DIVERSA CORP, S-1/A, 2000-01-20

DIVERSA CORP
S-1/A, 2000-01-20
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 2000

REGISTRATION NO. 333-92853

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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DIVERSA CORPORATION
(NAME OF ISSUER IN ITS CHARTER)

<TABLE>
<CAPTION>
DELAWARE 8731 22-3297375
<S> <C> <C>
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

10665 SORRENTO VALLEY ROAD
SAN DIEGO, CA 92121
(858) 623-5106
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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JAY M. SHORT, PH.D.
CHIEF EXECUTIVE OFFICER
DIVERSA CORPORATION
10665 SORRENTO VALLEY ROAD
SAN DIEGO, CA 92121
(858) 623-5106
(NAME, ADDRESS, TELEPHONE NUMBER OF AGENT FOR SERVICE)

COPIES TO:
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<S> <C>
M. WAINWRIGHT FISHBURN, JR., ESQ. FAYE H. RUSSELL, ESQ.
NANCY DENYES KRUEGER, ESQ. MARIA P. SENDRA, ESQ.
DAVID B. BERGER, ESQ. BROBECK, PHLEGER & HARRISON LLP
COOLEY GODWARD LLP 550 WEST "C" STREET
4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92101
SAN DIEGO, CALIFORNIA 92121 (619) 234-1966
(858) 550-6000
</TABLE>

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Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.

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If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................. 7,475,000 $15.00 $112,125,000 $29,601
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</TABLE>

(1) Includes shares that the Underwriters will have the option to purchase
solely to cover over-allotments, if any. Estimated solely for the purpose
of calculating the amount of the registration fee in accordance with Rule
457(o) under the Securities Act of 1933.

(2) $22,440 of this fee was previously paid by the Registrant.

---------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY +
+THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JANUARY 20, 2000

PRELIMINARY PROSPECTUS

6,500,000 SHARES

[LOGO OF DIVERSA]

COMMON STOCK

-----------

This is an initial public offering of 6,500,000 shares of common stock of
Diversa Corporation. We are selling all of the shares of common stock offered
under this prospectus.

We expect the public offering price for our common stock to be between $13.00
and $15.00 per share. There is currently no public market for our common stock.
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "DVSA."

SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

-----------

<TABLE>
<S> <C> <C>
Per
Share Total
-------- --------
Public offering price........................................ $ $
Underwriting discounts and commissions....................... $ $
Proceeds to Diversa.......................................... $ $
</TABLE>

-----------

We have granted the underwriters a 30-day option to purchase up to an
additional 975,000 shares of common stock from us at the initial public
offering price less the underwriting discount.

The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York, on
, 2000.

-----------

BEAR, STEARNS & CO. INC.

CHASE H&Q

DEUTSCHE BANC ALEX. BROWN

The date of this prospectus is , 2000
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[GATEFOLD COVER]

[Gatefold Cover: A diagram entitled "Diversa: Innovation from BioDiversity and
Gene Evolution" depicting alternative ecosystems, progressing to multiple
images depicting the discovery, development and manufacture of novel enzymes
and other biologically active compounds through our proprietary processes and
technologies, which then leads to photographs representing our four target
markets.

[Inside Front Cover: Heading reading "Diversa Corporation discovers and
develops novel enzymes and other biologically active compounds from diverse
environmental sources for use in agricultural, chemical processing, industrial
and pharmaceutical applications. We have commercialized our first product for
the industrial market and have multiple projects in various stages of
development in our target markets," followed by a diagram representing our
discovery and evolution processes and technologies, which then leads to
photographs representing our four target markets.

<PAGE>

PROSPECTUS SUMMARY

DIVERSA CORPORATION

You should read the following summary together with the more detailed
information regarding our company and our common stock being sold in this
offering and our financial statements and the notes to our financial statements
appearing elsewhere in this prospectus before making an investment decision.
You should also carefully consider the information discussed in "Risk Factors."

OUR BUSINESS AND TECHNOLOGIES

We believe that we are a global leader in discovering and developing novel
enzymes and other biologically active compounds from diverse environmental
sources for use in agricultural, chemical processing, industrial and
pharmaceutical applications. Enzymes are proteins that catalyze, or facilitate,
one or more chemical reactions. Our processes significantly speed the discovery
and development of such commercially valuable new enzymes and biologically
active small molecules. For example, we launched our first product for an
industrial application within two years of project initiation. Our processes
are designed to help our strategic partners and customers reduce cost, reduce
waste, improve yield and enhance the quality of end products and manufacturing.
We believe that the integration of our capabilities differentiates us from our
competitors. We accomplish this integration utilizing our proprietary methods
in the following manner:

. We collect genetic material from organisms that have not previously been
cultured in the laboratory found in diverse natural environments;

. We isolate, catalog and store genes and gene pathways in vast DNA
libraries;

. We screen these libraries to analyze more than a billion genes per day
to identify potentially useful enzymes and compounds;

. We optimize these enzymes and compounds by applying our
DirectEvolution(R) genetic modification technologies, including our Gene
Site Saturation Mutagenesis(TM) and GeneReassembly(TM) technologies; and

. We develop novel host organisms for the manufacture of resulting
products.

We believe our ability to construct vast libraries from DNA samples
collected from organisms in diverse environments is an important factor of our
success. Our use of minute DNA samples results in minimal impact to the
surrounding environment and has enabled us to enter into numerous formal
genetic resource access agreements. We estimate that our environmental gene
libraries currently contain the complete genomes of over 1 million unique
microorganisms.

Our ultra high-throughput screening technologies, such as SingleCell(TM)
screening, and our enrichment technologies, such as biopanning, allow for the
rapid discovery and identification of genes with desired biological activity or
specific DNA sequences. Our DirectEvolution technologies, Gene Site Saturation
Mutagenesis and GeneReassemby, enable us to modify the DNA sequences of genes
in order to optimize new genes for commercial applications.

We intend to commercialize products discovered or developed utilizing our
technologies, both independently and in collaboration with strategic partners.
We have successfully commercialized our first product and we have 42 other
projects with multiple production applications in various stages of
development. Our strategic partners are market leaders across multiple
industries and include Novartis Seeds AG, Novartis Agribusiness Biotechnology
Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A.
and Finnfeeds International Limited. These partners typically fund research
costs and provide various types of payments, which may include exclusivity
payments, technology access and development payments, milestone payments,
license and commercialization fees and royalties. In addition to $10.7 million
received from inception through December 31, 1999, our partners are committed
to fund at least $68.0 million under existing agreements over the next five
years. Our partners have also invested $9.2 million in our equity securities.

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OUR TARGET MARKETS AND PRODUCTS

We are developing enzymes and other biologically active compounds for a
number of industries, including agricultural, chemical processing, industrial
and pharmaceutical applications. Our target markets provide both short-term and
long-term product revenue opportunities. Within these broad markets we are
targeting billion dollar key market segments where we believe our technologies
and products will create high value and competitive advantages for our
strategic partners and our customers. We are identifying and producing enzymes
that exhibit dramatic increases in activity, efficiency and stability. Examples
of our product applications include the following:

. In agriculture, we are developing a variety of specialty enzymes and
engineered genes to improve crop protection, crop yield and nutritional
value, as well as to reduce harmful environmental waste.

. In chemical processing, we are developing a variety of enzymes to create
manufacturing efficiencies, reduce production costs and accelerate
generation of new chemical products and processes.

. For industrial applications, we successfully commercialized a heat-
tolerant enzyme useful for oil and gas recovery and are developing
numerous products related to enzymatic processes for detergent, corn
processing, textile, pulp and paper processing and fats and oils
applications.

. In pharmaceuticals, we are working to discover small molecule compounds
as candidates for anti-microbials, anti-fungals, anti-virals and other
therapeutic drugs.

OUR STRATEGY

Our goal is to be the leading provider of novel enzymes and biologically
active compounds for use in unique, economically attractive applications. The
key elements of our strategy are to:

. Protect and enhance our technology leadership position;

. Expand our existing DNA libraries through access to novel genetic
material and utilize our proprietary technologies to discover new genes
and gene pathways to provide solutions to market needs;

. Deploy our technologies across diverse markets in order to maximize our
return on investment;

. Pursue additional strategic alliances with market leaders to access
funding and industry-specific expertise and to more efficiently develop
and commercialize a larger product portfolio; and

. Independently develop and commercialize products in selected markets to
capture their full economic value.

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THE OFFERING

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<S> <C>
Common stock offered by Diversa................. 6,500,000 shares
Common stock to be outstanding after the
offering....................................... 32,311,401 shares
Use of proceeds................................. We intend to use the net proceeds from
this offering for research and
development, capital expenditures,
working capital, general corporate
purposes and possible future
acquisitions.
Proposed Nasdaq National Market symbol.......... DVSA
</TABLE>

The share amounts in this table are based on shares outstanding as of December
31, 1999. This table excludes:

. 5,492,798 shares of our common stock reserved for issuance under our
stock option plans of which 3,125,000 shares are subject to outstanding
options with a weighted average exercise price of $1.73 per share and
13,937 shares of common stock issuable upon exercise of an outstanding
option granted outside our stock option plans with an exercise price of
$0.03 per share;

. 277,719 shares available for issuance under our Non-Employee Directors'
Stock Option Plan;

. 416,579 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and

. 364,120 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.44 per share.

Except as otherwise indicated, information in this prospectus is based on the
following assumptions:

. the conversion of all outstanding shares of our preferred stock into
22,834,011 shares of common stock upon the closing of this offering;

. the issuance of an estimated 32,000 shares of common stock to be issued
at the closing of this offering to holders of our series A, B and D
preferred stock as payment of a dividend that began to accrue on
December 21, 1999;

. a 1-for-2.8806 reverse-split in our common stock that will take effect
prior to the date of this offering; and

. no exercise of the underwriters' over-allotment option to purchase up to
975,000 shares.

DIVERSA, Gene Site Saturation Mutagenesis, GSSM, Pyrolase, GeneReassembly,
DiverseLibraries, PathwayLibraries, DirectEvolution(R), SingleCell and SciLect
are trademarks of Diversa Corporation. This prospectus also refers to trade
names and trademarks of other organizations.

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SUMMARY FINANCIAL DATA

The following financial information should be read together with the
"Selected Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments................................... $ 5,084 $ 5,084 $ 88,514
Working capital................................ 13,604 13,604 97,034
Total assets................................... 29,531 29,531 112,961
Capital lease obligations, less current
portion....................................... 2,677 2,677 2,677
Redeemable convertible preferred stock......... 48,402 -- --
Stockholders' equity (deficit)................. (45,906) 2,496 85,926
</TABLE>

Pro forma net loss per share assumes all our preferred stock had been
converted into common stock on the date of original issuance. See our financial
statements for a more detailed description.

Pro forma balance sheet data assumes the conversion of all our outstanding
preferred stock into common stock in conjunction with the closing of this
offering.

The pro forma as adjusted balance sheet data above reflect the sale of
6,500,000 shares of our common stock in this offering at an assumed initial
public offering price of $14.00 per share after deducting estimated
underwriting discounts and commissions and estimated expenses of this offering,
the conversion of all outstanding preferred stock into common stock and the
issuance of an estimated 32,000 shares of common stock to be issued at the
closing of this offering to holders of our series A, B and D preferred stock as
payment of a dividend that began to accrue on December 21, 1999. See "Use of
Proceeds" and "Capitalization" for a discussion about how we intend to use the
proceeds from this offering and about our capitalization.

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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently consider immaterial may also impair our
operations. If any of the following risks actually occurs, our business could
be harmed. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.

WE HAVE A HISTORY OF NET LOSSES, WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.

We have incurred net losses since our inception, including a net loss of
approximately $11.8 million for the year ended December 31, 1998 and
approximately $10.5 million for the year ended December 31, 1999. As of
December 31, 1999, we had an accumulated deficit of approximately $56.4
million. We expect to incur additional losses for at least the next several
years. The extent of our future losses will depend, in part, on the rate of
growth, if any, in our contract revenue and on the level of our expenses. To
date, substantially all of our revenue has been derived from strategic
alliances and grants, and we expect that substantially all of our revenue for
the foreseeable future will result from payments from strategic alliances.

Future revenue from strategic alliances are uncertain because our ability to
generate revenue will depend upon our ability to enter into new strategic
alliances and to meet research, development and commercialization objectives
under new and existing agreements. We expect to spend significant amounts to
fund research and development and enhance our core technologies. As a result,
we expect that our operating expenses will increase significantly in the near
term, and, consequently, we will need to generate significant additional
revenue to achieve profitability. In order for us to generate revenue, we must
not only retain our existing strategic partners and attract new ones, but also
develop products or technologies that our partners choose to commercialize and
from which we can derive revenue through royalties. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.

BECAUSE WE ARE AN EARLY STAGE COMPANY DEVELOPING AND DEPLOYING NEW
TECHNOLOGIES, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR TECHNOLOGIES OR PRODUCTS,
WHICH COULD CAUSE US TO BE UNPROFITABLE OR CEASE OPERATIONS.

You must evaluate our business in light of the uncertainties and
complexities affecting an early stage biotechnology company. Our existing
proprietary technologies are new and in the early stage of development. We may
not be successful in the commercial development of these or any further
technologies or products. Successful products require significant development
and investment, including testing, to demonstrate their cost-effectiveness
prior to regulatory approval and commercialization. To date, we have
commercialized only one product, Pyrolase 160, and none of our strategic
partners have yet incorporated our technologies or inventions into their own
commercial products from which we can generate royalties. Because of these
uncertainties, our discovery process may not result in the identification of
product candidates that we or our strategic partners will commercialize. If we
are not able to use our technologies to discover new materials or products with
significant commercial potential, we will not be able to achieve our objectives
or build a sustainable or profitable business.

WE ARE DEPENDENT ON OUR STRATEGIC PARTNERS, AND OUR FAILURE TO SUCCESSFULLY
MANAGE OUR EXISTING AND FUTURE STRATEGIC ALLIANCE RELATIONSHIPS COULD PREVENT
US FROM DEVELOPING AND COMMERCIALIZING MANY OF OUR PRODUCTS AND ACHIEVING OR
SUSTAINING PROFITABILITY.

We currently have strategic alliance agreements with Novartis Seeds AG,
Novartis Agribusiness Biotechnology Research, Inc. and The Dow Chemical
Company, from which we expect to derive significant future revenue. Since we do
not currently possess the resources necessary to independently develop and
commercialize all of the potential products that may result from our
technologies, we expect to continue to

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enter into, and in the near-term derive additional revenue from, strategic
alliance agreements to develop and commercialize products. We will have limited
or no control over the resources that any strategic partner may devote to our
products. Any of our present or future strategic partners may not perform their
obligations as expected. These strategic partners 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 may not
develop products arising out of our collaborative arrangements or devote
sufficient resources to the development, manufacture, marketing or sale of
these products. If we fail to enter into or maintain strategic alliance
agreements, or if any of these events occur, we may not be able to
commercialize our products, grow our business or generate sufficient revenue to
support our operations. Our present or future strategic alliance opportunities
could be harmed if:

. We do not achieve our research and development objectives under our
strategic alliance agreements;

. We develop products and processes or enter into additional strategic
alliances that could conflict with the business objectives of our
strategic partners;

. We disagree with our strategic partners as to rights to intellectual
property we develop;

. We are unable to manage multiple simultaneous strategic alliances;

. Our strategic partners become competitors of ours or enter into
agreements with our competitors;

. Consolidation in our target markets limits the number of potential
strategic partners; or

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

WE DO NOT HAVE THE CAPACITY TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE. IF
WE ARE UNABLE TO ACCESS THE CAPACITY TO MANUFACTURE PRODUCTS IN SUFFICIENT
QUANTITY, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS OR GENERATE
SIGNIFICANT SALES.

We have only limited experience in enzyme manufacturing and we do not have
our own capacity to manufacture products on a commercial scale. We expect to be
dependent to a significant extent on third parties for commercial scale
manufacturing of our products. We have arrangements with a third party that has
the required manufacturing equipment and available capacity to manufacture
Pyrolase 160 under our direction and oversight. We also currently lease a pilot
facility for process development activities from a third party, which we intend
to vacate by March 2000. We plan to construct our own pilot development
facility during 2000 and have identified alternative capacity to meet interim
requirements. In addition to requiring investment in equipment, construction of
this new facility will necessitate compliance with applicable regulations.
After we complete the construction of our pilot facility, we will continue to
depend on third parties for large-scale commercial manufacturing. If we fail to
complete the construction of our pilot facility on time or at all, it could
interrupt our research and product development programs and harm our
relationships with strategic partners. Any difficulties or interruptions of
service with our third party manufacturers or our own planned pilot
manufacturing facility could disrupt our research and development efforts,
delay our commercialization of products and harm our relationships with our
strategic partners or customers.

WE HAVE ONLY LIMITED EXPERIENCE IN INDEPENDENTLY DEVELOPING, MANUFACTURING,
MARKETING, SELLING AND DISTRIBUTING COMMERCIAL PRODUCTS.

