BUSINESS

Overview

We are a biotechnology company focused on leveraging our proprietary technology platform to discover, develop, manufacture and market effective, safe and environmentally friendly natural pest management products for the agricultural and institutional and home markets. Our proprietary technology platform consists of our microorganism database, screening technology and natural product compound library and enables us to discover and characterize naturally occurring microorganisms that we believe can be developed into natural product solutions to almost any pest or plant disease. We are developing and commercializing a pipeline of natural pest management products, including our first product, Serenade, which we believe will offer superior alternatives to synthetic chemical pesticides and genetically modified crops for conventional and organic growers.

Using our proprietary technology platform, we isolate and screen naturally occurring microorganisms in a highly efficient manner to identify those that may have novel, effective and safe pest management characteristics. We then employ natural product chemistry to analyze and characterize the compound structures of selected microorganisms to identify product candidates for further development and commercialization. To date, we have screened more than 17,000 microorganisms, which has enabled us to identify 23 product candidates that display high levels of activity against insects, nematodes and plant diseases. These include Serenade, a biofungicide, and our most advanced product candidates, Sonata, a biofungicide, Virtuoso, a bioinsecticide, and Vivace, an enhancer of Bt, the world's most widely-used biopesticide. We believe that Serenade and each of these three initial product candidates can compete favorably with existing pest management products because they:

. are highly effective;

. offer growers an attractive value proposition in terms of cost-effective plant disease and pest control, resulting in increased yields;

. have an accelerated time-to-market;

. increase food and worker safety and reduce the risk of negative environmental impact;

. address the rapidly growing organic foods market; and

. reduce the risk of pest resistance.

We began selling Serenade in the United States in July 2000. On the basis of over 750 field trials, Serenade has generally proven to be as or more effective than synthetic chemical pesticides on a wide variety of plant diseases. Serenade is currently approved for use on high-value specialty crops, such as grapes, apples, pears, cherries, tomatoes, hops, several vegetables, peanuts and walnuts, and for home and garden uses, and we are seeking or plan to seek approval for other crops, such as bananas, citrus, turf and ornamentals. A formulation of Serenade is approved for use in organic agriculture, which allows us to address this increasingly important and rapidly growing market.

We believe that our proprietary technology platform will be the foundation for the discovery and development of natural products for the pest management industry. We also believe that our proprietary technology platform has broad commercial applications beyond pest management, including animal health, human health and pharmaceutical, aquaculture, industrial enzyme and specialty chemical applications. We intend to continue establishing strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to support the development and commercialization of natural products for pest management and other applications. To date, we have entered into strategic collaborations with Dow AgroSciences LLC, Maxygen, Inc., Dragoco Gerberging & Co. AG and American Home Products Corporation.

Industry Background

Crop Protection

Growers are constantly challenged to supply the increasing global demand for food, while reducing the negative impact of crop protection practices on consumers, farm workers and the environment. According to the Food and Agriculture Organization of the United Nations, global crop losses from pests, including bacterial, fungal and viral plant diseases, nematodes, insects and weeds, are estimated at $240 billion annually. Growers have historically relied on traditional practices such as cultivation, crop rotation and plant breeding to protect their crops. Although most growers currently rely on synthetic chemical pesticides for crop protection, an increasing number are integrating a combination of traditional practices with synthetic chemical pesticides, genetically modified crops and natural pest management products into a system called integrated pest management. Due to recent technological advances in natural pest management products and increasing environmental, food and worker safety concerns relating to synthetic chemical pesticides and genetically modified crops, natural pest management products are becoming an increasingly important component of the integrated pest management solution.

Synthetic Chemical Pesticides

According to Wood MacKenzie, consultants to the agricultural biotechnology sector, in 2000, approximately $30 billion was spent globally on synthetic chemical pesticides. Of this amount, approximately $11 billion was spent to protect high value specialty crops and turf and for home and garden uses, while the remainder was spent to protect large acreage row crops, according to Industrieverband Agrar e.V., the German Agrichemical Association. Although synthetic chemical pesticides often are effective in controlling pests, many are acutely toxic and are suspected carcinogens. The use of some synthetic chemical pesticides has been shown to have harmful effects on the environment, humans and other animals, including bees, lady beetles and other beneficial insects. Consumers are increasingly demanding food that is free of chemical residues and produced in an environmentally friendly manner. As a result, some food and beverage companies such as Campbell's Soup Company, Gerber Products Company and Kendall-Jackson Wine Estates restrict the use of several synthetic chemical pesticides on crops for which they have contracted.

In addition, growers incur significant costs when using synthetic chemical pesticides, including the costs of complying with required minimum waiting periods before workers may reenter fields after spraying, limitations on spraying in the period prior to a harvest because of chemical residues and increased susceptibility to pest resistance. According to the National Academy of Sciences, more than 500 pests have developed resistance to synthetic chemical pesticides. When resistance develops, growers must increase the quantity or frequency of pesticide applications to manage pests effectively, which not only increases crop production costs but also increases health and environmental risks associated with synthetic chemical pesticide use.

Concerns associated with the use of synthetic chemical pesticides, including adverse environmental effects, food and worker safety and increasing negative public perception, have prompted federal, local, state and foreign governments and regulatory agencies to restrict or eliminate some uses of these pesticides. For example, in 1996, Congress unanimously passed the Food Quality Protection Act of 1996, which has led the EPA to limit and, in some cases, prohibit the use of several synthetic chemical pesticides in and around schools and households and in foods. The European Union has also enacted legislation to reduce or restrict pesticide use.

