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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



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

For the quarterly period ended March 31, 2009

OR



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

For the transition period from  to

Commission file number 000-29173





VERENIUM CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-3297375                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|55 Cambridge Parkway, Cambridge, MA      |  | 02142     
|(Address of principal executive offices) |  | (Zip Code)

(617) 674-5300

(Registrants telephone number, including area code)





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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post files).     ̈  Yes     ̈  No

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



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

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

The number of shares of the registrants Common Stock outstanding as of May 8, 2009 was 97,648,641.









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VERENIUM CORPORATION

INDEX



|                               |  |                                                                                       |  |         
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --------
|                               |  |                                                                                       |  | Page No.
|PART I  FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Condensed Consolidated Financial Statements                                           |  |         
|                               |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|                               |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|                               |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|                               |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 24      
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 41      
|Item 4.                        |  | Controls and Procedures                                                               |  | 41      
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 42      
|Item 1A.                       |  | Risk Factors                                                                          |  | 43      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 67      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 67      
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |  | 67      
|Item 5.                        |  | Other Information                                                                     |  | 67      
|Item 6.                        |  | Exhibits                                                                              |  | 67      
|                               | 
|SIGNATURES                     |  | 69                                                                                   



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VERENIUM CORPORATION

PART IFINANCIAL INFORMATION



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

VERENIUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------------- | - | -------- | -
|                                                                                                                                                         |  | March 31,2009 |          |   | December 31,2008       |  
|                                                                                                                                                         |  | (Unaudited)   |          |   | (Adjusted see Note 1) |  
|ASSETS                                                                                                                                                   |  |               |          |   |                        |   |          |  
|Current assets:                                                                                                                                          |  |               |          |   |                        |   |          |  
|Cash and cash equivalents                                                                                                                                |  | $             | 15,862   |   |                        | $ | 7,458    |  
|Accounts receivable, net of allowance for doubtful accounts of $2,079 and $1,760 at March 31, 2009 and December 31,
2008                                 |  |               | 7,172    |   |                        |   | 8,051    |  
|Inventories, net                                                                                                                                         |  |               | 5,317    |   |                        |   | 2,432    |  
|Prepaid expenses and other current assets                                                                                                                |  |               | 2,851    |   |                        |   | 2,938    |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total current assets                                                                                                                                     |  |               | 31,202   |   |                        |   | 20,879   |  
|Property, plant and equipment, net                                                                                                                       |  |               | 116,476  |   |                        |   | 117,271  |  
|Restricted cash                                                                                                                                          |  |               | 10,400   |   |                        |   | 10,040   |  
|Derivative asset-convertible hedge transaction, net                                                                                                      |  |               | 3        |   |                        |   | 163      |  
|Debt issuance costs and other assets                                                                                                                     |  |               | 4,856    |   |                        |   | 5,270    |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total assets                                                                                                                                             |  | $             | 162,937  |   |                        | $ | 153,623  |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                    |  |               |          |   |                        |   |          |  
|Current liabilities:                                                                                                                                     |  |               |          |   |                        |   |          |  
|Accounts payable                                                                                                                                         |  | $             | 12,916   |   |                        | $ | 15,921   |  
|Accrued expenses                                                                                                                                         |  |               | 16,032   |   |                        |   | 13,831   |  
|Accrued interest on convertible senior notes                                                                                                             |  |               | 3,713    |   |                        |   | 1,382    |  
|Restructuring reserve, current portion                                                                                                                   |  |               | 908      |   |                        |   | 917      |  
|Deferred revenue (including $1,412 and $1,428 from a related party at March 31, 2009 and December 31, 2008)                                              |  |               | 3,176    |   |                        |   | 3,397    |  
|Derivative liabilitywarrants                                                                                                                            |  |               | 18       |   |                        |   | 359      |  
|Convertible senior notes, compound embedded derivative                                                                                                   |  |               | 5,283    |   |                        |   | 7,769    |  
|Equipment loans payable, current portion                                                                                                                 |  |               | 738      |   |                        |   | 1,068    |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total current liabilities                                                                                                                                |  |               | 42,784   |   |                        |   | 44,644   |  
|Convertible senior notes, at face value net of discounts (principal amount of $148.3 million and $159.4 million at March 31, 2009 and
December 31, 2008) |  |               | 125,429  |   |                        |   | 130,391  |  
|Restructuring reserve, less current portion                                                                                                              |  |               | 5,016    |   |                        |   | 5,175    |  
|Other long term liabilities                                                                                                                              |  |               | 1,009    |   |                        |   | 1,105    |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total liabilities                                                                                                                                        |  |               | 174,238  |   |                        |   | 181,315  |  
|Stockholders deficit:                                                                                                                                   |  |               |          |   |                        |   |          |  
|Preferred stock$0.001 par value; 5,000 shares authorized, no shares issued and outstanding at March 31, 2009 and December 31,
2008                      |  |               |         |   |                        |   |         |  
|Common stock$0.001 par value; 250,000 shares authorized, 76,939 and 67,782 shares issued and outstanding at March 31, 2009 and
December 31, 2008        |  |               | 77       |   |                        |   | 68       |  
|Additional paid-in capital                                                                                                                               |  |               | 562,810  |   |                        |   | 573,801  |  
|Cumulative effect of adjustment related to the adoption of EITF 07-05                                                                                    |  |               | 5,420    |   |                        |   |         |  
|Accumulated deficit                                                                                                                                      |  |               | (610,238 | ) |                        |   | (613,561 | )
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total Verenium Corporation stockholders deficit                                                                                                         |  |               | (41,931  | ) |                        |   | (39,692  | )
|Noncontrolling interests in consolidated entities                                                                                                        |  |               | 30,630   |   |                        |   | 12,000   |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total stockholders deficit                                                                                                                              |  |               | (11,301  | ) |                        |   | (27,692  | )
|                                                                                                                                                         |  |               |          |   |                        |   |          |  
|Total liabilities, noncontrolling interest and stockholders deficit                                                                                     |  | $             | 162,937  |   |                        | $ | 153,623  |  
|                                                                                                                                                         |  |               |          |   |                        |   |          |  

Note: The condensed consolidated balance sheet data at December 31, 2008 has been derived from the audited
consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.



3



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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                |  |                             |         |   |                        |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---------------------- | - | ------- | -
|                                                                                                                |  | Three Months EndedMarch 31, |        
|                                                                                                                |  | 2009                        |         |   | 2008                   |  
|                                                                                                                |  | (Unaudited)                 |         |   | (Adjusted  seeNote 1) |  
|Revenues (including related-party revenue of $16 and $2,259 for the three months ended March 31, 2009 and 2008) |  |                             |         |   |                        |   |         |  
|Product                                                                                                         |  | $                           | 10,569  |   |                        | $ | 11,201  |  
|Collaborative                                                                                                   |  |                             | 1,264   |   |                        |   | 3,475   |  
|Grant                                                                                                           |  |                             | 2,558   |   |                        |   | 559     |  
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Total revenues                                                                                                  |  |                             | 14,391  |   |                        |   | 15,235  |  
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Operating expenses:                                                                                             |  |                             |         |   |                        |   |         |  
|Cost of product revenues                                                                                        |  |                             | 5,755   |   |                        |   | 7,877   |  
|Research and development                                                                                        |  |                             | 17,815  |   |                        |   | 14,861  |  
|Selling, general and administrative                                                                             |  |                             | 9,172   |   |                        |   | 9,683   |  
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Total operating expenses                                                                                        |  |                             | 32,742  |   |                        |   | 32,421  |  
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Loss from operations                                                                                            |  |                             | (18,351 | ) |                        |   | (17,186 | )
|Interest income and other expense, net                                                                          |  |                             | 36      |   |                        |   | 356     |  
|Interest expense                                                                                                |  |                             | (3,150  | ) |                        |   | (2,076  | )
|Loss on exchange of convertible senior notes                                                                    |  |                             |        |   |                        |   | (3,599  | )
|Gain (loss) on debt extinguishment                                                                              |  |                             | 3,609   |   |                        |   | (48     | )
|Gain (loss) on net change in fair value of derivative assets and liabilities                                    |  |                             | 13,309  |   |                        |   | (564    | )
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Net loss                                                                                                        |  |                             | (4,547  | ) |                        |   | (23,117 | )
|Less: Loss attributed to noncontrolling interests in consolidated entities                                      |  |                             | 7,870   |   |                        |   |        |  
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Net income attributed to Verenium Corporation                                                                   |  | $                           | 3,323   |   |                        | $ | (23,117 | )
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Basic net income (loss) per share                                                                               |  | $                           | 0.05    |   |                        | $ | (0.38   | )
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Diluted net income (loss) per share                                                                             |  | $                           | 0.05    |   |                        | $ | (0.38   | )
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Weighted average shares used in computing:                                                                      |  |                             |         |   |                        |   |         |  
|Basic net income (loss) per share                                                                               |  |                             | 70,295  |   |                        |   | 61,206  |  
|                                                                                                                |  |                             |         |   |                        |   |         |  
|Diluted net income (loss) per share                                                                             |  |                             | 70,396  |   |                        |   | 61,206  |  
|                                                                                                                |  |                             |         |   |                        |   |         |  

See accompanying notes to condensed consolidated financial statements.



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                     |  |                             |         |   |                        |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---------------------- | - | ------- | -
|                                                                                     |  | Three Months EndedMarch 31, |        
|                                                                                     |  | 2009                        |         |   | 2008                   |  
|                                                                                     |  |                             |         |   | (Adjusted  seeNote 1) |  
|Net income (loss) attributed to Verenium Corporation                                 |  | $                           | 3,323   |   |                        | $ | (23,117 | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                             |         |   |                        |   |         |  
|Depreciation and amortization                                                        |  |                             | 2,589   |   |                        |   | 2,309   |  
|Share-based compensation                                                             |  |                             | 2,547   |   |                        |   | 3,474   |  
|Gain (loss) on extinguishment of debt                                                |  |                             | (3,609  | ) |                        |   | 48      |  
|Loss on exchange of convertible senior notes                                         |  |                             |        |   |                        |   | 3,599   |  
|Gain (loss) on net change in fair value of derivative assets and liabilities         |  |                             | (13,309 | ) |                        |   | 564     |  
|Loss attributed to noncontrolling interest in consolidated entities                  |  |                             | (7,870  | ) |                        |   |        |  
|Accretion convertible senior notes of debt discount                                  |  |                             | 1,285   |   |                        |   | 417     |  
|Non-cash restructuring charges                                                       |  |                             | 90      |   |                        |   | 59      |  
|Changes in operating assets and liabilities:                                         |  |                             |         |   |                        |   |         |  
|Accounts receivable                                                                  |  |                             | 576     |   |                        |   | (2,734  | )
|Inventory                                                                            |  |                             | (2,885  | ) |                        |   | 1,411   |  
|Other assets                                                                         |  |                             | 253     |   |                        |   | (1,372  | )
|Accounts payable and accrued expenses                                                |  |                             | 1,497   |   |                        |   | (4,402  | )
|Restructuring reserve                                                                |  |                             | (258    | ) |                        |   | (801    | )
|Deferred revenue                                                                     |  |                             | 82      |   |                        |   | (203    | )
|                                                                                     |  |                             |         |   |                        |   |         |  
|Net cash used in operating activities                                                |  |                             | (15,689 | ) |                        |   | (20,748 | )
|                                                                                     |  |                             |         |   |                        |   |         |  
|Investing activities:                                                                |  |                             |         |   |                        |   |         |  
|Purchases of short-term investments                                                  |  |                             |        |   |                        |   | (84,620 | )
|Sales and maturities of short-term investments                                       |  |                             |        |   |                        |   | 85,684  |  
|Purchases of property, plant and equipment, net                                      |  |                             | (1,794  | ) |                        |   | (21,972 | )
|Restricted cash                                                                      |  |                             | (360    | ) |                        |   |        |  
|                                                                                     |  |                             |         |   |                        |   |         |  
|Net cash used in investing activities                                                |  |                             | (2,154  | ) |                        |   | (20,908 | )
|                                                                                     |  |                             |         |   |                        |   |         |  
|Financing activities:                                                                |  |                             |         |   |                        |   |         |  
|Proceeds from issuance of convertible senior notes, net of issuance costs            |  |                             |        |   |                        |   | 50,829  |  
|Net cash paid for convertible hedge transaction                                      |  |                             |        |   |                        |   | (6,194  | )
|Make-whole payments on 2008 Notes                                                  |  |                             | (122    | ) |                        |   | (289    | )
|Principal payments on debt obligations                                               |  |                             | (396    | ) |                        |   | (828    | )
|Proceeds from sale of common stock                                                   |  |                             | 265     |   |                        |   | 862     |  
|Distributions from Galaxy Biofuels LLC                                               |  |                             | 26,500  |   |                        |   |        |  
|                                                                                     |  |                             |         |   |                        |   |         |  
|Net cash provided by financing activities                                            |  |                             | 26,247  |   |                        |   | 44,380  |  
|                                                                                     |  |                             |         |   |                        |   |         |  
|Net increase in cash and cash equivalents                                            |  |                             | 8,404   |   |                        |   | 2,724   |  
|Cash and cash equivalents at beginning of period                                     |  |                             | 7,458   |   |                        |   | 48,743  |  
|                                                                                     |  |                             |         |   |                        |   |         |  
|Cash and cash equivalents at end of period                                           |  | $                           | 15,862  |   |                        | $ | 51,467  |  
|                                                                                     |  |                             |         |   |                        |   |         |  
|Supplemental disclosure of cash flow information:                                    |  |                             |         |   |                        |   |         |  
|Interest paid                                                                        |  | $                           | 10      |   |                        | $ | 529     |  
|                                                                                     |  |                             |         |   |                        |   |         |  
|Conversion of convertible senior notes into common stock                             |  | $                           | 11,050  |   |                        | $ | 900     |  
|                                                                                     |  |                             |         |   |                        |   |         |  

See accompanying notes to condensed consolidated financial statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Summary of
Significant Accounting Policies

The Company

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

Recent Developments

As more fully described
in Note 4, on February 18, 2009, the Company and BP announced the second phase of the Companys strategic partnership through the formation of a joint venture to develop and commercialize cellulosic ethanol from non-food feedstocks.

As more fully described in Note 2,the conversion price on the Companys 2008 Notes re-set on February 27, 2009.
Following the reset, a number of holders of the 2008 Notes have converted some or all of their 2008 Notes, in most cases resulting in share issuances for the conversion along with the related make-whole payments, as well as, in limited
instances, cash payments for the make-whole payment.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, which are necessary for a fair presentation of the results of the interim periods presented, have been included. The results of operations for the interim periods are not necessarily indicative of results to
be expected for any other interim period or for the year as a whole. These unaudited condensed consolidated financial statements and footnotes thereto should be read in conjunction with the audited financial statements and footnotes thereto
contained in the Companys Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2008 filed with the Securities and Exchange Commission (SEC) on March 16, 2009 and April 30, 2009.

The Company has a working capital deficit of $11.6 million and an accumulated deficit of $610.2 million as of March 31, 2009. Based on the
Companys operating plan, which includes payments to be received by the Company or its consolidated entities from BP relating to the first and second phases of the strategic partnership, its existing working capital may not be sufficient to
meet the cash requirements to fund the Companys planned operating expenses, capital expenditures, potential payments under the 2008 Notes, and working capital requirements through December 31, 2009 without additional sources of cash
and/or the deferral, reduction or elimination of significant planned expenditures.

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

The Company plans to address the expected
shortfall of working capital by generating additional financing through a combination of corporate partnerships and collaborations, federal, state and local grant funding, selling and financing of assets, incremental product sales, and if necessary
and available, the sale of debt or equity securities. If the Company is unsuccessful in raising additional capital from any of these sources, it will defer, reduce, or eliminate certain planned expenditures. The Company will continue to consider
other financing alternatives. There can be no assurance that the Company will be able to obtain any sources of financing on acceptable terms, or at all.

If the Company cannot obtain sufficient additional financing in the short-term, it may be forced to restructure or significantly curtail its operations, file for bankruptcy or cease operations. The condensed
consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be forced to take
any such actions.



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Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including Verenium Biofuels Corporation (formerly Celunol Corp.), as well as Galaxy Biofuels LLC
(Galaxy), and Highlands Ethanol LLC (Highlands) both determined to be variable interest entities of which the Company is the primary beneficiary as defined by Financial Interpretation 46R Consolidation of Variable
Interest Entities (FIN 46R). All intercompany accounts have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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, the Company evaluates these estimates, including those related to revenue recognition,
long-lived assets, accrued liabilities, convertible senior notes and income taxes. These estimates are based on historical experience, on 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.

Adopted Accounting Pronouncements

On January 1, 2009, the Company adopted Financial Accounting Standards Board (FASB) Staff Position (FSP) Accounting Principles Board Opinions (APB) 14-1, Accounting for
Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)(APB 14-1), which clarifies the accounting for convertible debt instruments. The adoption of APB 14-1 affects the accounting
for our 8% Senior Convertible Notes issued in February 2008 and due April 1, 2012 (2008 Notes). APB 14-1 requires the Company to account separately for the liability and equity components of the convertible debt in a manner that
reflects the Companys nonconvertible debt (unsecured debt) borrowing rate when interest expense is recognized. APB 14-1 requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in our Condensed Consolidated Statement of Operations.

Once
adopted, APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. The following table sets forth the effect of the retrospective application of APB 14-1 on certain previously reported line
items (in thousands, except per share data):

Consolidated Statements of Operations:



|                                     |  |                                           |         |   |                  |   |     |             |  |   |         |  
|------------------------------------ |  | ----------------------------------------- | ------- | - | ---------------- | - | --- | ----------- |  | - | ------- | -
|                                     |  | For the Three Months Ended March 31, 2008 |        
|                                     |  | OriginallyReported                        |         |   | Effect of Change |   |     | As Adjusted | 
|Interest expense (1)                 |  | $                                         | (2,433  | ) |                  | $ | 357 |             |  | $ | (2,076  | )
|Loss on debt extinguishment (2)      |  |                                           |        |   |                  |   | (48 | )           |  |   | (48     | )
|Net loss                             |  |                                           | (23,342 | ) |                  |   | 225 |             |  |   | (23,117 | )
|Basic and diluted net loss per share |  |                                           | (0.38   | ) |                  |   |    |             |  |   | (0.38   | )



|(1) | This adjustment includes only the non-cash interest expense.
|--- | ------------------------------------------------------------



|(2) | Recognition of loss upon conversion of $0.9 million of principal during the three months ended March 31, 2008. Loss on debt extinguishment, under APB 14-1, is accounted for as
the difference between the fair value of the debt liability and the carrying value on the conversion date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidated
Balance Sheet:



|                                                             |  |                    |          |   |                  |   |         |             |  |   |          |  
|------------------------------------------------------------ |  | ------------------ | -------- | - | ---------------- | - | ------- | ----------- |  | - | -------- | -
|                                                             |  | December 31, 2008  |         
|                                                             |  | OriginallyReported |          |   | Effect of Change |   |         | As Adjusted | 
|Property, plant and equipment, net (3)                       |  | $                  | 115,711  |   |                  | $ | 1,560   |             |  | $ | 117,271  |  
|Debt issuance costs and other assets (4)                     |  |                    | 6,688    |   |                  |   | (1,418  | )           |  |   | 5,270    |  
|Convertible senior notes, at par value, net of discounts (5) |  |                    | 129,092  |   |                  |   | 1,299   |             |  |   | 130,391  |  
|Additional paid-in capital (6)                               |  |                    | 583,958  |   |                  |   | (10,157 | )           |  |   | 573,801  |  
|Accumulated deficit (7)                                      |  |                    | (622,613 | ) |                  |   | 9,052   |             |  |   | (613,561 | )



|(3) | Represents increase in capitalized interest for the demonstration plant as a result of the increase in the effective interest rate of the 2008 Notes upon the adoption of APB 14-1.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents the reclassification of debt issuance costs of $2.1 million related to the equity component (conversion option) to additional paid-in capital in stockholders
equity, partially offset by a decrease in amortization and write-off of debt discount to interest expense upon conversions aggregating approximately $12.1 million in face value due to lower issuance costs related to the debt component.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) | Represents the increase in carrying value of the 2008 Notes to reflect the fair value of the debt liability at issuance.
|--- | ------------------------------------------------------------------------------------------------------------------------



|(6) | Represents the adjustment to record the equity component debt discount, offset by the repurchase of the equity component upon conversions and issuance costs related to the equity
component.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Represents the decrease in non-cash interest expense due to the change in accounting for conversions under APB 14-1. During 2008, in accordance with Emerging Issues Task Force
(EITF) 00-27, Application of Issue 98-5 to certain Convertible Instruments (EITF 00-27), unamortized debt discounts and debt issuance costs upon conversion were written off to interest expense. Under APB 14-1
conversions are accounted for as gains or losses on debt extinguishment which is accounted for as the difference between the fair value of the debt liability and the carrying value on conversion (principal less unamortized discounts and debt
issuance costs).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, on January 1, 2009, the Company adopted EITF 07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock(EITF 07-5). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instruments contingent exercise and settlement provisions. The adoption of this pronouncement required the Company to perform additional analyses on both its freestanding equity
derivatives and embedded equity derivative features. The adoption of EITF 07-05 affected the Companys accounting for the 2008 Notes conversion rights resulting in the Company recording a derivative liability of $13.1 million representing the
fair value of the conversion rights as of January 1, 2009. The recording of the derivative liability resulted in the reclassification of the equity component included in stockholders equity recorded from the adoption of APB 14-1. EITF
07-5 requires the Company to recognize the cumulative effect of the change in accounting principle as an adjustment to the opening balance of retained earnings.

The cumulative adjustment to accumulated deficit related to our 2008 Notes was $5.4 million which represents the gains on remeasurement that would have been recognized if the guidance in EITF 07-5 had been applied
from the issuance date on February 27, 2008.

Long-Lived Assets

Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not
recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

Derivative Financial Instruments

The Companys 2008 Notes (See Note 2) have been accounted for in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and EITF No. 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially settled in a Companys own Stock (EITF 00-19), EITF 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own
Stock(EITF 07-5), and SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150).

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



8



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##### Table of Contents

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (SFAS 157) which defines fair value, establishes a framework for measuring fair value and expands
the disclosure requirements regarding fair value measurements. SFAS 157 was effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities as well as for non-financial assets and liabilities that are
recognized or disclosed at fair value on a recurring basis in the financial statements. In accordance with FSP No. 157-2,Effective Date of FASB Statement No. 157 (FSP 157-2), for all other non-financial assets and
liabilities, SFAS 157 was effective for fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not
Active (FSP 157-3), that clarifies the application of SFAS 157 for financial assets in a market that is not active and addresses key considerations in determining the fair value of a financial asset when the market for that financial
asset is not active.

On January 1, 2009, in accordance with FSP 157-2, the Company adopted the provisions of SFAS 157 on a
prospective basis for its non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis. SFAS 157 requires that the Company determine the fair value of financial and non-financial assets and liabilities
using the fair value hierarchy established in SFAS 157 and describes three levels of inputs that may be used to measure fair value, as follows:

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

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

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

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

The adoption of SFAS 157 for the Companys
non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis had no effect on consolidated net income for the three months ended March 31, 2009.