We intend to pursue some product opportunities independently. We currently
have only limited resources and capability to develop, manufacture, market,
sell or distribute products on a commercial scale. We will determine which
products to pursue independently based on various criteria, including:
investment required, estimated time to market, regulatory hurdles,
infrastructure requirements and industry-specific expertise necessary for
successful commercialization. At any time, we may modify our strategy and
pursue alliances for the development and commercialization of some products. We
may pursue products that ultimately require more resources than we anticipate
or which may be technically unsuccessful. In order for us to commercialize
these products directly, we would need to establish or obtain through
outsourcing arrangements the capability to develop, manufacture, market, sell
and distribute products. If we are unable to successfully commercialize

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products resulting from our internal product development efforts, we will
continue to incur losses. Even if we successfully develop a commercial product,
we may not generate significant sales and achieve profitability.

ETHICAL, LEGAL AND SOCIAL CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD
LIMIT OR PREVENT THE USE OF OUR PRODUCTS AND TECHNOLOGIES AND LIMIT OUR
REVENUE.

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

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

. Public attitude 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 strategic
partners from supporting, developing or commercializing our products and
technologies; and

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

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

IF WE ARE UNABLE TO CONTINUE TO COLLECT GENETIC MATERIAL FROM DIVERSE NATURAL
ENVIRONMENTS, OUR RESEARCH AND DEVELOPMENT EFFORTS AND OUR PRODUCT DEVELOPMENT
PROGRAMS COULD BE HARMED.

We collect genetic material from organisms found in diverse environments. We
collect material from government-owned land in foreign countries and in areas
of the United States under formal resource access agreements, and from private
lands under individual agreements with private land owners. If our access to
materials under access agreements or other arrangements terminates, it could
harm our internal and our collaborative research and development efforts. We
also collect samples from other environments where agreements are currently not
required, such as the deep sea. All of our agreements with foreign countries
expire in 2002 or earlier, and they are all subject to earlier termination. Our
access agreement with Iceland was terminated, and we have voluntarily ceased
collections of further samples in Yellowstone National Park pending their
resolution of collection guidelines.

ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR
COMPETITIVE POSITION.

Our intellectual property consists of patents, copyrights, trade secrets,
know-how and trademarks. As of January 15, 2000, we owned 24 issued patents
relating to our technologies, had received notices of allowance with respect to
7 other patent applications and have over 125 patents pending. In addition, as
of January 15, 2000, we had in-licensed more than 25 additional patents or
patent applications that we believe strengthen our patent portfolio. Our
success depends in part on our ability to obtain patents and maintain adequate
protection of our other intellectual property for our technologies and products
in the United States and other countries. The laws of some foreign countries do
not protect proprietary rights to the same extent as the laws of the United
States, and many companies have encountered significant problems in protecting
their proprietary rights in these foreign countries. These problems can be
caused by, for example, a lack of rules and methods for defending intellectual
property rights.

The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our proprietary rights from

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unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. We will apply for patents covering both our
technologies and products as we deem appropriate. However, these applications
may be challenged and may not result in issued patents. Our existing patents
and any future patents we obtain may not be sufficiently broad to prevent
others from practicing our technologies or from developing competing products.
Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, our
patents may be challenged, invalidated or fail to provide us with any
competitive advantages.

WE MAY ENCOUNTER DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.

Our strategy includes entering into and working on simultaneous projects
across multiple industries. We increased the number of our employees from 74 at
December 31, 1998 to 102 at December 31, 1999 and expect to significantly
increase our rate of growth to meet our strategic objectives. If our growth
continues, it will continue to place a strain on us. Our ability to effectively
manage our operations, growth, and various projects requires us to continue to
improve our operational, financial and management controls, reporting systems
and procedures and to attract and retain sufficient numbers of talented
employees. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner. In
addition, we may discover deficiencies in existing systems and controls.

LITIGATION OR OTHER PROCEEDINGS OR THIRD PARTY CLAIMS OF INFRINGEMENT COULD
REQUIRE US TO SPEND TIME AND MONEY AND COULD SHUT DOWN SOME OF OUR OPERATIONS.

Our commercial success depends on neither infringing patents and proprietary
rights of third parties, nor breaching any licenses or other agreements that we
have entered into with regard to our technologies, products and business. The
patent positions of biotechnology companies, including our patent position,
involve complex legal and factual questions and, therefore, enforceability
cannot be predicted with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. We cannot be sure that relevant patents have not
been issued that could block our ability to obtain patents or to operate as we
would like. Others may develop similar technologies or duplicate technologies
developed by us. We are aware of the existence of 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. We are also aware of the existence of claims in published patent
applications in some countries that, if granted and valid, may also block our
ability to commercialize products in these countries if we are unable to
circumvent or license them.

We are not currently a party to any litigation with regard to our patent
position. However, the biotechnology industry is characterized by extensive
litigation regarding patents and other intellectual property rights. Many
biotechnology companies have employed intellectual property litigation as a way
to gain a competitive advantage. If we became involved in litigation or
interference proceedings declared by the United States Patent and Trademark
Office, or oppositions or other intellectual property proceedings outside of
the United States, to defend our intellectual property rights or as a result of
alleged infringement of the rights of others, we might have to spend
significant amounts of money. We are aware of a significant number of patents
and patent applications relating to aspects of our technologies filed by, and
issued to, third parties. Should any of our competitors have filed patent
applications or obtain patents that claim inventions also claimed by us, we may
have to participate in an interference proceeding declared by the relevant
patent regulatory agency to determine priority of invention and, thus, the
right to a patent for these inventions in the United States. Such a proceeding
could result in substantial cost to us even if the outcome is favorable. Even
if successful on priority grounds, an interference may result in loss of claims
based on patentability grounds raised in the interference. The litigation or
proceedings could divert our management 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.

8
<PAGE>

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

We recently received a letter from a privately held biotechnology company
suggesting that we may want to consider licensing patents held by that third
party. We believe that we have defenses to any infringement claim with respect
to such patents. However, we cannot be certain that the third party will not
initiate litigation alleging that our technologies infringe claims of such
patent or that a court would not find such claims valid and infringed.

CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.

In order to protect our proprietary technology and processes, we also rely
in part on trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our trade secrets and
proprietary information. These measures may not provide adequate protection for
our trade secrets or other proprietary information. Our policy is to execute
confidentiality agreements with our employees and consultants upon the
commencement of an employment or consulting arrangement with us. These
agreements generally require that all confidential information developed by the
individual or made known to the individual by us during the course of the
individual's relationship with us be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to us shall be
our exclusive property. There can be no assurance that proprietary information
will not be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets or that we can meaningfully protect our trade secrets. Costly
and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business position.

MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN WE DO
MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.

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

We face, and will continue to face, intense competition. We are not aware of
another company that has the scope and integration of technologies and
processes that we have. There are, however, a number of companies who compete
with us in various steps throughout our technology process. For example,
Terragen Discovery is involved in accessing organisms from diverse environments
for pharmaceutical applications. A number of companies are performing high-
throughput screening of molecules. Maxygen, Inc. and Evotech have alternative
evolution technologies. Integrated Genomics, Inc., Myriad Genetics, Inc.,
ArQule, Inc. and Aurora Biosciences Corporation perform screening, sequencing
and/or bioinformatics services. Novo Nordisk and Genencor International, Inc.
are involved in the 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.

9
<PAGE>

Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Any products that we develop will compete
in highly competitive markets. Many of our potential competitors in these
markets have substantially greater financial, technical and marketing resources
than we do, and we cannot assure you that they will not succeed in developing
products that would render our products or those of our strategic partners
obsolete or noncompetitive. In addition, many of these competitors have
significantly greater experience than we do in their respective fields. Our
ability to compete successfully will depend on our ability to develop
proprietary products that reach the market in a timely manner and are
technologically superior to and/or are less expensive than other products on
the market. Current competitors or other companies may develop technologies and
products that are more effective than ours. Our technologies and products may
be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of our competitors. The existing
approaches of our competitors or new approaches or technology developed by our
competitors may be more effective than those developed by us.

STRINGENT LAWS AND REQUIRED GOVERNMENT APPROVALS COULD DELAY OUR INTRODUCTION
OF PRODUCTS.

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

In the United States, products for our target markets are regulated based on
their application, by either the FDA, the Environmental Protection Agency, or
EPA, or, in the case of plants and animals, the United States Department of
Agriculture, or USDA. The FDA regulates drugs, food and feed, as well as food
additives, feed additives and substances generally recognized as safe that are
used in the processing of food or feed. Under current FDA policy, our products,
or products of our strategic 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 or 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. The EPA regulates biologically derived chemical substances not
within the FDA's jurisdiction. An unfavorable EPA ruling could delay
commercialization or require modification of the production process resulting
in higher manufacturing costs, thereby making the product uneconomical. In
addition, the USDA may prohibit genetically engineered plants from being grown
and transported except under an exemption, or under controls so burdensome that
commercialization becomes impracticable. Our future products may not be
exempted by the USDA.

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

IF WE REQUIRE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, WE MAY NEED TO ENTER
INTO FINANCING ARRANGEMENTS WITH UNFAVORABLE TERMS OR WHICH COULD ADVERSELY
AFFECT YOUR OWNERSHIP INTEREST AND RIGHTS AS COMPARED TO OUR OTHER
STOCKHOLDERS. IF SUCH FINANCING IS NOT AVAILABLE, WE MAY NEED TO CEASE
OPERATIONS.

We currently anticipate that our available cash resources and receivables,
committed funding from strategic partners and the net proceeds from this
offering will be sufficient to meet our capital requirements for at least the
next two years. However, our capital requirements depend on several factors,
including:

. The level of research and development investment required to maintain
our technology leadership position;

10
<PAGE>

. Our ability to enter into new agreements with strategic 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 to commercialize our
products that would result in royalties;

. Costs of recruiting and retaining qualified personnel; and

. Our need to acquire or license complementary technologies or acquire
complementary businesses.

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

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

WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.

Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. For example, our revenue for the year ended
December 31, 1999 was $10.3 million, as compared to $1.3 million for the same
period in 1998. This increase was primarily due to revenue from new strategic
alliances. Revenue in future periods may be greater or less than revenue in the
immediately preceding period or in the comparable period of the prior year.
Some of the factors that could cause our operating results to fluctuate
include:

. Termination of strategic alliances;

. The success rate of our discovery efforts associated with milestones and
royalties;

. The ability and willingness of strategic partners to commercialize
royalty-bearing products on expected timelines;

. Our ability to enter into new agreements with strategic partners or to
extend the terms of our existing strategic alliance agreements, and the
terms of any agreement of this type;

. Our ability to successfully satisfy all pertinent regulatory
requirements;

. Our ability to successfully commercialize products developed
independently and the demand for such products; and

. General and industry specific economic conditions, which may affect our
strategic partners' research and development expenditures.

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

11
<PAGE>

operating expenses in 2000. Failure to achieve anticipated levels of revenue
could therefore significantly harm our operating results for a particular
fiscal period.

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

IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL AS NECESSARY, IT COULD DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND
HARM OUR RESEARCH AND DEVELOPMENT EFFORTS.

Our success depends to a significant degree upon the continued contributions
of our executive officers, management and scientific staff. If we lose the
services of one or more of these people, we may be unable to achieve our
business objectives or our stock price could decline. We may not be able to
attract or retain qualified employees in the future due to the intense
competition for qualified personnel among biotechnology and other technology-
based businesses, particularly in the San Diego area. If we are not able to
attract and retain the necessary personnel to accomplish our business
objectives, we may experience constraints that will adversely affect our
ability to meet the demands of our strategic partners in a timely fashion or to
support our internal research and development programs. In particular, our
product development programs depend on our ability to attract and retain highly
skilled scientists, including molecular biologists, biochemists and engineers.
Although we believe we will be successful in attracting and retaining qualified
personnel, competition for experienced scientists and other technical personnel
from numerous companies and academic and other research institutions may limit
our ability to do so on acceptable terms. All of our employees are at-will
employees, which means that either the employee or Diversa may terminate their
employment at any time.

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

IF WE ENGAGE IN ANY ACQUISITION, WE WILL INCUR A VARIETY OF COSTS AND MAY
POTENTIALLY FACE NUMEROUS OTHER RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS
OPERATIONS.

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

. Issue equity securities which would dilute current stockholders'
percentage ownership;

. Incur substantial debt; or

. Assume contingent liabilities.

We may not be able to successfully integrate any businesses, 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 strategic partners. Further, recent proposed accounting
changes could result in a negative impact on our results of operations as well
as the resulting cost of the acquisition. Any of these adverse consequences
could harm our business.

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<PAGE>

OUR POTENTIAL THERAPEUTIC DRUG PRODUCTS ARE SUBJECT TO VARIOUS LENGTHY AND
UNCERTAIN REGULATORY PROCESSES, WHICH MAY NOT RESULT IN THE NECESSARY
REGULATORY APPROVAL AND COULD PREVENT THE COMMERCIALIZATION OF THESE PRODUCTS.

Substantially all of our projects to date have focused on non-human
applications of our technologies and products. We have not submitted an
investigational new drug application for any product candidate, and no drug
product candidate developed with our technologies has been approved for
commercialization in the United States or elsewhere.

In the future, we may pursue strategic alliances for further research and
development of drug products for humans. The FDA must approve any drug product
before it can be marketed in the United States. Our product candidates must
also be approved by the regulatory agencies of foreign governments before any
product can be sold in those countries. Before we could file a new drug
application or biologic license application with the FDA, any product candidate
would be required to undergo extensive clinical trials, which could take many
years and require substantial expenditures. The regulatory process also
includes preclinical testing. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approval. In addition, delays or rejections may be
encountered based upon changes in regulatory policy or requirements for product
approval during the period of product development and regulatory agency review
of each submitted new drug application or product license application. The
regulatory process is expensive and time consuming. Even after investing
significant time and expenditures, we may not obtain regulatory approval for
any drug products.

WE MAY BE SUED FOR PRODUCT LIABILITY.

We may be held liable if any product we develop, or any product which is
made with the use of any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We currently have no product liability insurance. When we attempt to obtain
product liability insurance, this insurance may be prohibitively expensive, or
may not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or otherwise to protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our strategic partners. If we
are sued for any injury caused by our products, our liability could exceed our
total assets.

WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW 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. These provisions could discourage
potential take-over attempts and could adversely affect the market price of our
common stock. Because of these provisions, you might not be able to receive a
premium on your investment.

THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, AND YOU MAY NOT BE ABLE TO
RESELL YOUR SHARES AT OR ABOVE THE INITIAL OFFERING PRICE.

Prior to this offering, there has been no public market for shares of our
common stock. An active, liquid trading market may not develop following
completion of this offering, or if developed, may not be maintained. We will
determine the initial public offering price for the shares through negotiations
between us and representatives of the underwriters. This price may not be
indicative of prices that will prevail later in the trading market. The market
price of the common stock may decline below the initial public offering price,
and you may not be able to resell your shares at or above the initial public
offering price.

OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.

The stock market, from time to time, has experienced significant price and
volume fluctuations that are unrelated to the operating performance of
companies. The market prices of technology companies, particularly

13
<PAGE>

life science companies, have been highly volatile. Our stock may be affected by
this type of market volatility, as well as by our own performance. The
following factors, among other risk factors, may have a significant effect on
the market price of our common stock:

. Developments in our relationships with current or future strategic
partners;

. Announcements of technological innovations or new products by us or our
competitors;

. Developments in patent or other proprietary rights;

. Our ability to access genetic material from diverse ecological
environments and practice our technologies;

. Future royalties from product sales, if any, by our strategic partners;

. Fluctuations in our operating results;

. Litigation;

. Developments in domestic and international governmental policy or
regulation; and

. Economic and other external factors or other disaster or crisis.

FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.

The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the public market after the closing of this offering, or the perception that
these sales could occur. These sales could make it more difficult for us to
sell equity securities in the future at a time and price that we deem
appropriate. After this offering, we will have outstanding 32,311,401 shares of
common stock. All the shares sold in this offering will be freely tradeable. Of
the remaining 25,811,401 shares of common stock outstanding after this
offering, all of such shares will be eligible for sale in the public market
beginning 180 days after the date of this prospectus. After this offering we
also intend to register up to approximately 6,187,096 shares of our common
stock for sale upon exercise of outstanding stock options issued pursuant to
compensatory benefit plans or reserved for future issuance pursuant to our 1997
Equity Incentive Plan, 1999 Non-Employee Directors' Stock Option Plan and 1999
Employee Stock Purchase Plan. In addition, the market price of our common stock
could decline if we sell additional equity securities in connection with
financings or strategic alliance arrangements.

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.

After this offering, our officers, directors and stockholders with at least
5% of our stock will together control approximately 57.8% of our outstanding
common stock. If these officers, directors and principal stockholders act
together, they will be able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of mergers or other business
combination transactions. 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.

AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN
THE NET TANGIBLE BOOK VALUE OF YOUR SHARES.

We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. Therefore, if you
purchase shares of our common stock in this offering, you will incur immediate
and substantial dilution in pro forma net tangible book value of $11.34 per
share. You may incur additional dilution if the holders of outstanding options
or warrants exercise those options or warrants. Additional information
regarding the dilution to investors in this offering is included in this
prospectus under the heading "Dilution."

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<PAGE>

WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.

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

YEAR 2000 ISSUES COULD RESULT IN THE INTERRUPTION OF OUR BUSINESS AND
NEGATIVELY IMPACT OUR OPERATING RESULTS.