Development and registration of new synthetic chemical pesticides is costly due to stringent regulatory requirements. Major agrichemical companies typically test hundreds of thousands of chemicals each year to find a single new product that will meet these stringent regulatory requirements. According to the American Crop Protection Association, the average cost and time to bring a new synthetic chemical pesticide to market is now estimated to be at least $70 million to $100 million and seven to ten years. Accordingly, major agrichemical companies focus their product development efforts primarily on pesticides targeted for use on large acreage row crops in an effort to recover their substantial product development costs and achieve economies of scale. It is often uneconomical for major agrichemical companies to develop synthetic chemical

pesticides for use in the highly fragmented, specialty crop market, which results in fewer pest management alternatives for growers in this market.

Genetically Modified Crops

Beginning in the 1980s, major agrichemical companies sought to reduce human health risks associated with synthetic chemical pesticides by investing billions of dollars to develop genetically modified plants that resist pests or have high tolerance to herbicides. Grower acceptance of this technology is evidenced by the fact that, in 2000, growers in the United States planted approximately 78 million acres of genetically modified soy bean, cotton and corn crops, representing approximately 49% of the aggregate acreage of these crops planted in the United States.

Despite general acceptance by growers, consumer disapproval of genetically modified crops, especially in Europe and Japan, threatens the future commercial viability of this technology. In response to consumer concerns, several food processors have demanded that their contracted growers supply them with only non-genetically modified crops. Environmental groups have also voiced concerns about the unintended effects of genetically modified crops, including pest resistance, contamination of non-modified crops, allergic reactions in humans and negative impacts on non-target species such as on soil microorganisms and monarch butterfly populations. In addition, growers and food processors have found it difficult and costly to segregate and track modified and non-modified crops within the current commodity distribution system. For example, last year, genetically modified corn approved only for use as animal feed was found in many human foods, causing concern among consumers, food processors, regulators, environmental groups and growers.

Some scientific experts have asserted that widespread plantings of genetically modified crops that produce an internal pesticide could lead to the proliferation of pests resistant to that pesticide. As pests become resistant to pesticides produced by genetically modified crops, the effectiveness of these crops is reduced. The U.S. Environmental Protection Agency, or the EPA, requires companies that produce genetically modified crops to submit costly resistance management and monitoring plans with their registration packages.

Natural Pest Management Products

The development and use of natural pest management products is increasing rapidly in response to consumer, grower and regulatory concerns regarding current pest management practices, pest resistance and food and worker safety. An increasing number of growers are integrating natural pest management products into a more sustainable approach to crop protection.

Natural pest management products include biopesticides as well as minerals such as copper and sulfur. Biopesticides consist of or are based on a living organism or a substance produced by a living organism, and they are generally distinguished from synthetic chemical pesticides by their unique modes of action, low toxicity to non-target species, biodegradability and natural occurrence.

The EPA classifies biopesticides as microbials or biochemicals. Microbial pesticides contain a microorganism such as a bacterium or fungus as the active ingredient. The most widely used microbial pesticides are various types of the bacterium Bacillus thuringiensis, or Bt, which can control specific insects in vegetables and other crops. Biochemical pesticides are naturally occurring substances that control pests by non-toxic mechanisms. Biochemicals include products that interfere with a pest's growth or mating patterns such as pheromones and plant growth regulators that increase crop yield.

While only about 1% of annual global crop protection expenditures are attributable to natural pest management products, the use of these products is increasing rapidly. For example, according to the California Department of Pesticide Regulation from 1991 to 1999, biopesticide use in California, the state with the largest production of fruits and vegetables, increased at a compound annual growth rate of over 25%. Historically, biopesticide market share has been limited by the perceived relative lack of effectiveness, difficulty in

application, constraints in the timing of application and shorter shelf life as compared to synthetic chemical pesticides. We believe that recent advances in biopesticides will continue to overcome these perceived deficiencies and will greatly increase their adoption.

Organic Food

In order to be certified as organic, food must be produced and processed without the use of synthetic chemicals, bioengineering or any other adulteration. Accordingly, organic growers have few pest management alternatives, other than traditional practices and natural pest management products. Consumer demand for organically grown food has been increasing rapidly. We believe this is principally due to concerns about food safety and the adverse environmental effects of synthetic chemical pesticides and genetically modified crops. In the United States, sales of organically grown food have grown at a compound annual growth rate of more than 20% over the last decade, resulting in an estimated $6.6 billion in sales during 2000. In late 2000, the U.S. Department of Agriculture approved national production and labeling standards for organic food marketed in the United States. These standards are widely expected to facilitate the continued growth of the organic foods industry. Large food processors and agricultural businesses, such as Dole Food Company, General Mills, Inc., H.J. Heinz Company, Kellogg Company and Gerber Products Company, have entered the organic foods market due to its attractive profit margins and growth potential.

Institutional and Home Pest Management

Approximately $2.2 billion is spent annually worldwide on synthetic chemical pesticide products to control pests such as cockroaches, flies and mosquitoes in the institutional market, including in and around schools, parks, golf courses and other public use areas. Homeowners spend approximately $5.0 billion annually worldwide on pest management products to control pests in their homes, gardens and lawns and to control fleas and ticks on their pets. Producers of livestock such as cattle, swine and poultry use pest management products to control pests and parasites. The Food Quality Protection Act of 1996 has led to the reduction in use or elimination of some synthetic chemical pesticides, including in and around schools and households. Several states and municipalities have restricted pesticide use in and on public use areas. Congress is also considering new legislation to promote school pest management practices that minimize risk to children and provide safety information to parents and school staff when pesticides are used in schools. Homeowners are becoming increasingly concerned about the dangers to their children and pets of spraying synthetic chemical pesticides in their homes and gardens. As a result, institutional and home uses present opportunities for new effective, safe and environmentally friendly natural pest management products.