The following table summarizes, for each major category of assets or liabilities, the respective fair value and the classification by level of input
within the fair value hierarchy defined in SFAS 157 (in thousands):



|                                              |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      
|--------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- | ----- | - | - |  | - | ----- |  | - | -----
|                                              |  | March 31, 2009 |        | December 31, 2008
|                                              |  | Level 1        |        | Level 2           |   | Level 3 |  | Total |       | Level 1 |   | Level 2 |  | Level 3 |       | Total
|Assets:                                       |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      
|Cash equivalents (1)                          |  | $              | 15,862 |                   | $ |        |  | $     |      |         | $ | 15,862  |  | $       | 7,458 |       | $ |  |  | $ |      |  | $ | 7,458
|Derivative  convertible hedge, net (2)       |  |                |       |                   |   |        |  |       | 3     |         |   | 3       |  |         |      |       |   |  |  |   | 163   |  |   | 163  
|                                              |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      
|                                              |  | $              | 15,862 |                   | $ |        |  | $     | 3     |         | $ | 15,865  |  | $       | 7,458 |       | $ |  |  | $ | 163   |  | $ | 7,621
|                                              |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      
|Liabilities:                                  |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      
|Derivative  warrants (3)                     |  | $              |       |                   | $ |        |  | $     | 18    |         | $ | 18      |  | $       |      |       | $ |  |  | $ | 359   |  | $ | 359  
|Derivative - compound embedded derivative (4) |  |                |       |                   |   |        |  |       | 5,283 |         |   | 5,283   |  |         |      |       |   |  |  |   | 7,769 |  |   | 7,769
|                                              |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      
|                                              |  | $              |       |                   | $ |        |  | $     | 5,301 |         | $ | 5,301   |  | $       |      |       | $ |  |  | $ | 8,128 |  | $ | 8,128
|                                              |  |                |        |                   |   |         |  |       |       |         |   |         |  |         |       |       |   |   |  |   |       |  |   |      



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



|(2) | Represents the net fair value of the purchased call option and written call option entered into in connection with the issuance of the Companys 2008 Notes (See Note 2).
Classified as a net asset, using significant unobservable inputs (Level 3).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) | Represents warrants issued in conjunction with the Companys 2008 Notes (See Note 2). Classified as a liability, using significant unobservable inputs (Level 3).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Represents the compound embedded derivative included in the Companys 2008 Notes (See Note 2). The make-whole provision included in the compound embedded
derivative provides that, upon any noteholders conversion of the 2008 Notes for common stock, the Company is obligated to pay such holder an amount in cash or, subject to the satisfaction or waiver of certain conditions, shares of common stock
equal in value to the interest foregone over the life of the 2008 Notes as a result of such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate, and, if applicable,
valuing the shares of stock at a 5% discount to the applicable stock price at the time of conversion. The compound embedded derivative includes, among other rights, the noteholders right to receive make-whole amounts. The
Companys lattice valuation model assumes the noteholders exercise patterns will follow risk-neutral conversion behavior throughout the term of the instrument consistent with maximizing the expected present value of the 2008
Notes. Because the maximizing condition reflects the expected present value of the 2008 Notes as a whole and not the make-whole amount, the fair value of the compound embedded derivative does not reflect the maximum potential obligation
due under the make-whole provision. As such, the resulting $5.3 million fair value of the compound embedded derivative as of March 31, 2009 is lower than the potential $12.5 million make-whole obligation if all of
the outstanding 2008 Notes as of March 31, 2009 converted at that time. The compound embedded derivative is included in current liabilities on the accompanying Condensed Consolidated Balance Sheet.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
from December 31, 2008 to March 31, 2009 (in thousands):



|                                                  |  |                              |      |   |                                                  |   |         |                                              |  |   |      |  
|------------------------------------------------- |  | ---------------------------- | ---- | - | ------------------------------------------------ | - | ------- | -------------------------------------------- |  | - | ---- | -
|                                                  |  | DerivativeLiability-Warrants |      |   | DerivativeLiability -Compound EmbeddedDerivative |   |         | DerivativeAsset ConvertibleHedgeTransaction | 
|Balance at January 1, 2009                        |  | $                            | 359  |   |                                                  | $ | 7,769   |                                              |  | $ | 163  |  
|Adjustment to fair value included in earnings (1) |  |                              | (341 | ) |                                                  |   | (13,128 | )                                            |  |   | (160 | )
|Other adjustments (2)                             |  |                              |     |   |                                                  |   | 10,642  |                                              |  |   |     |  
|                                                  |  |                              |      |   |                                                  |   |         |                                              |  |   |      |  
|Balance at March 31, 2009                         |  | $                            | 18   |   |                                                  | $ | 5,283   |                                              |  | $ | 3    |  
|                                                  |  |                              |      |   |                                                  |   |         |                                              |  |   |      |  



|(1) | The derivative warrants, compound embedded derivative and convertible hedge transaction are revalued at the end of each reporting period and the resulting difference is included in
the results of operations. For the three months ended March 31, 2009, the net adjustment to fair value resulted in a gain of $13.3 million and is included in gain (loss) on net change in fair value of derivative assets and
liabilities on the accompanying Condensed Consolidated Statement of Operations (See Note 2).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Represents increase in derivative liability of $13.1 million related to the adoption of EITF 07-5 on January 1, 2009, which required the 2008 Notes conversion rights to be
recorded as a derivative liability, partially offset by make-whole payments related to the conversion of $10.1 million in face value of the 2008 Notes. (See Note 2)
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue Recognition

The Company recognizes
revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) 104, Revenue Recognition (SAB 104), EITF 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables (EITF 00-21) and EITF 99-19, Gross versus Net Presentation of Revenue (EITF 99-19).

Under SAB 104, revenue is recognized when the following criteria have been met: i) persuasive evidence of an arrangement exists; ii) services have been rendered or product has been delivered; iii) price to the
customer is fixed and determinable; and iv) collection of the underlying receivable is reasonably assured.

The Company has contracted with
Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme. Under EITF 99-19, revenue manufactured for the Company by Genencor is recognized on a net basis equal to the net profit share received from Danisco, as all the
following indicators of reporting net are met: i) the third party is the obligor; ii) amount earned is fixed; iii) third part maintains credit risk, as compared to the full value of the manufacturing costs plus profit share the Company currently
recognizes for Phyzyme it manufactures.

Billings to customers or payments received from customers are included in deferred revenue on the
balance sheet until all revenue recognition criteria are met. As of March 31, 2009, the Company had $3.2 million in deferred revenue, of which $3.0 million was related to funding from collaborative partners and $0.2 million was related to
product sales.

Product Revenue

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



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

Collaborative Revenue

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

The
Company recognizes fees received to initiate research projects over the life of the project. The Company recognizes fees received for exclusivity in a field over the period of exclusivity.

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

Grant Revenue

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

Revenue Arrangements with Multiple Deliverables

The Company sometimes enters into revenue arrangements that contain multiple deliverables in accordance with EITF 00-21. This issue addresses the timing
and method of revenue recognition for revenue arrangements that include the delivery of more than one product or service. In these cases, the Company recognizes revenue from each element of the arrangement as long as separate value for each element
can be determined, the Company has completed its obligation to deliver or perform on that element, and collection of the resulting receivable is reasonably assured.

Variable Interest Entities

The Company has implemented the provisions of FIN 46R, which
addresses consolidation by business enterprises of variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or
(2) in which the equity investors lack an essential characteristic of a controlling financial interest.

As more fully described in
Note 4, the Company and BP have entered into a strategic collaboration which includes two special purpose entities, Galaxy and Highlands, both of which are jointly owned by BP and the Company.

The Company has determined, pursuant to FIN 46R, that both Galaxy and Highlands qualify as variable interest entities and that Verenium is the primary
beneficiary of both entities. Because the Company is the primary beneficiary, Galaxy and Highlands are therefore subject to consolidation by the Company. As a result, BPs capital contributions are recorded as Noncontrolling interests in
consolidated entities on the Companys Condensed Consolidated Balance Sheet. The Company consolidates the operating results of Galaxy and Highlands, and records an adjustment to the Noncontrolling interests in consolidated entities for
BPs share of profits and/or losses in these entities.

Computation of Net Income (Loss) per Share



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The Company computes basic and diluted net income (loss) per share in accordance with SFAS No. 128,
Earnings per Share (SFAS 128). Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The Company had 0.2 million
and 0.5 million unvested restricted shares outstanding as of March 31, 2009 and 2008. Additionally, pursuant to the merger agreement with Celunol, 1.5 million shares of the Companys common stock issued to former Celunol stockholders were
placed in an escrow account until June 20, 2008 to satisfy the indemnification obligation of Celunol for breaches of the representations and warranties contained in the merger agreement or any legal proceedings related thereto. On June 20, 2008,
these shares were released to the former Celunol stockholders.

For purposes of the computation of net income (loss) per share, the
unvested restricted shares and the shares held in escrow are considered contingently returnable shares under SFAS 128 and are not considered outstanding common shares for purposes of computing net income (loss) per share until all necessary
conditions are met that no longer cause the shares to be contingently returnable. The impact of these contingently returnable shares on weighted average shares outstanding has been excluded for purposes of computing net income (loss) per share.

Diluted net income per share is based upon the weighted average number of common and common equivalent shares outstanding during the
period. Common equivalent shares related to stock options, restricted stock and warrants are calculated using the treasury stock method. Common stock equivalents from stock options, restricted stock and warrants of approximately 31.9 million were
excluded from the calculation of net income per share for the three months ended March 31, 2009, because the effect would be antidilutive. In addition, common stock equivalents from shares underlying the Companys convertible senior notes of
41.7 million were excluded from the net income per share for the three months ended March 31, 2009 because the effect would be antidilutive.

Computation for net income (loss) per share for the three months ended March 31, 2009 was as follows (in thousands):



|                                                   |  |                              |        |      |   |         |  
|-------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------- | -
|                                                   |  | Three Months Ended March 31, |       
|                                                   |  | 2009                         |        | 2008 |  
|Numerator                                          |  |                              |        |      |   |         |  
|Net Income (loss)                                  |  | $                            | 3,323  |      | $ | (23,117 | )
|                                                   |  |                             
|Denominator                                        |  |                              |        |      |   |         |  
|Basic weighted average common shares outstanding   |  |                              | 70,295 |      |   | 61,206  |  
|Dilutive effect of stock options                   |  |                              | 101    |      |   |        |  
|                                                   |  |                              |        |      |   |         |  
|Diluted weighted average common shares outstanding |  |                              | 70,396 |      |   | 61,206  |  
|                                                   |  |                              |        |      |   |         |  
|Basic net income (loss) per common share           |  | $                            | 0.05   |      | $ | (0.38   | )
|                                                   |  |                              |        |      |   |         |  
|Diluted net income (loss) per common share         |  | $                            | 0.05   |      | $ | (0.38   | )
|                                                   |  |                              |        |      |   |         |  

2. Convertible Debt

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



|                                                                                                                                                       |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                       |  | March 31,2009 |         |   | December31, 2008 |  
|5.5% Convertible Senior Notes, issued in 2007                                                                                                          |  | $             | 99,500  |   |                  | $ | 100,500 |  
|8% Senior Convertible Notes, issued in 2008 (principal face amount of $48.8 million as of March 31, 2009 and $58.9 million as of December 31,
2008)    |  |               | 31,230  |   |                  |   | 38,019  |  
|                                                                                                                                                       |  |               |         |   |                  |   |         |  
|Total carrying value                                                                                                                                   |  |               | 130,730 |   |                  |   | 138,519 |  
|Less: Current portion (representing the fair value of the compound embedded derivative and warrants being accounted for as derivative
liabilities) (1) |  |               | (5,301  | ) |                  |   | (8,128  | )
|                                                                                                                                                       |  |               |         |   |                  |   |         |  
|Carrying value, non current portion                                                                                                                    |  | $             | 125,429 |   |                  | $ | 130,391 |  
|                                                                                                                                                       |  |               |         |   |                  |   |         |  



|(1) | As more fully described below under the sub-heading 2008 Convertible Notesthe Companys total potential obligation under the make-whole
provisions of the 2008 Notes as of March 31, 2009 was $12.5 million, assuming that all holders of the 2008 Notes converted at that time. All or a portion of this make-whole payment could be paid in common shares, subject to certain
limitations as described below.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2007 Convertible Notes

In March and April 2007, the Company completed an offering of $120 million aggregate principal amount of 5.50% Convertible Senior Notes due April 1, 2027
(the 2007 Notes) in a private placement. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the 2007 Notes and of the Verenium common stock issuable upon conversion of the
2007 Notes. As more fully described below, $18.5 million in face value of the 2007 Notes were exchanged for new debt pursuant to the Companys issuance of its 2008 Notes. As of March 31, 2009, the Company had $99.5 million in face value
outstanding under the 2007 Notes.

The 2007 Notes bear interest at 5.5% per year, payable in cash semi-annually, and are convertible at the
option of the holders at any time prior to maturity, redemption or repurchase into shares of Verenium common stock at a conversion rate of 156.5 shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain circumstances), which
represents a conversion price of $6.40 per share. The total common shares that would be issued assuming conversion of the entire $99.5 million in 2007 Notes is 15.6 million shares.

On or after April 5, 2012, the Company may, at its option, redeem the 2007 Notes, in whole or in part, for cash at redemption price equal to 100% of the
principal amount of the 2007 Notes to be redeemed plus any accrued and unpaid interest to the redemption



12



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##### Table of Contents

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

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

2008 Convertible Notes

On February 27, 2008, the Company completed a private placement of 8% Senior Convertible Notes due April 1, 2012 (the 2008 Notes) and warrants
to purchase shares of Verenium common stock. Concurrent with entering into the purchase agreement for the 2008 Notes, the Company also entered into senior notes exchange agreements with certain existing holders of the 2007 Notes pursuant to which
such noteholders exchanged approximately $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and for warrants to purchase common stock. Including the 2008
Notes issued in exchange for the 2007 Notes, the Company issued $71.0 million in aggregate principal amount of the 2008 Notes and warrants to purchase approximately 8.0 million shares of common stock. As of March 31, 2009, outstanding principal
balance on the 2008 Notes was $48.8 million.

The conversion price for the 2008 Notes is $2.13 and is also subject to full ratchet
anti-dilution protection. The 2008 Notes are subject to automatic conversion at the Companys option if the Companys closing stock price exceeds $8.18 per share over a 30-trading day period ending prior to the date the Company provides
notice of the automatic conversion to investors, the average daily trading volume of the Companys stock over that 30-trading day period equals or exceeds $3 million, and certain other conditions are met.

Periodic interest payments on the 2008 Notes are approximately $1.0 million every three months, assuming an outstanding balance of $48.8 million, and are
payable on January 1, April 1, July 1 and October 1, of each year.

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



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



| |  |  | The Company is not permitted to incur indebtedness, other than certain project financing debt or up to $15 million in principal amount of debt, provided that if the
closing sale price of the Companys common stock exceeds $8.00 per share for 30 consecutive trading days, the limit on additional indebtedness increases to $30 million and if the closing sale price of the common stock exceeds $12.00 per share
for 30 consecutive trading days, the limit on additional indebtedness increases to $50 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

The 2008 Notes contain several embedded features, which are
required to be bifurcated and accounted separately as a derivative liabilities in accordance with SFAS 133 and SFAS 150. These embedded features are described in two categories: 1) detachable warrants; and 2) a compound embedded derivative, as set
forth below.

Detachable Warrants. In connection with the 2008 Notes, the Company issued warrants to purchase up to approximately 8
million shares of the Companys common stock. The warrants are exercisable six months following initial issuance at an initial exercise price of $4.44 per share. The exercise price and the number of shares of the Companys common stock
issuable upon exercise of the warrants are subject to weighted average anti-dilution protection.



13



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##### Table of Contents

Compound embedded derivative. The compound embedded derivative includes certain features of the
2008 Notes, with its major components consisting of; 1) the base conversion rights, including the full-ratchet antidilution provisions; 2) rights upon an event of default or change in control; and, 3) the make-whole provision.

Full-ratchet antidilution protection. In the event that the Company subsequently issues options (excluding options
issued under an approved stock plan by the Board of Directors) or convertible securities at a price-per-share which is below the current conversion price of the 2008 Notes, the holders of the 2008 Notes will be entitled to full-ratchet
antidilution protection, such that the conversion price will re-set to a price-per share equal to that of the new equity issuance.

Rights upon an event of default or change in control. If the Company were to trigger an event of default, as defined, holders of the 2008 Notes may require the Company to redeem all or portion of the 2008 Notes at a premium to their
face value. In the event of a change of control, as defined, the conversion rate may be subject to adjustment, or the holders may require the Company to redeem all or a portion of the 2008 Notes at a premium to their face value.

Make-whole provision. The 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the
2008 Notes for common stock, the Company is obligated to pay such holder an amount equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on
two-year U.S. Treasury notes as the discount rate. The 2008 Notes provide that the Company may, subject to the satisfaction of certain conditions (including that the shares to be issued must be registered for resale under a registration statement
filed with the Securities and Exchange Commission), pay interest or make-whole amounts with shares of its common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion. The registration
statement that the Company filed with the Securities and Exchange Commission to register the resale of the shares issuable upon conversion of the 2008 Notes, along with interest shares and shares issuable upon exercise of the warrants, only
registers a limited number of conversion shares and interest shares, and the Companys ability to pay make-whole payments and interest payments under the 2008 Notes using shares is accordingly limited.

In addition, concurrent with the issuance of the 2008 Notes, the Company entered into a convertible hedge transaction with a counterparty, which is
intended to reduce the potential dilution upon conversion of the 2008 Notes. The convertible hedge transaction is composed of two separate call options. Under the first call option, on April 1, 2012 (or earlier upon conversion of the 2008 Notes),
the Company is entitled to purchase 13,288,509 shares of the Companys common stock from the counterparty at a price per share equal to the initial conversion price of $4.09 (or a proportion of such number of shares based on the proportion of
the 2008 Notes being converted). Under the second call option, on three exercise dates staggered in six month intervals beginning on October 1, 2013, the counterparty is entitled to purchase an aggregate of 13,288,509 shares of the Companys
common stock at a price per share of $5.16. The cash cost of the convertible hedge transaction was approximately $6.2 million. The convertible hedge transaction must also be separately valued and accounted for as a derivative under SFAS 133.

Allocation of Proceeds to 2008 Notes

As previously described in Note 1, the Company adopted the provisions of APB 14-1 on January 1, 2009, which required retroactive restatement of the financial statements related to the 2008 Notes at inception.
This change in accounting treatment impacted the initial allocation of debt proceeds. The following table sets forth the initial allocation of proceeds from the 2008 Notes among the underlying debt instrument, conversion rights, and the detachable
warrants, as originally reported, and as adjusted to reflect the impact of APB 14-1 (in thousands):



|                                                    |  |                      |        |                               |   |       
|--------------------------------------------------- |  | -------------------- | ------ | ----------------------------- | - | ------
|                                                    |  | AsOriginallyReported |        | AsAdjustedforAdoptionofAPB-14
|Debt host instrument / fair value of debt liability |  | $                    | 35,165 |                               | $ | 31,586
|Fair value of compound embedded derivative          |  |                      | 31,135 |                               |   | 31,135
|Fair value of detachable warrants                   |  |                      | 4,700  |                               |   | 4,700 
|Equity component                                    |  |                      |       |                               |   | 3,579 
|                                                    |  |                      |        |                               |   |       
|Face value of 2008 Notes                            |  | $                    | 71,000 |                               | $ | 71,000
|                                                    |  |                      |        |                               |   |       



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##### Table of Contents

Valuation of Debt Liability and Embedded Features

Debt Liability and Equity Component

Prior to the adoption of APB 14-1, the value assigned to the debt host was based on the residual value of the debt proceeds after allocating the fair value of the compound embedded derivative and detachable warrants. As a result of the
adoption of APB 14-1, as described under Note 1, the Company was required to separately account for the debt and equity components of the 2008 Notes in a manner that reflects the Companys nonconvertible debt (unsecured debt) borrowing
rate.

APB 14-1 requires that the carrying amount of the liability component be estimated by measuring the fair value of a similar
liability that does not have an associated conversion feature. As a result, the Company determined that its effective interest rate was 32.6% and, in the absence of comparable market data, determined that, given the features of the 2008 Notes, this
derived effective interest rate was a fair approximation of a market rate of interest for a similar instrument. As a result, the 32.6% rate was applied to the 2008 Notes and coupon interest to calculate the fair value of the liability component. The
difference between the cash proceeds associated with the convertible debt and the estimated fair value of the liability component is recorded as an equity component.

Detachable Warrants

At inception, as originally reported and as adjusted for the adoption of APB
14-1, the fair value of the detachable warrants of $4.7 million were separated from the debt liability and recorded as derivative liabilities which resulted in a reduction of the initial notional carrying amount of the 2008 Notes, and as unamortized
discount, which is being accreted over the term of the 2008 Notes using the effective interest method.

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

Compound Embedded
Derivative

At inception, as originally reported and as adjusted for the adoption of APB 14-1, the fair value of the compound embedded
derivative of $31.1 million was separated from the debt liability and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the 2008 Notes, and as unamortized discount, which is being accreted
over the term of the 2008 Notes using the effective interest method.

The derivative liability arising from the compound embedded
derivative could require cash settlement within one year of any balance sheet date under certain conditions outside of the Companys control, including, but not limited to, payments in connection with a conversion at the option of the
noteholder. Furthermore, the amount of the make-whole payment upon conversion is not indexed to the Companys stock, and therefore would not qualify as an equity instrument under EITF 00-19. Based upon this, the Company initially
recorded a derivative liability related to the holders rights to a make-whole payment upon conversion, the portion of the embedded conversion rights settlable in cash due to the certain Nasdaq limits, and certain other rights. The
Company recorded this compound embedded derivative liability as a component of the current portion of convertible debt on its condensed consolidated balance sheet. On June 4, 2008, in connection with shareholder approval of issuance of shares in
excess of certain Nasdaq limits that required shareholder approval before shares in excess of such limits could be issued, $14.7 million of the compound embedded derivative value was reclassified into stockholders equity.

However, on January 1, 2009, upon adoption of EITF 07-5, as described under Note 1, the entire conversion rights were required to be accounted for
as a derivative liability. As a result, the fair value of the conversion rights on January 1, 2009 of $13.1 million was reclassified from stockholders equity into current liabilities. The compound embedded derivative liability, consisting of
the make-whole and the conversion rights, will be marked-to-market at the end of each reporting period, with any change in value reported as a non-operating expense or income in the consolidated statement of operations. The fair value of
the compound embedded derivative was determined using a lattice valuation methodology.

The Companys lattice valuation
model assumes the noteholders exercise patterns will follow risk-neutral conversion behavior throughout the term of the instrument consistent with maximizing the expected present value of the 2008 Notes. Because the maximizing condition
reflects the expected present value of the 2008 Notes as a whole and not the make-whole amount, the fair value of the compound embedded derivative does not reflect the maximum potential obligation due under the make-whole
provision. As such, the resulting fair value of the compound embedded derivative as of March 31, 2009 is lower than the potential $12.5 million make-whole obligation if all of the outstanding 2008 Notes as of March 31, 2009 converted on
that date.