We have completed our assessment of the year 2000 readiness of our core
information technology systems. Through this process, we contacted key external
suppliers of software applications and computer systems to coordinate the
evaluation of potential year 2000 issues. To date, we have not encountered any
material year 2000 problems with software and information systems provided to
us by third parties. We completed minor remediation with regard to software
programs, hardware and microprocessor-controlled equipment. We did not
experience any year 2000 problems. However, we believe that it is not possible
to determine with complete certainty that all year 2000 problems affecting us
have been identified or will be corrected. The number of devices and systems
that could be affected and the interactions among these devices and systems are
too numerous to address.

No one can accurately predict which year 2000 problem-related failures will
occur, or the severity, timing, duration or financial consequences of these
potential failures. If year 2000 problems significantly impact our strategic
partners, it could delay our research programs and the commercialization of
products, if any. Business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance could result in
litigation or contract termination. We could also lose future revenue as a
result of network, software or hardware failures. We also could be materially
adversely affected if third parties, upon whom we depend in order to run our
day-to-day business, experience year 2000 problems. For example, if our
supplier of electricity has not made appropriate year 2000 corrections, we
could experience a power outage and, consequently an interruption of our
research and development.

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SPECIAL STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" or the negative of these terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially
from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus or to conform these statements to
actual results.

USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately
$83.4 million, based upon an assumed initial public offering price of $14.00
per share, after deducting estimated underwriting discounts and estimated
offering expenses. If the underwriters' over-allotment option is exercised in
full, we estimate that net proceeds will be $96.1 million.

We intend to use the net proceeds of this offering for research and
development, capital expenditures, working capital and general corporate
purposes. Additionally, a portion of the proceeds may be used for possible
future acquisitions. We are not currently a party to any contracts or letters
of intent with respect to any acquisitions. Pending such uses, the net proceeds
of this offering will be invested in short-term, interest-bearing, investment-
grade securities.

DIVIDEND POLICY

We paid dividends of approximately $31,000 in 1995 and approximately $66,000
in 1997 to our series I preferred stockholders. These dividends were paid
pursuant to an agreement related to interest income on escrowed funds, and did
not represent a dividend from operating results. Pursuant to our certificate of
incorporation, our series A, B and D preferred stockholders are entitled to
receive a 5% dividend per annum from December 21, 1999 through the date of
completion of this offering. As of December 31, 1999, we have accrued $66,000
related to those dividends, and will accrue approximately $6,500 per day in
additional dividends for each day between January 1, 2000 and the completion of
this offering. We are entitled to pay this dividend in cash or in shares of
common stock valued at the initial public offering price. We intend to pay
these dividends in shares of our common stock and estimate that 32,000 shares
of common stock will be issued to satisfy this obligation. The annual dividend
is $0.05 per share of series A preferred stock, $0.033 per share of series B
preferred stock and $0.0425 per share of series D preferred stock. We presently
intend to retain future earnings, if any, to finance the expansion of our
business and do not expect to pay any cash dividends in the foreseeable future.
Any future determination to pay cash dividends will be at the discretion of our
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business conditions and other
factors that the board of directors may deem relevant.

CORPORATE INFORMATION

We were incorporated in the State of Delaware in December 1992 under the
name Industrial Genome Sciences, Inc. In August 1997, we changed our name to
Diversa Corporation.

Our executive offices are located at 10665 Sorrento Valley Road, San Diego,
California 92121, and our telephone number is (858) 453-7020. Our web site is
http://www.diversa.com. The information found on our web site is not a part of
this prospectus.

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CAPITALIZATION

You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes to those statements included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------
PRO FORMA
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments.. $ 5,084 $ 5,084 $88,514
======= ======= =======
Capital lease obligations, less current portion.... $ 2,677 $ 2,677 $ 2,677
------- ------- -------
Redeemable convertible preferred stock, par value
$0.001; 60,718,183 shares authorized; 60,220,183
shares issued and outstanding (actual); no shares
authorized, issued or outstanding (pro forma and
pro forma as adjusted)............................ 48,402 -- --
Stockholders' equity (deficit):
Series E convertible preferred stock, par value
$0.001; 5,555,556 shares authorized, issued and
outstanding (actual) 5,000,000 preferred stock
shares authorized, no shares issued or
outstanding (pro forma and pro forma as
adjusted)........................................ 6 -- --
Common stock, par value $0.001; 28,630,349 shares
authorized, 2,945,390 shares issued and
outstanding (actual); 65,000,000 shares
authorized, 25,779,401 shares issued and
outstanding (pro forma); 32,279,401 shares issued
and outstanding (pro forma as adjusted).......... 3 26 32
Additional paid-in capital........................ 15,747 64,132 147,556
Deferred compensation............................. (5,237) (5,237) (5,237)
Notes receivable from stockholders................ (36) (36) (36)
Accumulated deficit............................... (56,372) (56,372) (56,372)
Accumulated other comprehensive loss.............. (17) (17) (17)
------- ------- -------
Total stockholders' equity (deficit)........... (45,906) 2,496 85,926
------- ------- -------
Total capitalization........................... $ 5,173 $ 5,173 $88,603
======= ======= =======
</TABLE>

This table sets forth as of December 31, 1999:

. our actual capitalization;

. our pro forma capitalization, assuming the conversion of all of our
outstanding preferred stock into common stock in conjunction with the
closing of this offering;

. a 1-to-2.8806 reverse-split in our common stock that will take effect
prior to the date of this offering;

. our pro forma as adjusted capitalization to give effect to the sale of
6,500,000 shares of our common stock in this offering at an assumed
initial public offering price of $14.00 per share after deducting
estimated underwriting discounts and commissions and estimated expenses
of this offering and the conversion of all of our outstanding preferred
stock into common stock in conjunction with the closing of the initial
public offering.

This table excludes:

. 5,492,798 shares of our common stock reserved for issuance under our
stock option plans, of which 3,125,000 shares are subject to outstanding
options with a weighted average exercise price of $1.73 per share and
13,937 shares of common stock issuable upon exercise of an outstanding
option granted outside of our stock option plans with an exercise price
of $0.03 per share;

. 277,719 shares available for issuance under our Non-Employee Directors'
Stock Option Plan;

. 416,579 shares available for issuance under our 1999 Employee Stock
Purchase Plan;

. 364,120 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $1.44 per share; and

17
<PAGE>

DILUTION

Our historical net tangible book value as of December 31, 1999 was
approximately negative $45.9 million, or ($15.59) per share, based on the
number of common shares outstanding as of December 31, 1999. Historical net
tangible book value per share is equal to the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding as of December 31, 1999.

Our pro forma net tangible book value, as of December 31, 1999, was $2.5
million, or $0.09 per share of common stock, assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Pro forma
net tangible book value represents the amount of total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding
after considering the conversion of all outstanding preferred stock into common
stock. After giving effect to our sale of common stock offered hereby at an
assumed initial public offering price of $14.00 per share, and our receipt of
the estimated net proceeds from the offering, our pro forma net tangible book
value as of December 31, 1999 would have been approximately $85.9 million, or
$2.66 per share. This represents an immediate increase in net tangible book
value of $2.57 per share to existing stockholders and an immediate dilution of
$11.34 per share to new investors. The following table illustrates this per
share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $14.00
Historical net tangible book value per share before the
offering..................................................... $(15.59)
Increase per share attributed to the conversion of preferred
stock to common stock........................................ 15.68
-------
Pro forma net tangible book value per share before the
offering..................................................... 0.09
Increase per share attributable to new investors.............. 2.57
-------
Pro forma net tangible book value per share after this
offering....................................................... 2.66
------
Dilution per share to new investors............................. $11.34
======
</TABLE>

If the underwriters exercise their over-allotment in full, there will be an
increase in pro forma net tangible book value to $2.97 per share to existing
shareholders and an immediate dilution in pro forma net tangible book value of
$11.03 to new shareholders. Our existing shareholders would own 77.5% and our
new public investors would own 22.5% of the total number of shares of our
common stock outstanding after this offering.

The following table summarizes, on a pro forma basis as of December 31,
1999, the differences between existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discounts and commissions and our estimated offering expenses.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 25,779,401 79.9% $ 58,291,000 39.0% $ 2.26
New public investors...... 6,500,000 20.1% 91,000,000 61.0% $14.00
---------- ----- ------------ -----
Total................... 32,279,401 100.0% $149,291,000 100.0% $ 4.62
========== ===== ============ =====
</TABLE>

The discussion and tables above assume no exercise of stock options or
warrants outstanding as of December 31, 1999. As of December 31, 1999, there
were options outstanding under our employee stock option plans to purchase a
total of 3,125,000 shares of common stock, with a weighted average exercise
price of $1.73 per share, 364,120 shares of common stock issuable upon the
exercise of outstanding warrants, with a weighted average exercise price of
$1.44 per share, and an option outstanding granted outside our stock option
plans to purchase 13,937 shares of common stock at $0.03 per share held by one
of our founders. To the extent that any of these options or warrants are
exercised, there will be further dilution to new investors.

18
<PAGE>

SELECTED FINANCIAL INFORMATION

The selected financial data set forth below with respect to the Company's
statements of operations for the years ended December 31, 1997, 1998 and 1999,
and with respect to the Company's balance sheets at December 31, 1998 and 1999
are derived from our financial statements that have been audited by Ernst &
Young LLP, which are included elsewhere in this prospectus, and are qualified
by reference to such financial statements. The statement of operations data for
the years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from our audited financial
statements that are not included in this prospectus. The selected financial
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and related notes appearing elsewhere in
this prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Collaborative revenue........ $ -- $ 200 $ 669 $ 625 $ 9,166
Grant and product revenue.... 25 506 486 722 1,106
------- -------- -------- -------- --------
Total revenue.............. 25 706 1,155 1,347 10,272
Operating expenses:
Research and development..... 5,306 6,496 7,996 10,182 11,727
Write-off of acquired
patents..................... -- -- -- -- 3,106
Selling, general and
administrative.............. 3,551 4,465 4,774 3,354 6,044
Restructuring charge......... -- 1,164 -- -- --
------- -------- -------- -------- --------
Total operating expenses... 8,857 12,125 12,770 13,536 20,877
------- -------- -------- -------- --------
Operating loss............... (8,832) (11,419) (11,615) (12,189) (10,605)
Other income (expense)....... (72) (227) (92) 344 215
------- -------- -------- -------- --------
Net loss..................... (8,904) (11,646) (11,707) (11,845) (10,390)
Dividends payable to
preferred stockholders...... -- -- -- -- (66)
Net loss applicable to common
stockholders................ $(8,904) $(11,646) $(11,707) $(11,845) $(10,456)
======= ======== ======== ======== ========
Historical net loss per
share, basic and diluted.... $ (7.37) $ (7.68) $ (7.29) $ (6.70) $ (4.44)
======= ======== ======== ======== ========
Historical weighted average
shares outstanding.......... 1,208 1,517 1,606 1,768 2,353

Pro forma net loss per
share....................... $ (0.52) $ (0.42)
======== ========
Pro forma weighted average
shares outstanding.......... 22,673 25,187
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short term investments...... $ 622 $ 5,040 $ 16,607 $ 5,552 $ 5,084
Working capital.............. (1,276) 3,584 13,540 2,470 13,604
Total assets................. 4,769 9,973 20,284 8,706 29,531
Capital lease obligations,
less current portion........ 2,213 1,725 1,500 2,202 2,677
Redeemable convertible
preferred stock............. 10,595 26,182 48,402 48,402 48,402
Stockholders' equity
(deficit)................... (10,580) (22,156) (34,024) (45,738) (45,906)
</TABLE>

See our financial statements for a description of the computation of the
historical and pro forma net loss per share and the number of shares used in
the historical and pro forma per share calculations in "Statement of Operations
Data" above.

19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial
statements and the related notes to our financial statements and the other
financial information included elsewhere in this prospectus.

OVERVIEW

We were founded in December 1992 and began operations in May 1994. We
believe that we are the global leader in discovering and developing novel
enzymes and other biologically active compounds from diverse environmental
sources for use in agricultural, chemical processing, industrial and
pharmaceutical applications. To date, we have generated revenue from research
collaborations, government grants and enzyme product sales. Our strategic
partners include Novartis Seeds AG, Novartis Agribusiness Biotechnology
Research, Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A.
and Finnfeeds International Limited. Our current government grants are from the
National Institute of General Medical Sciences, the National Cancer Institute
and the National Institute of Environmental Health Sciences. Our enzyme product
sales to date are comprised of research kits and Pyrolase 160.

We have dedicated substantial resources to the development of our
proprietary technologies, which include capabilities for sample collection from
the world's microbial populations, generation of environmental gene libraries,
screening of these libraries using ultra-high throughput methods capable of
analyzing more than a billion genes per day and optimization via our
DirectEvolution technologies.

Our revenue has increased significantly since our inception, and for the
year ended December 31, 1999, we have experienced significant growth compared
to the year ended December 31, 1998. This increase was primarily attributable
to the addition of new strategic alliances, which included research funding and
technology access and development fees. Research funding is recognized as
revenue when the services are rendered. Revenue from technology access and
development fees is recognized over the term of the strategic alliance. Revenue
from milestone payments is recognized when the milestone is achieved. Our
strategic partners often pay us before we recognize the revenue, and these
payments are deferred until earned. As of December 31, 1999, we had current and
long-term deferred revenue totaling $18.8 million.

We have incurred substantial operating losses since our inception. As of
December 31, 1999, our accumulated deficit was $56.4 million, and total
stockholders' equity, after considering the conversion of all outstanding
shares of preferred stock to common stock, was $2.5 million. We expect to incur
additional operating losses over the next few years as we continue to develop
our technologies and fund internal product research and development.

RESULTS OF OPERATIONS

Years Ended December 31, 1999 and 1998

Revenue

Our revenue increased $9.0 million to $10.3 million for the year ended
December 31, 1999 from $1.3 million for the year ended December 31, 1998. This
increase was primarily attributable to the addition of new strategic alliances
with Novartis Agribusiness Biotechnology Research, Inc. and The Dow Chemical
Company and, to a much lesser extent, the addition of new government grants and
enzyme product sales. Revenue from collaborations accounted for 89% of total
revenue for the year ended December 31, 1999 and for 46% of total revenue for
the year ended December 31, 1998.

Research and Development Expenses

Our research and development expenses increased $1.5 million to $11.7
million for the year ended December 31, 1999, from $10.2 million for the year
ended December 31, 1998. During 1999, our research efforts were

20
<PAGE>

primarily focused on research associated with strategic alliance agreements and
continued work on internal products, whereas in 1998, we focused significant
resources on development of internal products and proprietary technologies.
1999 expenses also increased over 1998 due to amortization of deferred
compensation, as discussed in the paragraphs below. We expect that our research
and development expenses will increase substantially to support our
collaborative research programs, internal product research and development and
technology development.

Writeoff of Acquired Patents

In November 1999, we signed a license agreement with Terragen Discovery,
Inc. under which Terragen and Diversa agreed to cross license certain
technologies. We made an initial cash payment of $2.5 million and agreed to
make ongoing payments of $100,000 per year for the remaining life of the
patents. Our scientists have elected to pursue our existing technology, and are
not pursuing the Terragen patents for either existing or alternative future
uses. The Terragen license was acquired to enhance our intellectual property
position in combinational libraries and may reduce the risk of possible future
patent infringement claims. The Company recorded a charge of $3.1 million in
the fourth quarter to write off the entire cost of the license, consisting of
the initial payment of $2.5 million and the present value of the remaining
annual maintenance payments.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased $2.6 million to
$6.0 million for the year ended December 31, 1999 from $3.4 million for the
year ended December 31, 1998. This increase was primarily attributable to
expenses related to separation agreements with former employees and
amortization of deferred compensation, as discussed in the paragraph below. We
expect that our selling, general and administrative expenses will increase to
support our growth and requirements as a public company.

Other Income (Expense)

Other income (expense) primarily consists of interest income and interest
expense. Interest income was relatively level at $0.5 million for the year
ended December 31, 1999 as compared to $0.6 for the year ended December 31,
1998. Interest expense increased $0.1 million to $0.4 million for the year
ended December 31, 1999 from $0.3 million for the year ended December 31, 1998.
This increase was primarily attributable to expanded equipment lease financing.

Provision for Income Taxes

We incurred net operating losses for the year ended December 31, 1999 and
1998, and accordingly, we did not pay any federal or state income taxes. As of
December 31, 1999, we had federal net operating loss carryforwards of
approximately $45.8 million, which begin to expire in 2009. The net operating
loss carryforwards for state tax purposes were approximately $28.9 million,
which began to expire in 1999. We also had federal research and development tax
credit carryforwards of approximately $1.2 million, which begin to expire in
2009. Our utilization of the net operating losses and credits may be subject to
substantial annual limitations pursuant to Section 382 of the Internal Revenue
Code, and similar state provisions, as a result of changes in our ownership
structure. The annual limitations may result in the expiration of net operating
losses and credits prior to utilization.

Deferred Compensation and Other Non-Cash Compensation Charges

Deferred compensation for options granted to employees has been determined
as the difference between the exercise price and the fair value of our common
stock, as estimated by us for financial reporting purposes, on the date options
were granted. Deferred compensation for options granted to consultants has been
determined in accordance with Statement of Financial Accounting Standards No.
123 as the fair value of the equity instruments issued, and is periodically
remeasured as the underlying options vest in accordance with EITF 96-18.