The AgraQuest Solution and Advantages

We believe growers and other pesticide users seek pest management products that are effective, competitively priced, safe and environmentally friendly. We are developing and commercializing a pipeline of natural pest management products, including Serenade, which we believe will offer superior alternatives to synthetic chemical pesticides and genetically modified crops in terms of performance, value, safety and environmental impact.

We have developed a proprietary technology platform, consisting of a microorganism database, a screening technology and a natural product compound library, which we believe will provide the foundation for the discovery and development of natural products for the pest management industry. We also believe our technology platform can be used to develop products for broader applications, including animal health, human health and pharmaceutical, aquaculture, industrial enzymes and specialty chemicals.

Our Proprietary Technology Platform

Our proprietary technology platform has the following advantages:

. Highly efficient discovery process. We believe we can discover new effective product candidates faster than other developers of pest management products. Our first product, Serenade, was discovered after testing only 713 microorganisms. Major agrichemical companies typically test hundreds of thousands of chemicals each year to discover a single new product. To date, we have identified 23 product candidates from the more than 17,000 microorganisms in our database. We believe these product candidates can compete with synthetic chemical pesticides on performance, cost-effectiveness, shelf life and ease of use.

. Valuable data capture and utilization. Our proprietary technology platform allows us to gather data on the source of each microorganism, taxonomy, activity spectrum and the natural product compounds produced by the microorganism. Using this information, we are able to determine which microorganisms may have the highest pest management commercial potential. Expanding the information in our microorganism database and natural product compound library improves the efficiency of our product discovery process. This information may also be valuable to chemical, biotechnology, pharmaceutical and consumer products companies for developing natural products for their respective industries.

. Cost-effective and rapid new product development. We believe we can bring effective natural pest management products to market at greater speed and cost efficiency than our competitors. For example, we spent approximately $6 million for the testing, initial development and approval process for Serenade. The cost to bring a new synthetic chemical pesticide or genetically modified crop to market is estimated to be at least $70 million to $100 million.

Serenade and Our Initial Product Candidates

Serenade and our three initial product candidates:

. Are highly effective. Laboratory and field trials suggest that Serenade and our initial product candidates are generally more effective than existing biopesticides and generally are as or more effective than synthetic chemicals in controlling targeted pests. These trials also demonstrate that Serenade and Sonata generally have a broader disease control spectrum than synthetic chemical pesticides.

. Offer growers an attractive value proposition. We believe by using Serenade and our future natural pest management products, growers can increase profits while increasing food and worker safety and reducing environmental impact. Serenade is easy to use, competitively priced and has a comparable shelf life to synthetic chemical pesticides. In addition, the naturally low toxicity of Serenade allows growers to utilize it safely up to the time of harvest, limiting crop losses caused by the late onset of plant diseases.

. Have an accelerated time-to-market. By combining our proprietary technology platform and the favorable regulatory approval process for biopesticides, we have the ability to navigate our products quickly through the development and regulatory approval processes. For example, we were able to receive conditional EPA approval for Serenade within approximately 38 months from the time we first tested the Serenade strain. Conversely, it typically takes approximately seven to ten years to develop and obtain regulatory approval for a synthetic chemical pesticide or genetically modified crop.

. Increase safety and reduce risk to the environment. We believe Serenade and our initial product candidates offer a favorable alternative to synthetic chemicals and genetically engineered crops, which have come under heightened scrutiny due to the negative environmental impact and health risks associated with their use. Our product and product candidates are based on naturally occurring microorganisms that we select specifically for their safety and that leave no synthetic chemical residues, increasing food safety. Based upon extensive field trials and independent toxicology studies and risk

assessments, we believe that Serenade and Sonata offer improved safety for growers, workers, consumers and the environment.

. Provide unique solutions for organic crops. We believe Serenade and our initial product candidates will be of particular benefit by providing organic growers, who have a limited toolbox of crop protection solutions, with a means to grow their crops more productively.

. Have novel and complex modes of action that reduce the risk of pest resistance. Pest resistance concerns provide growers with strong motivation for growers to incorporate Serenade and our initial product candidates into their integrated pest management programs. Due to strict regulatory requirements, some synthetic chemical pesticides rely on a single mode of action and are therefore subject to an increased probability of pest resistance. Similarly, genetically modified crops typically contain a single active gene and are also subject to an increased probability of pest resistance. Conversely, biopesticides typically rely on novel and complex modes of action that are more difficult for pests to develop resistance to. We therefore believe that growers can allocate a large portion of their total pesticide use to our natural pest management products without compromising the risk of pest resistance in their fields.

. Are produced by environmentally friendly and sustainable production processes. Unlike the production of synthetic chemical pesticides, which requires large volumes of synthetic chemicals and solvents, our products are produced by fermentation using readily available agricultural raw materials such as soy flour and corn starch. Our production process is not only less harmful to the environment than that of synthetic chemical pesticides but also provides farmers with an additional sales channel for their products.

Our Strategy

Our goal is to become the leader in the discovery, development and commercialization of natural pest management products. The key elements of our strategy include:

. Utilize our proprietary technology platform to identify new product candidates. We intend to increase our natural pest management product offerings by identifying new product candidates discovered using our proprietary technology platform. By applying our proprietary screening technology to our microorganism database and utilizing our natural product compound library, we anticipate that we will continue to discover multiple natural pest management product candidates annually.

. Increase sales of Serenade. We have initiated marketing activities designed to increase the distribution and sale of Serenade. We intend to expand our distribution arrangements with established agrichemical distributors and retailers in order to leverage their existing sales forces and grower relationships. We also intend to expand our team of field development specialists to maintain close relationships with growers and educate industry leaders and distributors. As we obtain regulatory approvals, we plan to launch Serenade in key foreign markets, including Australia, Canada, Europe, Japan, New Zealand and South and Central America. We are seeking to add additional crops to the permitted uses of Serenade in Chile and the United States, and we may expand the use of Serenade to large acreage row crops.