15



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##### Table of Contents

Valuation of Convertible Hedge Transaction

The Company recorded a derivative asset of $6.2 million, representing the net cash paid by the Company to the counterparty of the two separate call
options that comprise the convertible hedge transaction. The convertible hedge transaction does not qualify for equity classification under EITF 00-19, as there are potential circumstances, though remote, where cash settlement may be required. As
such, the net fair value of the convertible hedge transaction has been reported as a noncurrent derivative asset on the Condensed Consolidated Balance Sheet and is marked-to-market at the end of each reporting period, with any change in value
reported as a non- operating expense or income in the Condensed Consolidated Statement of Operations. The Company has determined that the initial cash paid for each of the two separate call options that comprise the convertible hedge transaction
approximated fair value. The fair values of the two call options subsequent to the initial issuance date have been determined using the Black-Scholes Merton methodology.

Impact of Fair Value Remeasurements

The fair value of the compound embedded derivative, warrants,
and the two separate call options that comprise the convertible hedge transaction are recorded as a derivative asset or liability and marked-to-market each balance sheet date. The change in fair value is recorded in the statement of operations as
non-operating expense or income. Upon conversion or exercise of a derivative instrument, the instrument will be marked to fair value at the conversion date and then that fair value will be reclassified to equity if settled in the Company common
stock .

The fair value of the compound embedded derivative, detachable warrants and convertible hedge transaction are primarily affected
by the Companys stock price, but are also affected by the Companys stock price volatility, expected life, interest rates and the passage of time as it relates to the make-whole amount. For the three months ended March 31,
2009, the net change in fair value measurements impacting all derivative assets and liabilities resulted in a gain of $13.3 million.

Loss on Exchange of Notes

In connection with the issuance of the 2008 Notes, the Company exchanged $18.5 million in
aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and related warrants. Pursuant to EITF 96-19, Debtors Accounting for a Modification or Exchange of Debt
Instruments (EITF 96-19), an exchange of debt instruments with substantially different terms is a debt extinguishment and requires the recognition of a gain or loss on exchange. The Company determined that the exchange
qualified as a debt extinguishment under EITF 96-19, and recorded a loss on the exchange of $3.6 million, equal to the difference between the carrying value of the 2007 Notes and the fair value of the 2008 Notes and warrants issued.

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

Interest Expense on 2008 Notes

The Company recorded interest expense related to the 2008 Notes, as follows (in thousands):



|                                             |  |                                    |       |      |   |    
|-------------------------------------------- |  | ---------------------------------- | ----- | ---- | - | ---
|                                             |  | For the ThreeMonths EndedMarch 31,
|                                             |  | 2009                               |       | 2008
|8% coupon interest, payable in cash          |  | $                                  | 1,102 |      | $ | 530
|Non-cash accretion of debt discount          |  |                                    | 1,285 |      |   | 417
|Non-cash amortization of debt issuance costs |  |                                    | 109   |      |   | 44 
|                                             |  |                                    |       |      |   |    
|                                             |  | $                                  | 2,496 |      | $ | 991
|                                             |  |                                    |       |      |   |    

The initial debt discount, after the adoption of APB 14-1, relates to the compound embedded
derivative, detachable warrants, and the equity component related to the conversion rights not included in the compound embedded derivative at issuance. The unamortized value of the debt discount is included in the carrying value of the 2008 Notes
on the accompanying Condensed Consolidated Balance Sheet and is being amortized into interest expense over the term of the 2008 Notes, or approximately 4 years.

Conversion of 2008 Notes

Since inception through March 31, 2009, holders of the 2008 Notes have
converted principal in the amount of $22.1 million into approximately 11.9 million shares of the Companys common stock, including approximately 4.6 million shares to satisfy a portion of the related make-whole obligations.

During the three months ended March 31, 2009, in accordance with SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities  A replacement of FASB Statement 125 (SFAS 140), the Company recorded a gain on conversion of $3.6 million, calculated as the difference between the carrying value of the converted
2008 Notes and the fair value of the shares of common stock delivered to the noteholders upon conversion. The carrying value of the converted 2008 Notes was equal to the $10.1 million of principal less the unamortized debt discount and issuance
costs, which totaled $7.5 million, as of the conversion date. During the quarter, the Company issued a total of 8.2 million shares with a total market value as of the dates of conversion of $3.9 million to settle the 2008 Notes and
make-whole payments.

Between April 1, 2009 and May 8, 2009, holders of the 2008 Notes converted an additional principal amount
of $17.6 million into approximately 20.4 million shares of the Companys common stock, including approximately 12.1 million shares to satisfy a portion of the related make-whole obligations. Cash payments to satisfy
make-whole obligations during this time were not material.

3. Balance Sheet Details

Inventory

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



|                 |  |               |       |   |                  |   |       |  
|---------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                 |  | March 31,2009 |       |   | December 31,2008 |  
|Raw materials    |  | $             | 474   |   |                  | $ | 607   |  
|Work in progress |  |               | 2,168 |   |                  |   | 241   |  
|Finished goods   |  |               | 3,125 |   |                  |   | 1,824 |  
|                 |  |               |       |   |                  |   |       |  
|                 |  |               | 5,767 |   |                  |   | 2,672 |  
|Reserve          |  |               | (450  | ) |                  |   | (240  | )
|                 |  |               |       |   |                  |   |       |  
|Net inventory    |  | $             | 5,317 |   |                  | $ | 2,432 |  
|                 |  |               |       |   |                  |   |       |  

The Company reviews inventory periodically and reduces the carrying value of items considered to
be slow moving or obsolete to their estimated net realizable value. The Company considers several factors in estimating the net realizable value, including shelf life of raw materials, demand for its enzyme products and historical write-offs.

Property and equipment

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

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



|                                                |  |               |         |   |                  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | March 31,2009 |         |   | December 31,2008 |  
|Laboratory, machinery and equipment             |  | $             | 50,183  |   |                  | $ | 50,477  |  
|Computer equipment                              |  |               | 12,835  |   |                  |   | 12,838  |  
|Furniture and fixtures                          |  |               | 6,325   |   |                  |   | 6,325   |  
|Leasehold improvements                          |  |               | 9,236   |   |                  |   | 9,194   |  
|Land                                            |  |               | 1,560   |   |                  |   | 1,560   |  
|Pilot facility                                  |  |               | 18,913  |   |                  |   | 18,904  |  
|Demonstration facility                          |  |               | 93,037  |   |                  |   | 90,996  |  
|                                                |  |               |         |   |                  |   |         |  
|Property and equipment, gross                   |  |               | 192,089 |   |                  |   | 190,294 |  
|Less: Accumulated depreciation and amortization |  |               | (75,613 | ) |                  |   | (73,022 | )
|                                                |  |               |         |   |                  |   |         |  
|Property and equipment, net                     |  | $             | 116,476 |   |                  | $ | 117,272 |  
|                                                |  |               |         |   |                  |   |         |  

Included in the costs of its demonstration facility as of March 31, 2009 and
December 31, 2008 is $7.8 million and $6.8 million in capitalized interest, which was determined by applying the Companys effective interest rate to the average amount of accumulated expenditures for its demonstration facility. The
demonstration plant was placed in service in February 2009, and as such, the Company ceased capitalizing interest on that date.

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



|                        |  |          
|----------------------- |  | ---------
|Laboratory equipment    |  | 3-5 years
|Computer equipment      |  | 3 years  
|Furniture and fixtures  |  | 5 years  
|Machinery and equipment |  | 3-5 years
|Office equipment        |  | 3 years  
|Software                |  | 3 years  
|Pilot facility          |  | 10 years 
|Demonstration facility  |  | 10 years 



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

Depreciation related to the pilot and demonstration facilities begins in the period that such assets are placed in service. The
pilot facility was placed in service in January 2007, and is being depreciated over a 10-year life. Subsequent modifications to the pilot facility which do not extend its useful life but meet the criteria for capitalization, are considered
immediately placed in service when incurred, and depreciated over the remainder of the pilot facilitys useful life. The demonstration facility was placed in service in February 2009. During the first quarter 2009, the demonstration facility is
being depreciated using an estimated 10-year life. The Company is in the process of performing an evaluation to determine the final useful lives for the demonstration plant and each of its components.

Accrued expenses

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



|                                  |  |               |        |                  |   |       
|--------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                  |  | March 31,2009 |        | December 31,2008
|Professional and outside services |  | $             | 2,705  |                  | $ | 2,608 
|Employee compensation             |  |               | 8,149  |                  |   | 6,050 
|Royalties                         |  |               | 537    |                  |   | 1,233 
|Other                             |  |               | 4,641  |                  |   | 3,940 
|                                  |  |               |        |                  |   |       
|                                  |  | $             | 16,032 |                  | $ | 13,831
|                                  |  |               |        |                  |   |       

4. Strategic Partnership with BP Biofuels North America LLC

Galaxy Biofuels LLC

Effective August 1,
2008, the Company entered into a Joint Development and License Agreement (JDA) with BP focused on the development and commercialization of cellulosic ethanol technologies. As part of the transaction, Galaxy Biofuels LLC, a special
purpose entity was formed, equally owned by the Company and BP. Pursuant to the JDA, the Company granted to Galaxy a worldwide, royalty-free license and sublicense to Vereniums existing background technology related to the production of
cellulosic ethanol, which will continue to be owned by Verenium. Galaxy owns new intellectual property relating to cellulosic ethanol production developed through the joint development program under the JDA and is responsible for administering the
licensing of the technology package resulting from the joint development program. Future profits and losses related to the licensing of these technologies will be shared equally by the Company and BP. The Company accounts for its investment in
Galaxy pursuant to FIN 46R, and has determined that Galaxy is subject to consolidation by Verenium.

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

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

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

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



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



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



17



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##### Table of Contents

| |  |  | Ongoing joint development fees are accounted for as a monthly expense of Galaxy.
| | - |  | --------------------------------------------------------------------------------

As a result, the Companys Condensed Consolidated Balance Sheets include a line item called Noncontrolling Interest in consolidating
entities, which reflects BPs ownership of Galaxys equity. This line item is adjusted by BPs 50% share of Galaxys profits and losses, and increased by cash distributions made by BP to Verenium on behalf of Galaxy.
BPs share of Galaxys losses is reflected in the Condensed Consolidated Statement of Operations as Loss attributed to noncontrolling interest in consolidating entities. Since inception, Galaxy has incurred approximately $40
million in losses through March 31, 2009, 50% of which have been allocated to BP. The Company anticipates Galaxy will continue to incur losses related to ongoing joint development through at least the initial 18 months of the strategic
partnership.

Highlands Ethanol LLC

On February 18, 2009, the Company announced the second phase of its strategic partnership with BP through the formation of a joint venture to focus on the commercial development of facilities for the production of cellulosic ethanol
from non-food feedstocks. The joint venture company, Highlands is owned equally by the Company and BP. Highlands will act as the commercial entity for the deployment of cellulosic ethanol technology being developed and proven under the Galaxy joint
development program. Highlands will be led and supported by a team comprised of employees from both BP and Verenium and will be governed with equal representation from both parent companies.

In return for a 50% interest in Highlands, BP agreed to pay Highlands $22.5 million in an initial cash commitment and the Company agreed to contribute
development assets related to its Highlands County, Florida development project and another commercial project site in early stages of development in the Gulf Coast region. This collaboration is intended to develop of one of the nations first
commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida and to create future opportunities for commercial implementation of cellulosic ethanol technologies.

Highlands will initially focus on developing and securing financing for a commercial-scale cellulosic ethanol facility in Highlands County, Florida and
expects to break ground on that site in 2010. The estimated construction cost for this facility, which is expected to produce 36 million gallons-per-year, is estimated to be between $250 and $300 million. Production from this plant is expected
to begin in 2012.

The Company originally formed the Highlands entity in October 2007 as a wholly-owned subsidiary of Verenium
Corporation. The entity was fully consolidated by the Company as a subsidiary for the years ended December 31, 2007 and 2008. BPs consideration was used to acquire a 50% ownership interest in the existing entity. The Company has
determined the joint venture is a variable interest entity, and that the Company is the primary beneficiary which requires consolidation of the entity. FIN 46R requires that assets and liabilities be consolidated at carrying value if the entity
is a business and if the Company retains control of the entity.

The components of the consolidation at their carrying values (in
thousands) at February 18, 2009 were as follows (in thousands):



|                     |  |            |    
|-------------------- |  | ---------- | ---
|Account Class        |  | Amount ($)
|Other current assets |  | $          | 125
|Long term assets     |  |            | 100
|Current liabilities  |  |            |   
|Equity               |  |            | 225

All intercompany amounts have been properly eliminated upon consolidation, and the noncontrolling
interest is presented in accordance with SFAS 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), on the Companys Condensed Consolidated Balance Sheet and Statement of Operations.

5. Segment Information and Concentration of Business Risk

Segment Information

The Company operates in two segments, as defined by SFAS 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), identified as biofuels and specialty enzymes. The biofuels segment is focused on developing unique technical and operational capabilities designed to enable the
production and commercialization of biofuels, in particular ethanol from cellulosic biomass. The specialty enzymes segment develops high performance enzymes for use within the alternative fuels, specialty industrial processes, and animal nutrition
and health markets to enable higher throughput, lower costs, and improved environmental outcomes.

Management assesses performance and
allocates resources based on discrete financial information for the biofuels and specialty enzymes business segments. For the biofuels segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty
enzymes segment, performance is assessed based on total revenues, product revenues, product gross margin, total operating expenses and capital expenditures. For the three months ended March 31, 2009, the specialty enzyme segment comprised 100%
of product revenues, and cost of product revenues. Operating expenses for each segment include direct and allocated



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##### Table of Contents

research and development and selling, general and administrative expenses. In managements evaluation of performance, certain corporate operating
expenses are excluded from the business segments such as: non-cash share-based compensation, restructuring charges, severance, depreciation and amortization, and other corporate expenses, which are not allocated to either business segment. In
addition, management evaluates segment performance based upon capital expenditures and other assets that are specifically identified to the business segment and excludes certain corporate assets that can be attributed to, or utilized by, both
business segments. Expenses and assets shared by the segments require the use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different
results by segment. Further, expenses allocated to each of the two segments may not be indicative of the expenses of each operating segment if such segment operated on a stand-alone basis.

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



|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | --------- |  | - | ------ | - |  | -------- | ------- | - | ---------------- | - | ------ | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                  |  | Three Months Ended March 31, 2009 |         |   | Three Months Ended March 31, 2008 |  
|                                                  |  | Biofuels                          |         |   | SpecialtyEnzymes                  |   | Corporate |  |   | Total  |   |  | Biofuels |         |   | SpecialtyEnzymes |   |        | Corporate |  |   | Total  |  
|Product revenues                                  |  | $                                 |        |   |                                   | $ | 10,569    |  | $ |       |   |  | $        | 10,569  |   |                  | $ |       |           |  | $ | 11,201 |   |  | $ |       |   |  | $ | 11,201  |  
|Collaborative and grant revenues                  |  |                                   | 2,334   |   |                                   |   | 1,488     |  |   |       |   |  |          | 3,822   |   |                  |   |       |           |  |   | 4,034  |   |  |   |       |   |  |   | 4,034   |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Total revenues                                    |  |                                   | 2,334   |   |                                   |   | 12,057    |  |   |       |   |  |          | 14,391  |   |                  |   |       |           |  |   | 15,235 |   |  |   |       |   |  |   | 15,235  |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Product gross profit                              |  |                                   |        |   |                                   |   | 4,814     |  |   |       |   |  |          | 4,814   |   |                  |   |       |           |  |   | 3,324  |   |  |   |       |   |  |   | 3,324   |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) |  |                                   | 17,880  |   |                                   |   | 4,734     |  |   | 4,373  |   |  |          | 26,987  |   |                  |   | 9,989  |           |  |   | 9,554  |   |  |   | 5,001  |   |  |   | 24,544  |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Operating income (loss)                           |  | $                                 | (15,546 | ) |                                   | $ | 1,568     |  | $ | (4,373 | ) |  | $        | (18,351 | ) |                  | $ | (9,989 | )         |  | $ | (2,196 | ) |  | $ | (5,001 | ) |  | $ | (17,186 | )
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Capital expenditures                              |  | $                                 | 1,543   |   |                                   | $ | 251       |  | $ |       |   |  | $        | 1,794   |   |                  | $ | 20,695 |           |  | $ | 484    |   |  | $ | 793    |   |  | $ | 21,972  |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  

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



|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        
|-------------------------------- |  | -------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                 |  | As of March 31, 2009
|                                 |  | Biofuels             |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant & equipment, net |  | $                    | 109,803 |                  | $ | 2,670     |  | $     | 4,003  |  | $ | 116,476
|Cash and other assets            |  |                      | 1,650   |                  |   | 22,289    |  |       | 22,522 |  |   | 46,461 
|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets        |  | $                    | 111,453 |                  | $ | 24,959    |  | $     | 26,525 |  | $ | 162,937
|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        



|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|---------------------------------- |  | ----------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                   |  | As of December 31, 2008
|                                   |  | Biofuels                |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant and equipment, net |  | $                       | 109,030 |                  | $ | 3,502     |  | $     | 4,739  |  | $ | 117,271
|Cash and other assets              |  |                         | 702     |                  |   | 21,142    |  |       | 14,508 |  |   | 36,352 
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets          |  | $                       | 109,732 |                  | $ | 24,644    |  | $     | 19,247 |  | $ | 153,623
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        

Concentrations of Business Risk

A relatively small number of customers and collaboration partners historically have accounted for a significant percentage of the Companys revenue.
Revenue from the Companys largest customer, Danisco Animal Nutrition, represented 53% and 49% of total revenue for the three months ended March 31, 2009 and 2008. For the three months ended March 31, 2008, Syngenta represented 18% of
total product revenue. The Company does not anticipate that it will continue to receive significant funding from Syngenta in the future.

Accounts receivable from these two customers comprised approximately 45% of accounts receivable at March 31, 2009 and 68% at December 31, 2008.



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



|              |  |                              |        |      |   |       
|------------- |  | ---------------------------- | ------ | ---- | - | ------
|              |  | Three Months Ended March 31,
|              |  | 2009                         |        | 2008
|North America |  | $                            | 6,626  |      | $ | 4,446 
|South America |  |                              | 2,010  |      |   | 3,805 
|Europe        |  |                              | 5,424  |      |   | 6,636 
|Asia          |  |                              | 331    |      |   | 348   
|              |  |                              |        |      |   |       
|              |  | $                            | 14,391 |      | $ | 15,235
|              |  |                              |        |      |   |       

For the three months ended March 31, 2009 and 2008, 77% and 81% of the Companys product
revenue has come from one focus area, animal nutrition and health.

The Company manufactures most of its enzyme products through a
manufacturing facility in Mexico City, owned by Fermic S.A., or Fermic. Total Fermic assets as of the three months ended March 31, 2009, totaled approximately $2.7 million.

6. Share-based Compensation

The Company recognized share-based compensation expense of $2.5 million
and $3.5 million during the three months ended March 31, 2009 and 2008. These charges had no impact on the Companys reported cash flows. Share-based compensation expense was allocated among the following expense categories (in thousands):



|                                    |  |                              |       |      |   |      
|----------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                    |  | Three Months Ended March 31,
|                                    |  | 2009                         |       | 2008
|Research and development            |  | $                            | 1,476 |      | $ | 1,324
|Selling, general and administrative |  |                              | 1,071 |      |   | 2,150
|                                    |  |                              |       |      |   |      
|                                    |  | $                            | 2,547 |      | $ | 3,474
|                                    |  |                              |       |      |   |      

As of March 31, 2009, there was $7.8 million of total unrecognized compensation expense
related to unvested share-based compensation arrangements granted under the equity incentive plans, including the impact of options and restricted shares assumed in the merger. This expense is expected to be recognized over a weighted-average period
of 2.8 years as follows (in thousands):



|                                                       |  |   |      
|------------------------------------------------------ |  | - | -----
|Fiscal Year 2009 ( April 1, 2009 to December 31, 2009) |  | $ | 2,326
|Fiscal Year 2010                                       |  |   | 1,841
|Fiscal Year 2011                                       |  |   | 1,031
|Fiscal Year 2012                                       |  |   | 530  
|Fiscal Year 2013                                       |  |   | 430  
|Thereafter                                             |  |   | 1,616
|                                                       |  |   |      
|                                                       |  | $ | 7,774
|                                                       |  |   |      

7. Restructuring Charges

In connection with the January 2006 decision to reorganize and refocus the Companys resources, management commenced several cost containment measures, including a reduction in workforce of 83 employees and the
consolidation of its facilities. Pursuant to SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities(SFAS 146),the Company recorded net charges of $12.0 million in 2006 related to these
activities. The following table sets forth the activity in the restructuring reserves through March 31, 2009 (in thousands):



|                                                    |  |   |        |  
|--------------------------------------------------- |  | - | ------ | -
|Balance at January 1, 2006                          |  | $ |       |  
|Accrued and expensed through December 31, 2008      |  |   | 11,023 |  
|Charged against accrual through December 31, 2008   |  |   | (7,964 | )
|Adjustments and revisions through December 31, 2008 |  |   | 3,033  |  
|                                                    |  |   |        |  
|Balance at January 1, 2009                          |  |   | 6,092  |  
|Charged against accrual                             |  |   | (258   | )
|Adjustments and revisions                           |  |   | 90     |  
|                                                    |  |   |        |  
|Balance at March 31, 2009                           |  | $ | 5,924  |  
|                                                    |  |   |        |  



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During the first quarter of 2006, the Company completed the employee termination activities under this
restructuring. No further payments or expenses related to employee separation are anticipated under this program. The facility consolidation costs are based on estimates, representing the discounted cash flow of lease payments (net of anticipated
sublease income) on the vacated space through its contractual lease term in 2016.

Pursuant to SFAS 146, the Company is required to
re-assess these estimates on a periodic basis. Accordingly, the Company may revise these estimates in future periods, which could give rise to additional charges or adjustments. For the three months ended March 31, 2009, the restructuring reserve
was adjusted by $90,000 representing the fair value adjustment for the quarter, for a total gross obligation of $8.7 million, net of sublease income.

All amounts are classified within selling, general and administrative expenses on the Companys Condensed Consolidated Statement of Operations.

8. Related-Party Transactions

Syngenta AG

The Company has had an ongoing research collaboration with Syngenta since 1999 and in January 2007 the Company announced a new 10-year research and
development partnership with Syngenta. The new agreement, which replaced a seven-year agreement with Syngenta that started in early 2003, is focused on the discovery and development of a range of novel enzymes to economically convert pre-treated
cellulosic biomass to mixed sugars, which is a critical step in the process of biofuel production.

The Company recognized revenue from
Syngenta and its affiliates of $16,000 and $2.1 million for the three months ended March 31, 2009 and 2008. Accounts receivable due from Syngenta were $0 and $0 million, and deferred revenue associated with Syngenta was $1.4 million at
March 31, 2009 and December 31, 2008.

9. Commitments

Letter of Credit

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

As of March 31, 2009, the Company had a letter of credit in place pursuant to this agreement for approximately $10.4 million, representing
approximately 24 months current rent, per the lease agreement. The letter of credit is issued under the Companys existing bank agreement. The Company is required by the Bank to secure this obligation with cash, which is reflected as
restricted cash on the Companys Condensed Consolidated Balance Sheet as of March 31, 2009. Any increases to the letter of credit resulting from increases in rent or changes in working capital or market capitalization are effective upon
notice to the Company by the landlord.