21
<PAGE>

In connection with the grant of stock options to employees, we recorded
deferred compensation of approximately $6.8 million in the year ended December
31, 1999. This amount was recorded as a component of stockholders' equity and
is being amortized as a charge to operations over the vesting period of the
options. We recorded amortization of deferred compensation of approximately
$1.6 million for the year ended December 31, 1999. Included in research and
development and selling, general and administrative expenses are $0.5 million
and $1.1 million, respectively, of amortization expense.

We recorded non-cash compensation charges of $0.8 million in 1999 in
conjunction with the acceleration of vesting for stock options of terminated
employees. We calculated the charge as the difference between the exercise
price of the stock options and the fair value of our common stock estimated for
financial reporting purposes on the date of the modification of the option
grants.

Years Ended December 31, 1998 and 1997

Revenue

Our revenue increased to $1.3 million in 1998 from $1.2 million in 1997.
This increase was primarily attributable to the addition of new government
grants. Revenue from collaborations accounted for 46% of total revenue for 1998
and 58% of total revenue for 1997.

Research and Development Expenses

Our research and development expenses increased $2.2 million, or 28%, to
$10.2 million for 1998 from $8.0 million for 1997. This increase was primarily
attributable to expanded technology development and internal product
development.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses decreased $1.4 million to
$3.4 million for 1998 from $4.8 million for 1997. This decrease was primarily
attributable to lower staffing and related costs and reduced product
advertising and promotions. In addition, 1997 expenses include costs associated
with relocating our facilities from Pennsylvania to California.

Other Income (Expense)

Interest income increased $0.3 million to $0.6 million for 1998 from $0.3
million for 1997. This increase was attributable primarily to higher average
cash balances during 1998. Interest expense was level at $0.3 million year over
year.

Provision for Income Taxes

We incurred net operating losses for 1998 and 1997, and accordingly, we did
not pay any federal or state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our business primarily through private
placements of preferred stock with net proceeds of $55.7 million, and funding
from strategic partners and government grants. As of December 31, 1999, we had
cash, cash equivalents and short-term investments of approximately $5.1
million, and $0.8 million available under an equipment financing line of
credit. We expect to receive an additional $15.0 million in January 2000 from
Novartis Seeds AG as an initial payment under a strategic alliance agreement
signed in December 1999. Our funds are currently invested in U.S. Treasury and
government agency obligations and investment-grade corporate obligations.

22
<PAGE>

As part of our plan to lease new executive offices and research and
development facilities in 2000, we plan to construct a pilot manufacturing
facility, which will be used for process development activities. Our costs for
fixed assets relating to the pilot manufacturing facility will be approximately
$2.4 million, all of which we anticipate financing through equipment leases. As
of December 31, 1999, we had no purchase commitments relating to the pilot
facility.

Our operating activities used cash of $6.6 million in the year ended
December 31, 1999, $10.8 million in the year ended December 31, 1998, and $11.2
million in 1997. Our use of cash for all periods primarily resulted from our
losses from operations and the changes in our working capital accounts.

Our investing activities used cash of $2.9 million in 1999, $1.9 million in
1998 and $0.7 million in 1997. Our investing activities consist primarily of
purchases of property and equipment, purchases of investment securities and
increases in long-term deferred assets.

Our financing activities provided $7.5 million for the year ended December
31, 1999 and provided cash of $0.6 million in 1998 and $23.5 million in 1997.
Our financing activities have consisted primarily of the sale of preferred
stock to both private investors and strategic partners, and proceeds received
and payments made under our capital lease lines and notes payable.

We expect that the proceeds from this offering, combined with our current
cash and cash equivalents, short-term investments, and funding from existing
strategic alliances and grants including committed minimum funding totaling
$68.0 million from our collaborators to be received between 2000 and 2004 will
be sufficient to fund our operations for at least the next two years. This
estimate is a forward-looking statement that involves risks and uncertainties
as set forth under the caption "Risk Factors" in this prospectus. Our future
capital requirements and the adequacy of our available funds will depend on
many factors, including scientific progress in our research and development
programs, the magnitude of those programs, our ability to establish strategic
alliance relationships, and competing technological and market developments.
Therefore, it is possible that we may seek additional financing within this
timeframe. If we require additional capital to fund our operations and such
financing is not available, we may need to cease operations. Alternatively, we
may need to enter into financing arrangements which could dilute some
stockholders' ownership interests and adversely affect their rights.

YEAR 2000

The year 2000 problem potentially affects the computers, software and other
equipment that we use, operate or maintain in our operations. As a result, we
have formalized our year 2000 compliance plan to be implemented by a team of
employees, led by our internal information technology staff, responsible for
monitoring the assessment and remediation status of our year 2000 projects. We
have been working on this year 2000 compliance plan for the past six months.

Information Technology Systems. As part of our compliance plan, we made an
assessment of the year 2000 readiness of our core information technology
systems, including our servers, databases, internally developed software,
desktop computers and significant microprocessor-controlled equipment. The
majority of our computer systems and software are less than 26 months old. Our
business system was put into use in 1998 and has been certified year 2000
compliant. We have completed our assessment of the year 2000 readiness of our
core information technology systems. Through this process, we contacted key
external suppliers of software applications and computer systems to coordinate
the evaluation of potential year 2000 issues. We completed minor remediation
with regard to software programs, hardware and microprocessor-controlled
equipment. When appropriate, we coordinated our remediation efforts with our
third party suppliers.

Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices may
be affected by the year 2000 problem.

23
<PAGE>

Costs of Remediation. We have spent less than $50,000 to date for
remediation and expect to incur minimal additional costs related to any
required modifications, upgrades or replacements of our internal systems.

To date, we have not experienced any material adverse effect on our business
or operating results as a result of any year 2000 problems. In addition, we
have not deferred any material information technology projects or equipment
purchases, as a result of our year 2000 problem activities.

Most Likely Consequences of Year 2000 Problems. We believe we have
identified and resolved all year 2000 problems that could materially adversely
affect our business operations. However, we believe that it is not possible to
determine with complete certainty that all year 2000 problems affecting us have
been identified or corrected. The number of devices and systems that could be
affected and the interactions among these devices and systems are too numerous
to address. In addition, no one can accurately predict which year 2000 problem-
related failures will occur or the severity, timing, duration, or financial
consequences of these potential failures. As a result, we believe that the
following consequences are possible:

. Operational inconveniences and inefficiencies for us and our strategic
partners that will divert management's time and attention and financial
and human resources from ordinary business activities;

. Business disputes alleging that we failed to comply with the terms of
contracts or industry standards of performance, some of which could
result in litigation or contract termination; and

. Loss of revenue as a result of network, software or hardware failures.

We also could be materially adversely affected if third parties upon whom we
depend in order to run our day-to-day business experience year 2000 problems.

Contingency Plans. We do not anticipate needing to develop contingency plans
to be implemented if our efforts to identify and correct year 2000 problems
affecting our internal systems are not effective. If the need arises, we will
rapidly develop contingency plans that may include:

. Accelerated replacement of affected equipment or software;

. Short to medium-term use of backup equipment and software or other
redundant systems;

. Increased work hours for our personnel or the hiring of additional
information technology staff; and

. The use of contract personnel to correct, on an accelerated basis, any
year 2000 problems that arise or to provide interim alternate solutions
for information system deficiencies.

Our implementation of any of these contingency plans could harm our
business.

Disclaimer. The discussion of our efforts and expectations relating to year
2000 compliance contains forward-looking statements. Our ability to achieve
year 2000 compliance, and the level of incremental costs associated with our
compliance, could be adversely affected by, among other things, the
availability and cost of contract personnel and external resources, third-party
suppliers' ability to modify proprietary software and unanticipated problems
not identified in the ongoing compliance review.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities," which will be effective for our fiscal
year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an
asset or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met. SFAS 133 is not anticipated to have
a significant impact on our operating results or financial condition when
adopted, since we currently do not engage in hedging activities.

24
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our capital lease obligations, the interest rates under which are closely tied
to market rates, and our investments in interest rate sensitive financial
instruments. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation of our invested principal funds by limiting default risks,
market risk and reinvestment risk. We mitigate default risk by investing in
investment grade securities. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of our interest sensitive financial instruments at
December 31, 1998 or December 31, 1999. Declines in interest rates over time
will, however, reduce our interest income while increases in interest rates
over time will increase our interest expense.

25
<PAGE>

BUSINESS

We believe that we are a global leader in discovering and developing novel
enzymes and other biologically active compounds, together known as
biomolecules, from diverse environmental sources for use in agricultural,
chemical processing, industrial and pharmaceutical applications. We apply our
fully-integrated and proprietary processes to obtain previously unaccessed
genetic material from uncultured organisms found in various natural
environments, catalog and store genes in gene libraries, screen these libraries
using methods capable of analyzing more than a billion genes per day, optimize
selected enzymes and compounds by applying our proprietary DirectEvolution(R)
genetic modification technologies, including Gene Site Saturation
Mutagenesis(TM) and GeneReassembly(TM), and we develop novel host organisms for
the manufacture of resulting products. We have entered into a number of
strategic alliances with market leaders across multiple industries, including:
Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow
Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and Finnfeeds
International Limited.

INDUSTRY BACKGROUND

Introduction

Microbes, such as bacteria and fungi, are the world's most abundant and
varied organisms and can be found in almost every ecosystem, including oceans,
deserts, rain forests and arctic regions. Through generations of natural
selection in diverse environments, microbes have developed characteristics that
are broader and more varied than those encountered in plants or animals. These
characteristics, which include the ability to survive in extreme temperature,
tolerate high or low pH and high or low salt environments, are the result of
the highly diverse genetic material found in the microbial world. This genetic
material, commonly known as DNA, is a fundamental molecule found in the cells
of all living organisms and is composed of four different chemical bases called
nucleotides. Nucleotides are arranged into units called genes, which are the
elements of heredity. Each gene carries the instructions for the production of
a protein. One key class of proteins, known as enzymes, carries out the
chemical reactions that give each microbe its unique character. Countless
microbes, each with their unique enzymes, influence our lives in a multitude of
ways. For example, some microbes make the soil fertile, clean up the
environment and supply the atmosphere with oxygen, while others are used to
produce vitamins and drugs, or improve our food.

Commercial Applications

Virtually any product or process that utilizes or could utilize proteins can
potentially be improved using novel, naturally occurring biomolecules.
Consequently, naturally occurring biomolecules are commercially applicable to a
broad range of multi-billion dollar industries. For example, enzymes isolated
from microorganisms have been used in home laundry detergents and for the
production of cheese and sweeteners. While most enzyme applications were
developed prior to the era of biotechnology, new commercial applications have
been limited in the 1990's primarily because of the lack of new varieties of
enzymes. Additionally, a significant portion of the enzymes being used
commercially are not optimal for their intended uses.

Traditional Approaches and Their Limitations

Traditional methods of discovering enzymes and other biologically active
molecules do not utilize a DNA-based approach, but are accomplished by
screening extracts of plants or culturing microorganisms for the activity of
interest. Once an activity is identified, purification is performed and the
relevant molecule is isolated. With respect to biologically active molecules,
this process is followed by the difficult and time consuming task of
determining the chemical structure of the molecule, which requires producing
sufficient quantities of the molecule by culturing a sample in the laboratory.
To date, modern biochemical science has characterized greater than 3,000
enzymes. Nearly all of such enzymes have been identified from organisms that
have been successfully cultured in the laboratory. Therefore, enzymes from only
a small fraction of the billions

26
<PAGE>

of different species of microorganisms living throughout the world have been
characterized. The reasons for this include:

. Less than an estimated 1% of the microorganisms in most habitats will
grow using standard laboratory techniques because it is so difficult to
precisely create the required environmental conditions;

. If an extract from a plant or cultured organism is not collected at the
appropriate time, the activity of interest may not be present, since
enzymes and other bioactive molecules may only be synthesized at
specific times during a cell cycle or under specific conditions; and

. Even if the enzyme or bioactive molecule is isolated, the targeted
recovery of the corresponding gene or genes encoding these molecules is
usually difficult.

Accordingly, the universe of potentially useful compounds from biodiversity
remains largely untapped.

Once an enzyme of interest is discovered, its genetic sequence can be
studied and genetic variation may be introduced in an attempt to modify its
function through this process of evolution. Genetic variation is generated
predominantly by two methods: mutation and recombination. Mutation is the
introduction of changes into a gene. Mutation can be achieved by several
methods, including forcing the DNA to replicate in a manner which intentionally
causes random changes. Mutation is typically achieved by randomly introducing
single DNA base mutations into a gene in an attempt to alter a single amino
acid within the corresponding protein. Each of these methods has deficiencies
that make it virtually impossible to generate all 19 possible amino acid
changes at each position within the protein. To generate all amino acid changes
at each site would require multiple, appropriately positioned DNA base changes.
In actual practice, fewer than six changes, on average, are explored due to
deficiencies in mutation and sampling methods. Recombination, the other method
for producing genetic variation, is the mixing of two or more related genes to
form hybrids. However, the generation of improved variants has, to date, been
inefficient and laborious, or has allowed only closely related genes to be
recombined.

Regardless of the method used to generate the variation, mutation or
recombination, the improved molecules must be selected from numerous unimproved
or defective versions. This selection process requires the ability to quickly
screen large numbers of genes to distinguish the improved versions.

Once a desired gene is found and optimized, commercial production requires
insertion of the gene into a production system or host. Almost all of the
current commercial enzymes used in industrial applications today were derived
from cultured microorganisms and produced in these or similar organisms.
However, genes encoding unique biomolecules may not be able to be expressed and
commercially produced in traditional systems. Thus, traditional methods present
both the problem of novel biomolecule identification and the challenge of
commercial production of any identified biomolecules.

DIVERSA'S SOLUTION AND ADVANTAGES

Our proprietary technologies and tools address the limitations of
traditional approaches for the recovery and modification of novel genes and
linked genes comprising novel gene pathways and the manufacture and
commercialization of related products. Our fully-integrated process includes
the following steps:

. We collect small environmental samples containing heterogeneous
populations of uncultured microbes from diverse ecosystems and extract
the genetic material from these organisms, eliminating the need to grow
and maintain the organisms in cultures in the laboratory. Since small
samples yield sufficient DNA, we minimize our impact on sensitive
environments.

. We create gene expression libraries, DiverseLibraries(TM), from the DNA
extracted from the organisms found in the specified environment, and
PathwayLibraries(TM), libraries of multi-gene pathways responsible for
the production of small molecules. We estimate that our gene expression
libraries

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<PAGE>

currently contain the complete genomes of over 1 million unique
microorganisms, comprising a vast resource of genetic material that can
be screened for valuable commercial products.

. We employ proprietary methods for quickly and cost-effectively screening
large numbers of novel genes and their variants. Our proprietary
screening techniques efficiently address the tremendous volume of
genetic material captured in our libraries and significantly accelerate
the product development process. Our data management and analysis
system, SciLect(TM), allows us to store and manipulate the vast amount
of information generated from our screening activities.

. We utilize our proprietary DirectEvolution technologies, including Gene
Site Saturation Mutagenesis and GeneReassemby, to enable a full range of
accelerated DNA mutations. This greatly enhances the efficiency of the
evolution process, and reduces the laborious nature of current mutation
and recombination processes.

. We insert a selected gene or pathway into novel hosts for biomolecule
production for the manufacture of resulting products, facilitating
better gene expression and thereby improving the efficiency of
traditional production processes.

Innovation From Biodiversity And Gene Evolution Process

[Diagram titled Diversa: Innovation from BioDiversity Process]

We believe the integration of these capabilities enables us to maintain our
leadership in developing and commercializing novel products to address the
needs of our target markets. The genetic diversity of our expansive gene
libraries and our proprietary high-throughput screening and evolution
technologies allow us to shorten the development cycles for novel enzymes and
biologically active compounds. Additionally, our processes are designed to help
our customers improve their manufacturing processes, reduce costs, reduce
waste, improve yield and improve the quality of their end products.

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<PAGE>

MARKET OPPORTUNITIES

We are developing products for a number of multi-billion dollar markets,
including agricultural, chemical processing, industrial and pharmaceutical
applications. Our target markets provide both short-term and long-term product
revenue opportunities, with chemical and industrial products having relatively
short development and regulatory approval processes, agricultural products
having intermediate term development and regulatory approval processes, and
pharmaceutical products having longer development and regulatory approval
processes.

Within these broad markets we are targeting key segments where we believe
our technologies and products will create high value and competitive advantages
for our strategic partners and our customers. We have been able to identify and
produce enzymes that exhibit dramatic increases in efficiency and stability
applicable to strategic partners' and customers' unique requirements, such as
high or low temperature stability, high or low pH tolerance, high or low salt
tolerance, or combinations of these features.

Agricultural Products

The growth of the agricultural market has been spurred by the world's
population growth. This growth has led to the demand for new technology that
improves productivity, reduces environmental impact and improves quality,
safety and nutritional value of agricultural products. Animal feed crops, such
as corn, wheat, barley, rye, oats and soybean, can be improved through the
selective development of value-added traits. We estimate that the animal feed
market is currently $36 billion in annual revenue. Additionally, in 1997 $5.9
billion was spent on animal feed additives for the purpose of improving feed
digestibility and increasing nutritional value.