. Develop and commercialize product candidates. We will continue to allocate significant research and development resources to develop and commercialize new natural pest management products that we have identified using our proprietary technology platform. To date, we have identified 23 product candidates, including Sonata, Virtuoso and Vivace, which each display high levels of activity against insects, nematodes and plant diseases. We initially intend to focus our research and development efforts on Sonata, Virtuoso and Vivace, all of which we believe can compete favorably with existing pest management products on efficacy, cost-effectiveness, pest resistance, shelf life, ease of use, food and worker safety and environmental impact. We may also establish strategic collaborations with third parties to support the development and commercialization of those natural pest management product candidates that we choose not to develop internally. We will maintain control over product quality, consistency and margins by manufacturing our products at our facility in Tlaxcala, Mexico.

. Focus initially on high-value specialty crops. We are focusing our initial commercialization efforts on high value specialty crops in the United States, such as grapes, apples, pears, tomatoes, vegetables, nuts and ornamentals. We expect growers of high-value specialty crops to derive the greatest economic benefit from our natural pest management products, in terms of relative cost, safety and the value of the expected yield increases.

. Maximize organic market opportunities. To address the rapidly growing organic market, in which there are few pest management alternatives, we will continue to ensure that a formulation of each of our products meets the requirements for organic food production in our target, specialty- crop markets. We also intend to conduct field trials in large acreage organic crops, such as cereals, which are well suited for our products but have less competition than conventional large acreage crops.

. Brand AgraQuest as the leading provider of natural pest management solutions. We believe that building our corporate brand will foster continued adoption of our natural pest management products by establishing AgraQuest as a leading supplier of effective, safe and environmentally friendly natural pest management products with significant benefits over existing pest management solutions. We also believe that strong brands will increase strategic collaboration opportunities, contributing to potential revenue growth and diversification. To enhance industry and public awareness of our company and increase demand for our natural pest management products, including Serenade, we intend to pursue an aggressive brand development strategy through targeted advertising, conference and trade show appearances, promotions and public relations.

. Leverage our proprietary technology platform in conjunction with strategic collaborators. We intend to pursue strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to use our proprietary screening technology and microorganism database to develop products for use in pest management, as well as animal health, human health and pharmaceuticals, aquaculture, industrial enzymes and specialty chemicals. Strategic collaborations will allow us to enhance our market presence and visibility and have the potential to generate significant revenues.

. Pursue select acquisitions. We may invest in or acquire businesses, technologies or products that we believe would strategically complement our business and allow us to be a more complete provider of crop production solutions.

Our Proprietary Technology Platform

Our proprietary technology platform consists of three key components: a microorganism database, screening technology and a natural product compound library. Our proprietary technology allows us to quickly and accurately identify microorganisms with the greatest pest management commercial potential. To date, we have identified 23 product candidates from the more than 17,000 microorganisms in our database that display high levels of activity against insects, nematodes and plant diseases.

Our product candidates are discovered and developed through the following steps:

[A flow chart diagram describing our product candidate discovery and development processes, including the following text:

DISCOVERY
. Collection and Isolation (sourcing and isolation of microorganism)
. Fermentation (produce sufficient testing quantities; maximize pesticidal properties; mimic commercial media)
. Primary Screening (test and confirm pesticidal activity and dose response)
. Preliminary Toxicology (test for toxic effects)
. Natural Product Chemistry (compare natural compounds produced by each selected microorganism with compounds in our natural product compound library; perform stability studies: pH, temperature; identification, purificaton and structure elucidation of active compounds
. Pre-Development Testing PRODUCT DEVELOPMENT
. Process Development and Formulation
. Advanced Toxicology
. Commercial Development
. Field Testing]

Discovery

. Collection and isolation. We use information from our existing microorganism database such as taxonomic groups, geographical locations, types of samples, niches and habitats to collect and identify new microorganism samples that may have novel, effective and safe pest management characteristics. We then isolate these selected microorganisms on proprietary media.

. Fermentation. Before testing the selected microorganisms for activity against pests, we first ferment them to produce sufficient quantities for testing. We grow the selected microorganisms in proprietary media, which maximizes their pesticidal properties. In addition, we have developed several proprietary fermentation processes that are designed to replicate those that would be required for large-scale fermentation and commercial production and, therefore, we avoid the time and expense of an unsuccessful scale-up.

. Primary screening. We use automated, miniaturized biological assays to test the selected microorganism's effectiveness against several insect, mite and nematode pests and plant diseases. We compare those results to synthetic chemical pesticide standards. When a microorganism shows a high level of pesticidal activity, we conduct further tests to determine the spectrum of activity, mode of action, stability and activity on plants.

. Natural product chemistry. Using high-performance liquid chromatography with diode array detection technology, we compare the natural product compounds produced by each of the selected microorganisms with the compounds in our natural product compound library. This allows us to eliminate those microorganisms that produce known toxins and select those that we believe are novel and safe. From the selected microorganisms, we identify and characterize the natural product compounds responsible for their pesticidal activity by using high performance liquid chromatography, liquid chromatography-mass spectroscopy and nuclear magnetic resonance equipment.

. Pre-development testing. We conduct laboratory, greenhouse and initial small plot field tests to select product candidates for further development.

Product Development

. Development of the manufacturing process. We have developed proprietary processes that increase the yield of both the microorganism and the natural product compounds produced by the microorganism during fermentation. We have developed proprietary methods for producing and analyzing these compounds, which results in greater product consistency and efficacy than biopesticides produced using conventional techniques. We believe that our process development allows us to produce products that have superior performance and lower cost than existing biopesticides and have comparable or better performance than synthetic chemical pesticides. We then scale up these proprietary processes in progressively larger fermentation tanks.