10. Contingencies

Class Action Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the
plaintiffs in a class action lawsuit filed in December 2002 in a U.S. federal district court (the Court). This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other
public companies that conducted an Initial Public Offering (IPO) of their common stock in 2000 and the late 1990s (the IPO Cases). On February 15, 2005, the Court issued a decision certifying a class action for
settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the
modified settlement. On April 24, 2006, the Court held a Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Courts earlier
decision certifying as class actions the six IPO Cases designated as focus cases. The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome
of the plaintiffs petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition, but clarified that the plaintiffs may
seek to certify a more limited class in the District Court. Accordingly, the settlement as originally negotiated was terminated pursuant to stipulation of the parties and will not be finally approved. On or about August 14, 2007, Plaintiffs
filed amended complaints in the six focus cases, and thereafter moved for certification of the classes and appointment of lead plaintiffs and lead counsel in those cases. The six focus case issuers filed motions to dismiss the claims against them in
November 2007 and an opposition to plaintiffs motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certification motion.
On February 25, 2009, liaison counsel for plaintiffs informed the district court that a settlement of the IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and final approval by the court. On
April 2, 2009, the parties submitted a tentative settlement agreement to the court and moved for preliminary approval thereof. If approved, the settlement would result in the dismissal of all claims against the Company and its officers and
directors with prejudice, and the Companys pro rata share of the settlement fund will be fully funded by insurance.



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The Company is covered by a claims-made liability insurance policy which it believes will satisfy any
potential liability of the Company under this settlement. Due to the inherent uncertainties of litigation, and because the settlement has not yet been finally approved by the Court, the ultimate outcome of this matter cannot be predicted.

Noteholder Lawsuit

A holder of the 2008 Notes has filed a lawsuit against the Company asserting a conversion price of $1.47, rather than $2.13, for a portion of its 2008 Notes for which it has submitted conversion notices. The lawsuit requests
additional shares based on such conversions, damages and declaratory relief. Since the conversion price re-set date on February 27, 2009 through May 8, 2009, the holder has converted approximately $8.8 million in face value, and the
Company has issued approximately 4.1 million in shares to settle these conversions at $2.13 per share. Assuming a conversion price of $1.47, 1.8 million additional shares would be issuable in connection with these conversions.
The Company believes the lawsuit is without merit and has disputed the holders assertion. The Company does not believe that this lawsuit will have a material impact on its financial statements.

In accordance with SFAS 5, Accounting for Contingencies (SFAS 5), the Company believes any contingent liabilities related
to these claims are not probable or estimable and therefore no amounts have been accrued for these matters.

In addition to the matter
noted above, from time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which management considers to be
immaterial, individually and in the aggregate. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is
inherently unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against the Company. It is possible, nevertheless, that the Companys consolidated financial position, cash flows or
results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

11.
Impact of Recently Issued Accounting Standards

Business Combinations

On January 1, 2009 the Company adopted the provisions of FASB SFAS No. 141(R), Business Combinations (SFAS
No. 141R), which revised SFAS No. 141, Business Combinations. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of
business combinations. Among other things, SFAS No. 141R expands the definitions of a business and business combination, requires recognition of contingent consideration at fair value on the acquisition date and requires acquisition-related
transaction costs to be expensed as incurred. The provisions of SFAS No. 141R were applied in valuing the assets in the Highlands joint venture. Pursuant to the provisions of SFAS 141R, since the Company is consolidating Highlands as prescribed
by FIN 46R, the assets contributed are carried on the Companys balance sheet at their respective carrying values. Accordingly, the adoption of SFAS 141R did not have a material impact on the Companys condensed consolidated financial
statements.

In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies (FAS 14R-1). The FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value per SFAS No. 157, if
the acquisition-date fair value can be reasonably determined. If the fair value cannot be reasonably determined, then the asset or liability should be recognized in accordance with SFAS No. 5, Accounting for Contingencies, and FASB
Interpretation (FIN) No. 14, Reasonable Estimation of the Amount of a Loss - an interpretation of FASB Statement No. 5. The FSP also requires new disclosures for the assets and liabilities within the
scope of the FSP. The Company will apply the guidance of the FSP to business combinations completed on or after January 1, 2009.

Noncontrolling
Interests in Consolidated Financial Statements

On January 1, 2009, the Company adopted SFAS 160 which establishes accounting
and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires entities to record the acquisition of non-controlling interests in subsidiaries initially at fair value. In
accordance with the requirements of SFAS 160, the Company has provided a new presentation on the face of the consolidated financial statements to separately classify non-controlling interests within the equity section of the consolidated balance
sheets and to separately report the amounts attributable to controlling and non-controlling interests in the consolidated statements of operations, comprehensive income and changes in equity for all periods presented. There were no changes in the
Companys ownership interests in previously existing subsidiaries or deconsolidation of subsidiaries for the three months ended March 31, 2009.



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Accounting for Convertible Debt Instruments

On January 1, 2009, the Company adopted APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash
(including partial cash settlement) upon conversion. APB 14-1 requires the Company to account separately for the liability and equity components of the convertible debt in a manner that reflects the Companys nonconvertible debt (unsecured
debt) borrowing rate when interest expense is recognized. APB 14-1 requires bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of
interest expense in our Condensed Consolidated Statement of Operations. See Note 1 for impact of adoption on the Companys financial statements.

On January 1, 2009, the Company adopted EITF 07-05. EITF 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entitys own stock, which would qualify as a
scope exception under SFAS 133. See Note 1 for impact of adoption of EITF 07-05 on the Companys financial statements.

Fair Value
Accounting

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 extends the disclosure requirements of SFAS 107 to interim period financial statements, in addition to the existing requirements for annual
periods and reiterates SFAS 107s requirement to disclose the methods and significant assumptions used to estimate fair value. FSP FAS 107-1 and APB 28-1 is effective for the Companys interim and annual periods commencing with its
June 30, 2009 consolidated financial statements and will be applied on a prospective basis. FSP FAS 107-1 and APB 28-1 is not expected to have a material impact on the Companys consolidated financial statements.



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

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

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



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



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



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



| |  |  | the expected benefits of our strategic partnership with BP;
| | - |  | -----------------------------------------------------------



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



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



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



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



| |  |  | our products and product candidates under development;
| | - |  | ------------------------------------------------------



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



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



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



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



| |  |  | our anticipated revenues from collaborative agreements, grants and licenses granted to third parties and our ability to maintain our collaborative relationships
with third parties;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the impact of dilution to our shareholders and a decline in our share price and our market capitalization from future issuances of shares of our common stock
(including in connection with conversion of the 2008 Notes);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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



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



| |  |  | the continued development of our pilot facility;
| | - |  | ------------------------------------------------



| |  |  | the optimization of our demonstration-scale facility and our plans to prove the economic and commercial viability of our cellulosic ethanol production process by
the end of 2009;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our expectation that production from the commercial-scale cellulosic ethanol facility that Highlands is developing in Highlands, Florida will begin in 2012 and that
we will break ground for that facility in 2010, and that the estimated construction cost for that facility will be between $250 and $300 million;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | our ability to use multiple feed stocks to produce cellulosic ethanol;
| | - |  | ----------------------------------------------------------------------



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



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

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



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



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

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

Overview

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

Our biofuels and specialty enzymes businesses are both supported by a research and development team with expertise in gene discovery and optimization,
cell engineering, bioprocess development, biochemistry and microbiology. Over the past 16 years, our research and development team has developed a proprietary technology platform that has enabled us to apply advancements in science to discovering
and developing unique solutions in complex industrial or commercial applications. We have dedicated substantial resources to the development of our proprietary technologies, which include capabilities for sample collection from the worlds
microbial populations, generation of DNA libraries, screening of these libraries using ultra high-throughput methods capable of analyzing more than one billion genes per day, and optimization based on our gene evolution technologies. We have
continued to shift more of our resources from technology development to commercialization efforts for our existing and future technologies and products. While our technologies have the potential to serve many large markets, our primary areas of
focus for product development are (i) integrated solutions for the production of advanced biofuels, such as cellulosic ethanol, and (ii) specialty enzymes for alternative fuels, specialty industrial processes, and animal nutrition and
health. We have current collaborations and agreements with market leaders, such as BP Biofuels North America LLC, or BP, Bunge Oils, and Cargill Health and Food Technologies, each of which complement our internal technology and product development
efforts.

We expect to continue to invest in these commercialization efforts, primarily in the area of biofuels. We believe this will not
only benefit our mission to advance the commercialization of cellulosic ethanol within our biofuels business unit, but will also enable us to create additional enzyme market opportunities that are focused on external applications for the broader
biofuels industry.

We have a substantial intellectual property estate comprising more than 250 issued patents and more than 350 pending
patents as of March 31, 2009. We believe that we can leverage our intellectual property estate to enhance and improve our technology development and commercialization efforts across both business units while maintaining protection on key
intellectual property assets.

For the three months ended March 31, 2009, total revenues decreased 6% compared to the three months
ended March 31, 2008. The decrease in revenue was primarily attributed to the cancellation of our Bayovac-SRS and Quantum product lines during 2008, as well as the completion of our Sygnenta collaboration as of December 31, 2008. In
addition, as part of our strategic reorganization in January 2006, we began to de-emphasize certain collaborations that were not strategic to our current market focus in favor of greater emphasis on sales of products. As a result, we expect that our
product revenue will continue to represent the majority of our total revenue in the future. As of March 31, 2009, our strategic collaborations, including our strategic partnership with BP, have provided us with more than $340 million in funding
since inception and are committed to additional funding of more than $75 million through 2012, subject to our performance under existing agreements, excluding milestone payments, license and commercialization fees, and royalties or profit sharing.
Our committed funding includes $22.5 million, Highlands, from our second partnership with BP, announced February 2009. This second joint venture will act as a separate commercial entity, with the $22.5 million BP funding used solely for the
operations of Highlands.

Our strategic partners often pay us before we earn the revenue, and revenue recognition from these payments are
deferred until earned. As of March 31, 2009, we had $3.2 million in deferred revenue, of which $3.0 million was related to funding from collaborative partners and $0.2 million was related to product sales.



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Excluding our non-cash gains in the first quarter of 2009 (driven by non-cash gains on our 2008 Notes),
we have incurred net losses since our inception. As of March 31, 2009, we had a working capital deficit of $11.6 million, and an accumulated deficit of $610.2 million. Our results of operations have fluctuated from period to period and likely
will continue to fluctuate substantially in the future. We expect to incur losses into the foreseeable future as a result of any combination of one or more of the following:



| |  |  | anticipated additional investments to implement our biofuels commercialization strategy, including capital expenditures related to optimization of our demonstration
facility, and capital or operating costs we may incur for land acquisition, feedstock development, and design and engineering for our first commercial plants through our joint ventures with BP;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining our sales and marketing infrastructure to support our specialty enzyme business;
| | - |  | --------------------------------------------------------------------------------------------



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



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

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

As more fully described in the Risk Factorsbeginning on page 43,
Liquidity and Capital Resourcesbeginning on page 33 and Note 1 of the Notes to Condensed Consolidated Financial Statements beginning on page 6 of this report, our independent registered public accounting firm has included an
explanatory paragraph in its report on our 2008 financial statements related to the uncertainty in our ability to continue as a going concern. While we believe that we will be successful in raising or generating additional cash through a combination
of corporate partnerships and collaborations, federal, state and local grant funding, selling or financing assets, incremental product sales and the sale of equity or debt securities, if we are unsuccessful in raising additional capital from any of
these sources, we may need to defer, reduce or eliminate certain planned expenditures, restructure or significantly curtail our operations, file for bankruptcy or cease operations.

Recent Strategic Events

Our Strategic Partnership with BP

We have entered into a strategic partnership with BP to accelerate the development and commercialization of cellulosic ethanol, specifically in the field
of conversion of biomass to fermentable sugars for the production, or the use in production, of ethanol. Our strategic partnership with BP is critical to our success in validating and commercializing our cellulosic ethanol technology. This strategic
collaboration consists of two phases, which are described below and include a technology development joint venture and a commercial development joint venture. Prior to entering into this strategic partnership, we had no material relationship with
BP.

In August 2008, we announced the initial phase of the partnership, which includes a joint technology development effort that utilizes
our broad technology platform in an effort to supply enabling technology to support the development of a portfolio of low-cost, environmentally-sound cellulosic ethanol production facilities in the United States, and potentially throughout the
world. During the initial 18-month phase of the joint development program, we expect to receive a total of $90 million in connection with our participation.

In connection with the joint development program, we formed Galaxy Biofuels LLC, or Galaxy, a special purpose entity, which is equally owned by BP and us, and entered into a Joint Development and License Agreement
with BP. Galaxy has access to certain intellectual property rights held or controlled by the parties prior to entering the Joint Development and License Agreement, all of which will continue to be owned by the respective contributing company. Galaxy
owns new intellectual property relating to cellulosic ethanol production developed through the joint development program and is responsible for administering the licensing of the technology package resulting from the joint development program. In
February 2009, we announced the second phase of our strategic partnership, a joint venture to develop and commercialize cellulosic ethanol from non-food feedstocks. The joint venture company, Highlands Ethanol LLC, or Highlands, is owned
equally by us and BP. Highlands will act as the commercial entity for the deployment of cellulosic ethanol technology being developed and proven under our joint development program with BP. This collaboration is intended to construct one of the
nations first commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida and to create future opportunities for leveraging cellulosic ethanol technologies.

Together, we and BP have agreed to commit a total of $45 million in funding and assets to Highlands, including an aggregate cash commitment of $22.5
million from BP and contribution by us of development assets related to our Highlands County, Florida development project and another commercial project site in early stages of development in the Gulf Coast region. Highlands is led and supported by
a team comprised of employees from both BP and Verenium and is governed with equal representation from both companies.

Highlands
initial focus is developing and securing financing for the commercial-scale cellulosic ethanol facility in Highlands County, Florida, with plans to break ground on that site in 2010. The estimated construction cost for this 36 million gallons
per year facility is between $250 and $300 million. We expect the first production of cellulosic ethanol from this plant to begin in 2012.



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Results of Operations

Three Months Ended March 31, 2009 and 2008

Selected Segment Financial Data

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

We assess performance and allocate resources based on discrete financial information for the biofuels and specialty enzymes segments. For the biofuels
segment, performance is assessed based on total operating expenses and capital expenditures. For the specialty enzymes segment performance is assessed based on total revenues, product revenues, product gross profit, total operating expenses and
capital expenditures. For the three months ended March 31, 2009, the specialty enzyme segment comprised 100% of our product revenue and cost of product revenue. Our operating expenses for each segment include direct and allocated research and
development and selling, general and administrative expenses. In managements evaluation of performance, certain corporate operating expenses are excluded from the business segments such as: non-cash share-based compensation, restructuring
charges, severance, depreciation and amortization, and other corporate expenses, which are not allocated to either business segment. In addition, we evaluate segment performance based upon capital expenditures and other assets that are specifically
identified to the business segment, excluding certain corporate assets such as cash, short-term investments, and other assets that can be attributed to, or utilized by, both business segments. Expenses and assets shared by the segments require the
use of judgments and estimates in determining the allocation of expenses to the two segments. Different assumptions or allocation methods could result in materially different results by segment. Further, expenses allocated to each of the two
segments may not be indicative of the expenses of each operating segment if such segments operated on a stand-alone basis.

Selected
operating results for the three months ended March 31, 2009 and 2008, and identifiable assets as of March 31, 2009 and December 31, 2008 for each of our business segments is set forth below (in thousands):



|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | - | --------- |  | - | ------ | - |  | -------- | ------- | - | ---------------- | - | ------ | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                  |  | Three Months Ended March 31, 2009 |         |   | Three Months Ended March 31, 2008 |  
|                                                  |  | Biofuels                          |         |   | SpecialtyEnzymes                  |   | Corporate |  |   | Total  |   |  | Biofuels |         |   | SpecialtyEnzymes |   |        | Corporate |  |   | Total  |  
|Product revenues                                  |  | $                                 |        |   |                                   | $ | 10,569    |  | $ |       |   |  | $        | 10,569  |   |                  | $ |       |           |  | $ | 11,201 |   |  | $ |       |   |  | $ | 11,201  |  
|Collaborative and grant revenues                  |  |                                   | 2,334   |   |                                   |   | 1,488     |  |   |       |   |  |          | 3,822   |   |                  |   |       |           |  |   | 4,034  |   |  |   |       |   |  |   | 4,034   |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Total revenues                                    |  |                                   | 2,334   |   |                                   |   | 12,057    |  |   |       |   |  |          | 14,391  |   |                  |   |       |           |  |   | 15,235 |   |  |   |       |   |  |   | 15,235  |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Product gross profit                              |  |                                   |        |   |                                   |   | 4,814     |  |   |       |   |  |          | 4,814   |   |                  |   |       |           |  |   | 3,324  |   |  |   |       |   |  |   | 3,324   |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Operating expenses (excluding cost of goods sold) |  |                                   | 17,880  |   |                                   |   | 4,734     |  |   | 4,373  |   |  |          | 26,987  |   |                  |   | 9,989  |           |  |   | 9,554  |   |  |   | 5,001  |   |  | $ | 24,544  |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Operating income (loss)                           |  | $                                 | (15,546 | ) |                                   | $ | 1,568     |  | $ | (4,373 | ) |  | $        | (18,351 | ) |                  | $ | (9,989 | )         |  | $ | (2,196 | ) |  | $ | (5,001 | ) |  | $ | (17,186 | )
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|Capital expenditures                              |  | $                                 | 1,543   |   |                                   | $ | 251       |  | $ |       |   |  | $        | 1,794   |   |                  | $ | 20,695 |           |  | $ | 484    |   |  | $ | 793    |   |  | $ | 21,972  |  
|                                                  |  |                                   |         |   |                                   |   |           |  |   |        |   |  |          |         |   |                  |   |        |           |  |   |        |   |  |   |        |   |  |   |         |  

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



|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        
|-------------------------------- |  | -------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                 |  | As of March 31, 2009
|                                 |  | Biofuels             |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant & equipment, net |  | $                    | 109,803 |                  | $ | 2,670     |  | $     | 4,003  |  | $ | 116,476
|Cash and other assets            |  |                      | 1,650   |                  |   | 22,289    |  |       | 22,522 |  |   | 46,461 
|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets        |  | $                    | 111,453 |                  | $ | 24,959    |  | $     | 26,525 |  | $ | 162,937
|                                 |  |                      |         |                  |   |           |  |       |        |  |   |        



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|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|---------------------------------- |  | ----------------------- | ------- | ---------------- | - | --------- |  | ----- | ------ |  | - | -------
|                                   |  | As of December 31, 2008
|                                   |  | Biofuels                |         | SpecialtyEnzymes |   | Corporate |  | Total
|Property, plant and equipment, net |  | $                       | 109,030 |                  | $ | 3,502     |  | $     | 4,739  |  | $ | 117,271
|Cash and other assets              |  |                         | 702     |                  |   | 21,142    |  |       | 14,508 |  |   | 36,352 
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        
|Total identifiable assets          |  | $                       | 109,732 |                  | $ | 24,644    |  | $     | 19,247 |  | $ | 153,623
|                                   |  |                         |         |                  |   |           |  |       |        |  |   |        

Consolidated Results of Operations

Revenues

Revenues for the three
months ended March 31, 2009 and 2008 are as follows (in thousands):



|                   |  |                              |        |          |   |        |  |     |   
|------------------ |  | ---------------------------- | ------ | -------- | - | ------ |  | --- | --
|                   |  | Three Months Ended March 31, |        | % Change |  
|                   |  | 2009                         |        | 2008     |  
|Revenues:          |  |                              |        |          |   |        |  |     |   
|Phyzyme phytase    |  | $                            | 7,597  |          | $ | 7,402  |  | 3   | % 
|All other products |  |                              | 2,972  |          |   | 3,799  |  | (22 | )%
|                   |  |                              |        |          |   |        |  |     |   
|Total product      |  |                              | 10,569 |          |   | 11,201 |  | (6  | )%
|Collaborative      |  |                              | 1,264  |          |   | 3,475  |  | (64 | )%
|Grant              |  |                              | 2,558  |          |   | 559    |  | 358 | % 
|                   |  |                              |        |          |   |        |  |     |   
|Total Revenues     |  | $                            | 14,391 |          | $ | 15,235 |  | (6  | )%
|                   |  |                              |        |          |   |        |  |     |   

Revenues decreased 6%, or $0.8 million, to $14.4 million for the three months ended March 31,
2009 primarily due to the discontinuation of our Bayovac-SRS and Quantum product line during late 2007 and early 2008, as well as the completion of our Syngenta collaboration as of December 31, 2008. This decrease in these products and
collaboration revenue was offset by increases in other product lines as outlined further below, and further increases in grant revenue. For the three months ended March 31, 2009, our revenue mix continued to shift to a larger percentage of
product and grant revenues, consistent with our strategy to grow product sales and biofuels projects, and de-emphasize collaborations that are not core to our strategic market focus. Product and grant revenues represented 91% of total revenues for
the three months ended March 31, 2009, as compared to 77% for the three months ended March 31, 2008.

Product revenues decreased
$0.6 million, or 6%, for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008. This decrease is attributed primarily to the following factors:



| |  |  | While gross shipments of Phyzyme in the first quarter of 2009 remained at levels comparable to 2008, our reported net Phyzyme revenue was lower than our reported
net revenue in the first quarter of 2008. This is attributed to a larger percentage of Phyzyme sales manufactured by Genencor, a subsidiary of Danisco, for which we recognize only the profit share component of Phyzyme sales. Due to capacity
constraints during late 2008, we contracted with Genencor to serve as a second-source manufacturer of Phyzyme. Pursuant to current accounting rules, we recognize revenue from Phyzyme that is manufactured by Genencor in an amount equal to the net
profit share received from Danisco, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We discontinued two of our product lines, Bayovac-SRS and Quantum, during early 2008.
| | - |  | -------------------------------------------------------------------------------------

The decrease attributed to the above factors was partially offset by an increase in sales of our Fuelzyme-LF enzyme compared to the same period in 2008.

Revenues from Phyzyme represented approximately 72% of total product revenues for the three months ended March 31, 2009 as compared
to 66% for the three months ended March 31, 2008. We expect that Phyzyme will continue to represent a significant percentage of our total product revenues in the foreseeable future.



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Given current market conditions, we cannot be certain that demand for our enzyme products and resulting
sales will continue at current levels. In fact, we have begun to see an indication that our Phyzyme, Fuelzyme and Purifine revenues may be negatively impacted by the current decline in the global economy. In particular:



| |  |  | Following a year of substantial growth in revenues and related market share of our Phyzyme enzyme, we and our partner, Danisco, have seen a softening in the phytase
animal feed market attributed to a recessionary decrease in demand for poultry.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Demand for our Fuelzyme-LF has been impacted by the recent challenges in the corn ethanol industry. Reduced demand for gasoline and thus for ethanol, combined with
low ethanol prices and high corn prices have created an adverse business environment, and has caused some corn ethanol plants to suspend or cease operations, or file for bankruptcy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | One of our prime initial targets for Purifine is the soybean oil processing market in Latin America, which has suffered challenging market conditions since early
2008. As a result, our Purifine revenue in 2008 was below initial expectations, and we anticipate that the ramp-up in Purifine revenues will be slower than initially expected.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

While we did not experience a significant decline in product revenues from any of these factors during the first quarter, we can not be certain that our
revenues will increase, or remain at current levels for the remainder of the year.

