

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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
| |   |                                                                                                                                                                                                                                                                                                                   
| |  | 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.                                                                                          

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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 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.

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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 March 31, 2002 to 368 at March 31, 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 efficient or timely manner. In addition, we may discover deficiencies in existing systems and controls.

23



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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 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.

24



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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, in the
future we may pursue collaborations for further research and development of drug products for humans that would require FDA approval before they could be marketed in the United States. In addition, any drug product candidates must also be approved
by the regulatory agencies of foreign governments before any product can be sold in those countries. Under current FDA policy, our products, or products of our collaborative partners incorporating our technologies or inventions, to the extent that
they come within the FDAs jurisdiction, may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions which cannot be satisfactorily answered, if results from pre-clinical or clinical trials do not
meet regulatory requirements or if they are deemed to be food additives whose safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to resolve and could prevent a product from being commercialized. Even after investing
significant time and expenditures, 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 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

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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 other 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.                                                                                    

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

26



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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 March 31, 2003 was $8.0
million, as compared to $7.2 million for the quarter ended March 31, 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.                                                                                  

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

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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.

We recently consummated a series of
transactions with Syngenta and TMRI that involved, in part, our acquiring certain property and equipment from TMRI. If appropriate 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

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

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

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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |   |                                                                                                           
| |  | 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 57% of our outstanding common stock as of May 6, 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 May 6, 2003, Syngenta and its affiliates controlled approximately
19% of our outstanding common stock, and by themselves will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval. The interests of this concentration of ownership may not
always coincide with our interests or the interests of other stockholders. For instance, officers, directors, and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider.
Similarly, this concentration of ownership may have the effect of delaying or preventing a change in control of our company otherwise favored by our other stockholders. This concentration of ownership could depress our stock price.

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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 March 31, 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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of a date within 90 days prior
to the filing date of this quarterly report (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting

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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 Controls.     Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such
controls.

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, the chairman of our board of directors, and the underwriters of our initial public offering of common stock. The complaint is purportedly filed on behalf of purchasers of our common stock between February 14, 2000 and December 6, 2000, and
alleges claims under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint is among the so-called laddering cases that
have been commenced against many companies that had public offerings of securities prior to or during December 2000, and the complaint has been transferred to the District Court Judge who is handling the ongoing litigation against over 300 companies
involving complaints of a similar nature. Those complaints are being coordinated as part of one proceeding denominated In re Initial Public Offering Securities Litigation. Among other allegations, the complaint alleges that, in connection with our
February 14, 2000 initial public offering, the defendant underwriters conditioned share allocations on customers agreeing to purchase additional shares in the aftermarket at pre-arranged prices and/or to pay the underwriters excessive and
undisclosed compensation representing a material portion of the customers profits from aftermarket sales of their initial public offering share allocations. The complaint alleges that the failure to disclose these alleged arrangements made our
registration statement for our initial public offering and the related prospectus materially false and misleading. The complaint, which seeks unspecified damages, asserts claims under the Securities Act Sections 11 and 15 and Exchange Act Sections
10(b) and 20.

On February 19, 2003, the District Court decided several motions to dismiss in In re Initial Public Offering Securities Litigation that were filed before the complaint was filed against us.
Nevertheless, as part of its decision, the District Court dismissed the Exchange Act Section 10(b) claims against us, one of our executives and the chairman of our board of directors, and dismissed the Exchange Act Section 20 claims in their
entirety. The District Court, however, did not dismiss the Securities Act Sections 11 and 15 claims as against any of the defendants named in the complaint.

We strongly deny any liability in connection
with this lawsuit and intend to vigorously defend against it. We have notified our insurance carriers of the lawsuit, and are requesting indemnification and/or contribution from the underwriters of our initial public offering of common stock.

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Item 2.     Changes in Securities and Use of Proceeds

On February 20, 2003 we completed the acquisition of certain licenses and tangible assets of Syngenta Participations AG, and its
wholly-owned subsidiary, Torrey Mesa Research Institute, pursuant to a series of agreements among the parties that also included entering into a research collaboration agreement with Syngenta. In connection with, and as partial consideration for,
our acquiring these licenses and tangible assets and entering into these agreements with Syngenta and TMRI, we issued to Syngenta and TMRI an aggregate of 6,034,983 shares of our common stock and issued to Syngenta a warrant to purchase up to
1,293,211 shares of our common stock, subject to adjustment, at an initial exercise price of $22 per share. The warrant is exercisable beginning in February 2008 for a period of ten years. We issued the common stock and the warrant to Syngenta and
TMRI in reliance on the exemption from registration permitted under Regulation D of the Securities Act of 1933, as amended.