. Formulation. We are able to develop proprietary wettable powder, liquid and granule formulations that allow us to tailor our products to our customers' needs. This allows us to develop product formulations with enhanced performance characteristics, such as effectiveness, value, shelf life, suitability for organic agriculture, dispersibility, wettability, rainfastness, compatibility with other pest management products and ease of use.

. Field testing. We conduct hundreds of field trials for each product candidate that we develop. These field trials are conducted in small plots on commercial farms or research stations by our own field development specialists and private and public researchers to determine large-scale effectiveness, use rates, spray timing and crop safety. We conduct field trials globally in both hemispheres to accelerate the results of our field trials and provide alternate season learning opportunities. As the product candidate nears commercialization, we conduct demonstration trials in conjunction with our sales and marketing team. These trials are conducted with distributors, influential growers and food processors on larger acreages in a commercial setting.

                                    Primary Modes
 Product Name         Uses            of Action      Target Markets   Regulatory Status
 Serenade       Controls many     Attacks fungal    Registered for    Registered in
                bacterial and     spores and        use on specialty  the United
                fungal plant      bacteria as they  crops, including  States,
                diseases          germinate;        apples, pears,    Chile, Mexico
                                  excretes          grapes,           and Puerto Rico;
                                  antifungal        cherries,         approved for use
                                  compounds;        tomatoes, hops,   in 49 U.S.
                                  competes for      several           states; filed
                                  space and food    vegetables,       registration
                                  on the plant's    peanuts and       packages in the
                                  surface           walnuts, and for  European Union,
                                                    home and garden;  Argentina,
                                                    also targeting    New Zealand and
                                                    bananas,          Switzerland
                                                    ornamentals and
                                                    turf
---------------------------------------------------------------------------------------
 Sonata         Controls many     Prevents spore    Specialty crops,  Technical and
                fungal and some   germination on    cereals,          experimental use
                bacterial         plant's surface;  ornamentals and   permit
                diseases;         excretes          home and garden   registrations
                complementary to  antifungal                          submitted to the
                Serenade          compounds                           EPA and the
                                                                      California EPA
---------------------------------------------------------------------------------------
 Virtuoso       Controls          Possibly          Specialty crops,  In development;
                caterpillar       inhibits cell     turf, home and    registration not
                pests; fleas,     growth in         garden, and row   yet submitted to
                some flies and    caterpillar       crops; animal     the EPA
                mites             pests             health, pets
---------------------------------------------------------------------------------------
 Vivace         Enhances the      Increases the     Specialty crops,  In development;
                activity of Bt    effect of Bt in   home and garden   registration not
                bioinsecticide;   destroying the                      yet submitted to
                complementary to  stomach lining                      the EPA
                Virtuoso          of insects

Serenade

We believe that Serenade is the first and only biofungicide that is effective on a wide variety of plant diseases. Serenade is based on a novel and patented strain of Bacillus subtilis, which we isolated using our proprietary screening technology. Bacillus subtilis bacteria are known to be non-toxic and not harmful to animals. We began marketing Serenade commercially in the United States in July 2000. Serenade currently is targeted for use on high value specialty crops and is registered for use on apples, pears, grapes, cherries, tomatoes, hops, several vegetables, peanuts and walnuts. We are seeking to expand the permitted uses of Serenade to other specialty crops, turf and ornamentals. Serenade is currently formulated as a wettable powder and a wettable disbursable granule that is topically applied either independently or in conjunction with traditional pesticides. We believe Serenade has the following advantages:

. High level of broad spectrum activity against many bacterial and fungal plant diseases;

. Can be integrated into pest management programs for both conventional and organic growers;

. Improved safety for the environment, applicators and farm workers;

. Can be sprayed up until harvest and does not require any special handling or equipment;

. No synthetic chemical residues, enhancing food safety; and

. Reduced likelihood of pest resistance due to its novel and complex mode of action.

To address the rapidly growing organic market, we have developed and registered with the EPA a formulation of Serenade that is included on the Organic Materials Review Institute's list of approved products. Additionally, we have in-house capabilities to develop other formulations of Serenade that specifically address market needs and customer preferences. For example, we are currently developing Rhapsody, a formulation of Serenade targeted for ornamental flowers and foliage.

We believe Serenade offers an attractive value proposition to the grower in terms of cost effective plant disease control resulting in increased yields compared to synthetic chemical pesticides. For example, field trials conducted by our customers, the University of Arizona and our own field development specialists to determine the effectiveness of Serenade in controlling Sclerotinia, a major lettuce disease, indicated that Serenade was on average 8% more effective than the leading chemical in controlling Sclerotinia, which implies increased lettuce yields of on average 31%.

Serenade has been tested in more than 750 field trials in the United States and 16 other countries worldwide. In addition to conducting our own field trials, we have also conducted field trials with major growers, universities and consultants in order to further validate the performance of Serenade. The compiled field data shows that Serenade is generally as or more effective than synthetic chemical pesticides in preventing a broad spectrum of diseases, such as: botrytis bunch rot/gray mold, powdery mildews, fire blight, bacterial spot, Sclerotinia rots/blights and black sigatoka. Of particular interest is Serenade's control of fire blight, lettuce drop and tomato bacterial spot for which growers have limited alternatives.

In addition to field trials, we also have conducted numerous laboratory and greenhouse experiments. Laboratory and greenhouse experiments show that Serenade works effectively on brown rot in stone fruits such as peaches and almonds and gray mold in strawberries. Laboratory studies and field observations also show that Serenade has curative activity on powdery mildew; unlike most pesticides, it was shown to control the disease after the disease was already present. These potential applications of Serenade are being tested more fully in research field trials.