Genetically engineered crops with improved traits are expected to contribute
substantially more value to the existing $15 billion agriculture seeds market.
In addition, consumer and regulatory demands for alternative pest management
solutions will fuel growth in the agrochemical market, estimated at $33 billion
in 1998.

In agriculture, we are developing a variety of specialty enzymes, engineered
genes and small molecules for use in the following applications:

. Crop Protection. We have developed enzymes that will be used as
biological catalysts to produce building blocks for agricultural
chemicals and active ingredients in herbicides and insecticides. We are
also developing genes to be inserted into crops to provide them with
insect resistance and herbicide tolerance. In addition, we are
developing small molecules with anti-fungal properties. These products
are designed to increase crop yield and reduce the environmental impact
of crop protection techniques.

. Animal Feed Additives. Animal feed additives are designed to increase
digestibility of essential vitamins and minerals, increase nutritional
value and animal product yield and reduce harmful materials in waste. We
are developing several classes of enzymes, including phytases,
carbohydrases and proteases, for the increased absorption of organic
phosphorous and digestibility of carbohydrates, as well as the promotion
of weight gain in livestock. We are also developing genes to impart
these same qualities into genetically engineered crops.

. Agricultural Product Processing. We have developed genes for improving
grain processing, nutrition and specialty foods. These applications
include starch and oil modification and breakdown of non-starch
polysaccharides to increase nutritional and food value.

. Animal Health. In addition to the above applications, we intend to
develop vaccines and therapeutics to treat and prevent diseases of farm
animals.

Chemical Processing

Annual revenue for the chemical industry currently exceeds $800 billion. Our
focus is on both fine chemicals, such as chiral chemicals used as building
blocks for pharmaceuticals, and high-performance

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chemicals. The current market for fine chemical intermediates is approximately
$45 billion, of which an estimated $25 billion relates to building blocks
useful for the manufacture of chiral and other drugs.

In chemical processing, we are developing a variety of specialty enzymes for
use in the following applications:

. Building Blocks for Production of Chiral Pharmaceuticals. We are
developing enzymes for the production of desired, active and essential
elements for the manufacture of chiral drugs, including many of the
leading revenue generating drugs currently on the market. We believe
these enzymes may also reduce production costs and waste associated with
manufacturing these compounds.

. High Performance Specialty Chemicals and Polymers. We are developing
enzymes that act as biological catalysts in the production of specialty
chemicals and polymers such as amino acids, anti-oxidants, vitamins and
pigments. These enzymes are intended to reduce manufacturing costs both
by reducing the amount and number of steps necessary to produce these
specialty chemicals and polymers and by reducing the production of
unwanted byproducts from these production processes.

Industrial Enzymes

Industrial enzymes represents a growing market, estimated at $1.8 billion in
revenue in 1998. We believe there are a number of applications within this
market that could provide us with commercial opportunities. We are currently
developing a variety of specialty enzymes for use in the following
applications:

. Oil and Gas Well Breakers. We have developed thermostable enzyme
breakers that improve viscosity control and are designed for use in deep
and high temperature wells. These enzyme breakers allow for improved
extraction of oil and gas from existing wells, resulting in greater
production and increased revenue per well.

. Detergents. We are developing more effective enzymes for solving
currently unmet needs in fabric care, dishwashing and industrial
cleaning. These specialty enzymes are intended to improve removal of
oil, protein, starch and other difficult-to-remove stains, as well as
maintain the original condition of washed fabrics.

. Corn Wet Milling. Corn wet milling enzymes are used to modify the starch
found in corn to produce higher value end products, such as high
fructose corn syrup and ethanol. We are developing new enzymes that we
believe will significantly reduce the costs and energy requirements for
this process, by eliminating the need for particular process adjustments
and the waste that results from these processes.

. Textile Manufacturing. We have developed, and are continuing to develop,
enzymes that assist in the removal of starch from textiles in
manufacturing and also impart desired appearance qualities to the
finished fabric. These enzymes are designed to reduce the manufacturing
cost and waste associated with the use of harsh chemicals currently used
in this process.

. Pulp and Paper Processing. We intend to develop enzymes to aid in pre-
bleaching pulp, which reduces the need to use strong oxidizer chemicals,
such as chlorine and sulfite, in that process. The enzymes we develop
could reduce the cost of pulp processing both by reducing the amount of
oxidizer chemicals required and the expense associated with treating the
waste resulting from the use of these harsh chemicals.

. Production of Modified Oils. We intend to develop enzymes to create
custom products, such as margarines, cooking oils and lubricants,
through the modification of fats and oils. Our enzymes will be directed
to improving product qualities, such as reducing the cholesterol causing
components in margarine and cooking oils and improving the heat
stability of lubricants.

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Pharmaceutical Products

According to an industry source, the worldwide pharmaceutical market was
$300 billion in 1998 and is expected to grow to $415 billion by 2002. Our
earlier-stage pharmaceutical program seeks to apply our technologies to the
discovery and development of compounds for selected applications within this
market. We believe that the initial applications for our technologies will lead
to strategic partnerships that include:

. Discovery of Small Molecule Compounds. Using our ultra high-throughput
screening methods, we are working to discover small molecule compounds
as candidates for anti-microbials, anti-fungals, anti-virals and other
therapeutic drugs. We believe that our recombinant product methodologies
can yield results superior to other approaches because natural pathways
can yield more complex chemical structures compared to lab-based
synthesis. In addition, naturally-derived molecules have been pre-
selected in the environment to perform specific biological functions.
Finally, our recombinant small molecule discovery approach permits
higher throughput discovery.

. Improving Protein Therapeutics, Vaccines and Gene Therapy Products. We
intend to apply our technologies to the improvement of protein
therapeutics, vaccines and gene therapy products. Our DirectEvolution
technologies can be utilized on environmental and human proteins to
generate human therapeutics with enhanced activity, reduced side effects
and extended patent life.

OUR STRATEGY

Our goal is to be the leading provider of novel enzymes and biologically
active compounds for use in agricultural, chemical processing, industrial and
pharmaceutical applications. The key elements of our strategy are to:

Protect and enhance our technology leadership position. We are unique
relative to our competitors in that we have an end-to-end product solution
consisting of access to novel genetic material, assay technologies capable of
screening more than a billion genes per day, multiple evolution technologies
and manufacturing expertise. We have surrounded our technology with a
substantial portfolio of intellectual property, and we will continue to make
investments in developing and protecting these assets.

Expand our existing DNA libraries through access to novel genetic material
and utilize our proprietary technologies to discover new genes and pathways to
provide solutions to market needs. We believe our ability to create expanded
libraries using minute samples of genetic material collected from diverse
environments is an important factor to our success. Our need to use only small
environmental samples results in minimal impact to the surrounding ecosystem,
enabling us to enter into formal genetic resource access agreements. To date,
we have obtained samples under these agreements with Costa Rica, Bermuda,
Indonesia, Yellowstone National Park, Mexico and Iceland. We intend to enter
into additional agreements to further strengthen our biodiversity access
program by expanding both the countries and the types of ecosystems from which
we obtain samples. We have also collected samples from private lands in the
United States and in areas that do not require formal access agreements, such
as the deep sea. Using our proprietary techniques to recover the genes from
these samples, we have constructed our DiverseLibraries. We intend to expand
these DiverseLibraries, which we estimate currently contain the total genomes
of over 1 million unique microorganisms. We are also making a significant
effort to expand our collection of multi-gene pathways, our PathwayLibraries.
We believe that the application of our proprietary technologies to this vast
resource of genetic material will provide us with a myriad of product
candidates for attractive commercial applications.

Deploy our technologies across diverse markets in order to maximize our
return on investment. We are focusing on commercial solutions for a broad range
of applications for the agricultural, chemical, industrial processing and
pharmaceutical industries. Products and processes utilizing genes, proteins,
small molecules, pathways and bioactive molecules are all potential targets.
Discoveries or developments made for any particular market may find use in
other applications, resulting in enhanced revenues, more efficient use of
corporate resources and increased return on investments.

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Pursue additional strategic alliances with market leaders to access funding
and industry-specific expertise and to more efficiently develop and
commercialize a larger product portfolio. We will continue to enter into
strategic alliances with leading corporations in our target markets. The key
components of the commercial terms of such arrangements typically include some
combination of the following types of fees: exclusivity fees, technology access
fees, technology development fees, research support payments, milestone
payments, license or commercialization fees and royalties or profit sharing
income from the commercialization of products resulting from the strategic
alliances. These partners represent market leaders across multiple industries,
and include Novartis Seeds AG, Novartis Agribusiness Biotechnology Research,
Inc., The Dow Chemical Company, Rhone-Poulenc Animal Nutrition S.A. and
Finnfeeds International Limited.

Independently develop and commercialize products in selected markets to
capture their full economic value. In addition to developing enzymes and
bioactive molecules through strategic alliances, we have developed and will
continue to develop products independently. For example, we successfully
introduced our first commercial product, Pyrolase 160, into the oil and gas
services market in 1999, and are currently developing Pyrolase 200, a second-
generation product with a higher range of temperature stability. We will
determine which products to pursue independently based on various criteria,
including: investment required, estimated time to market, regulatory hurdles,
infrastructure requirements and industry-specific expertise necessary for
successful commercialization. Because we will retain commercial rights to
independently developed products, we expect that these products will provide
attractive margins.

TECHNOLOGIES

DNA Sampling and Processing

Our discovery program begins with access to biodiversity. Biodiversity can
be defined as the total variety of life on earth, including genes, species,
ecosystems and the complex interactions between them. We have obtained samples
from virtually all ecosystems represented on earth including such environments
as: geothermal and hydrothermal vents, acidic soils and boiling mud pots,
alkaline springs, marine and freshwater sediments, marine symbionts, manure
piles, contaminated industrial sites, arctic tundra, dry Antarctic valleys,
super cooled sea ice, microbial mats, bacterial communities associated with
insects and nematodes, fungi and plant endophytes. We also access genetic
material from public and private culture collections. Because we clone DNA
directly from environmental sources, we need to collect only minute samples of
genetic material, which results in minimal impact on the surrounding ecosystem.
As a result, we have been able to obtain broad access to biologically diverse
environments around the world.

Gene Library Generation

To successfully capture the enormous genetic diversity present in uncultured
microbial community samples, we have developed a series of techniques, which
enable substantial recovery of DNA from a wide range of sample types, while
assuring DNA purity.

Our methods for analysis of environmental samples give scientists a rapid
estimation of the total number of species present and the relative abundance of
each species within a sample. DNA recovered from complex environmental samples
often represents the genomes of thousands of different microbial species, some
of which are generally more abundant than others. We estimate that there may be
as much as a 100,000-fold difference in abundance between a dominant species
and a rare species in a single sample. To access the genetic material of rare
microbial species in a given sample, we have developed proprietary
normalization technologies that result in a more equal representation of each
species at the genetic level. Because current culturing techniques are
generally incapable of capturing this underrepresented genetic material, this
potentially valuable source of genetic information has historically not been
available to commercialize.

DiverseLibrary Generation. We have developed proprietary methods for
construction of complex, representative environmental gene libraries. A gene
library is a stored collection of DNA fragments or genes.

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<PAGE>

We store these genes in library form by cloning or splicing the DNA fragments
into a vector, a piece of DNA that acts as a carrier or a transporter into a
host cell. The DNA fragment spliced into the vector DNA is called a
recombinant molecule or clone. A collection of clones representing the entire
DNA isolated from the organisms in the sample is a representative gene
library. In order to capture the complete genomic diversity present in these
complex microbial samples, which may contain more than 4,000 distinct genomes,
we prepare very large member libraries. The result is the creation of a
DiverseLibrary, which typically represents genomic coverage of these
microorganisms. We estimate that collectively our DiverseLibraries contain the
complete genomes of over 1 million different microorganisms, which far exceeds
the estimated 10,000 microorganisms which have been described in the
scientific literature.

PathwayLibrary Generation. We are also developing PathwayLibraries,
collections of multi-gene pathways used in the discovery and production of
small molecules. While a single gene is responsible for the production of an
enzyme, the production of small molecules, such as antibiotics, typically
requires multiple genes working together in a coordinated fashion within a
genetic pathway. In addition, whereas the genetic blueprint for the production
of an enzyme is generally contained within approximately 1,000 nucleotides of
DNA, the blueprint for the production of an antibiotic pathway is typically
more than 25,000 nucleotides, and can be greater than 100,000 nucleotides. For
this reason, we are developing specific molecular tools that can accommodate
and stably maintain such large pieces of DNA in a library.

Screening and Enrichment

We have developed an array of automated, ultra high-throughput screening
technologies and enrichment strategies. Our proprietary rapid screening
capabilities are designed to discover novel biomolecules by screening for
biological activity, known as expression-based screening, as well as by
identifying specific DNA sequences of interest, known as sequence-based
screening.

We have developed several hundred assays capable of expression-based
screening from thousands to over 1 billion clones per day. Our key screening
technologies include SingleCell screening and high-throughput robotic-based
screening. Our ultra high-throughput SingleCell screening system uses
Flouresence Activated Cell Sorting, or FACS, a technology that enables the
identification of biological activity within a single cell. Our SingleCell
screens have been developed to identify clones based on activity or DNA
sequences. This system incorporates a laser with multiple wavelength
capabilities and the ability to screen up to 50,000 clones per second, or over
1 billion clones per day. The robotic screening system uses a high density
microtiter plate-based format, currently capable of screening and
characterizing up to 1 million clones per day.

If the clone expresses an activity or contains a DNA sequence of interest,
it is isolated for further analysis.

We have also developed rapid methods for sequence-based screening for
targeted genes directly from purified DNA. One of these methods, biopanning,
is a powerful alternative to traditional methods, especially when the gene is
toxic or unstable, or when the expression assay is laborious and time
consuming. Using our proprietary techniques, it is possible to screen 100
million clones per day for DNA sequences of interest.

Because we conduct patented, activity-based screening, we are able to use
gene sequences with known function from our proprietary database to identify
the function of genes in public databases based on their sequences. These
newly identified sequences are then added to the repertoire of proprietary
sequences in our own database. As more microbial genomes are sequenced, our
ability to associate gene sequence with enzyme function will be enhanced. This
sequence database provides us with unique opportunities to find and patent
more sequences with similar function and the potential to modify these
sequences in order to create optimized catalysts and other biomolecules for
various commercial applications.

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DirectEvolution

The genetic code is structured such that a sequence of three nucleotides
defines an amino acid. Nature uses 20 common amino acids in proteins arranged
in a sequence, defining the protein structure and activity. Over the course of
evolution, nature has sampled countless sequence possibilities to evolve
enzymes to function optimally within the cell. However, when an enzyme is
removed from its natural cellular environment and used to perform reactions,
such as in a chemical process, its function may not be optimal. Laboratory
methods can accelerate the evolutionary process of optimization outside of the
cell by creating a large number of variants for screening. In the traditional
method for improving proteins, called site-directed mutation, a single site is
typically targeted for change based on prior knowledge of the protein
structure. Other traditional techniques, including random mutation, typically
produce single nucleotide changes which can only access a limited number of
alternative amino acids, typically fewer than 6 of the possible 19
alternatives. These methods are limited by their inability to produce all
sequence variations. Furthermore, the large number of resulting sequences
presents formidable screening challenges.

We believe our techniques overcome the limitations of these traditional
methods, not only because of our superior screening capabilities, but also by
increasing the number and types of sequence variations we can create. Our
evolution technologies used to modify the DNA sequence of the genes,
DirectEvolution, include Gene Site Saturation Mutagenesis (GSSM) and
GeneReassembly. GSSM creates a family of related genes that all differ from a
parent gene by a single amino acid change at a defined position. By performing
GSSM on a gene encoding a protein, we create all possible single amino acid
substitutions within that protein, removing the need for prior knowledge about
the protein structure and allowing all possibilities to be tested in an
unbiased manner. The family of variant genes created using GSSM is then
available to be screened for proteins with improved qualities, such as
increased ability to work at high temperature, increased reaction rate,
resistance to deactivating chemicals or other properties important in a
chemical process. Individual changes in the gene that cause improvements can
then be combined to create a single highly improved version of the protein.

In addition to altering single genes using the GSSM technique, we use our
proprietary GeneReassembly technologies for the reassembly of related genes
from two or more different species. Our GeneReassembly technologies recombine
multiple genes to create a large population of new gene variants. The new genes
created by GeneReassembly are then screened for one or more desired
characteristics. This evolutionary process can be repeated on reassembled genes
until new genes expressing the desired properties are identified.
GeneReassembly technologies can be used to evolve properties which are coded
for by single genes, multiple genes and entire genomes.