Collaborative revenue decreased 64%, or $2.2 million,
to $1.3 million for the three months ended March 31, 2009. Collaborative revenue accounted for 9% of total revenue for the three months ended March 31, 2009 as compared to 23% of total revenue for the three months ended March 31,
2008. We have continued to de-emphasize collaborations that are not core to our current focus in favor of greater emphasis on sales of products and biofuels projects. We anticipate that collaborative revenue will continue to decrease in 2009 as
compared to 2008, due in large part to this de-emphasis of non-strategic collaborations and decrease in revenue related to the expected wind-down of projects with existing strategic collaborators such as Syngenta, Bunge, and BASF. For example, under
the terms of our 10-year agreement with Syngenta, our two-year funding period totaling $8 million per year expired on December 31, 2008. We do not anticipate that we will continue to receive significant funding from Syngenta under this
agreement.

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

Grant revenue increased 358%, or $2.0 million, to $2.6 million for the three months ended March 31, 2009. The increase in grant revenues was
primarily attributable to various new grants awarded during late 2008 and early 2009 from the Department of Energy to further develop commercially viable renewable fuels and discover and develop new enzymes and enzyme cocktails to break down various
types of biomass. We continue to pursue additional opportunities to secure federal, state or local agency funding to support our biofuels initiatives. As of March 31, 2009, we have committed funding from various governmental agencies totaling
$34.5 million through 2012, and expect to continue to see an increase in grant revenue during 2009 as compared to 2008.

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

Product Gross Margin

Product gross margin for the three months ended March 31, 2009 and 2008 are as follows (in thousands):



|                        |  |                              |        |          |   |        |  |     |   
|----------------------- |  | ---------------------------- | ------ | -------- | - | ------ |  | --- | --
|                        |  | Three Months Ended March 31, |        | % Change |  
|                        |  | 2009                         |        | 2008     |  
|Product revenue         |  | $                            | 10,569 |          | $ | 11,201 |  | (6  | )%
|Cost of product revenue |  |                              | 5,755  |          |   | 7,877  |  | (27 | )%
|                        |  |                              |        |          |   |        |  |     |   
|Product gross margin    |  | $                            | 4,814  |          | $ | 3,324  |  | 45  | % 

Cost of product revenue includes both fixed and variable costs, including materials and supplies,
labor, facilities, royalties and other overhead costs, associated with our product revenues. Excluded from cost of product revenue are costs associated with the scale-up of manufacturing processes for new products that have not reached
commercial-scale production volumes, which we include in our research and development expenses. Cost of product revenue decreased $2.1 million, or 27%, to $5.8 million for the three months ended March 31, 2009 compared to the three months ended
March 31, 2008. This decrease resulted primarily from the change in accounting for our Phyzyme product revenue and related cost manufactured by Genencor as described below.

We manufacture most of our enzyme products through a manufacturing facility in Mexico City, owned by Fermic S.A., or Fermic. We also have contracted with
Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme. As discussed above, we recognize revenue from Phyzyme that is manufactured by Genencor in an amount equal to the net profit share received from Danisco, as
compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic. While this revenue recognition treatment has little or no negative impact on the gross margin in absolute dollars we
recognize for every sale of Phyzyme, it does have a negative impact on the gross product revenue we recognize for Phyzyme as the volume of Phyzyme manufactured by Genencor increases.



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Product gross margin totaled $4.8 million, or 46% of product revenue, for the three months ended
March 31, 2009 compared to $3.3 million, or 30% of product revenue, for the three months ended March 31, 2008. Gross margin percentage improvement reflects various factors, specifically:



| |  |  | Due to our manufacturing arrangement with Genencor to serve as a second-source manufacturer for Phyzyme as previously described, we record revenue and costs related
to Phyzyme that Genencor manufactures on a net basis versus a gross basis. This had no impact on the absolute value of our gross margin, but resulted in an increase to the gross margin percentage reported for the three months ended March 31,
2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the three months ended March 31, 2008, gross margin percentage was lower due to (i) inventory losses related to contamination issues in our Phyzyme
enzyme manufacturing process; and (ii) incremental zero-margin freight revenue and related costs incurred to meet customer ship dates. Both of these factors negatively impacted gross profit and resulted in a lower gross margin in the first
quarter of 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the reasons described above, we believe that product gross margin (dollars) is a better indication
of performance than product gross margin percentage.

In addition because a large percentage of our manufacturing costs are fixed, we have
realized continued gross margin improvements as product revenues have increased; however, our gross margin may be negatively impacted in the future if our product revenues decrease or if they do not grow in line with our increase in minimum capacity
requirements at Fermic. In addition, our gross margins are dependent upon the mix of product-related sales as the cost of product-related revenue varies from product to product.

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

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

Operating Expenses

Research and development and selling, general and administrative expenses for the three months ended March 31, 2009 and 2008 are as follows (in
thousands):



|                                             |  |      |        |      |   |          |  |    |   
|-------------------------------------------- |  | ---- | ------ | ---- | - | -------- |  | -- | --
|                                             |  | 2009 |        | 2008 |   | % Change | 
|Research and development                     |  | $    | 17,815 |      | $ | 14,861   |  | 20 | % 
|Selling, general and administrative expenses |  |      | 9,172  |      |   | 9,683    |  | (5 | )%
|                                             |  |      |        |      |   |          |  |    |   
|                                             |  | $    | 26,987 |      | $ | 24,544   |  | 10 | % 
|                                             |  |      |        |      |   |          |  |    |   



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Our operating expenses for the three months ended March 31, 2009 increased 10% compared to the prior
three months ended March 31, 2008, related primarily to the acceleration of biofuels development and commercialization efforts in 2009.

Research and Development

Research and development expenses consist primarily of costs associated with development of our
technologies and our product candidates, including costs associated with out pilot and demonstrationscale cellulosic ethanol facilities, manufacturing scale-up and bioprocess development for our current products, and costs associated with
research activities performed on behalf of our collaborators.

For the three months ended March 31, 2009, we estimate that
approximately 37% of our research and development personnel costs, based upon hours incurred were spent on unfunded product and technology development, and that approximately 63% were spent on research activities funded in whole or in part by our
Galaxy joint venture. For the three months ended March 31, 2008, we estimate that approximately 69% of our research and development personnel costs, based upon hours incurred, were spent on unfunded product and technology development, and that
approximately 31% were spent on research activities funded by our collaborations and grants. The increase in percentage of time spent on funded product and technology development from the prior year is primarily attributed to our focus on cellulosic
ethanol process development, which is partially funded by BP through our Galaxy joint venture.

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



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



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



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



| |  |  | We have product candidates and technologies in various stages of development related to collaborations and grants as well as internally developed products and
technologies. At any time, we may modify our strategy and pursue additional collaborations for the development and commercialization of some products and technologies that we had intended to pursue independently. For example, in 2008 we entered into
a joint collaboration with BP to co-fund the advancement and validation of our cellulosic ethanol process technology, which had previously been largely self-funded.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Our research and development expenses increased $3.0 million, to $17.8 million (including share-based compensation of $1.5 million) for the three months
ended March 31, 2009 compared to $14.9 million (including share-based compensation of $1.3 million) for the three months ended March 31, 2008. Our research and development expenses by operating segment for the three months ended
March 31, 2009 and 2008 were as follow (in thousands):



|                  |  |      |        |      |   |          |  |     |   
|----------------- |  | ---- | ------ | ---- | - | -------- |  | --- | --
|                  |  | 2009 |        | 2008 |   | % Change | 
|Biofuels          |  | $    | 15,679 |      | $ | 6,911    |  | 127 | % 
|Specialty Enzymes |  |      | 2,136  |      |   | 7,950    |  | (73 | )%
|                  |  |      |        |      |   |          |  |     |   
|                  |  | $    | 17,815 |      | $ | 14,861   |  | 20  | % 
|                  |  |      |        |      |   |          |  |     |   

Biofuels Research and Development

Research and development expenses related to our biofuels business include cost related to our ongoing development and validation of our cellulosic
ethanol process technology, including, but not limited to, enzyme discovery and development and bioprocess development designed to improve ethanol yields and reduce cost-per-gallon, feedstock testing and validation at the laboratory, pilot- and
demo-plant scale, as well as costs related to commissioning, optimization and operation of our demo plant in Jennings, Louisiana. During 2008, costs related to our ligno cellulosic programs partially funded by Syngenta, were included in Speciality
Enzymes research and development. In 2009, we reclassed these costs in our Biofuels segment.



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Our biofuels research and development expenses increased $8.8 million from 2008 to 2009. This increase is
related to acceleration of our biofuels technology development efforts during 2008, which has continued in 2009, particularly related to our demo plant commissioning and optimization at our site in Jennings, Louisiana, which BP has substantially
funded through our Galaxy joint venture. As described in more detail below, our gross research and development costs related to Galaxy and Highlands are included in Research and development on our Condensed Consolidated Statements of
Operations, with BPs cost reimbursement to us included in Loss attributed to noncontrolling interest in consolidated entities.

We consider our current cellulosic ethanol technology under development to be our Generation 1 or Gen 1 technology. To date, we have demonstrated that our Gen 1 technology can produce cellulosic ethanol at a
small scale in the laboratory, pilot plant, and demonstration plant, but at yields and cost that are not yet commercially viable. We will require continued and substantial investment to further develop our Gen 1 technology, and continue to believe
that Gen 1 will produce a viable technology that could be deployed on a commercial scale as early as 2012. Our first commercial plant is scheduled to break ground in 2010.

Specialty Enzymes Research and Development

Research and development expenses related to our
specialty enzyme business include costs related to ongoing bioprocess development and manufacturing process yield improvements, funded support for research collaborations and to a lesser extent, early stage product development.

Due to limited capital resources and challenging economic conditions, we are not spending significant resources on early stage specialty enzyme product
development during 2009 without additional investment from strategic partners.

Our specialty enzymes research and development expenses
decreased $5.8 million from 2008 to 2009. This decrease is related primarily to our shift in focus to biofuels process development, and to a lesser extent the de-emphasis of early stage product development for our specialty enzyme business segment
and collaboration and grant work not core to our current focus.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2009 and 2008 are as follows (in thousands):



|                                             |  |                              |       |          |   |       |  |    |   
|-------------------------------------------- |  | ---------------------------- | ----- | -------- | - | ----- |  | -- | --
|                                             |  | Three Months Ended March 31, |       | % Change |  
|                                             |  | 2009                         |       | 2008     |  
|Selling, general and administrative expenses |  | $                            | 9,172 |          | $ | 9,683 |  | (5 | )%

Selling, general and administrative expenses decreased $0.5 million, or 5%, to $9.2 million
(including share-based compensation of $1.1 million) for the three months ended March 31, 2009. Excluding the impact of share-based compensation, selling, general and administrative expenses increased $0.6 million for the three months ended
March 31, 2009 as compared to the same period in 2008, primarily due to the biofuels development efforts for first commercial plant, which BP partially funds through our Highlands joint venture.

Share-Based Compensation Charges

We
recognized $2.5 million, or $0.04 per share, and $3.5 million, or $0.06 per share, for the three months ended March 31, 2009 and 2008. These charges had no impact on our reported cash flows. Share-based compensation expense was allocated among
the following expense categories (in thousands):



|                                    |  |                              |       |      |   |      
|----------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                    |  | Three Months Ended March 31,
|                                    |  | 2009                         |       | 2008
|Research and development            |  | $                            | 1,476 |      | $ | 1,324
|Selling, general and administrative |  |                              | 1,071 |      |   | 2,150
|                                    |  |                              |       |      |   |      
|                                    |  | $                            | 2,547 |      | $ | 3,474
|                                    |  |                              |       |      |   |      

Share-based compensation decreased $0.9 million for the three months ended March 31, 2009 as
compared to the same period in 2008, primarily related to the completion of vesting of restricted stock awards for executive severance during the first quarter of 2008. The decrease was further due to the Companys trend to grant fewer options
as compared to prior years.

Interest expense, net

Interest income on cash and short term investments decreased $0.3 million for the for the three months ended March 31, 2009 compared to 2008 primarily due to lower average cash and investment balances.



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Interest expense was $3.2 million, net of $1.0 million in capitalized interest for the demonstration
facility, for the three months ended March 31, 2009 compared to $2.1 million for the three months ended March 31, 2008, net of $0.9 million in capitalized interest for the demonstration facility. The increase was primarily attributed to
interest on the 2008 Notes issued in February 2008, partially offset by the decrease in interest related to equipment loans. We recorded aggregate interest expense related to the 2008 Notes of $2.5 million for the three months ended March 31,
2009 and $1.0 million for the three months ended March 31, 2008, comprised of the following (in thousands):



|                                             |  |                            |       |      |   |    
|-------------------------------------------- |  | -------------------------- | ----- | ---- | - | ---
|                                             |  | For the Three Months Ended
|                                             |  | 2009                       |       | 2008
|8% coupon interest, payable in cash          |  | $                          | 1,102 |      | $ | 530
|Non-cash accretion of debt discounts,        |  |                            | 1,285 |      |   | 417
|Non-cash amortization of debt issuance costs |  |                            | 109   |      |   | 44 
|                                             |  |                            |       |      |   |    
|                                             |  | $                          | 2,496 |      | $ | 991
|                                             |  |                            |       |      |   |    

Loss on Exchange of Convertible Notes

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

Gain (Loss) on Net Change in Fair Value of Derivative Assets and Liabilities

The fair value of the compound embedded derivative, warrants, and the convertible hedge transaction in connection with our 2008 Notes are recorded as a
derivative asset or liability and marked-to-market each balance sheet date. The change in fair value is recorded in the Condensed Consolidated Statement of Operations as Change in fair value of derivative assets and liabilities. During
the three months ended March 31, 2009, we recorded a net gain of $13.3 million compared to a net loss of $0.6 million during the three months ended March 31, 2008 related to the change in fair value of our recorded derivative asset and
liabilities.

Gain (loss) on Debt Extinguishment

During the three months ended March 31, 2009, pursuant to current accounting rules, we recorded a gain on debt extinguishment of $3.6 million, calculated as the difference between the carrying value of the converted
2008 Notes and the fair value of the shares of common stock delivered to the noteholders upon conversion. The carrying value of the converted 2008 Notes was equal to the $10.1 million of principal less the unamortized debt discount and issuance
costs, which totaled $7.5 million, as of the conversion date. During the quarter, we issued a total of 8.2 million shares with a total market value as of the dates of conversion of $3.9 million to settle the 2008 Notes and make-whole
payments.

Loss Attributed to Noncontrolling Interest in Consolidated Entities

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



| |  |  | The license to technology we granted to Galaxy and ongoing joint development work we perform for Galaxy are accounted for as capital contributions to Galaxy;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Transaction fees and joint development fees paid by BP are accounted for as capital contributions to Galaxy, which are subsequently distributed to us as a reduction
to our capital account;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ongoing joint development fees are accounted for as a monthly expense of Galaxy.
| | - |  | --------------------------------------------------------------------------------

In connection with the second phase of our strategic partnership with BP, we hold joint interest in Highlands, a special purpose entity. We are
considered the primary beneficiary of Highlands and consolidate its financial results. Pursuant to current accounting rules, the ongoing joint development is considered a monthly expense of Highlands. All contributions are contributed directly into
Highlands.

As a result, our consolidated financial statements include a line item called Noncontrolling Interest in consolidated
entities. On our Condensed Consolidated Balance Sheet, this line reflects BPs ownership of Galaxys and Highlands equity. This line item is reduced by BPs 50% share of Galaxys and Highlands profits and
losses, and increased by cash distributions made by BP to us on behalf of Galaxy. BPs share of losses is reflected in our Condensed Consolidated Statement of Operations as Loss attributed to noncontrolling interest in consolidated
entities. Galaxy and Highlands have incurred losses through March 31, 2009, 50% of which have been allocated to BP, and we anticipate these entities will continue to incur losses related to ongoing joint development through at least the
initial joint development program and construction processes.

Liquidity and Capital Resources

Since inception, we have financed our business primarily through the sale of common and preferred stock, funding from
strategic partners and government grants, the issuance of convertible debt, and product sales. As of March 31, 2009 our strategic partners, most recently including BP, have provided us with more than $340 million in funding since inception,
including $19.5 million from various government agencies, and are committed to additional funding of more than $75 million through 2012, subject to our performance under existing agreements, excluding milestone payments, license and
commercialization fees, and royalties or profit sharing. Our committed funding includes $22.5 million from our Highlands joint venture with BP, announced in February 2009. Highlands will act as a separate commercial entity, with the $22.5 million BP
funding used solely for this entity.



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

Capital Requirements

As of
March 31, 2009, we had available cash and cash equivalents of approximately $15.9 million, excluding approximately $10.4 million in restricted cash. Historically, we have funded our capital requirements through available cash, issuances of debt
and equity, product, collaboration and grant revenue, capital leases and equipment financing line of credit agreements. We have issued $172.5 million of convertible debt to fund our cellulosic ethanol pilot and demonstration-scale facilities and
other working capital requirements over the last two years. As of March 31, 2009, we had a working capital deficit of $11.6 million.

We will require additional capital to fund our operations. Our independent registered public accounting firm has included an explanatory paragraph in its report on our 2008 financial statements related to the substantial doubt in our
ability to continue as a going concern. Our cash at March 31, 2009, along with anticipated cash from grants, revenue, our commitment from BP and other sources may not be sufficient to meet cash requirements to fund our operating expenses,
capital expenditures, potential payments under our 2008 Notes, and working capital through December 31, 2009 without additional sources of cash.

We will also need to raise sufficient capital to fund the construction of the first commercial cellulosic ethanol plant in Highlands County, Florida. We recently entered into a joint venture with BP intended to
advance the design and engineering of the commercial facility, and we expect to break ground on this facility in 2010. We estimate that the total costs of construction for this first commercial plant will be $250 to $300 million, which we anticipate
will be funded from a combination of non-recourse debt and equity capital. We and BP recently filed a joint application for a Department of Energy loan guarantee program. If awarded, funding from this program could cover as much as 80% of the total
cost of construction of the project, although we expect this program would fund 60% to 70% of the cost of construction. We expect the remaining 30% to 40% to be funded by equal project equity investments from BP and us. This will require us to raise
project equity capital of up to $60 million in addition to the cash required to fund our ongoing operations.

We believe that we will be
successful in generating additional cash to fund our operations through a combination of additional corporate partnerships and collaborations, federal, state and local grant funding, incremental product sales, selling or financing assets, and, if
necessary and available, the sale of equity or debt securities. If we are unsuccessful in raising additional capital from any of these sources, we may need to defer, reduce or eliminate certain planned expenditures.

There can be no assurance that we will be able to obtain any sources of financing on acceptable terms, or at all. If we are not able to defer, reduce or
eliminate our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may need to restructure or significantly curtail our operations, divest all or a portion of our business, file for bankruptcy or cease
operations.

2007 Convertible Notes Offering

In March 2007 and April we completed an offering of $120 million aggregate principal amount of 5.50% Convertible Senior Notes due April 1, 2027, or the 2007 Notes, in a private placement, generating net cash
proceeds to the Company of approximately $114.8 million. The 2007 Notes have been registered under the Securities Act of 1933, as amended, to permit registered resale of the 2007 Notes and of the Verenium common stock issuable upon conversion of the
2007 Notes. As more fully described below, $18.5 million in face value of the 2007 Notes were exchanged for new debt pursuant to the issuance of our 2008 Notes. As of March 31, 2009, we had $99.5 million in face value outstanding under the 2007
Notes.

The 2007 Notes bear interest at 5.5% per year, payable in cash semi-annually, and are convertible at the option of the holders
at any time prior to maturity, redemption or repurchase into shares of Verenium common stock at a conversion rate of 156.5 shares per $1,000 principal amount of 2007 Notes (subject to adjustment in certain circumstances), which represents a
conversion price of $6.40 per share. In connection with the 2007 Notes offering, we paid $5.2 million in financing charges, which is reflected in other long term assets on the accompanying consolidated balance sheet, and is being amortized to
interest expense over the initial five-year term of the 2007 Notes using the effective interest method.

2008 Convertible Notes
Offering

On February 27, 2008, we completed a private placement of 8% Convertible Senior Notes due April 1, 2012, or the
2008 Notes, and warrants to purchase our common stock. Concurrent with entering into the purchase agreement, we also entered into senior notes exchange agreements with certain existing holders of our 2007 Notes pursuant to which such noteholders
exchanged approximately $18.5 million in aggregate principal amount of the 2007 Notes for approximately $16.7 million in aggregate principal amount of the 2008 Notes and for warrants to purchase common stock. Including the 2008 Notes issued in
exchange for the 2007 Notes, we issued



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$71 million in aggregate principal amount of the 2008 Notes and warrants to purchase approximately 8 million shares of our common stock. Gross proceeds
from new investments were approximately $54 million and net proceeds from new investments, after giving effect to payment of certain transaction-related expenses and the cash cost of the convertible hedge transaction described below, were
approximately $44 million.

The conversion price for the 2008 Notes is $2.13 and is also subject to full ratchet anti-dilution protection.
In addition, the 2008 Notes are subject to automatic conversion at our option if our closing stock price exceeds $8.18 per share over a 30-trading day period ending prior to the date we provide notice of the automatic conversion to investors, the
average daily trading volume of our stock over that 30-trading day period equals or exceeds $3 million, and certain other conditions are met.

We are required to pay interest on the 2008 Notes at the rate of 8% per year, and the 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the 2008 Notes for common stock, we are
obligated to pay such holder an amount equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate.
The 2008 Notes provide that we may, subject to the satisfaction of certain conditions (including that the shares to be issued must be registered for resale under a registration statement filed with the Securities and Exchange Commission), pay
interest or make-whole amounts with shares of our common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion. The registration statement that we filed with the Securities and Exchange
Commission to register the resale of the shares issuable upon conversion of the 2008 Notes, along with interest shares and shares issuable upon exercise of the warrants, only registers a limited number of conversion shares and interest shares, and
our ability to pay make-whole payments and interest payments under the 2008 Notes using shares is accordingly limited. As of March 31, 2009, our potential maximum remaining make-whole obligation assuming conversion of
100% of the 2008 Notes on that date was approximately $12.5 million, a substantial portion of which we may be required to settle in cash. Were many holders of our 2008 Notes to convert their 2008 Notes, or if a significant amount were converted at
approximately the same time, our cash resources at that time could be insufficient to make the required make-whole payments. Any such inability on our part to make the required make-whole payments in cash could potentially
have a number of negative consequences including, among others, that (i) we could be forced to defer, reduce or eliminate certain existing and projected operating expenses and capital requirements, (ii) we could be forced to seek to raise
capital, which may not be available on reasonable terms or at all, particularly given recent conditions in the United States and global equity and credit markets, (iii) we could default on our obligation to make any required cash
make-whole and other payments under the 2008 Notes and any such default could cause a default under our other outstanding debt and result in payments under the 2008 Notes and such other debt being accelerated, and (iv) we could be
forced to cease operations.

Since inception through March 31, 2009, holders of the 2008 Notes had converted principal in the amount of
$22.1 million into approximately 11.9 million shares of the Companys stock, including approximately 4.6 million shares to satisfy a portion of the related make-whole obligations.

During the three months ended March 31, 2009, pursuant to current accounting rules, we recorded a gain on debt extinguishment of $3.6 million, calculated
as the difference between the carrying value of the converted 2008 Notes and the fair value of the shares of common stock delivered to the noteholders upon conversion.

Between April 1, 2009 and May 8, 2009, holders of the 2008 Notes converted an additional principal amount of $17.6 million into approximately 20.4 million shares of the Companys common stock, including
approximately 12.1 million shares to satisfy a portion of the related make-whole obligations. Cash payments to satisfy make-whole obligations during this time were not material.