Serenade received registration approval for Chile in October 1999, in the United States in June 2000, and in Mexico in July 2001. We are currently seeking regulatory approval for Serenade in the European Union, Costa Rica, Argentina, New Zealand, Switzerland, Japan, Australia, South Africa and Canada. In October 2000, we received notice that our Serenade registration package passed the completeness check by the Commission of the European Communities, Director General of Agriculture, and we have commenced national registrations in the European Union.

Sonata

Sonata is based on a novel and patented strain of Bacillus pumilus, which we isolated using our proprietary screening technology. Bacillus pumilus bacteria are known to be non-toxic and not harmful to animals. Our strain of Bacillus pumilus has a unique, high level of broad spectrum activity against many fungal and some bacterial plant diseases. Laboratory, greenhouse and more than 60 field trials indicate that Sonata is particularly effective against downy mildews, powdery mildews, rusts, Sclerotinia blights/rots and some bacterial diseases.

We believe that Sonata is as or more effective, safer and more environmentally friendly than many synthetic chemical pesticides. In addition, while their complex modes of action make it unlikely that product resistance will develop even when used alone, Serenade and Sonata can be rotated or combined with each other or with other pest management products to reduce the likelihood of pest resistance. Growers usually prefer to use multiple products for disease control and typically rotate or tank mix several pest management products within a growing

season. Sonata's complementary nature addresses growers' desire to avoid reliance on a single product, reduces the likelihood of resistance development and obtains the best spectrum of disease control.

We submitted the technical registration for Sonata to the EPA in May 2000. An experimental use permit that would allow sales on 4,000 acres of some crops was submitted to the EPA and the Department of Pesticide Regulation of the California Environmental Protection Agency in November 2000.

Virtuoso

Virtuoso is based on a novel and proprietary strain of Streptomyces, which we tested using our proprietary screening technology. This strain, which was licensed exclusively to us for an indefinite term in 1998, has broad spectrum control of caterpillar pests, such as armyworms, codling moths, cotton bollworms and budworms, cabbage loopers and diamondback moths, and it also has activity on fleas, some flies and mites.

We believe Virtuoso will be an effective replacement for toxic insecticides such as organophosphates for caterpillar pests. Organophosphates are being restricted by the EPA under the Food Quality Protection Act. In addition, there are major caterpillar pests affecting most of the crops we are targeting with Serenade and Sonata, and Virtuoso would allow us to offer growers of these crops both plant disease and insect control products. Laboratory tests and initial field trials indicate that Virtuoso is generally as effective as synthetic chemical pesticides in controlling some types of pests. Independent laboratory and initial field studies conducted by four major agrichemical companies indicated that Virtuoso has a high level of broad spectrum activity against caterpillar pests. We also believe Virtuoso has applications in the animal health and pet markets because of its activity on fleas and some flies.

Vivace

Vivace is a proprietary and novel suite of natural product compounds that we isolated from a microorganism using our proprietary screening process. Vivace is an early stage product candidate that has been shown to substantially enhance the activity of Bt, which has provided caterpillar pest control for conventional and organic growers for many years. Bt protein genes have been engineered into crop plants and commercialized for caterpillar pest control in cotton and corn. However, Bt sprays and Bt crops are not as effective as synthetic chemical pesticides on some caterpillar pests, such as armyworms. Our studies have shown that Vivace improves the activity of Bt by up to tenfold such that caterpillar pest control generally equals that of synthetic chemical pesticides. Vivace has no insecticidal activity by itself, and is effective against caterpillar pests only in combination with Bt. Vivace's and Virtuoso's complementary natures address growers' desire to avoid reliance on a single product, reduce the likelihood of resistance development and obtain the best spectrum of disease control. We intend to position Vivace and Virtuoso for use together in integrated pest management systems for the specialty crop, turf and home and garden markets.

Sales, Marketing and Distribution

We have initiated marketing activities designed to promote sales of Serenade and our future natural pest management products by implementing the following strategies:

. Target early adopters of new pest management technologies. We intend to target large commercial growers in the United States, who generally set industry standards through early adoption of new pest management technologies. We plan to continue to recruit leading growers and their consultants to participate in field trials, enabling them to become familiar with our natural pest management products and to experience their benefits firsthand.

. Educate growers about the benefits of our natural pest management products. We will continue to perform on-farm demonstrations and provide field data packages to support and validate our product claims. We will also continue to participate in trade shows and conferences to educate growers and their licensed pest control advisors about the benefits of our natural pest management products.

. Enhance distribution relationships. We will continue using established agrichemical distribution channels to distribute Serenade and our future products. We intend to provide distributors a portfolio of products with attractive profit margins and growth potential. In addition, we will continue to provide distributors access to innovative alternative pest management solutions, which we believe will reduce their dependence on major agrichemical companies.

. Develop and leverage relationships with key industry influencers. We will continue to develop relationships early in the product development process with influential members within our target markets, including technical experts at leading agricultural universities, licensed pest control advisors, wineries, baby food manufacturers and other food processors and produce packers. We believe that educating industry influencers about the benefits of Serenade and our future products increases the likelihood that they will recommend our products to their growers and customers.

We have signed agreements to distribute Serenade in the United States with leading agricultural distributors United Agri Products, Western Farm Services and Wilbur Ellis, and in Chile with Moviagro, a Monsanto joint venture. These distribution agreements are terminable by either party on minimal notice, typically 30 days, and do not require the distributors to purchase any of our products. We also have arrangements to develop and distribute Serenade in Japan through SDS Biotech, Japan's largest supplier of biopesticides, and in France with Agtrol. We have a one-year agreement to sell Serenade to consumers through Gardens Alive!, a leading home and garden catalog retailer.