As illustrated in the table below, we believe the combination of our GSSM
and GeneReassembly technologies addresses the broadest range of potential
optimization parameters for any enzyme:

<TABLE>
<CAPTION>
CHARACTERISTICS FOR ENZYME OPTIMIZATION OPTIMAL DIRECTEVOLUTION TECHNOLOGY
- ---------------------------------------------------------------------------------------
<S> <C>
Stability GSSM
- ---------------------------------------------------------------------------------------
Enhancement without inappropriate immune
response GSSM
- ---------------------------------------------------------------------------------------
Activity GeneReassembly/GSSM
- ---------------------------------------------------------------------------------------
Expression GeneReassembly/GSSM
- ---------------------------------------------------------------------------------------
Specificity GeneReassembly/GSSM
</TABLE>

We believe that the ability to selectively apply our GSSM or GeneReassembly
technologies to optimize enzymes provides us with a distinct competitive
advantage. GSSM is better suited in some situations, for example, in the
optimization of an enzyme's stability or its immune response characteristics.
With respect to stability, applying GSSM may significantly improve temperature
tolerance through combining single amino acid alterations at defined positions,
while maintaining the enzyme's overall characteristics, such as specificity. In
one situation, we have used this technology to improve enzyme stability by a
factor of 30,000. Similarly,

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<PAGE>

adverse immune system responses may be avoided by the incremental changes
created by GSSM. In contrast, random shuffling technologies, which cause
dramatic block shifts in DNA structure, are more likely to reduce stability and
create undesirable immune response characteristics. On the other hand, when
optimizing for activity, expression and specificity, both GSSM and
GeneReassembly can produce optimal results. Because we have multiple evolution
technologies combined with optimal natural enzymes to which we apply these
evolution methodologies, we believe that we are well-positioned to provide the
best solutions to our customers.

Our Data Management and Analysis System - SciLect

We have developed and continue to enhance a leading edge, web-based
relational scientific database for internal purposes called SciLect. SciLect
provides a secure, reliable and accurate source for storage, retrieval and
analysis of vast amounts of proprietary biological data. Our SciLect system
includes custom-developed and third-party bioinformatics software tools which
assist in the acquisition and analysis of complex data relating to genes,
proteins, sequence similarity to known genes, three-dimensional structure
prediction and biological pathways. SciLect includes information relating to:

. Samples - detailed descriptions of each sample collected;

. DNA extractions - the results of separating or isolating DNA molecules
directly from samples;

. Gene libraries - detailed descriptions of the genetic material in our
DiverseLibraries and PathwayLibraries;

. Screening events - the results of assays from our high-throughput
screening systems;

. Novel enzymes - specific properties or characteristics of each enzyme
(e.g. optimal temperature, optimal pH, specific activity);

. Sequence data and analysis results - the output of raw DNA sequence data
from our ultra high-throughput screening technologies and the analytical
results from the application of our bioinformatics software tools;

. Clone data - descriptions of host organisms containing unique fragments
of DNA or copies of DNA optimized for increasing DNA or enzyme yield;

. Optimization data - results from GSSM and GeneReassembly;

. Expression data - results from the process of optimizing protein
production; and

. Patents - information on key data, genes and processes relating to our
intellectual property portfolio.

Utilizing the combination of SciLect and public databases, we are able to
first verify that we have a unique gene. We are then able to mine public
databases for previously unidentified proteins that can be added to our
portfolio of patented proteins. Publicly available databases of proteins and
genomic data are imported daily to our secure environment. Through the use of
SciLect, we have assembled a large proprietary database of patent-protected,
assembled and annotated unique gene sequences of over 1,000 novel enzymes.

Production - Host Cell Optimization

Production of proteins and pathway products has historically been very
challenging due to the difficulty of producing commercial quantities of these
products in traditional host organisms. This problem can be overcome by finding
or developing a more suitable host organism. In the past, random mutation has
been used in an effort to create more efficient hosts. We believe our host cell
optimization processes will accelerate this effort. We are working on a number
of host organisms to improve their functionality as production hosts by:

. Sequencing the complete DNA of a host organism;

. Engineering defined changes in the host genome by, for instance, adding
or removing genes that, when substituted, will improve production or
permit the host to grow better under industrial conditions;

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. Monitoring the effects of changes on the production of enzymes and
pathway products and continuing to engineer changes; and

. Applying our screening technologies to rapidly characterize the effects
of these changes.

PRODUCTS

We have successfully commercialized our first product, Pyrolase 160, an
enzyme for oil and gas well fracturing operations. Sales of this product
commenced in January 1999, only two years after project initiation. We expect
to commercialize Pyrolase 200, a second generation oilfield enzyme product that
operates at a wider temperature range, in 2000. We believe our independent
development of Pyrolase 160 validates our technologies and illustrates our
ability to develop products rapidly using our proprietary methods.

We intend to commercialize products both independently and in collaboration
with strategic partners. The following chart summarizes the stages of
development for the portfolio of projects we are pursuing. We anticipate that a
single project may lead to multiple commercial product candidates.

[DIAGRAM OF A PYRAMID WITH EIGHT LEVELS, EACH INDICATING A STAGE OF DEVELOPMENT
AND THE NUMBER OF PROGRAMS THAT HAVE PROGRESSED THROUGH THE SPECIFIED STAGE.]

As of January 15, 2000, we had 43 projects in various stages of development
in our target markets. Of these, 8 had reached advanced stages of development,
of which one had been commercialized. An additional 15 projects had already
entered the product candidate stage with 20 more projects in various earlier
stages of development. We believe that each of these projects could lead to
multiple product solutions across multiple target markets.

CURRENT ALLIANCES AND OTHER AGREEMENTS

Current Alliances

Our strategy includes pursuing strategic alliances with market leaders in
our target markets. In exchange for selected rights to future products, these
strategic alliances provide us funding and resources to develop and
commercialize a larger product portfolio. In various instances, these strategic
alliances allow us to leverage our partners' established brand recognition,
global market presence, established sales and distribution channels and other
industry-specific expertise. The key components of the commercial terms of such
arrangements typically include some combination of the following types of fees:
exclusivity fees, technology access fees, technology development fees, research
support payments, milestone payments, license or commercialization fees and
royalties or profit sharing from the commercialization of products. In addition
to $10.7 million received from inception through December 31, 1999, our
partners are committed to fund $68.0 million under existing agreements over the
next five years. Our partners have also purchased $9.2 million of our equity
securities.

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To date, we have entered into the following strategic alliances:

Novartis

In January 1999, we entered the agricultural biotechnology arena through a
strategic alliance with Novartis Agribusiness Biotechnology Research, Inc. This
alliance covers a multi-project collaborative research and development
agreement to develop products for crop enhancement and improved agronomic
performance. Under terms of the agreement, we are utilizing our unique
discovery and screening technologies to identify and optimize genes and gene
pathways for use in transgenic crops. The initial projects focus on new genomic
approaches that will provide improved performance and quality traits in crops
and enhance production. Under the agreement, Novartis receives a worldwide
exclusive license to products developed. In conjunction with the transaction,
Novartis purchased 5,555,556 shares of series E preferred stock for gross
proceeds of $7.3 million, paid a technology access fee of $3.0 million and
provided project research funding of $2.2 million to us, for aggregate total
proceeds of $12.5 million. We are recognizing the research payments and the
technology access fee on a percentage of completion basis as research is
performed.

In December 1999, we formed a five-year, renewable strategic alliance with
Novartis Seeds AG. Through a contract joint venture, we will jointly pursue
opportunities in the field of animal feed and agricultural product processing.
We will share in the management of the venture and fund a portion of the sales
and marketing costs of this venture. Under the agreements, Novartis receives
exclusive, worldwide rights in the field of animal feed and project exclusive,
worldwide rights in the field of agricultural product processing. Novartis will
pay us for the license granted under this agreement, of which $15.0 million
will be due within 30 days of regulatory approval and an additional $5.0
million due at the 18 month anniversary of this agreement. Additionally, we
will receive minimum research funding over five years of $33.9 million, as well
as milestone payments upon achievement of project objectives totaling up to
$7.7 million and license and commercialization fees for any resulting products.
We will receive a share of the profits in the form of royalties on any product
sales.

Either party may terminate these agreements in the event a material breach
remains uncured for 90 days. Novartis may terminate these agreements within 60
days of a change of control of Diversa.

The Dow Chemical Company

In July 1997, we entered into an alliance with The Dow Chemical Company. The
alliance was for a project involving biocatalytic discovery and optimization
for use in new and existing Dow processes. This initial project was directed
towards the incorporation of a high performance enzyme into a modified chemical
process. Our staff successfully optimized an enzyme for this project with
significantly greater thermostability at a defined temperature, thereby meeting
milestones specified in the agreement.

In July 1999, we entered into a new, three-year research agreement and a
license agreement with Dow. The new agreements significantly broaden the scope
of our original alliance. We are applying our discovery and optimization
technologies for Dow to develop a variety of novel enzymes for multiple
chemical processes on a reaction-exclusive basis. The research agreement
involves multiple projects in the field of chemical processing. The three-year
agreement requires Dow to make technology development payments totaling $4.5
million. Dow will also fund the research costs for the duration of the contract
totaling $10.8 million. We will also receive milestone payments of up to $2.7
million upon achievement of established objectives and license and
commercialization fees for any resulting products. We will also receive
royalties on sales of our royalty-bearing products sold or sublicensed by Dow.
We are amortizing the technology development fees over the minimum guaranteed
period of the agreement. In the license agreement, we grant Dow an exclusive,
worldwide, royalty-bearing license to use enzymes for research processes.
Either party may terminate the research agreement upon failure to pay amounts
due for 30 days or material breach if uncured within 60 days. The research
agreement may also be terminated by Dow with 180 days written notice or upon a
change of control to a Dow competitor

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<PAGE>

with 30 days notice, in both cases upon the payment of defined penalties. We
may terminate the license agreement in the event of a material breach if
uncured for 30 days. Dow may terminate the license agreement on 3 months
written notice.

Rhone-Poulenc Animal Nutrition S.A.

In June 1999, we entered into a six month collaboration agreement with
Rhone-Poulenc Animal Nutrition S.A., RPAN, under which we are using our gene
discovery and optimization technologies to develop novel enzymes which can be
used for biotransformation as an alternative to chemical synthesis. RPAN will
receive an option to obtain an exclusive, worldwide royalty-bearing license to
the targeted enzymes for a specified field. If RPAN does not exercise its
option, the agreement will expire. If RPAN exercises its option, the term of
this agreement will continue until the expiration of all patent rights covering
the licensed enzymes. RPAN supports research costs and will pay us a license
fee and a royalty based upon cost savings attributable to licensed enzymes.
This agreement may be terminated by either party upon material breach if
uncured within 30 days.

Finnfeeds International Limited

In May 1996, we formed an alliance with Finnfeeds International Limited. The
companies worked jointly to identify and develop a novel phytase enzyme that
when used as an additive in animal feed applications allows higher utilization
of phytic acid phosphates from the feed, thereby increasing its nutritional
value. The addition of phytase to animal feed reduces the need for inorganic
phosphorus supplementation and lowers the level of harmful phosphates that are
introduced to the environment through animal waste, resulting in inorganic
phosphate cost savings and a significant reduction in environmental pollution.
In conjunction with the agreement, we issued 844,444 shares of our series C
preferred stock to Finnfeeds for $1,900,000. We received and recognized as
revenue $0.8 million in research funding over the period from May 1996 through
December 31, 1998. We achieved all milestones under the agreement.

Following the completion of the initial objectives of our alliance with
Finnfeeds, in December 1998, we entered into a license agreement with
Finnfeeds. Under this license agreement, we granted Finnfeeds an exclusive,
worldwide license to an enzyme and related technology for specified uses.
Finnfeeds has continuing royalty obligations to us on product sales that
incorporate the licensed technology. Finnfeeds can terminate this agreement at
any time upon six months notice to us. We can terminate this agreement upon
material breach by Finnfeeds if uncured within 60 days.

License Agreements

In addition to our strategic alliances, we have entered into various
agreements whereby we have in-licensed patented technologies to supplement our
internally developed methods, the most significant of which we have outlined
below. The financial impact of these agreements to us is not significant.

Invitrogen Corporation

In March 1999, we signed an agreement with Invitrogen Corporation for the
exchange of proprietary technologies and products in specified fields of use.
Under the terms of the agreement, we have an exclusive license to use
Invitrogen's TOPO Cloning technology in the field of cloning nucleic acids from
mixed populations and uncultured organisms. Invitrogen has an option to access
selected proprietary DNA modifying enzymes for use in the research reagent
marketplace. The TOPO Cloning technology broadens our portfolio of cloning
technologies. We paid Invitrogen a license fee and will pay an annual
maintenance fee in exchange for materials. Each party will have a royalty
obligation for the life of the patent rights on product sales that incorporate
the licensed technology. We can terminate this agreement with 90 days written
notice. Invitrogen

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can terminate with 90 days written notice upon our failure to make any payment
or immediately upon our default if uncured within 90 days.

Terragen Discovery, Inc.

In November 1999, we signed a royalty-free cross-license agreement with
Terragen Discovery, Inc. granting non-exclusive, worldwide license rights for
the life of specified patents. We granted rights to our patents protecting
accessing genomes of uncultured organisms for the discovery of pathways
producing novel small molecules for pharmaceutical applications and Terragen
granted us co-exclusive rights to patents protecting generation and screening
of combinatorial libraries from mixed populations of organisms for all fields
of use. Under the agreement, we paid Terragen a $2.5 million license fee and
will pay annual maintenance fees for the remaining life of the patents. The
term of the licenses we granted to Terragen and that Terragen granted to us
will continue until the expiration of all valid claims within the licensed
patent rights. Either party may terminate this agreement in the event a
material breach remains uncured for 60 days. Both parties have rights to
terminate under special conditions.

One Cell Systems, Inc.

In December 1997, we entered into a research license agreement with One Cell
Systems, Inc. which provided us with non-exclusive access to One Cell's
proprietary encapsulation technologies for an initial term of twelve months.
This agreement was extended in February 1999. Under the terms of the agreement,
we receive equipment and reagents to use the proprietary technology in exchange
for annual payments. The extension to the agreement expires on December 31,
1999 but is renewable for a subsequent term at One Cell's option.

Mycogen Corporation

In December 1997, we signed a license agreement with Mycogen Corporation for
access to its proprietary expression system. Under the terms and conditions of
the agreement, we have an exclusive, worldwide license to use the system for
the production of enzymes in exchange for a license fee and royalties paid to
Mycogen. The agreement can be terminated by either party upon material breach
if uncured for 60 days.

Biodiversity Access Agreements

We have obtained genetic material under formal genetic resource access
agreements with Costa Rica, Bermuda, Indonesia, Yellowstone National Park,
Mexico and Iceland. Pursuant to the terms of these agreements, we have obtained
non-exclusive access to collect samples from diverse ecosystems, we own the
samples collected and we pay a royalty to the other party on the sale of
products derived from the samples. All of these agreements expire in 2002 or
earlier, and they are all subject to earlier termination. Our access agreement
with Iceland was terminated, and we have voluntarily ceased collections of
further samples in Yellowstone National Park pending their resolution of
collection guidelines. If an access agreement terminates and a new agreement is
not established, we will not be permitted to collect any further materials from
the specified location; however, we will retain the right to use any samples we
have already collected. The financial impact of these agreements to us is not
significant.

COMPETITION

We believe we are the leader in the field of biomolecule discovery and
optimization from biodiversity. We are not aware of another company that has
the scope and integration of technologies and processes that we have. There
are, however, a number of competitors who are competent in various steps
throughout our technology process. For example, Terragen Discovery, Inc. is
involved in accessing organisms from diverse environments. A number of
companies are performing high-throughput screening of molecules. Maxygen, Inc.
and Evotech have alternative evolution technologies. Integrated Genomics Inc.,
Myriad Genetics, Inc., ArQule, Inc. and Aurora Biosciences Corporation perform
screening, sequencing and/or bioinformatics services. Novo

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Nordisk A/S and Genencor International Inc. 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.

We believe that the principal competitive factors in our market are access
to genetic material, technological experience and expertise and proprietary
position. We believe that we compete favorably with respect to the foregoing
factors.

Any products that we develop will compete in multiple, highly competitive
markets. Many of our potential competitors in these markets have substantially
greater financial, technical and marketing resources than we do, and we cannot
assure you that they will not succeed in developing products that would render
our products or those of our strategic partners obsolete or noncompetitive. In
addition, many of these competitors have significantly greater experience than
we do in their respective fields. Our ability to compete successfully will
depend on our ability to develop proprietary products that reach the market in
a timely manner and are technologically superior to and/or are less expensive
than other products on the market. Current competitors or other companies may
develop technologies and products that are more effective than ours. Our
technologies and products may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or
more of our competitors. The existing approaches of our competitors or new
approaches or technology developed by our competitors may be more effective
than those developed by us.

MANUFACTURING STRATEGY

Our manufacturing strategy is to secure contract manufacturing relationships
with qualified third parties possessing sufficient industrial fermentation
capacity to meet our commercial production requirements. We plan to place our
own technical personnel on site at contract manufacturing facilities to plan
and supervise our production. Our employees have extensive experience in scale-
up and production of industrial fermentation products, including industrial
enzymes. We have cleared regulatory requirements for our first two commercial
enzymes, and are producing our first product at commercial scale. We
manufacture Pyrolase 160 pursuant to an arrangement with a third party that has
the required manufacturing equipment and available capacity to manufacture the
product under our direction and oversight. We also currently lease a pilot
facility for process development activities from a third-party, which we intend
to vacate by March 2000. We plan to construct our own pilot development
facility during 2000 and have identified alternative capacity to meet interim
requirements. In addition to requiring investment in equipment, construction of
this new facility will necessitate compliance with applicable regulations.
After we complete the construction of our pilot facility, we will continue to
depend on third parties for large-scale commercial manufacturing.