The warrants are exercisable and the number of shares of our common stock issuable upon exercise of the warrant are for shares of our common stock. The
initial exercise price of the warrants is $4.44 per share. The exercise price and the number of shares of our common stock issuable upon exercise of the warrants is subject to weighted average anti-dilution protection.

In connection with the transactions described above, we entered into a convertible hedge transaction with a counterparty, which is intended to reduce the
potential dilution upon conversion of the 2008 Notes. The convertible hedge transaction is composed of two separate call options. Under the first call option, on April 1, 2012 (or earlier upon conversion of the 2008 Notes), we are entitled to
purchase 13,288,509 shares of our common stock from the counterparty at a price per share equal to the initial conversion price of $4.09 (or a proportion of such number of shares based on the proportion of the 2008 Notes being converted). Under the
second call option, on three exercise dates staggered in six month intervals beginning on October 1, 2013, the counterparty is entitled to purchase an aggregate of 13,288,509 shares of our common stock at a price per share of $5.16. The cash
cost of the convertible hedge transaction was approximately $6.2 million.

During 2008, we used the net proceeds from the sale of our 2008
Notes and warrants for general corporate and working capital purposes, including the completion of construction and commissioning of our cellulosic ethanol demonstration facility.



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##### Table of Contents

The following table summarizes our principal contractual and interest obligations for the 2007 and 2008
Notes as of March 31, 2009, assuming such obligations are not converted prior to maturity (in thousands):



|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        
|---------------------------------------- |  | ----- | ------- | ---------------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | ------ |  | - | -------
|                                         |  |       |         | Payments due by Period
|                                         |  | Total |         | Less than1 Year        |   | 1 - 3 Years |  | 3 - 5 Years |        | More than5 Years
|2007 Notes (1)                           |  | $     | 200,741 |                        | $ | 5,472       |  | $           | 10,945 |                  | $ | 10,945 |  | $ | 173,379
|2008 Notes (2)                           |  |       | 61,592  |                        |   | 2,933       |  |             | 7,821  |                  |   | 50,838 |  |   |       
|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        
|Total Principal and Interest Obligations |  | $     | 262,333 |                        | $ | 8,405       |  | $           | 18,766 |                  | $ | 61,783 |  | $ | 173,379
|                                         |  |       |         |                        |   |             |  |             |        |                  |   |        |  |   |        



|(1) | The holders of the 2007 Notes have the right to require us to purchase the 2007 Notes for cash on April 1, 2012, April 1, 2017 and April 1, 2022 plus any accrued and unpaid
interest.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Total obligations under the 2008 Notes include approximately $12.8 million in interest through maturity of the 2008 Notes. Interest payments on the 2008 Notes may be made, at our
option and subject to the satisfaction of certain conditions, in shares of common stock, or interest shares, valued at a 5% discount to the average of the volume weighted stock price during a measurement period prior to the applicable interest
payment date, as long as such shares have been registered with the Securities and Exchange Commission. Due to Securities and Exchange Commission limitations on the amount of shares we were permitted to register in the resale registration statement
we filed with the Securities and Exchange Commission to register the resale of the interest shares, along with the shares issuable upon conversion of the 2008 Notes and shares issuable upon exercise of the warrants, we only registered a limited
number of interest shares, and as a result we intend to continue paying a significant portion of our quarterly interest payments in cash.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance Sheet

Our consolidated assets have increased by $9.3 million, to $162.9 million at
March 31, 2009 from $153.6 million at December 31, 2008, attributable primarily to the increase in cash from payments received under our collaboration with BP.

Our consolidated liabilities have decreased by $7.1 million, to $174.2 million at March 31, 2009 from $181.3 million at December 31, 2008, primarily attributable to a decrease in our carrying value of debt,
due to additional conversions during the first quarter, which resulted in the issuance of 8.0 million shares of our common stock.

Cash Flows Related to Operating, Investing and Financing Activities

Our operating activities used cash of
$15.7 million for the three months ended March 31, 2009. Our cash used in operating activities consisted primarily of cash used to manufacture inventory for our specialty enzyme business, and to fund our efforts in cellulosic ethanol
technology process development and commercialization, which was partially offset by proceeds from BPs capital contributions to Galaxy which are included in financing activities described below.

Our investing activities used cash of $2.2 million for the three months ended March 31, 2009. Our investing activities included purchases of
property, plant and equipment primarily for the completion of construction, start-up and commissioning of our demonstration plant.

During
2007, 2008, and 2009, Celunol and Verenium spent in excess of $100 million in capital expenditures for further modifications and improvements to our pilot facility and the construction, start-up, commissioning and optimization of our
demonstration-scale cellulosic ethanol facility in Jennings, Louisiana. In early 2009 we achieved a key development milestone with our 1.4 million gallon per year demonstration-scale cellulosic ethanol facility in Jennings, Louisiana with the
commissioning of the facility. As a result, we just recently produced our first gallons of cellulosic ethanol out of the plant. Work to optimize the facility and make process improvements has commenced as we seek to ensure reliable and
cost-effective operation. We will require significant additional capital and operating expenditures to complete the optimization of our demonstration-scale facility throughout 2009. We do not have fixed-priced arrangements with our major engineering
and construction firms; as such, most of our engineering and construction costs related to our demonstration-facility are incurred and paid on a time and materials basis. During 2007 and 2008, we incurred significant costs in excess of our projected
expenditures for the improvements to our pilot plant and construction of our demonstration plant.

Our financing activities generated net
cash of $26.2 million for the three months ended March 31, 2009, consisting primarily of capital contributions by BP into Galaxy, a consolidated variable interest entity.



36



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##### Table of Contents

Contractual Obligations

The following table summarizes our contractual obligations at March 31, 2009, excluding the principal and interest payments for our 2008 Notes and
2007 Notes shown above (in thousands):



|                                  |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  
|--------------------------------- |  | ----- | ------- | - | ---------------------- | - | ------ | ----------- |  | - | ----------- | - |  | ---------------- | ------ | - |  | - | ------- | -
|                                  |  |       |         |   | Payments due by Period |  
|                                  |  | Total |         |   | Less than1 Year        |   |        | 1 - 3 Years |  |   | 3 - 5 Years |   |  | More than5 Years |       
|Contractual Obligations           |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  
|Verenium:                         |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  
|Operating leases gross            |  | $     | 45,495  |   |                        | $ | 5,925  |             |  | $ | 12,550      |   |  | $                | 13,180 |   |  | $ | 13,840  |  
|Sublease income (1)               |  |       | (6,212  | ) |                        |   | (963   | )           |  |   | (2,027      | ) |  |                  | (2,176 | ) |  |   | (1,046  | )
|                                  |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  
|Operating leases, net             |  |       | 39,283  |   |                        |   | 4,962  |             |  |   | 10,523      |   |  |                  | 11,004 |   |  |   | 12,794  |  
|Manufacturing costs to Fermic (2) |  |       | 37,823  |   |                        |   | 15,199 |             |  |   | 22,624      |   |  |                  |       |   |  |   |         |  
|License and research agreements   |  |       | 2,422   |   |                        |   | 295    |             |  |   | 590         |   |  |                  | 584    |   |  |   | 953     |  
|Equipment loans                   |  |       | 775     |   |                        |   | 730    |             |  |   | 45          |   |  |                  |       |   |  |   |        |  
|Highlands(3):                     |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  
|Operating leases                  |  |       | 156,822 |   |                        |   | 2,124  |             |  |   | 4,894       |   |  |                  | 5,818  |   |  |   | 143,986 |  
|                                  |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  
|Total Contractual Obligations     |  | $     | 237,125 |   |                        | $ | 23,310 |             |  | $ | 38,676      |   |  | $                | 17,406 |   |  | $ | 157,733 |  
|                                  |  |       |         |   |                        |   |        |             |  |   |             |   |  |                  |        |   |  |   |         |  



|1 | Sublease rental income is expected to be received through February 2015, pursuant to a facilities sublease agreement we entered into during the fourth quarter of 2007.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | Pursuant to our manufacturing agreement with Fermic, we are obligated to reimburse monthly costs related to manufacturing activities. These costs scale up as our projected
manufacturing volume increases. As of March 31, 2009, under this agreement over the next three years we have made minimum commitments to Fermic of approximately $37.8 million.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3 | Highlands is 50% owned with two operating lease agreements for 16,200 net plantable acres in Florida and 142.2 acres of improved and irrigated farmland being used by Highlands as a
seed farm, intended for the growth of energy cane to be used as agricultural bio-mass for our first cellulosic ethanol plant.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Manufacturing and Supply Agreements

During 2002, we entered into a manufacturing agreement with Fermic to provide us with
the capacity to produce commercial quantities of certain enzyme products. Based on actual and projected increased product requirements, the agreement was amended in 2006 to provide for additional capacity to be installed over the next two years.
Under the terms of the agreement, we can cancel the committed purchases with thirty months notice provided that the term of the agreement, including the termination notice period, aggregates four years. Pursuant to our agreement with Fermic,
we are also obligated to reimburse monthly costs related to manufacturing activities. These costs scale up as our projected manufacturing volume increases. As of March 31, 2009, under this agreement we have made minimum commitments to Fermic of
approximately $37.8 million, over the next three years.

During 2009, we anticipate funding as much as $0.7 million in additional equipment
costs related to our manufacturing agreement with Fermic. As we continue to develop our commercial manufacturing platforms, we may be required to purchase additional capital equipment under this agreement. Through March 31, 2009, we had
incurred costs of approximately $20.1 million for equipment related to this agreement.

Due to capacity constraints at Fermic in 2008 we
were not able to supply adequate quantities of Phyzyme necessary to meet the demand from Danisco. As a result, we contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer for Phyzyme. Our supply agreement with
Danisco for Phyzyme contains provisions which allow Danisco, with six months advance notice, to assume the right to manufacture Phyzyme. If Danisco were to exercise this right, we may experience excess capacity at Fermic. If Danisco assumed the
right to manufacture Phyzyme and we were unable to absorb the excess capacity at Fermic with other products, our results of operations and financial condition would be adversely affected.

Bank Debt

On September 30,
2005, we entered into a $14.6 million Loan and Security Agreement (the Bank Agreement) with a commercial bank (the Bank). The Bank Agreement provided for a one-year credit facility for up to $10.0 million in financing
for qualified equipment purchases in the United States and Mexico (the Equipment Advances) and a $4.6 million letter of credit sub-facility (the Letter of Credit Sublimit). The Bank Agreement was amended in October 2006 to
increase the Letter of Credit Sublimit to $4.7 million. Borrowings under the Equipment Advances are structured as promissory notes which are secured by qualified equipment purchases and repaid over 36 to 48 months, depending on the location of
the equipment financed. Borrowings bear interest at the Banks prime rate (3.25% at March 31, 2009) plus 0.75%. On September 30, 2006, our draw-down period under the Equipment Advances expired.



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

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

At March 31, 2009, there was approximately $0.6 million in outstanding borrowings under the Equipment Advances and a letter of credit for
approximately $10.4 million under the Letter of Credit Sublimit, as required under our facilities leases. As further discussed below we have been required to cash secure the letter of credit with the Bank.

As of March 31, 2009, we were in compliance with all debt covenants under our various financing agreements.

Letter of Credit

Pursuant to our
facilities leases for our office and laboratory space in San Diego, we are required to maintain a letter of credit on behalf of our landlord in lieu of a cash deposit. The total amount required under the letter of credit is based on minimum required
working capital and market capitalization. As of March 31, 2009, we had a letter of credit in place pursuant to this agreement for approximately $10.4 million, representing the $100,000 minimum and approximately 24 months current rent.
The letter of credit is issued under our existing Bank Agreement as described above. We are required by the Bank to secure this obligation with cash, which is reflected as restricted cash on our Consolidated Balance Sheet as of March 31, 2009.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that would give rise to additional material contractual obligations as of March 31, 2009.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, long-lived assets, accrued liabilities, convertible
senior notes, 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 consolidated
financial statements.

Revenue Recognition

We follow the provisions as set forth by current accounting rules, which primarily include SAB 104 and EITF 99-19.

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

We generate revenue from research collaborations generally through funded research, up-front fees
to initiate research projects, fees for exclusivity in a field, and milestones. We recognize revenue from research funding on a proportional performance basis, as research hours are incurred under each agreement. We recognize fees to
initiate research over the life of the project. We recognize revenue from exclusivity fees over the period of exclusivity. Our collaborations often include contractual milestones. When we achieve these milestones, we are entitled to payment, as
defined by the underlying agreements. We recognize revenue for milestone payments when earned, as evidenced by written acknowledgement from the collaborator, provided that (i) the milestone event is substantive and its achievability was not
reasonably assured at the inception of the agreement, (ii) the milestone represents the



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culmination of an earnings process, (iii) the milestone payment is non-refundable and (iv) our past research and development services, as well as
our ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees that the we customarily charges for similar research and development services.

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

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

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

We have contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer of Phyzyme.
Under EITF 99-19, revenue manufactured for us by Genencor is recognized on a net basis equal to the net profit share received from Danisco, as all the following indicators of reporting net are met: i) the third party is the obligor; ii) amount
earned is fixed; iii) third part maintains credit risk, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture.

Share-based Compensation

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

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

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

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

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

Convertible Debt and Derivative Accounting

We account for our Convertible Senior Notes in accordance with APB 14-1. We adopted APB 14-1 on January 1, 2009. It significantly impacts the accounting for our 2008 Notes by requiring us to account separately for the liability
and equity components of the convertible debt. The liability component is measured so the effective interest expense associated with the convertible debt reflects the issuers borrowing rate at the date of issuance for similar debt instruments
without the conversion feature. The difference between the cash proceeds associated with the convertible debt and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the convertible debt.



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Determining the fair value of the liability component requires the use of accounting estimates and
assumptions. These estimates and assumptions are judgmental in nature and could have a significant impact on the determination of the liability component and, in effect, the associated interest expense. According to the guidance, the carrying amount
of the liability component is determined by measuring the fair value of a similar liability that does not have an associated equity component. If no similar liabilities exist, estimates of fair value are primarily determined using assumptions that
market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities.

We perform an assessment of all embedded features of a debt instrument to determine if 1) such features should be bifurcated and separately accounted for, and, 2) if bifurcation requirements are met, whether such features should be
classified and accounted for as equity or liability. The fair value of the embedded feature is measured initially, included as a liability on the balance sheet, and remeasured each reporting period. Any changes in fair value are recorded in the
statement of operations. We monitor, on an on ongoing basis, whether events or circumstances could give rise to a change in our classification of embedded features.

We account for the conversion of our 2008 Notes in accordance with SFAS 140. SFAS 140 states that upon conversion the difference between the carrying value of the converted 2008 Notes and the fair value of the common
stock delivered to the noteholders is recorded as a gain (loss) on debt extinguishment in the statement of operations.

Variable
Interest Entities

We have implemented the provisions of FIN 46R, which addresses consolidation by business enterprises of variable
interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential
characteristic of a controlling financial interest.

We have entered into a strategic collaboration with BP which includes two special
purpose entities, Galaxy and Highlands, both of which are jointly owned by BP and us.

We have determined, pursuant to FIN 46R, that both
Galaxy and Highlands qualify as variable interest entities and that we is the primary beneficiary of both entities. Because we are the primary beneficiary, Galaxy and Highlands are therefore subject to consolidation by us. As a result, BPs
capital contributions are recorded as a noncontrolling interests in consolidated entities on our Condensed Consolidated Balance Sheet. The Company consolidates the operating results of Galaxy and Highlands, and records an adjustment to the
Noncontrolling interests in consolidated entities for BPs share of profits and/or losses in these entities.

Long-Lived Assets

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

Income Taxes

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

We adopted the provisions of FIN 48 on January 1, 2007, and commenced analyzing filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open
tax years in these jurisdictions. As a result of adoption, we have recorded no additional tax liability. As of March 31, 2009 we have not yet completed our analysis of our deferred tax assets. As such, we have removed these
amounts and the offsetting valuation allowance has been removed from our deferred tax assets. We are in the process of completing a Section 382 analysis regarding the limitation of the net operating loss and research and development
credits.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.
While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess
of their net recorded amounts, an adjustment to the deferred tax assets would increase our income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Our deferred tax assets at March 31, 2009 were fully offset by a valuation allowance.

Inventories

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



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Capitalized Interest

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

Recently Issued Accounting Standards

Information with respect to recent accounting standards is included in
Note 1 of the Notes to Condensed Consolidated Financial Statements.



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

Our exposure to market risk is limited to interest rate risk and, to a lesser extent, foreign currency risk. Our exposure as of the end of the latest fiscal year is described in Part II, Item 7A of our annual report on Form 10-K for
the year ended December 31, 2008.

Interest Rate Exposure

As of March 31, 2009, we had outstanding debt obligations at face value of $149.1 million, including $99.5 million of 2007 Notes, $48.8 million of 2008 Notes, and $0.8 million of equipment loans payable. As
of March 31, 2009, the fair value of our 2007 Notes was approximately $17.0 million and the fair value of our 2008 Notes was approximately $23.1 million.

Foreign Currency Exposure

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



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

Evaluation of Disclosure Controls and
Procedures

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

Under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and
15d-15(e)) as of March 31, 2009. Based on such evaluation, such officers have concluded that, as of March 31, 2009, our disclosure controls and procedures were effective.

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

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



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PART IIOTHER INFORMATION



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

Class Action Shareholder Lawsuit

In June 2004, the Company executed a formal settlement agreement with the plaintiffs in a class action lawsuit filed in December 2002
in a U.S. federal district court (the Court). This lawsuit is part of a series of related lawsuits in which similar complaints were filed by plaintiffs against hundreds of other public companies that conducted an Initial Public Offering
(IPO) of their common stock in 2000 and the late 1990s (the IPO Cases). On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the
settlement subject to modification of certain bar orders contemplated by the settlement. On August 31, 2005, the Court reaffirmed class certification and preliminary approval of the modified settlement. On April 24, 2006, the Court held a
Final Fairness Hearing to determine whether to grant final approval of the settlement. On December 5, 2006, the Second Circuit Court of Appeals vacated the lower Courts earlier decision certifying as class actions the six IPO Cases
designated as focus cases. The Company is not one of the six focus cases. Thereafter, the District Court ordered a stay of all proceedings in all of the IPO Cases pending the outcome of the plaintiffs petition to the Second Circuit
for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs rehearing petition, but clarified that the plaintiffs may seek to certify a more limited class in the District
Court. Accordingly, the settlement as originally negotiated was terminated pursuant to stipulation of the parties and will not be finally approved. On or about August 14, 2007, Plaintiffs filed amended complaints in the six focus cases, and
thereafter moved for certification of the classes and appointment of lead plaintiffs and lead counsel in those cases. The six focus case issuers filed motions to dismiss the claims against them in November 2007 and an opposition to plaintiffs
motion for class certification in December 2007. The Court denied the motions to dismiss on March 16, 2008. On October 2, 2008, the plaintiffs withdrew their class certification motion. On February 25, 2009, liaison counsel for
plaintiffs informed the district court that a settlement of the IPO Cases had been agreed to in principle, subject to formal approval by the parties and preliminary and final approval by the court. On April 2, 2009, the parties submitted a
tentative settlement agreement to the court and moved for preliminary approval thereof. If approved, the settlement would result in the dismissal of all claims against the Company and its officers and directors with prejudice, and the Companys
pro rata share of the settlement fund will be fully funded by insurance.

The Company is covered by a claims-made liability insurance
policy which it believes will satisfy any potential liability of the Company under this settlement. Due to the inherent uncertainties of litigation, and because the settlement has not yet been finally approved by the Court, the ultimate outcome of
this matter cannot be predicted.

Noteholder Lawsuit

A holder of our 2008 Notes filed a lawsuit against us asserting a conversion price of $1.47, rather than $2.13, for a portion of 2008 Notes for which it has submitted conversion notices. The
lawsuit requests additional shares based on such conversions, damages and declaratory relief. Since the conversion price re-set date on February 27, 2009 through May 8, 2009, the holder has converted approximately $8.8 million in face
value, and we have issued approximately 4.1 million in shares to settle these conversion at $2.13 per share. Assuming a conversion price of $1.47, 1.8 million additional shares would be issuable in connection with these
conversions. We believe the lawsuit is without merit, and have disputed the holders assertion. If we were to be found to have not satisfied our obligations under the 2008 Notes, because we processed the applicable
conversion notices at the wrong conversion price, we could, among other negative consequences, be required to redeem the 2008 Notes in whole or in part. We do not believe that this lawsuit will have a material impact on our financial
statements.

In accordance with SFAS No. 5, Accounting for Contingencies the Company believes any contingent
liabilities related to these claims are not probable or estimable and therefore no amounts have been accrued in regards to these matters.

In addition to the matter noted above, from time to time, the Company is subject to legal proceedings, asserted claims and investigations in the ordinary course of business, including commercial claims, employment and other matters, which
management considers to be immaterial, individually and in the aggregate. In accordance with generally accepted accounting principles, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a
particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against the Company. It is possible, nevertheless, that the Companys consolidated
financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.



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

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

We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors previously discussed in our Form 10-K for the year ended December 31, 2008.

Risks Applicable to Our Business Generally

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

You must evaluate our business in light of the uncertainties and
complexities affecting an early stage biotechnology company or cellulosic ethanol manufacturing company. Our existing proprietary technologies are new and in the early stage of development for both biofuels and specialty enzymes. We may not be
successful in the commercial development of these or any further technologies, products or processes. Successful products and processes require significant development and investment, including testing, to demonstrate their cost- effectiveness prior
to regulatory approval and commercialization. To date, we have commercialized 12 of our own products, all in the specialty enzymes area, including our Purifine, Fuelzyme, and Luminase enzymes. In addition, four of our collaborative partners,
Invitrogen Corporation, Danisco Animal Nutrition, Givaudan Flavors Corporation, and Syngenta Animal Nutrition (formerly known as Zymetrics, Inc.), have incorporated our technologies or inventions into their own commercial products from which we have
generated and/or can generate royalties. We have not yet commercialized any products or processes related to our biofuels segment. Our specialty enzyme products and technologies have only recently begun to generate significant revenues. Because of
these uncertainties, our discovery process may not result in the identification of product candidates or biofuels production processes that we or our collaborative partners will successfully commercialize. If we are not able to use our technologies
to discover new materials, products, or processes with significant commercial potential, or if we are unable to sell our cellulosic ethanol or an integrated solution for the production of cellulosic ethanol, we will continue to have significant
losses in the future due to ongoing expenses for research, development and commercialization efforts and we may be unable to obtain additional funding to fund such efforts.

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

As of March 31, 2009, we had a working capital deficit of $11.6 million, and an accumulated deficit of approximately $610.2 million. We expect to continue to incur additional losses for the foreseeable future.

Product revenues currently account for the majority of our annual revenues, and we expect that a significant portion of our revenue for
2009 will result from the same source. Future revenue from collaborations is uncertain and will depend upon our ability to maintain our current collaborations, enter into new collaborations and to meet research, development, and commercialization
objectives under new and existing agreements. Over the past two years, our product revenue in absolute dollars and as a percentage of total revenues has increased significantly. Due to uncertainty in current market conditions, our product revenue
may not continue to grow in either absolute dollars or as a percentage of total revenues. If product revenue increases, we would expect sales and marketing expenses to increase in support of increased volume. Additionally, as our business model
develops, our general and administrative expenses might increase based on broadening our infrastructure to support continued growth in the business. In addition, the amounts we spend will impact our ability to become profitable and this will depend,
in part, on:



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



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



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



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



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



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



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We may not achieve any or all of our goals and, thus, we cannot provide assurances that we will ever be
profitable on an operating basis or maintain revenues at current levels. If we fail to achieve profitability and maintain or increase revenues, the market price of our common stock will likely decrease.