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 March 31, 2003, approximately $17.7 million of the net proceeds had been used to purchase property and equipment and approximately $12.2
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

On February 19, 2003, we held a Special Meeting of Stockholders to approve the proposed issuance of shares of our common
stock and a warrant, and the issuance of shares of our common stock upon exercise of the warrant, to Syngenta Participations AG, or its affiliates in connection with the consummation of the transactions contemplated by a series of agreements we
entered into with Syngenta Participations AG and Torrey Mesa Research Institute, a wholly-owned subsidiary of Syngenta Participations AG, on December 3, 2002. At the Special Meeting of Stockholders held on February 19, 2003, the stockholders
approved such proposal, with 28,700,623 votes cast in favor of the proposal, 74,376 votes cast against the proposal, and 16,045 votes abstaining.

Item 5.     Other Information

None

Item 6.     
 Exhibits and Reports on Form 8-K

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(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)                                                                                                                                                                                                                                                                
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.45         | Amended and Restated Research Collaboration Agreement dated as of January 3, 2003 between the Company and Syngenta Participations AG.
(4)                                                                                                                                                                                                                                                                                         
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|99.1           | Certification of Chief Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                             



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

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(b)     We filed a Current Report on Form 8-K on January 6, 2003 to file as exhibits the various agreements associated with our transactions with Syngenta
Participations AG and its wholly-owned subsidiary, Torrey Mesa Research Institute.

We filed an amended Current Report on Form 8-K on January 9, 2003 to file as an exhibit the Amended and Restated Research
Collaboration Agreement dated as of January 3, 2003 between us and Syngenta Participations AG that replaced in its entirety Exhibit 10.46 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6,
2003.

We filed a Current Report on Form 8-K on March 4, 2003 announcing the completion of the acquisition of certain licenses and tangible assets of Syngenta Participations AG, and its wholly-owned
subsidiary, Torrey Mesa Research Institute, pursuant to a series of agreements among the parties that also included our entering into a research collaboration agreement with Syngenta.

35



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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: May 14, 2003 | By:                 | /s/ KARIN EASTHAM                           
|                   |                     |                                             
|                   |                     | Karin Eastham                               
|                   |                     | Senior Vice President, Finance,             
|                   |                     | Chief Financial Officer and Secretary       
|                   |                     | (Principal Financial and Accounting Officer)

CERTIFICATIONS

I, Jay M. Short, certify that:

|   |                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                                                                                                                                                
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | I have reviewed this quarterly report on Form 10-Q of Diversa Corporation;                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                               
|2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|   |                                                                                                                                                                                                                                                                                                                               
|3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                   
|   |                                                                                                                                                                                                                                                                                                                               
|4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                | a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
|   |                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                | b) | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date);
and                                                                                                  

36



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|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                           | c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                          
|5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board
of directors (or persons performing the equivalent function):                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                           | a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal controls; and
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                           | b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                          
|6. | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

|                                     
|-------------------------------------
|/s/ JAY M. SHORT                     
|                                     
|President and Chief Executive Officer

I, Karin Eastham, certify that:

|   |                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | I have reviewed this quarterly report on Form 10-Q of Diversa Corporation;                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                               
|2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|   |                                                                                                                                                                                                                                                                                                                               
|3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;                   
|   |                                                                                                                                                                                                                                                                                                                               
|4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                |    |                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                | a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us

37



---

|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    | by others within those entities, particularly during the period in which this quarterly report is being prepared;                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                           | b) | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date);
and                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                           | c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                          
|5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board
of directors (or persons performing the equivalent function):                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                           | a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal controls; and
|   |                                                                                                                                                                                                                                                                                                                                                                                           |    |                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                           | b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                          
|6. | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

|                                                          
|----------------------------------------------------------
|/s/ KARIN EASTHAM                                         
|                                                          
|Senior Vice President, Finance and Chief Financial Officer

38