We do not currently depend on any single supplier for the raw materials
necessary for the operation of our business. We may become dependent on a
single supplier in the future.

GOVERNMENT REGULATION

Many of our product opportunities, and all of our projects to date, have
applications other than as regulated drug products. Non-drug biologically
derived products are regulated, in the United States, based on their
application, by either the FDA, the Environmental Protection Agency (EPA) or,
in the case of plants and animals, United States Department of Agriculture
(USDA). In addition to regulating drugs, the FDA also regulates food and food
additives, feed and feed additives, and GRAS (Generally Recognized As Safe)
substances used in the processing of food. The EPA regulates biologically
derived chemicals not within the FDA's jurisdiction. Although the food and
industrial regulatory process can vary significantly in time and expense from
application to application, the timelines generally are shorter in duration
than the drug regulatory process, ranging from six months to three years.

The European regulatory process for these classes of biologically derived
products has undergone significant change in the recent past, as the EU
attempts to replace country by country regulatory procedures

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<PAGE>

with a consistent EU regulatory standard in each case. Some country-by-country
regulatory oversight remains. Other than Japan, most other regions of the world
generally accept either a United States or a European clearance together with
associated data and information for a new biologically derived product.

In the United States, transgenic agricultural products may be reviewed, by
the FDA, EPA and USDA, depending on the plant and the trait engineered into it.
The regulatory process for these agricultural products can take up to five
years of field testing under USDA oversight, and up to another two years for
applicable agencies to complete their reviews.

Outside of the United States, scientifically-based standards, guidelines and
recommendations pertinent to transgenic and other products intended for the
international marketplace are being developed by, among others, the
representatives of national governments within the jurisdiction of the
standard-setting bodies, including Codex Alimentarius, the International Plant
Protection Convention and the Office des International Epizooties. The use of
the existing standard-setting bodies to address concerns about products of
biotechnology is intended to harmonize risk-assessment methodologies and
evaluation of specific products or classes of products.

PROPRIETARY RIGHTS

Our intellectual property consists of patents, copyrights, trade secrets,
know-how and trademarks. Protection of our intellectual property is a strategic
priority for our business. Our ability to compete effectively depends in large
part on our ability to obtain patents for our technologies and products,
maintain trade secrets and operate without infringing the rights of others and
to prevent others from infringing on our proprietary rights. As of January 15,
2000, we owned 24 issued patents relating to our technologies, had received
notices of allowance with respect to 7 other patent applications and have over
125 patents pending. In addition, as of January 15, 2000, we have in-licensed
more than 25 additional patents or patent applications that we believe
strengthen our patent position.

The patent positions of biotechnology companies, including our patent
position, involve complex legal and factual questions and, therefore,
enforceability cannot be predicted with certainty. Patents, if issued, may be
challenged, invalidated or circumvented. We cannot be sure that relevant
patents have not been issued that could block our ability to obtain patents or
to operate as we would like to. Others may develop similar technologies or
duplicate technologies developed by us. We are aware of the existence of
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. We are also aware of
the existence of claims in published patent applications in some countries
that, if granted and valid, may also block our ability to commercialize
products in these countries if we are unable to circumvent or license them.

The biotechnology industry is characterized by extensive litigation
regarding patents and other intellectual property rights. Many biotechnology
companies have employed intellectual property litigation as a way to gain a
competitive advantage. Third parties may sue us in the future to challenge our
patent rights or claim infringement of their patents. An adverse determination
in litigation or interference proceedings to which we may become a party could
subject us to significant liabilities to third parties, require us to license
disputed rights from third parties or require us to cease using the disputed
technology. We are aware of a significant number of patents and patent
applications relating to aspects of our technologies filed by, and issued to,
third parties. Should any of our competitors have filed patent applications or
obtain 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 U.S. Such a proceeding could result in
substantial cost to us even if the outcome is favorable. Even if successful on
priority grounds, an interference may result in loss of claims based on
patentability grounds raised in the interference. Although patent and
intellectual property disputes in the biotechnology area are often settled
through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be
available to us on satisfactory terms, if at all.

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We also rely on trade secrets, technical know-how and continuing invention
to develop and maintain our competitive position. We have taken security
measures to protect our trade secrets, proprietary know-how and technologies
and confidential data and continue to explore further methods of protection.
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 or made known to the individual by us during the course of the
individual's relationship with us to be kept confidential and not disclosed to
third parties. These agreements also generally provide that inventions
conceived by the individual in the course of rendering services to us shall be
our exclusive property. There can be no assurance that proprietary information
will not be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets or that we can meaningfully protect our trade secrets.

EMPLOYEES

As of December 31, 1999, we had approximately 102 full-time employees, 25 of
whom hold Ph.D. degrees. Of these employees, 77 were engaged in research and
development and 25 were engaged in business development, finance and general
administration. None of our employees are represented by labor unions or
covered by collective bargaining agreements. We have not experienced any work
stoppages and consider our employee relations to be good.

FACILITIES

Our executive offices and research and development facilities are currently
located in San Diego, California. We lease approximately 24,900 square feet of
space. These facilities are leased through January 31, 2002. We are also
negotiating a sublease for approximately 3,000 square feet of adjacent
laboratory space for use through December 2000. To meet our expected growth
needs, we have selected two site alternatives in proximity to our current space
and are currently in lease negotiations for approximately 75,000 square feet of
space that will be built to our specifications. We plan to occupy the new space
in late 2000, at which time we plan to sublease our current space for the
remaining term. We will not have any equity interest related to the new
facility.

LEGAL PROCEEDINGS

We are not presently a party to any material legal proceedings.

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SCIENTIFIC ADVISORY BOARD

We have established a select group of scientists to advise us on scientific
and technical matters in areas of the Company's business. The scientific
advisors are compensated with a $15,000 annual fee, payable quarterly. We have
also entered into consulting and other agreements with a number of our
scientific advisors under which they have received options to purchase shares
of our common stock.

None of our scientific advisors is employed by us, and they may have other
commitments to, or consulting or advisory contracts with, their employers or
other entities that may conflict or compete with their obligations to us. Our
scientific advisors include:

<TABLE>
<CAPTION>
NAME TITLE/AFFILIATION
- ---- -----------------
<S> <C>
Melvin I. Simon, Ph.D.................... Chairman and Professor of Biology
California Institute of Technology
Karl O. Stetter, Ph.D.................... Chairman and Professor of Microbiology
University of Regensburg, Germany
Robert M. Kelly, Ph.D.................... Professor of Chemical Engineering
North Carolina State University
George M. Whitesides, Ph.D............... Chairman and Professor of Chemistry
Harvard University
</TABLE>

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information about our directors and executive
officers as of January 15, 2000:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jay M. Short, Ph.D. .................... 41 President, Chief Executive Officer and
Chief Technology Officer, Director
William H. Baum......................... 54 Senior Vice President, Business Development
Karin Eastham........................... 50 Senior Vice President, Finance, Chief
Financial Officer and Secretary
R. Patrick Simms........................ 55 Senior Vice President, Operations
Carolyn A. Erickson..................... 35 Vice President, Intellectual Property
Daniel T. Carroll (1)................... 73 Director
James H. Cavanaugh, Ph.D. (1)........... 62 Director
Patricia M. Cloherty (1)................ 57 Director
Peter Johnson (2)....................... 54 Director
Donald D. Johnston (2).................. 74 Director
Mark Leschly (2)........................ 31 Director
Melvin I. Simon, Ph.D. ................. 62 Director
</TABLE>
- --------
(1) Member of human resources (compensation) committee.

(2) Member of audit committee.

Dr. Jay M. Short was appointed our Chief Executive Officer in February 1999.
He has served as our Chief Technology Officer and as a director since September
1994 and also as our President since June 1998. Dr. Short served as President
of Stratacyte, Inc. and Vice President of Research & Development and Operations
for Stratagene Cloning Systems, both molecular biology companies based in La
Jolla, California. Dr. Short serves as a director for Invitrogen Corporation, a
gene expression company, and StressGen Biotechnologies Corp., a company engaged
in the medical application of stress proteins. Dr. Short received his Ph.D.
from Case Western Reserve University and his B.A. from Taylor University.

Mr. William H. Baum joined us in August 1997 as Vice President, Sales and
Marketing, and was promoted to Senior Vice President, Business Development in
November 1999. Mr. Baum was Vice President of Global Sales and Marketing with
International Specialty Products, a specialty chemical company, from July 1993
to August 1997. Prior to joining International Specialty, Mr. Baum was with
Betz Laboratories, also a specialty chemical company, for 20 years in a variety
of international and domestic executive management positions including
Executive Vice President of European Operations and as Managing Director of
Germany. Mr. Baum received a B.S. from Widener University.

Ms. Karin Eastham was appointed Senior Vice President, Finance, Chief
Financial Officer and Secretary in May 1999. Ms. Eastham served as Vice
President, Finance and Administration and Chief Financial Officer of CombiChem,
Inc., a computational chemistry company, from April 1997 to April 1999. From
October 1992 through April 1997, Ms. Eastham served as Vice President, Finance
and Administration and Chief Financial Officer of Cytel Corporation, a
biopharmaceutical company. Ms. Eastham also held several positions, including
Vice President, Finance, at Boehringer Mannheim Corporation, from June 1976 to
August 1988. Ms. Eastham received a B.S. and an M.B.A. from Indiana University.
She is a Certified Public Accountant.

Mr. R. Patrick Simms has served as our Senior Vice President, Operations
since October 1998. He served as our Vice President, Process Engineering and
Manufacturing from February 1997 to October 1998. Mr. Simms served as Senior
Vice President, Business Development and Manufacturing, at Biosys, Inc., an

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agricultural biotechnology company focusing on natural insecticide products,
from March 1990 to February 1997. Biosys filed for reorganization under Chapter
11 of the U.S. Bankruptcy Code in September 1996. Mr. Simms subsequently filed
for liquidation under Chapter 7 of the U.S. Bankruptcy Code in February 1997.
From December 1984 to March 1990, Mr. Simms served as Vice President,
Commercial Operations, at Genencor, a biotech company focusing on industrial
enzymes. Prior to joining Genencor, Mr. Simms spent 18 years with A.E. Staley
in a wide range of technical and operational positions. Mr. Simms received a
B.S. from West Virginia University .

Ms. Carolyn A. Erickson has served as Vice President, Intellectual Property
since November 1999. From July 1994 to November 1999, Ms. Erickson held several
positions with us, including Director of Intellectual Property, Manager,
Business Development & Regulatory Affairs, Senior Patent & Licensing Liaison,
Patent & Licensing Liaison and Laboratory Administrator. Prior to joining us,
from April 1988 to June 1994 Ms. Erickson held several positions in Business
Development/Technology Transfer, Product Management, Marketing and Technical
Sales for Stratagene Cloning Systems. Ms. Erickson received a B.A. from the
University of California, San Diego.

Dr. James H. Cavanaugh has been a director since December 1992 and our
Chairman since October 1998. Dr. Cavanaugh is President of HealthCare Ventures
LLC, a health care venture capital management company. Dr. Cavanaugh was
formerly President of SmithKline & French Laboratories--U.S., the
pharmaceutical division of SmithKline Beckman Corporation. Previously, he was
President of SmithKline Beckman's clinical laboratory business and, before
that, President of Allergan International. Prior to his industry experience,
Dr. Cavanaugh served as Staff Assistant to The President for Health Affairs and
then Deputy Director of the Domestic Council. Under President Ford, he was
appointed Deputy Assistant to the President for Domestic Affairs and Deputy
Chief of the White House Staff. Dr. Cavanaugh is on the board of directors of
LeukoSite, Inc. and MedImmune, Inc., and non-executive Chairman of the Board of
Shire Pharmaceuticals Group PLC. He also serves on the boards of the National
Center for Genome Resources and the National Committee for Quality Health Care.
Dr. Cavanaugh received a Ph.D. and M.A. from the University of Iowa and a B.S.
from Farleigh Dickinson University.

Mr. Daniel T. Carroll has been a director since October 1996. Mr. Carroll
has been Chairman of The Carroll Group, a management consulting firm, since
1982. From early 1980 until early 1982, he was President and Chief Executive
Officer and a director of Hoover Universal, Inc. From 1972 until early 1980, he
was President of Gould Inc. He served as President of the Management Consulting
Division at Booz Allen & Hamilton, Inc. from 1954 to 1972. He is a director of
A.M. Castle & Co., American Woodmark Corporation, Aon Corporation, Comshare,
Inc., Oshkosh Truck Corporation, Wolverine World Wide, Incorporated, and
Woodhead Industries Inc. Mr. Carroll earned an A.B. from Dartmouth College and
an M.A. from the University of Minnesota.

Ms. Patricia M. Cloherty has been a director since May 1996. Ms. Cloherty is
a Special Limited Partner of Patricof & Co. Ventures, Inc., an international
venture capital company. From 1988 through 1999, she was General Partner, and
successively, Senior Vice President, President and Co-Chairman of that firm.
From 1970 to 1977, she also was General Partner of that firm. She has served in
government, as Deputy Administrator of the U.S. Small Business Administration
from 1977 through 1978 and as Chairman of the U.S. Russia Investment Fund from
1995 to the present. She is past president and chairman of the National Venture
Capital Association and has been honored by the National Association of Small
Business Investment Companies for her work with growth companies. She is a
director of several privately-held companies and of several philanthropies. She
holds a B.A. from the San Francisco College for Women and an M.A. and an M.I.A.
from Columbia University.

Mr. Peter Johnson has been a director since December 1999. Mr. Johnson was a
founder of Agouron Pharmaceuticals, Inc. and has served as President and Chief
Executive Officer of Agouron since its inception in 1984. He received a B.A.
and an M.A. from the University of California, San Diego.

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Mr. Donald D. Johnston has been a director since September 1993. Since 1986,
Mr. Johnston has worked as a consultant for various companies, including
Johnson & Johnson, Human Genome Sciences, Inc. and HealthCare Investment
Corporation. He worked in product and general management for Johnson & Johnson
from 1962 to 1986, including serving as President of J&J Baby Products Co. from
1972 to 1977. Mr. Johnston also served as a director of Johnson & Johnson from
1975 through 1986. Mr. Johnston currently serves on the board of directors of
Osteotech, Inc. Mr. Johnston received a B.A. from the University of Cincinnati.

Mr. Mark Leschly has been a director since August 1999. Mr. Leschly is a
managing director of Rho Management Company, Inc. Prior to joining Rho in July
1999, beginning in 1994 Mr. Leschly worked at HealthCare Ventures where he was
a general partner. Prior to Healthcare Ventures, he worked at McKinsey &
Company, a management consulting company. Mr. Leschly is a director of several
privately-held companies and is a member of the advisory board of the Harvard
AIDS Institute. Mr. Leschly received a B.A. from Harvard University and an
M.B.A. from the Stanford Graduate School of Business.

Dr. Melvin I. Simon has been a director since May 1994. Dr. Simon is
Chairman and has been a professor in the Division of Biology at the California
Institute of Technology since 1982, where he is currently the Anne P. and
Benjamin F. Biaggini Professor of Biological Sciences. From 1965 to 1982, Dr.
Simon was a professor at the University of California, San Diego. He received a
B.S. from the City College of New York and a Ph.D. from Brandeis University.

CLASSIFIED BOARD

Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, three of the nominees to the board will be
elected to one-year terms, two will be elected to two-year terms and three will
be elected to three-year terms. After these initial terms, directors will be
elected for three-year terms. Messrs. Carroll and Leschly and Ms. Cloherty and
have been designated Class I directors whose terms expire at the 2001 annual
meeting of stockholders. Messrs. Johnson and Johnston have been designated
Class II directors whose terms expire at the 2002 annual meeting of
stockholders. Drs. Cavanaugh, Short and Simon have been designated Class III
directors whose terms expire at the 2003 annual meeting of stockholders. For
additional discussion regarding the effects of our classified board, see
"Description of Capital Stock--Possible Anti-Takeover Matters".

COMMITTEES OF THE BOARD OF DIRECTORS

Our human resources committee reviews and makes recommendations to the board
concerning compensation and benefits of all of our executive officers,
administers our stock option plan and establishes and reviews general policies
relating to compensation and benefits of our employees. The human resources
committee currently consists of Mr. Carroll, Dr. Cavanaugh and Ms. Cloherty.

The audit committee of the board of directors reviews our internal
accounting procedures and consults with and reviews the services provided by
our independent accountants. The audit committee currently consists of Messrs.
Johnson, Johnston and Leschly.

DIRECTOR COMPENSATION

Prior to the completion of this offering, our directors did not receive cash
compensation for their service as members of the board of directors, except for
Messrs. Carroll and Johnston, who each received $10,000 per year, and Dr.
Simon, who received $25,000 for his service as a director and as a scientific
advisor. Non-employee directors are reimbursed for expenses in connection with
attendance at board and committee meetings. Following the completion of this
offering, our directors will receive $1,500 for each board meeting

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attended. Dr. Simon will continue to receive compensation in connection with
his service under our consulting agreement with him. We do not provide
additional compensation for committee participation or special assignments of
the board of directors. From time to time, some of our directors have received
grants of options to purchase shares of our common stock under the 1997 Equity
Incentive Plan in connection with their employment or consulting agreements.
For information concerning options we have granted to our non-employee
directors, please see the description under the caption "Certain Transactions--
Agreements with Officers and Directors" included in this prospectus. See "--
Executive Compensation--Employment Agreements" for a description of employment
agreements with employee directors. Upon the completion of this offering, all
of our non-employee directors will be eligible to receive equity incentives in
the form of stock option grants under our 1999 Non-Employee Directors Stock
Option Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended December 31, 1999, Mr. Carroll, Dr. Cavanaugh
and Ms. Cloherty served as members of our human resources committee. We have
never employed any member of the human resources committee of our board of
directors. None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving on our board of directors or our human resources
committee of the board of directors. For information on recent purchases of our
capital stock by the members of our human resources committee or their
respective affiliates, please see the description under the caption "Certain
Transactions--Sales of Stock and Notes" included in this prospectus.