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

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

The report of our independent registered
public accounting firm for the fiscal year ended December 31, 2008 contains an explanatory paragraph which states that we have incurred recurring losses from operations and, based on our operating plan and existing working capital deficit, this
raises substantial doubt about our ability to continue as a going concern. We have an accumulated deficit of $610.2 million and working capital deficit of $11.6 million as of March 31, 2009.

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

We will require additional capital to fund our operations,
including substantial capital to fund the first commercial cellulosic ethanol plant with BP, which we estimate will cost as much as $300 million to complete. We believe that we will be successful in raising or generating additional cash to fund
these requirements through a combination of additional corporate partnerships and collaborations, federal and state grant funding, project financing, including non-recourse debt, product sales, selling or financing assets, and, if necessary and
available, the sale of equity or debt securities. There can be no assurance that we will be able to obtain any sources of financing on acceptable terms, or at all. If we are unsuccessful in raising additional capital from any of these sources, we
may need to defer, reduce or eliminate certain planned expenditures.

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

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

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



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



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



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



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



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



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



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



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

We may seek additional funds through a combination of existing and additional corporate partnerships and collaborations, federal, state and local grant
funding and loan guarantees, product sales, selling or financing assets, and the sale of equity or debt securities. In addition, we expect to attempt to raise funds in the non-recourse, project-finance capital markets to finance growth of our
project portfolio. Such funds may not be available to us or may be available on terms not satisfactory to us. We currently have applications pending for federal, state and local financial incentives such as grants; however, such funds may not be
available to us in adequate amounts, if at all. An inability to raise adequate funds to support the growth of our project portfolio will materially adversely affect our business.



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



| |  |  | reduce our capital expenditures;
| | - |  | --------------------------------



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



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



| |  |  | significantly reduce our workforce;
| | - |  | -----------------------------------



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



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



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

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

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

We may not have adequate funds to pay interest on our 5.5% Convertible Senior Notes, or 2007 Notes, or to purchase the 2007 Notes on required purchase dates or upon a
fundamental change.

In April 2007, we completed the sale of $120 million of 2007 Notes, the terms of which include provisions whereby
on each of April 1, 2012, April 1, 2017 and April 1, 2022, holders of the 2007 Notes may require us to purchase, for cash, all or a portion of their 2007 Notes at 100% of their principal amount, plus any accrued and unpaid
interest up to, but excluding, that date. As of March 31, 2009, $99.5 million of the 2007 Notes remains outstanding. The 2007 Notes also require us to pay interest at the rate of 5.5% per year in cash. If a fundamental change,
which is defined in the indenture related to the 2007 Notes, occurs, holders of the 2007 Notes may require us to repurchase, for cash, all or a portion of their 2007 Notes. We may not have sufficient funds to pay the interest, purchase price or
repurchase price of the 2007 Notes when due. In addition, the terms of any borrowing agreements which we may enter into from time to time may require early repayment of borrowings under circumstances similar to those constituting a fundamental
change. For example, the holders of the 2008 Notes may require us to redeem the 2008 Notes under such circumstances. Those agreements may also make our repurchase of 2007 Notes an event of default under the agreements. If we fail to pay
interest on the 2007 Notes or to purchase or repurchase the 2007 Notes when required, we will be in default under the indenture for the 2007 Notes, which would also cause an event of default under the 2008 Notes and may also cause an event of
default under the terms of other borrowing arrangements that we may enter into from time to time. Any of these events could have a material adverse effect on our business, results of operations and financial condition, up to and including causing us
to cease operations altogether.

We may not have adequate funds to pay interest or make-whole payments on our 8% Senior Convertible Notes,
or 2008 Notes, or to purchase the 2008 Notes at required times.

In February 2008, we completed a private placement of $71 million of
2008 Notes and warrants to purchase our common stock. As of May 8, 2009, approximately $31.3 million of the 2008 Notes remains outstanding.

We are required to pay interest on the 2008 Notes at the rate of 8% per year, and the 2008 Notes also include a make-whole provision whereby, upon any holders conversion of the 2008 Notes for common stock, we are
obligated to pay such holder an amount equal to the interest foregone over the life of the 2008 Notes based on such conversion, discounted back to the date of conversion using the published yield on two-year U.S. Treasury notes as the discount rate.
The 2008 Notes provide that we may, subject to the satisfaction or waiver of certain conditions (including that the shares to be issued must be registered for resale under a registration statement filed with the Securities and Exchange Commission),
pay interest or make-whole amounts with shares of our common stock at a 5% discount to the applicable stock price at the time of the interest payment or conversion. The registration statement that we filed with the Securities and
Exchange Commission to register the resale of the shares issuable upon conversion of the 2008 Notes, along with interest shares and shares issuable upon exercise of the warrants, only registers a limited number of conversion shares and interest
shares, and our ability to pay make-whole payments and interest payments under the 2008 Notes using shares is, absent waiver from the holder of the condition, accordingly limited. As of May 8, 2009, our potential maximum remaining
make-whole obligation assuming conversion of 100% of the 2008 Notes on that date was approximately $8.0 million, a substantial portion of which we may be required to settle in cash. Were many holders of our 2008 Notes to convert their
2008 Notes, or if a significant amount were converted at approximately the same



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time, our cash resources at that time could be insufficient to make the required make-whole payments. Also, one holder of 2008 Notes has asserted
that certain make-whole payments made to it in shares should have been paid in cash, and has filed a lawsuit against us asserting a conversion price of $1.47, rather than $2.13, for a portion of its 2008 Notes for which it has submitted
conversion notices. The lawsuit requests additional shares based on such conversions, damages and declaratory relief. We have disputed the assertions made by that noteholder and believe our positions are correct. However, if we were found to have
been required to pay such make-whole payments in cash, or were found to have otherwise not satisfied our obligations under the 2008 Notes, we could, among other negative consequences, be required to redeem the 2008 Notes in whole or in
part. The holders of the 2008 Notes may also require us to redeem their 2008 Notes in connection with certain change of control events, and any borrowing agreements which we may enter into from time to time may similarly require early
repayment of borrowings under circumstances like those constituting a change of control under the terms of the 2008 Notes. For example, the holders of the 2007 Notes may require us to repurchase, for cash, all or a portion of the 2007
Notes in such circumstances. Those agreements may also make our repurchase of 2008 Notes an event of default under the agreements. We may not have sufficient funds to pay the interest, make-whole payments or repurchase or redemption
amounts of the 2008 Notes when due, or any amounts due under other borrowing agreements at the same time such amounts are due under the 2008 Notes or otherwise, and any default under the 2008 Notes or any other borrowing agreements (including the
2007 Notes) could cause events of default under our other debt obligations (including the 2008 Notes and the 2007 Notes, as applicable). Any of these events could cause the maturity of some or all of our debt obligations (including the 2008 Notes
and the 2007 Notes, as applicable) to be accelerated, and could have a material adverse effect on our business, results of operations and financial condition, up to and including causing us to cease operations.

Conversion of the 2008 Notes and/or the 2007 Notes, exercise of related warrants, anti-dilution adjustments that may occur under the 2008 Notes and/or the related
warrants, and the issuance of shares of common stock in payment of interest or make-whole payments under the 2008 Notes will dilute the ownership interest of existing stockholders.

The conversion or exercise of some or all of the 2007 Notes and/or the 2008 Notes and related warrants, and the issuance of shares of common stock in
payment of interest or make-whole payments under the 2008 Notes, could significantly dilute the ownership interests of existing stockholders. In April 2008, the conversion price of the 2007 Notes decreased from $8.16 per share to $6.40
per share, based on a re-set provision contained in the 2007 Notes. In February 2009, the conversion price of the 2008 Notes decreased from $4.09 per share to $2.13 per share, based on a re-set provision contained in the 2008 Notes. These re-sets in
the applicable conversion prices for the 2007 Notes and the 2008 Notes have caused, and will continue to cause, additional shares to be issued upon conversion of these instruments compared to the number of shares initially issuable upon such
conversions.

The 2008 Notes also contain full ratchet anti-dilution protection, which could cause further reductions in the $2.13
conversion price for the 2008 Notes should we engage in subsequent issuances that trigger those provisions. One holder of the 2008 Notes has filed a lawsuit against us asserting a conversion price of $1.47, rather than $2.13, for a portion of its
2008 Notes for which it has submitted conversion notices. We have disputed this assertion and believe our position is correct. If we were required to honor those conversion notices or future conversion notices at the lower conversion price, that
would cause additional shares to be issued. Additionally, the warrants related to the 2008 Notes and certain warrants held by Syngenta contain weighted average anti-dilution protection that could also cause more shares to be come issuable under
those warrants if we engage in subsequent issuances that trigger those provisions. In addition, given the low recent values for our stock price, to the extent we satisfy required interest or make-whole payments under the 2008 Notes by
issuing shares, which we intend to do to the extent permissible under the terms of the 2008 Notes, including to the extent we obtain waivers from the holders to do so, we will be issuing relatively more shares than if our stock price was at a higher
level. For example, in connection with the conversion of $27.6 million in aggregate principal amount of 2008 Notes that occurred between January 1, 2009 and May 8, 2009, we issued approximately 15.9 million shares in partial
satisfaction of the related make-whole obligations. Sales in the public market of the common stock issuable upon conversion of the 2007 Notes and/or 2008 Notes or exercise of the related warrants, or issuable in payment of interest or
make-whole payments under the 2008 Notes, have, and we expect that any future sales based on such conversions, exercises or issuances will continue to, adversely affect prevailing market prices of our common stock. In addition, the
existence of the 2007 Notes and 2008 Notes may encourage short selling by market participants because the conversion of the 2007 Notes and 2008 Notes could be used to satisfy short positions, or the anticipated conversion of the 2007 Notes or 2008
Notes into shares of our common stock could depress the price of our common stock.

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

We are subject to certain covenants under the 2008 Notes that restrict our financial and operational
flexibility. For example, we are restricted from incurring additional indebtedness (other than certain project financing debt and up to $15 million principal amount of additional indebtedness, subject to increase in certain circumstances based on
the closing sale price of our common stock). In addition, if we sell, transfer or dispose of any part of our specialty enzymes business unit (other than sales or licenses in the ordinary course of business and other than any sales, dispositions or
other transfers, in one or a series of related transactions, providing for gross proceeds of $1 million or less), we are required to deposit cash in a restricted cash account for the benefit of the holders of the 2008 Notes in an amount equal to the
lesser of 50% of the total consideration received for such sale, transfer or disposition and 50% of the then outstanding principal amount of the 2008 Notes. The obligation to make such a deposit terminates when the closing sale price of our common
stock exceeds $7 per share for 30 consecutive trading days and certain other conditions are satisfied. The



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2008 Notes also include full ratchet anti-dilution protection any future financing by us involving the issuance of equity, or rights to acquire equity, at a
price or prices below the prevailing conversion price of the 2008 Notes at the time of such a financing transaction would trigger these provisions in the 2008 Notes and those warrants, causing a further, possibly substantial, reduction in the
conversion price for the 2008 Notes or the exercise price of the warrants and additional possible dilution for our shareholders, which would increase the cost and reduce the benefits to us of any such equity financing. As a result of these
covenants, our ability to finance our operations through the incurrence of additional debt or the issuance of additional equity or the sale of our specialty enzymes business unit is limited. The 2008 Notes also include a covenant prohibiting us from
repaying, redeeming, restructuring or modifying our 2007 Notes. As a result of this covenant, we will likely be unable to refinance the 2007 Notes without a prior or concurrent refinancing of the 2008 Notes.

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

The face
value of our total consolidated long-term debt as of March 31, 2009, which includes the 2007 Notes, the 2008 Notes and debt under our secured credit facility with a commercial bank, was approximately $149 million, representing approximately
139% of our total capitalization as of such dates.

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



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



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



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



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



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

Moreover, if we fail to make any required payments under our debt, or otherwise breach the terms of our debt, all or a substantial portion of our debt
could be subject to acceleration. In such a situation, it is unlikely we would be able to repay the accelerated debt, which would have a material adverse impact on our business, results of operations and financial condition, up to and including
causing us to cease operations.

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

Revenue from our collaborations has decreased both as a proportion of our total revenue and in absolute dollars in recent years. Since we do not
currently possess the resources necessary to independently fund the development and commercialization of cellulosic ethanol, or all of the potential specialty enzyme products that may result from our technologies, we expect to continue to pursue,
and in the near-term derive additional revenue from, strategic alliance and collaboration agreements to develop and commercialize products and technologies that are core to our current market focus. We will have limited or no control over the
resources that any strategic partner or collaborator may devote to our products and technologies. Any of our present or future strategic partners or collaborators may fail to perform their obligations as expected. These strategic partners or
collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our strategic partners or collaborators may not develop technologies or products
arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing, or sale of these technologies and products. If any of these events occur, or we fail to enter into or maintain strategic
alliance or collaboration agreements, we may not be able to commercialize our technologies and products, grow our business, or generate sufficient revenue to support our operations.

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



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



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



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



| |  |  | We develop technologies or products and processes or enter into additional strategic alliances or collaborations that conflict with the business objectives of our
strategic partners or collaborators;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We disagree with our strategic partners or collaborators as to rights to intellectual property we develop, or their research programs or commercialization
activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Our strategic partners or collaborators experience business difficulties which eliminate or impair their ability to effectively perform under our strategic
alliances or collaborations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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

We do not expect to receive continued funding under our collaboration with Syngenta, which could negatively impact our business.

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

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

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

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

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

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

If appropriate opportunities become available, we may consider acquiring businesses, assets, technologies, or products that we believe are a strategic
fit with our business. As of March 31, 2009, we have no commitments or agreements with respect to any material acquisitions. If we further pursue such a strategy, we could:



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



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



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

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

*Our business is subject to complex corporate governance, public disclosure, and accounting requirements that have increased both our costs and the risk of
noncompliance.

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and
financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Financial Accounting Standards Board, the Public Company Accounting
Oversight Board, the SEC, and NASDAQ, have implemented requirements, standards and regulations, including expanded disclosures, accelerated reporting requirements and more complex accounting rules, and continue developing additional requirements.
Our efforts to comply with these regulations have resulted in, and are likely to continue resulting in, increased general and administrative expenses and diversion of management time and attention from operating activities to compliance activities.
We may incur additional expenses and commitment of managements time in connection with further evaluations, either of which could materially increase our operating expenses or accordingly increase our net loss.



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Because new and modified laws, regulations, and standards are subject to varying interpretations, in many
cases due to their lack of specificity, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This evolution may result in continuing uncertainty regarding financial disclosures and
compliance matters and additional costs necessitated by ongoing revisions to our disclosures and governance practices. This further could lead to possible restatements, due to the complex nature of current and future standards and possible
misinterpretation or misapplication of such standards.

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

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

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

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

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

Our commercial success depends in part on
not infringing patents and proprietary rights of third parties, and not breaching any licenses or other agreements that we have entered into with regard to our technologies, products, and business. The patent positions of companies whose businesses
are based on biotechnology, including our patent position, involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. We intend to apply for patents relating to our technologies, processes and
products as we deem appropriate. Patents, if issued, may be challenged, invalidated, or circumvented. We cannot be sure that patents have not been issued that could block our ability to obtain patents or to operate as we would like. Others may
develop similar technologies or duplicate technologies developed by us. There may be patents in some countries that, if valid, may block our ability to commercialize products in these countries if we are unsuccessful in circumventing or acquiring
the rights to these patents. There also may be claims in published patent applications in some countries that, if granted and valid, may also block our ability to commercialize processes or products in these countries if we are unable to circumvent
or license them. Our intellectual property rights may be challenged by others. For example, in February 2007, an interference proceeding was declared in the United States Patent and Trademark Office between a United States patent assigned to us
and a pending United States patent application owned by a third party, with allowable claims directed to our GeneReassembly technology. On February 25, 2008 the Board of Patent Appeals and Interferences ruled in favor of the other party and the
claims in our issued patent were cancelled. We are not currently a party to any litigation with regard to our patent position. However, the biotechnology industry is characterized by frequent and extensive litigation regarding patents and other
intellectual property rights. Many biotechnology companies have employed intellectual property litigation as a way to gain a competitive advantage. When and if we become involved in litigation or interference proceedings declared by the United
States Patent and Trademark Office, or oppositions or other intellectual property proceedings outside of the United States, to defend our intellectual property rights or as a result of alleged infringement of the rights of others, we might have to
spend significant amounts of money. Any intellectual property litigation could potentially force us to do one or more of the following:



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



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



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



| |  |  | redesign those products, facilities or processes that use any allegedly infringing technology, which may result in significant cost or delay to us, or which could
be technically infeasible.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are aware of a significant number of patents and patent applications relating to aspects
of our technologies filed by, and issued to, third parties. We cannot assure you that if we are sued on these patents we would prevail.

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

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

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

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

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



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



| |  |  | Public attitudes regarding, and potential changes to laws governing, ownership of genetic material which could harm our intellectual property rights with respect to
our genetic material and discourage collaborative partners from supporting, developing, or commercializing our products, processes and technologies; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

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

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



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In the United States, specialty enzyme products for our target markets are regulated based on their use,
by either the FDA, the EPA, or, in the case of plants and animals, the USDA. The FDA regulates drugs, food, and feed, as well as food additives, feed additives, and substances generally recognized as safe that are used in the processing of food or
feed. While substantially all of our current specialty enzyme projects to date have focused on non-human applications and specialty enzyme products outside of the FDAs review, in the future we may pursue collaborations for further research and
development of drug products for humans that would require FDA approval before they could be marketed in the United States. In addition, any drug product candidates must also be approved by the regulatory agencies of foreign governments before any
product can be sold in those countries. Under current FDA policy, our products, or products of our collaborative partners incorporating our technologies or inventions, to the extent that they come within the FDAs jurisdiction, may be subject
to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions which cannot be satisfactorily answered, if results from pre-clinical or clinical trials do not meet regulatory requirements or if they are deemed to be food
additives whose safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to resolve and could prevent a product from being commercialized. Even after investing significant time and expenditures, our collaborators may not obtain
regulatory approval for any drug products that incorporate our technologies or inventions. Our collaborators have not submitted an investigational new drug application for any product candidate that incorporates our technologies or inventions, and
no drug product candidate developed with our technologies has been approved for commercialization in the United States or elsewhere. The EPA regulates biologically derived chemical substances not within the FDAs jurisdiction. An unfavorable
EPA ruling could delay commercialization or require modification of the production process resulting in higher manufacturing costs, thereby making the product uneconomical. In addition, the USDA may prohibit genetically engineered plants from being
grown and transported except under an exemption, or under controls so burdensome that commercialization becomes impracticable. Our future products may not be exempted by the USDA.

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

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

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

Furthermore, as we operate our business, we may become liable for the investigation and cleanup of environmental contamination at each of the properties
that we own or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory
agencies, we may be responsible under Comprehensive Environmental Response, Compensation and Liability Act, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may
also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require expending significant amounts for
investigation, cleanup, or other costs.

In addition, new laws, new interpretations of existing laws, increased governmental enforcement of
environmental laws, or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental
controls at ethanol production facilities. Present and future environmental laws and regulations, and interpretations thereof, applicable to ethanol operations, more vigorous enforcement policies and discovery of currently unknown conditions may
require substantial expenditures that could have a material adverse effect on our results of operations and financial position.

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

Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive, and biological materials. Our
operations also produce hazardous waste products. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state, and local laws and regulations govern the use,
manufacture, storage, handling, and disposal of these materials. We may be sued for any injury or contamination that results



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from our use or the use by third parties of these materials, and our liability may exceed our total assets. In addition, compliance with applicable
environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development, or production efforts.

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

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

We face, and will continue to face, intense competition in our specialty enzymes business. There are a number of
companies who compete with us in various steps throughout our technology process. For example, Codexis, Maxygen, Inc., Evotec, and Xencor have alternative evolution technologies. Integrated Genomics Inc., Myriad Genetics, Inc., and ArQule, Inc.
perform screening, sequencing, and/or bioinformatics services. Novozymes A/S, Genencor International Inc., and Dyadic International are involved in development, overexpression, fermentation, and purification of enzymes. There are also a number of
academic institutions involved in various phases of our technology process. Many of these competitors have significantly greater financial and human resources than we do. These organizations may develop technologies that are superior alternatives to
our technologies. Further, our competitors may be more effective at implementing their technologies for modifying DNA to develop commercial products.

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

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

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

The loss of any key members of our senior management, or business development or scientific staff, or failure to attract or retain other key management, business development or scientific employees, could prevent us from developing and
commercializing biofuels and cellulosic ethanol and other new products and entering into collaborations or licensing arrangements to execute on our business strategy. We may not be able to attract or retain qualified employees in the future due to
the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the San Diego and New England areas, or due to competition for, or availability of, personnel with the qualifications or
experience necessary for our biofuels business, particularly in the Jennings, Louisiana area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely
affect our ability to meet the demands of our collaborative partners in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs



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are dependent on our ability to attract and retain highly skilled scientists, including molecular biologists, biochemists, and engineers. Competition for
experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms. All of our employees are at-will employees, which means that either the
employee or we may terminate their employment at any time.

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

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

We may be sued for product liability.

We may be held liable if any product or process we develop, or any product which is made or process which is performed with the use of any of our
technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing, or sale. We currently have limited product liability insurance covering claims up to $10 million that may not fully cover our potential
liabilities. In addition, if we attempt to obtain additional product liability insurance coverage, this additional insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products or processes developed by us or our collaborative partners. If we are sued for any injury
caused by our products, our liability could exceed our total assets.

Risks Specific to Our Vertically-Integrated Biofuels Business

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

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



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



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



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



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



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



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



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

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

While we have a pilot-scale cellulosic ethanol facility and have commissioned our demonstration-scale cellulosic ethanol facility to demonstrate the
economics of cellulosic ethanol production using our proprietary processes, we have yet to complete the optimization of our demonstration-scale facility, nor have we begun construction of a large-scale commercial cellulosic ethanol
facility. While we have estimated the construction and operating costs for our initial large-scale commercial cellulosic ethanol facilities, these assumptions may prove to be incorrect. Accordingly, we cannot be sure that we can
manufacture cellulosic ethanol in an economical manner at large scale. If we fail to commence large-scale production in a timely manner or to develop large-scale manufacturing capacity and experience, or fail to manufacture cellulosic ethanol
economically on a commercial scale or in commercial volumes, our commercialization of cellulosic ethanol and our business, financial condition, and results of operations will be materially adversely affected.



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

Our strategy currently includes the continued development of our pilot-scale facility for process development, optimization of our demonstration-scale plant to validate the economics of our processes at commercial-scale volumes of
cellulosic ethanol production, and development and construction of commercial scale plants for the production of large quantities of ethanol for commercial distribution and sale. We plan to grow our business by investing in new facilities and/or
acquiring existing facilities, either independently or with potential development partners, as well as pursuing other business opportunities such as the production of other renewable fuels to the extent we deem those opportunities advisable. We
believe that there is increasing competition for suitable production sites. We may not find suitable sites for construction of new facilities, suitable acquisition candidates or other suitable expansion opportunities.