We currently have ten employees dedicated to sales and marketing in the United States organized into eight geographic sales territories. We anticipate adding additional sales and marketing personnel in the United States and in international territories.

Strategic Collaborations

We have entered into, and will continue to pursue, strategic collaborations with chemical, biotechnology, pharmaceutical and consumer products companies to support the development and commercialization of natural pest management product candidates identified through our proprietary technology platform. The terms of strategic collaborations that we undertake depend on the nature and stage of development of the particular product candidate. For example, for product candidates in early stages of development, we may grant a third party the commercial rights to that product candidate in exchange for our use of that party's research, development or marketing resources. We also intend to license our microorganism database for applications beyond pest management, including the discovery and development of natural products for animal health, human health and pharmaceutical, aquaculture, industrial enzyme and specialty chemical products. We believe that these strategic collaborations will allow us to maximize the potential value and reinforce the credibility of our proprietary technology platform, as well as enhance our market presence and revenue growth.

We have entered into the following strategic collaborations:

Dow AgroSciences. In October 2000, we entered into a research and development agreement with Rohm and Haas Company, the agricultural business of which was subsequently acquired by Dow AgroSciences LLC. Under this agreement, Dow AgroSciences has the exclusive, worldwide rights to commercialize seven of our product candidates for all uses other than human health, animal health and aquaculture. Together with Dow AgroSciences, we will jointly review and direct the process of identifying organisms for testing. If Dow AgroSciences selects a product candidate for further development, it must pay us a fee, reimburse us for our development costs relating to that product candidate and make additional milestone payments based on the progress of product development. Additionally, if Dow AgroSciences determines to further commercialize any of these product candidates, it will make additional milestone payments to us, pay the costs of EPA registration, and pay us a royalty on any product sales. In addition, we retain a right of first refusal to manufacture these product candidates for Dow AgroSciences for which we will receive cost reimbursements plus a share in the profits. In November 2000, Dow AgroSciences selected its first product candidate to develop and

commercialize under this agreement and began making initial milestone payments to us. In connection with this agreement, Dow AgroSciences purchased 83,333 shares of our Series F preferred stock for $500,000.

Maxygen. In December 2000, we entered into an agreement with Maxygen, Inc. under which we granted Maxygen a nonexclusive license to develop and commercialize 3,000 of the more than 17,000 microorganisms in our microorganism database for gene-shuffling uses other than for the development of biopesticides. Maxygen has the right to select which 3,000 microorganisms it wishes to be further developed from our database. Under this agreement, Maxygen paid an up-front collection fee and may make future milestone payments based on the progress of its product development and commercialization of products from these microorganisms. The up-front collection fee is being recognized ratably as we deliver these microorganisms to Maxygen.

American Home Products, Fort Dodge Animal Health Division. In November 2000, we entered into an agreement with the Fort Dodge Animal Health Division of American Home Products Corporation under which we agreed to provide it with selected microorganisms from our microorganism database for testing and product development. We will seek to enter into a licensing arrangement with Fort Dodge in the event it desires to commercialize any products based on these microorganisms.

Dragoco. In July 2001, we entered into a license agreement with Dragoco Gerberding & Co. AG, an international supplier of perfume compositions, aroma chemicals, cosmetic raw materials and active ingredients, under which we granted Dragoco an exclusive license to some of our patents and other proprietary rights to develop natural mosquito and other insect repellants. Under this agreement, Dragoco agreed to make quarterly royalty payments based on product sales and sublicense proceeds.

Manufacturing

To control product quality and the speed and timing of manufacturing, protect our proprietary position in our products and lower our manufacturing costs, we purchased a manufacturing facility in Tlaxcala, Mexico in December 2000 from Abbott Laboratories, and we recently began manufacturing Serenade at this facility. This plant has approximately 208,000 square-feet of manufacturing and support facilities on approximately 35 acres. We have established comprehensive quality control and assurance procedures to ensure that we sell high quality products. The facility includes several seed and fermentation tanks, a downstream processing, recovery and extraction building, several microbiology and quality control laboratories, a waste treatment plant, warehouses and offices. We intend to add spray drying and packaging facilities and equipment, and we expect this facility to be fully operational by the end of 2001. We believe this facility will be adequate to meet our anticipated manufacturing volume requirements for the foreseeable future. In addition, the site is large enough to accommodate additional fermentation and other processing equipment as needed.

To date, we have relied primarily on third parties to manufacture Serenade. We have a 3,000 square-foot fermentation pilot plant in our Davis, California facility that we use to scale up new processes and to produce material for field trials. We intend to use a portion of the net proceeds from this offering to expand our Davis facility.

Research and Development

We currently have 32 employees dedicated to research and development, 16 of whom hold Ph.D. degrees. Our research and development team has technical expertise in microbiology, natural product chemistry, entomology, plant pathology, fermentation, product formulation and field development. In addition, we have formed a scientific advisory board comprised of individuals specializing in the fields of natural product chemistry, microbiology, biochemistry and fermentation who from time to time provide our management and scientists with specific expertise in both research and product development.

Our research and development activities are principally conducted at our Davis, California facility as well as by our field development specialists on crops in their respective regions.

We have made, and will continue to make, substantial investments in research and development. Our research and development expenses were $3.1 million in 1998, $4.5 million in 1999, $6.3 million in 2000 and $2.7 million for the six months ended June 30, 2001.

Intellectual Property

We rely on patents and other proprietary right protections, including trade secrets and proprietary know-how, to preserve our competitive position. We own 19 issued U.S. patents and have two pending patent applications covering our products, including microorganisms and natural product compounds, uses and related technologies. Also, we own eight foreign patents and have 95 pending foreign patent applications. We have received six trademark registrations and have five trademark applications pending in the United States. We also have received 93 trademark registrations and have 89 trademark applications pending in various other countries.