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

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

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

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

We have experienced cost overruns for our
demonstration plant through the commissioning phase. We may continue to experience significant delays or cost overruns during the optimization phase as a result of a variety of factors, such as shortages of workers or materials, transportation
constraints, adverse weather, unforeseen design flaws, construction defects, or labor issues, any of which could prevent us from commencing or optimizing operations as expected at our facilities.

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

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

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



| |  |  | successfully complete the optimization of our demonstration facility;
| | - |  | ---------------------------------------------------------------------



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



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



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

We are dependent on BP under our joint ventures in cellulosic ethanol.

We have a strategic partnership with BP to accelerate the development and commercialization of cellulosic ethanol technology. The first phase of our
partnership combines a broad technology platform and operational capabilities in an effort to advance the development of a portfolio of low-cost, environmentally-sound cellulosic ethanol production facilities in the United States, and potentially
throughout the world. The second phase of our partnership is focused on the commercial deployment of our technologies into a commercial-scale cellulosic ethanol production facility. We are dependent upon BPs financial and technical
contributions under both of these joint ventures in order to realize the benefits of the strategic partnership with BP. If BP were not to engage actively in efforts to perform under our joint ventures or were to pursue alternative efforts in
cellulosic ethanol, the joint ventures may not be successful and our business could be harmed. If BP were to discontinue its participation in either of these joint ventures, we would need to continue the efforts on our own or identify and enter into
arrangements with one or more other partners. If we were to fund all of the technology development efforts, we would need to raise additional funds to do so, which would be difficult in the current financing environment. Alternatively, it may be
difficult for us to find a different partner that is a good strategic fit and to enter into a new strategic relationship on terms that are favorable to us. If we could not find an alternative way to pursue our development and commercialization
efforts in cellulosic ethanol, our business would be adversely affected.

Our failure to successfully develop our cellulosic ethanol processes and
technology would adversely affect our ability to achieve the benefits under our strategic partnership with BP, and could prevent us from successfully developing and commercializing cellulosic ethanol and achieving or sustaining profitability.

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

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

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



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If we do not participate in projects under our commercial joint venture with BP or are unable to fund our portion of
projects that we have elected to participate in under the joint venture, our interest in the joint venture may be bought out by BP or diluted, and the anticipated economic benefits to us of the joint venture may be lost or reduced.

We are participating in commercial development activities with BP under Highlands Ethanol LLC, a joint venture owned equally by BP and us, which will
act as the commercial entity for the deployment of cellulosic ethanol technology being developed and proven under our joint development program with BP. This joint venture is intended to progress the development of one of the nations first
commercial-scale cellulosic ethanol facilities, located in Highlands County, Florida and to create future opportunities for commercializing cellulosic ethanol technologies. If we do not continue to participate in the development of the Highlands
project by funding our portion of the costs, or if we do participate but are unable to meet our funding obligations with respect to the project, BP may chose to buy out our interest in the joint venture or may dilute our interest in the joint
venture. Loss or reduction of our interest in Highlands could have a material adverse impact on our future revenues and could have a material adverse impact on our business, financial condition and results of operations.

If we are unable to co-develop commercial plant production projects with BP under our Highlands joint venture, we may not achieve the anticipated benefits of our
relationship with BP.

There are substantial risks involved in the design, development, and construction of commercial-scale cellulosic
ethanol production facilities, which is the focus of our Highlands joint venture with BP, including, but not limited to, the following risks:



| |  |  | legal and regulatory risk related to land use, permitting, and environmental regulations;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | cost overruns;
| | - |  | --------------



| |  |  | risk that technology will not scale from a demonstration to commercial facility;
| | - |  | --------------------------------------------------------------------------------



| |  |  | risk that production costs will not be competitive with the price of competing fuels like gasoline or corn-based ethanol;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to obtain necessary financing to fund the commercial project;
| | - |  | -----------------------------------------------------------------------



| |  |  | decrease in support from the government through loss of subsidies, loss of tax credits, a decrease in federal financial support including the risk that we may not
be granted the loan guarantee from the DOE which BP and we recently applied for; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | introduction of next-generation technologies that are superior to our cellulosic ethanol process technology.
| | - |  | ------------------------------------------------------------------------------------------------------------

Any one of these factors could have a material adverse impact on our and BPs ability to complete our first planned commercial facility, which would
have a material adverse impact on our business, financial condition and results of operations.

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

We allocated $42.4 million of the purchase price of Celunol on June 20, 2007 to
acquired in-process research and development projects. Acquired in-process research and development, or IPR&D, represents the valuation of acquired, to-be-completed research projects. Prior to the merger, Celunols ongoing research and
development initiatives primarily involved the development of its patented and proprietary biotechnology to enable production of fuel-grade ethanol from cellulosic biomass materials. As of the merger date, pursuant to authoritative guidance under
SFAS No. 2, Accounting for Research and Development Costs, these projects were not determined to have reached technological feasibility and have no alternative future use. Accordingly, the amounts allocated to those projects
were expensed in the accompanying statements of operations in June 2007, the period in which the merger was consummated.

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



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and profitability of the developmental projects, discount rates of 40% were considered appropriate for valuation of the IPR&D. We believe that these
discount rates were commensurate with the projects stage of development and the uncertainties in the economic estimates described above.

Since our IPR&D represents costs for technology that has not yet reached technological feasibility, we have, and will continue to, require substantial investment in the future development and commercialization of our Gen 1 technology.
While we expect to deploy this technology at a commercial scale as early as 2012, we can not assure you that we will ever be successful in commercializing this technology. If these projects are not successfully developed, our sales and profitability
will be adversely affected in future periods.

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

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

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

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



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



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



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



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



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



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

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

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



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



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



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



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



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

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

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

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



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

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



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



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



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



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



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



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



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



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

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

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

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

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

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

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



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

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

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

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

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

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

Domestic fuel
ethanol production has increased steadily from 1.5 billion gallons per year in 1999 to 9.2 billion gallons per year in 2008, according to the Renewable Fuels Association. In addition, there is a significant amount of capacity being added to the fuel
ethanol industry, including capacity that may be added as a result of government programs and/or incentives, and capacity added to address anticipated increases in demand. However, demand for ethanol may not increase as quickly as expected, or at
all. If the ethanol industry has excess capacity, a fall in prices will likely occur which will have an adverse impact on the viability of our vertical integration strategy within biofuels, as well as our results of operations, cash flows and
financial condition if we proceed to market ethanol. Demand for ethanol could be impaired due to a number of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption could occur as a
result of increased gasoline or oil prices. For example, price increases could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline mileage capabilities.

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

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

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



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

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

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

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

The elimination or alteration of the mandates for ethanol use contained in the Energy Independence and Security Act of 2007 could have a material
adverse effect on our results of operations.

Under the Energy Independence and Security Act of 2007, use of renewable fuels, including
ethanol, in the United States is mandated to increase from 9 billion gallons in 2008 to 36 billion gallons by 2022. The Act also mandates the use of 16 billion gallons per year of cellulosic ethanol by 2022. Elimination or reduction
of these mandated targets could adversely effect demand for ethanol and could have a material adverse effect on our results of operations and financial condition.

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

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

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

Imported ethanol is generally subject to a $0.54 per gallon tariff and a 2.5% ad valorem tax that was designed to offset the $0.51 per
gallon ethanol subsidy available under the federal excise tax incentive program for refineries that blend ethanol in their fuel. There is a special exemption from the tariff for ethanol imported from certain countries in Central America and the
Caribbean islands, which is limited to a total of 7.0% of United States production per year (with additional exemptions for ethanol produced from feedstock in the Caribbean region over the 7.0% limit). We do not know the extent to which the volume
of imports would increase or the effect on United States prices for ethanol if the tariff is not renewed beyond its current expiration in early 2011. In addition The North America Free Trade Agreement countries, Canada and Mexico, are exempt from
duty. Imports from the exempted countries have increased in recent years and are expected to increase further as a result of new plants under development. In particular, the ethanol industry has expressed concern with respect to a new plant under
development by Cargill, Inc., one of the largest ethanol producers in the United States, in El Salvador that would take the water out of Brazilian ethanol and then ship the dehydrated ethanol from El Salvador to the United States duty-free. Since
production costs for ethanol in Brazil are estimated to be significantly less than what they are in the United States, the import of the Brazilian ethanol duty-free through El Salvador, or the import of ethanol duty-free from any country not
exempted from the tariff, may negatively impact the demand for domestic ethanol and the price at which we sell our ethanol.



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

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

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

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

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

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



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



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



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



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



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



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

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

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

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



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Risks Specific to Our Specialty Enzymes Business

*Macroeconomic conditions beyond our control could lead to decreases in demand for our products, reduced profitability or deterioration in the quality of our accounts
receivable.

Domestic and international economic, political and social conditions are uncertain due to a variety of factors, including



| |  |  | global, regional and national economic downturns;
| | - |  | -------------------------------------------------



| |  |  | the availability and cost of credit;
| | - |  | ------------------------------------



| |  |  | volatility in stock and credit markets;
| | - |  | ---------------------------------------



| |  |  | energy costs;
| | - |  | -------------



| |  |  | fluctuations in currency exchange rates
| | - |  | ---------------------------------------



| |  |  | the risk of global conflict;
| | - |  | ----------------------------



| |  |  | the risk of terrorism and war in a given country or region; and
| | - |  | ---------------------------------------------------------------



| |  |  | public health issues.
| | - |  | ---------------------

Our business depends on our customers demand for our products and services, the general economic health of current and prospective customers, and their desire or ability to make investments in technology. A
deterioration of global, regional or local political, economic or social conditions could affect potential customers in a way that reduces demand for our products and disrupts our manufacturing and sales plans and efforts. These global,
regional or local conditions also could disrupt commerce in ways that could interrupt our supply chain and our ability to get products to our customers. These conditions may also affect our ability to conduct business as usual. Changes in
foreign currency exchange rates may negatively impact reported revenue and expenses. In addition, our sales are typically made on unsecured credit terms that are generally consistent with the prevailing business practices in the country in
which the customer is located. A deterioration of political, economic or social conditions in a given country or region could reduce or eliminate our ability to collect accounts receivable in that country or region. In any of these events, our
results of operations could be materially and adversely affected.

*The financial instability of our customers could adversely affect our business and
result in reduced sales, profits and cash flows.

We sell our products to and extend credit to our customers based on an evaluation of
each customers financial condition, usually without requiring collateral. Our Fuelzyme customers are particularly exposed to the challenges facing the corn ethanol industry. While customer credit losses have historically been within our
expectations and reserves, we cannot assure you that this will continue. The financial difficulties of a customer could cause us to curtail business with that customer or the customer to reduce its business with us and cancel orders. Our inability
to collect on our trade accounts receivable from any of our major customers could adversely affect our results of operations and financial condition.

*Our international manufacturing operations are subject to the risks of doing business abroad, which could affect our ability to manufacture our products in international markets, obtain products from foreign suppliers or control the
costs of our products.

We currently rely on Fermic, a foreign sourcing of our products out of Mexico, to manufacture a majority all of
our commercial enzyme products. As a result, we are subject to the general risks of doing business outside the U.S., particularly Mexico, including, without limitation, work stoppages, transportation delays and interruptions, political instability,
expropriation, nationalization, foreign currency fluctuation, changing economic conditions, the imposition of tariffs, import and export controls and other non-tariff barriers, and changes in local government administration and governmental
policies, and to factors such as the short-term and long-term effects of health risks like the recent outbreak of swine flu. There can be no assurance that these factors will not adversely affect our business, financial condition or results of
operations.



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If we are unable to access the capacity to manufacture products in sufficient quantity, we may not be able to
commercialize our products or generate significant sales.

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

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

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

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

Due to capacity constraints at Fermic in 2008, we were not able to supply adequate quantities of Phyzyme necessary to meet the increased demand from
Danisco. As a result, we contracted with Genencor, a subsidiary of Danisco, to serve as a second-source manufacturer for Phyzyme. Pursuant to current accounting rules, revenue from Phyzyme that is supplied to us by Genencor is recognized in an
amount equal to the net profit share received from Danisco, as compared to the full value of the manufacturing costs plus profit share we currently recognize for Phyzyme we manufacture at Fermic. While this revenue recognition treatment has little
or no negative impact on the gross margin we recognize for every sale of Phyzyme, it does have a negative impact on the gross product revenue we recognize for Phyzyme as the volume of Phyzyme manufactured by Genencor increases.

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

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

We currently have only limited resources and capability to develop,
manufacture, market, sell, or distribute specialty enzyme products on a commercial scale. We will determine which specialty enzyme products to pursue independently based on various criteria, including: investment required, estimated time to market,
regulatory hurdles, infrastructure requirements, and industry-specific expertise necessary for successful commercialization. At any time, we may modify our strategy and pursue collaborations for the development and commercialization of some
specialty enzyme products that we had intended to pursue independently. We may pursue specialty enzyme products that ultimately require more resources than we anticipate or which may be technically unsuccessful. In order for us to commercialize more
specialty enzyme products directly, we would need to establish or obtain through outsourcing arrangements additional capability to develop, manufacture, market, sell, and distribute such products. If we are unable to successfully commercialize
specialty enzyme products resulting from our internal product development efforts, we will continue to incur losses in our specialty enzymes business, as well as in our business as a whole. Even if we successfully develop a commercial specialty
enzyme product, we may not generate significant sales and achieve profitability in our specialty enzymes business, or in our business as a whole.



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

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



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



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



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

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

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

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

Risks Related to Owning Our
Common Stock

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

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

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

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



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



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



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



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



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



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



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



| |  |  | the cost and timing of optimization and operation of our cellulosic ethanol demonstration facility;
| | - |  | ---------------------------------------------------------------------------------------------------



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



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



| |  |  | increased expenses related to the implementation of our vertical integration strategy within biofuels.
| | - |  | ------------------------------------------------------------------------------------------------------

A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Failure to achieve anticipated levels
of revenue could therefore significantly harm our operating results for a particular fiscal period.

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

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

The market price of our common stock has in the past been and is likely to continue to be subject to significant fluctuations. Between
January 1, 2006 and May 8, 2009, the closing market price of our common stock has ranged from a low of $0.23 to a high of $11.58. Since the completion of our merger with Celunol on June 20, 2007, the closing market price of our common
stock has ranged from $0.23 to $6.83. The closing market price of our common stock on March 31, 2009 was $0.29, and the closing price of our common stock on May 8, 2009 was $0.60. Some of the factors that may cause the market price of our
common stock to fluctuate include:



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



| |  |  | interruption or delay in the optimization and operation of our cellulosic ethanol demonstration facility;
| | - |  | ---------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | our results of operations and financial condition, including our cash reserves and cost level;
| | - |  | ----------------------------------------------------------------------------------------------



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



| |  |  | significant accidents, damage from severe weather or other natural disasters affecting our cellulosic ethanol pilot and demonstration facilities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | developments involving our 2008 Notes and 2007 Notes;
| | - |  | -----------------------------------------------------



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



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



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



| |  |  | sales of a substantial number of shares of our common stock by our large shareholders;
| | - |  | --------------------------------------------------------------------------------------



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



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



| |  |  | issuance of shares by us, and sales in the public market of the shares issued, upon conversion of the 2008 Notes, 2007 Notes or exercise of our outstanding
warrants, including the extent to which we issue shares versus pay cash in satisfaction of any make-whole obligation arising upon conversion of some or all of the 2008 Notes; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

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

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

Our officers, directors, and stockholders with at least 10% of our stock together controlled
approximately 47% of our outstanding common stock as of March 31, 2009. If these officers, directors, and principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and
control matters requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. 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.



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

None.



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

None.



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

None.



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

The Company hereby informs its
stockholders that the date of its 2009 annual meeting of stockholders will be more than 30 calendar days later than the date of the 2008 annual meeting of stockholders. The Company has not yet determined the date of its 2009 annual meeting of
stockholders, but will inform its stockholders of such date as soon as practicable. To be considered for inclusion in the proxy materials for the 2009 annual meeting of stockholders, stockholder proposals must be submitted in writing no later than
June 1, 2009, to the Companys Secretary at 55 Cambridge Parkway, Cambridge, MA 02142. Stockholders wishing to submit proposals or director nominations that are not to be included in the proxy statement for the 2009 annual meeting of
stockholders must do so no later than the tenth day following the day on which the date of the 2009 annual meeting of stockholders is publicly announced. Stockholders are also advised to review the Companys Bylaws, which contain additional
advance notice requirements, including requirements with respect to advance notice of stockholder proposals and director nominations.



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



|(a) | 
|--- | 



|               |  |                                                                                                                                                                                                                                                                                                            
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                     
|               | 
|3.1            |  | Amended and Restated Certificate of Incorporation - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, filed with the Securities
and Exchange Commission on May 12, 2000, and incorporated herein by reference.                                      
|               | 
|3.2            |  | Certificate of Amendment of Restated Certificate of Incorporation - filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006, filed with the
Securities and Exchange Commission on March 16, 2007, and incorporated herein by reference.                       
|               | 
|3.3            |  | Amended and Restated Bylaws - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (File No. 000-29173), filed with the Securities
and Exchange Commission on May 12, 2000, and incorporated herein by reference.                                       
|               | 
|3.4            |  | Amendment to Bylaws of Verenium Corporation - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 27, 2007, and
incorporated herein by reference.                                                                                  
|               | 
|3.5            |  | Certificate of Amendment of Restated Certificate of Incorporation, filed June 26, 2007 - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and
Exchange Commission on June 26, 2007, and incorporated herein by reference.                                        
|               | 
|3.6            |  | Certificate of Amendment of Restated Certificate of Incorporation, filed March 13, 2009 - filed as an exhibit to the Companys Current Report on Form 10-K for the year ended
December 31, 2008, filed with the Securities and Exchange Commission on March 16, 2009, and incorporated herein by reference.



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|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|4.1  |  | Form of Common Stock Certificate of the Company - filed as an exhibit to the Companys Registration Statement on Form S-1 (No. 333-92853) filed with the Securities and Exchange Commission,
as amended, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                      
|     | 
|4.2  |  | Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 13, 2000 (including the Form of Certificate of Designation of
Series A Junior Participating Preferred Stock attached thereto as Exhibit A, the Form of Right Certificate attached thereto as Exhibit B, and the Summary of Rights to Purchase Preferred Shares attached thereto as Exhibit C) - filed as an exhibit to
the Companys Current Report on Form 8-K (File No. 000-29173), filed with the Securities and Exchange Commission on December 15, 2000, and incorporated herein by reference.
|     | 
|4.3  |  | Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of December 2, 2002 - filed as an exhibit to the Companys
Current Report on Form 8-K (File No. 000-29173), filed with the Securities and Exchange Commission on December 4, 2002, and incorporated herein by reference.                                                                                                                                                                                                                                                                          
|     | 
|4.4  |  | Certificate of Designation of Series A Junior Participating Preferred Stock - filed as an exhibit to the Companys Current Report on Form 8-K (File No. 000-29173), filed with the Securities
and Exchange Commission on December 15, 2000, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                   
|     | 
|4.5  |  | Form of Warrant issued by the Company to Syngenta Participations AG - filed as an exhibit to the Companys Current Report on Form 8-K (File No. 000-29173), filed with the Securities and
Exchange Commission on January 6, 2003, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                             
|     | 
|4.6  |  | Registration Rights Agreement dated as of December 3, 2002 among Syngenta Participations AG, Torrey Mesa Research Institute, Syngenta Seeds AG and the Company - filed as an exhibit to the
Companys Current Report on Form 8-K (File No. 000-29173), filed with the Securities and Exchange Commission on January 6, 2003, and incorporated herein by reference.                                                                                                                                                                                                                                                                  
|     | 
|4.7 |  | Registration Rights Agreement, dated as of July 18, 2003, by and between GlaxoGroup Limited and the Company - filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 (File No. 000-29173), filed with the Securities and Exchange Commission on August 14, 2003, and incorporated herein by reference.                                                                                                                                                                                                                                                                              
|     | 
|4.8  |  | Second Amendment to Rights Agreement by and between the Company and American Stock Transfer and Trust Company, as Rights Agent, dated as of February 12, 2007 - filed as an exhibit to the
Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 12, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                      
|     | 
|4.9  |  | Reference is made to Exhibits 3.1, 3.2 and 3.5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     | 
|4.10 |  | Indenture, dated March 28, 2007, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee, including Form of 5.50% Convertible Senior Note due
2027 - filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 28, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                 
|     | 
|4.11 |  | Registration Rights Agreement, dated March 28, 2007, among the Company and the Initial Purchasers identified therein - filed as an exhibit to the Companys Current Report on Form 8-K, filed
with the Securities and Exchange Commission on March 28, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                  
|     | 
|4.12 |  | Form of Common Stock Warrant Agreement and Warrant Certificate - filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and
Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                             
|     | 
|4.13 |  | Form of Preferred Stock Warrant Agreement and Warrant Certificate - filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and
Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                          
|     | 
|4.14 |  | Form of Debt Securities Warrant Agreement and Warrant Certificate - filed as an exhibit to the Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and
Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                          
|     | 
|4.15 |  | Senior Debt Indenture, dated November 14, 2007, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee - filed as an exhibit to the
Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                                 
|     | 
|4.16 |  | Subordinated Debt Indenture, dated November 14, 2007, between the Company and Wells Fargo Bank, National Association, a national banking association, as trustee - filed as an exhibit to the
Companys Registration Statement on Form S-3 (No. 333-147403) filed with the Securities and Exchange Commission on November 15, 2007, and incorporated herein by reference.                                                                                                                                                                                                                                                           



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|        |  |                                                                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|4.17    |  | Form of Registration Rights Agreement  filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2008,
and incorporated herein by reference.                                                                                          
|        | 
|4.18    |  | Form of Senior Convertible Note  filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2008, and
incorporated herein by reference.                                                                                                
|        | 
|4.19    |  | Form of Warrant  filed as an exhibit to the registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 25, 2008, and incorporated herein by
reference.                                                                                                             
|        | 
|4.20    |  | Notice of Adjustment dated April 1, 2008, filed as an exhibit to the Companys Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 1, 2008 and
incorporated herein by reference.                                                                                             
|        | 
|10.1*   |  | Employment Agreement, dated January 13, 2009, by and between the Company and Jeffrey G. Black  filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the Securities and Exchange Commission on March 16, 2009, and incorporated herein by reference.
|        | 
|10.2  |  | Amended and Restated Liability Operating Agreement of Highlands Ethanol, LLC, dated February 18, 2009, by and between BP Biofuels North America, LLC, Verenium Biofuels Corporation and Highlands
Ethanol, LLC  filed herewith.                                                                                
|        | 
|10.3*   |  | Employment Agreement, dated April 24, 2009, by and between the Company and James E. Levine  filed herewith.                                                                                                                                                                                                    
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed herewith.                                                                                                                                      
|        | 
|31.2    |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended - filed herewith.                                                                                                                                      
|        | 
|32.1    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - filed herewith.                                                                                                                



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



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



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

SIGNATURES

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



|                   |  |  |  |                                                      
|------------------ |  |  |  | -----------------------------------------------------
|                   |  |  |  | VERENIUM CORPORATION                                 
|                   |  | 
|Date: May 15, 2009 |  |  |  | /s/ JAMES E. LEVINE                                  
|                   |  |  |  | James E. Levine                                      
|                   |  |  |  | Executive Vice President and                         
|                   |  |  |  | Chief Financial Officer (Principal Financial Officer)



69