We have been issued three U.S. patents for Serenade and one U.S. patent for Sonata, covering their respective bacterial strains, compounds produced by the strains, their formulations, use against plant pathogens and combinations with other pesticides. These patents will expire between May 2020 and September 2021. The U.S. Patent and Trademark Office has allowed claims to compounds produced by the novel Serenade strain. We have filed an additional U.S. patent application for Sonata and received a notice of allowance in August 2000. If this patent is issued, it will expire 20 years from the date of application.

We have also filed a U.S. patent application on our Virtuoso strain, the natural product compounds produced by the strain, its formulations, its use as an insecticide and its combination with other pesticides. Any patent that issues will expire 20 years from the date of application.

Our success depends on our ability to operate without infringing the patents and proprietary rights of third parties. We cannot determine with certainty whether patents or patent applications of other parties may materially affect our ability to make, use or sell any products. A number of crop protection and other pest management companies, universities and research institutions may have filed patent applications or may have been granted patents that cover technologies similar to the technologies owned by or licensed to us.

Although we believe our patents and patent applications provide a competitive advantage, the patent positions of crop protection and other pest management companies are highly uncertain and involve complex legal and factual questions. Our patents or those for which we have licensed or will license rights may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection or competitive advantages to us. We and our collaborators or licensors may not be able to develop patentable products or obtain patents from pending patent applications. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us.

Third-party patent applications and patents could reduce the coverage of the patents owned by or licensed to us. If patents containing competitive or conflicting claims are issued to third parties, we may be enjoined from pursuing commercialization of products or be required to obtain licenses to these patents or to develop or obtain alternative products. In addition, other parties may duplicate, design around or independently develop similar or alternative technologies to ours or our licensors.

Litigation may be necessary to enforce patents issued or licensed to us or to determine the scope or validity of another party's proprietary rights. U.S. Patent Office interference proceedings may be necessary if we and another party both claim to have invented the same subject matter. We may not prevail in any of these actions or proceedings, and we could incur substantial costs and our management's attention would be diverted if:

. litigation is required to defend against patent suits brought by third parties;

. we participate in patent suits brought against or initiated by our licensors;

. we initiate similar suits; or

. we participate in an interference proceeding.

Regulatory Considerations

Our activities are subject to extensive federal, state, local and foreign governmental regulations. These regulations may prevent us or our collaborators from developing or commercializing products in a timely manner or under technically or commercially feasible conditions and may impose expenses, delays and other impediments to our product development and registration efforts. In the United States, the U.S. EPA regulates our natural pest management products under the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Food, Drug and Cosmetics Act and the Food Quality Protection Act. Additionally, crop protection products must be registered by the appropriate state authority before sale in that state.

To register a crop protection product in the United States a company must demonstrate the product is safe to humans, non-target organisms and to the environment. To demonstrate the biopesticide's safety, required studies must be conducted that evaluate mammalian toxicology, ecotoxicological effects to non- target organisms and physical and chemical properties of the product.

To obtain Federal registration the company is also required to demonstrate product efficacy and safety to the labeled crops. The EPA can require submission of all efficacy and phytotoxicity data the company has acquired. The registration dossier is subject to both scientific and administrative reviews by EPA scientists and management before registration approval. The scientific review involves thorough evaluation of submitted data and completion of risk assessments for human dietary and ecotoxicological exposures. Upon completion of this process, the registration package, including the proposed label, is sent to the Office of General Council for legal review. The final step in the registration process is administrative sign-off by the EPA director of the Biopesticides and Pollution Prevention Division.

On June 20, 2000, the EPA granted conditional approval for full commercial use of Serenade Biofungicide Wettable Powder. The conditional nature of this approval does not impact our ability to market and sell Serenade, but the approval for Serenade expires two years from the date of issue. For Serenade to continue to be registered after June 20, 2002, we were required to submit to the EPA by July 16, 2001 a two-year storage stability study and additional studies on the effect of Serenade on selected non-target species. All of these studies have been completed and submitted to the EPA, and indicate that Serenade poses no foreseeable hazards to the non-target species. Upon review and acceptance of these data, we believe that the EPA will convert the Serenade registration from conditional to unconditional status. We are required to submit one additional study to the EPA by May 2002. If we are unable to meet the conditions specified by the EPA, however, the EPA could revoke our registration or impose use restrictions that are not currently applicable to Serenade.

As with any pesticide, our pest management products will continue to be subject to review by the EPA and state regulatory agencies. The EPA has the authority to revoke the registration or impose limitations on the use of any of our pest management products if we do not comply with the regulatory requirements, if unexpected problems occur with a product or the EPA receives other newly discovered adverse information.

In addition to EPA approval, we are required to obtain regulatory approval from the appropriate state regulatory authority in individual states and foreign regulatory authorities before we can market or sell any pest management product in those jurisdictions. Serenade is currently registered in 49 states in the United States,

including California, the largest producer of fruits, nuts and vegetables in the United States. We were also required to submit additional field data for Serenade to the California EPA, which we submitted in July 2001. We have also registered Serenade in Chile, Mexico and Puerto Rico. Our registration package for Serenade in the European Union has been determined to be complete by the EU Commission. However, until the registration is granted within the entire EU, we must obtain provisional authorization approval in each country in order to market and sell products in those countries. We have submitted applications for Serenade registration in Argentina and New Zealand and expect approvals in those countries.

Our manufacturing operations are also subject to federal, state, local and foreign worker safety, air pollution, water pollution and solid and hazardous waste regulatory programs and periodic inspection. We believe that our facilities are in substantial compliance with all applicable environmental regulatory requirements.