47
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded or paid to, or
earned or accrued for services rendered to us in all capacities during the
fiscal year ended December 31, 1999 to our current and former Chief Executive
Officer, the four other most highly compensated officers whose total salary and
bonus exceeded $100,000 in fiscal 1999 and our former Chief Financial Officer
who departed from Diversa during the last fiscal year. In accordance with SEC
rules, the compensation described in the table does not include medical, group
life insurance or other benefits which are available generally to all our
salaried employees and perquisites and other personal benefits which do not
exceed the lesser of $50,000 or 10% of the officers' total salary and bonus
disclosed in this table. We refer to these officers as our named executive
officers in other parts of this prospectus.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
--------------------------- ---- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Jay M. Short, Ph.D. (1)..................... 1999 $262,333 $500,000 -- --
Current President, Chief Executive Officer 1998 $243,000 $545,000 -- 1,292,045
and Chief Technology Officer

Terrance J. Bruggeman (2)................... 1999 $ 72,315 $ -- $316,229(3) --
Former Chief Executive Officer 1998 $270,000 $ 65,000 $ 25,000(4) --

William H. Baum............................. 1999 $207,400 $ 10,000 -- 199,609
Senior Vice President, Business
Development 1998 $195,000 $ 28,000 -- --

Karin Eastham (5)........................... 1999 $142,100 -- -- 277,718
Current Senior Vice President, Finance, 1998 -- -- -- --
Chief Financial Officer and Secretary

R. Patrick Simms............................ 1999 $188,558 $ 10,000 -- 95,465
Senior Vice President, Operations 1998 $173,000 $ 29,000 $ 7,096(6) 34,714

Kathleen H. Van Sleen (7)................... 1999 $ 97,898 $ -- $228,467(8) 34,714
Former Vice President, Finance and 1998 $190,000 $ 36,000 $ 4,949(6) --
Administration, Chief Financial Officer,
Treasurer and Secretary
</TABLE>
- --------

(1) In 1998, Dr. Short held the title of Chief Technology Officer and, from
June 1998, President. At the time of Dr. Short's appointment as President
in June 1998, he was awarded a bonus of $1,000,000 payable in two equal
installments of $500,000 in 1998 and 1999. In January 2000, our Board
granted Dr. Short an option to purchase 206,453 shares of common stock at
an exercise price equal to the initial public offering price.

(2) Mr. Bruggeman resigned as Chief Executive Officer effective as of February
1999.

(3) Consists of $4,200 for reimbursement of relocation costs, $297,500 for
severance payments and $14,529 for separation expenses.

(4) Consists of $16,700 for reimbursement of relocation costs and $8,300 for a
cost of living adjustment for relocation.

(5) Ms. Eastham commenced her employment as Senior Vice President, Finance,
Chief Financial Officer and Secretary in April 1999 at a base salary of
$210,000.

48
<PAGE>

(6) For reimbursement of relocation costs.

(7) Ms. Van Sleen resigned as Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary effective as of March 1999.

(8) Consists of $131,125 for separation payments, $55,443 for payments relating
to Ms. Van Sleen's purchase of a residence and $41,900 of forgiveness of
indebtedness.

OPTION GRANTS

The following table sets forth information concerning stock options granted
to our named executive officers during the fiscal year ended December 31, 1999:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
PERCENTAGE REALIZABLE VALUE AT
OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -------------------
NAME GRANTED YEAR (PER SHARE) DATE 5% 10%
---- ---------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Short, Ph.D...... -- -- $ -- -- $ -- $ --

Terrance J. Bruggeman... -- -- -- -- -- --

William H. Baum......... 17,357 1.1% 0.58 01/07/09 376,000 591,000
43,393 2.9% 1.73 06/30/09 891,000 1,427,000
138,859 9.2% 2.02 10/26/09 2,810,000 4,527,000

Karin Eastham........... 208,289 13.7% 1.73 04/29/09 4,275,000 6,851,000
69,429 4.6% 2.02 10/26/09 1,405,000 2,264,000

R. Patrick Simms........ 26,036 1.7% 0.58 01/07/09 564,000 886,000
69,429 4.6% 2.02 10/26/09 1,405,000 2,264,000

Kathleen H. Van Sleen... 34,714 2.3% 0.58 01/07/09 752,000 1,182,000
</TABLE>

The figures above represent options granted under our 1997 Equity Incentive
Plan. We granted options to purchase 1,515,695 shares of our common stock in
1999. All options were granted at an exercise price equal to the fair market
value of the common stock on the date of grant as determined by our board of
directors.

The options granted to our employees typically vest in 25% increments on
each of the four annual anniversaries of the date of grant. The options granted
to our consultants generally vest in 33% increments on each of the three annual
anniversaries of the date of the grant or in accordance with specified
performance goals over a ten-year term. Options granted to the persons listed
above expire 10 years from the grant date.

The potential realizable value represents amounts, net of exercise price
before taxes, that may be realized upon exercise of the options immediately
prior to the expiration of their terms assuming appreciation of 5% and 10% over
the option term. The 5% and 10% values are calculated based on rules
promulgated by the SEC and are applied to an assumed initial public offering
price of $14.00 per share and do not reflect our estimate of future stock price
growth. The actual value realized may be greater or less than the potential
realizable value set forth in the table.

We have never granted stock appreciation rights.

49
<PAGE>

OPTIONS EXERCISED AND FISCAL YEAR-END VALUES

The following table sets forth information concerning the number and value
of options exercised by each of the named executive officers as of December 31,
1999 and the value and number of unexercised options held by each of the named
executive officers at December 31, 1999. The value of unexercised in-the-money
options at December 31, 1999 represents an amount equal to the difference
between the assumed initial public offering price of $14.00 per share and the
option exercise price, multiplied by the number of unexercised in-the-money
options. An option is in-the-money if the fair market value of the underlying
shares exceeds the exercise price of the options.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
SHARES ACQUIRED VALUE -------------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jay M. Short, Ph.D...... 290,300 $397,324 276,816 724,929 $ 55,000 $7,738,000
Terrance J. Bruggeman... 428,676 560,620 -- -- -- --
William H. Baum......... 95,466 152,350 -- 199,609 -- 2,479,000
Karin Eastham........... 69,429 16,667 -- 208,289 -- 2,539,000
R. Patrick Simms........ 19,093 30,470 64,437 159,468 871,000 2,045,000
Kathleen H. Van Sleen... -- -- 118,463 19,526 1,604,000 263,000
</TABLE>

1994 EMPLOYEE INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN

Introduction. On October 12, 1994, our board adopted, and on December 20,
1994, our stockholders approved our 1994 Employee Incentive and Non-Qualified
Stock Option Plan. The plan was subsequently amended to, among other things,
authorize a total of 2,912,587 shares of common stock for issuance under the
plan. The 1994 plan was terminated by our board on August 28, 1997. We will not
grant any additional stock options under the 1994 plan; however, termination of
the plan did not affect any outstanding options which remained in effect. Since
the plan has been terminated, shares subject to stock awards that in the past
have expired, and in the future either expire or otherwise terminate, without
having been exercised in full, will not be available for grant under the plan.

The terminated 1994 plan permitted the grant of options to our directors
employed by us, officers, employees and consultants. Outstanding options are
either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code to employees or nonstatutory stock options.

The 1994 plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1994 plan to its
human resources committee. Subject to the limitations set forth in the 1994
plan, the board and the committee exercised the authority to select the
eligible persons to whom award grants are to be made, to designate the number
of shares to be covered by stock options, to determine whether an option was an
incentive stock option or a nonstatutory stock option, to establish vesting
schedules, to specify the exercise price of options and the type of
consideration to be paid upon exercise and, subject to specified restrictions,
to specify other terms of awards.

The maximum term of options granted under the 1994 plan is ten years. Stock
options granted under the 1994 plan generally are non-transferable. Options
exercisable on the date of termination of employment, or such other
relationship with us, generally expire three months after the termination of an
optionholder's service, except that all unexercised options will be immediately
terminated if the optionholder is terminated for cause or if the board makes a
determination that the optionee was engaged in disloyalty, convicted of a
felony, disclosed company trade secrets or breached a non-competition agreement
with us. However, if an optionholder is

50
<PAGE>

permanently disabled or dies during his or her service, that person's options
exercisable on the date of disability or death generally may be exercised up to
12 months following disability or death unless, in the case of disability, such
person commences employment with a competitor during such time.

The exercise prices of options granted under the 1994 plan were determined
by the board or committee in accordance with the guidelines set forth in the
1994 plan. The exercise prices of incentive stock options granted under the
plan could not be less than 100% of the fair market value of the common stock
on the date of the grant or 110% of the fair market value on the date of the
grant if the optionee, at the time of the grant, owned more than 10% of the
total combined voting power of all of our stock. The exercise price of a
nonstatutory stock option could not be less than $0.01 per share.

In the event of a change in control in our ownership as defined in our plan,
all outstanding stock awards under the 1994 plan must either be assumed or
substituted by the surviving entity. In the event the surviving entity does not
assume or substitute such stock awards, then the vesting and exercisability of
outstanding awards will accelerate prior to the change in control and such
awards will terminate to the extent not exercised prior to the change in
control.

Notwithstanding the previously described change in control provision, in the
event that a change in control occurs and within one month prior to, or 13
months after, such change in control an employee's employment is involuntarily
terminated as defined in the 1994 plan, then the vesting and exercisability of
all options held by such employee under the 1994 plan will be accelerated in
full on the effective date of his involuntary termination.

As of December 31, 1999, we had issued and outstanding under the 1994 plan
options to purchase approximately 109,847 shares of common stock and
approximately 841,986 shares of common stock had been purchased upon the
exercise of options under the 1994 plan. The per share exercise prices of these
options range from $0.03 to $0.73.

1997 EQUITY INCENTIVE PLAN

On August 28, 1997, our board adopted our 1997 Equity Incentive Plan, and
the plan was approved by our stockholders on October 15, 1997. The plan has
been subsequently amended, most recently in 1999 to authorize a total of
5,982,633 shares of common stock for issuance under the plan. Shares subject to
stock awards that have expired or otherwise terminated without having been
exercised in full again become available for grant.

The 1997 plan permits the grant of options to our directors, employees and
consultants. Options may be either incentive stock options to employees within
the meaning of Section 422 of the Internal Revenue Code or nonstatutory stock
options. In addition, the 1997 plan permits the grant of stock bonuses and
rights to purchase restricted stock. Except in specified circumstances, no
person may be granted options covering more than 694,299 shares of common stock
in any calendar year.

The 1997 plan is administered by the board or a committee appointed by the
board. The board has delegated the authority to administer the 1997 plan to its
human resources committee. Subject to the limitations set forth in the 1997
plan, the compensation committee and the administrator have the authority to
select the eligible persons to whom grants are to be made, to designate the
number of shares to be covered by each award, to determine whether an option is
to be an incentive stock option or a nonstatutory stock option, to establish
vesting schedules, to specify the exercise price of options and the type of
consideration to be paid upon exercise and, subject to specified restrictions,
to specify other terms of awards.

The maximum term of options granted under the 1997 plan is ten years.
Incentive stock options granted under the 1997 plan generally are non-
transferable. Nonstatutory stock options generally are nontransferable,
although the applicable option agreement may permit some transfers. Options
generally expire three months after the termination of an optionholder's
service. However, if an optionholder is permanently disabled or dies

51
<PAGE>

during his or her service, that person's options generally may be exercised up
to 12 months following disability or death.

The exercise price of options granted under the 1997 plan is determined by
the board or committee in accordance with the guidelines set forth in the 1997
plan. The exercise price of an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant.

The board or the committee will have the authority, with the consent of the
affected optionholders, to cancel outstanding options under the plan in return
for the grant of new options for the same or a different number of option
shares with an exercise price per share based upon the fair market value of our
common stock on the new grant date.

Options granted under the 1997 plan vest at the rate determined by the board
or committee and specified in the option agreement. The terms of any stock
bonuses or restricted stock purchase awards granted under the 1997 plan will be
determined by the board or committee. The purchase price of restricted stock
under any restricted stock purchase agreement will be determined by the board
or committee and will not be less than 85% of the fair market value of our
common stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the 1997 plan are generally nontransferable, although
the applicable award agreement may permit some transfers.

In the event of a change in control in our ownership as defined in our plan,
all outstanding stock awards under the 1997 plan must either be assumed or
replaced with substitute awards by the surviving entity. In the event the
surviving entity does not assume or substitute such stock awards, then the
vesting and exercisability of outstanding awards will accelerate prior to the
change in control and such awards will terminate to the extent not exercised
prior to the change in control. Notwithstanding the previously described change
in control provision, in the event that a change in control occurs and within
one month prior to, or 13 months after, such change in control an employee's
employment is involuntarily terminated as defined in the 1997 plan, then the
vesting and exercisability of all options held by such employee under the 1997
plan will be accelerated in full on the effective date of his involuntary
termination.

The board may amend or terminate the 1997 plan at any time. Amendments will
generally be submitted for stockholder approval to the extent required by
applicable law.

As of December 31, 1999, we had issued and outstanding under the 1997 plan
options to purchase approximately 3,014,988 shares of common stock and
approximately 599,775 shares had been purchased upon the exercise of options.
The per share exercise prices of these options range from $0.43 to $8.65.

NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

In December 1999, our board adopted our 1999 Non-Employee Directors' Stock
Option Plan. We intend to seek stockholder approval of the plan prior to the
closing of this offering. The plan provides for the automatic grant of options
to purchase shares of common stock to our non-employee directors. The
directors' plan is administered by the board, unless the board delegates
administration to a committee of at least two disinterested directors.

A total of 277,719 shares of common stock have been reserved for issuance
under the directors' plan, none of which are currently subject to outstanding
options. Pursuant to the terms of the directors' plan:

. On the closing of this offering, each person who is then a non-employee
director will be granted an option to purchase 27,771 shares of common
stock;

. Each person who, after the closing of this offering, for the first time
becomes a non-employee director automatically will be granted, upon the
date of his or her initial appointment or election to be a non-

52
<PAGE>

employee director, a one-time option to purchase 27,771 shares of common
stock, provided such person has not previously been in our employ; and

. On the day following each annual meeting of our stockholders commencing
with the 2001 annual meeting of stockholders, each person who is elected
to be a non-employee director at such annual meeting automatically will
be granted an option to purchase 6,943 shares of common stock, pro-rated
to the extent that a director did not serve as a director for a full
year prior to the annual meeting.

Options granted under the directors' plan shall vest in equal monthly
installments over three years from the date of grant and must be exercised
within ten years from the date they are granted, subject to earlier termination
following the optionee's cessation of service. Options granted under the
directors' plan may be exercised prior to vesting, subject to our repurchase.
Outstanding options under the plan will vest in full on an accelerated basis
upon certain changes in control or ownership of the Company, unless assumed or
replaced with substitute options by the successor entity. The exercise price of
options under the directors' plan will equal 100% of the fair market value of
the common stock on the date of grant. Options granted under the directors'
plan are generally transferable to family members and trusts under which the
director or members of the director's family are beneficiaries. Unless
otherwise terminated or amended by the board of directors, the directors' plan
automatically terminates when all of our common stock reserved for issuance
under the directors' plan has been issued.

EMPLOYEE STOCK PURCHASE PLAN

In December 1999, our board adopted the 1999 Employee Stock Purchase Plan.
We intend to seek stockholder approval of the plan prior to the closing of this
offering. A total of 416,579 shares of common stock initially has been reserved
for issuance under the purchase plan. The share reserve will automatically
increase on the day of each annual stockholders' meeting by an amount equal to
three-fourths of one percent (0.75%) of the total number of outstanding shares
of our common stock on the day of the annual stockholders' meeting, or an
amount determined by our board, but in no event will any such annual increase
exceed 86,787 shares. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. Under the purchase plan, the board of directors may authorize
participation by eligible employees, including officers, in periodic offering
following the commencement of the purchase plan. The initial offering under the
purchase plan will commence on the effective date of this offering and
terminate on February 28, 2002.

Unless otherwise determined by the board, employees are eligible to
participate in the purchase plan only if they are employed by us or one of our
subsidiaries designated by the board of directors for at least 20 hours per
week, are customarily employed for at lest five months per calendar year and do
not beneficially own more than 5% of our outstanding capital stock. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the purchase plan. The amount withheld is then used to purchase
shares of common stock on specified dates determined by the board of directors.
The price of common stock purchased under the purchase plan shall be at least
85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the fair market value of the
common stock at the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment.

In the event of a merger, reorganization, consolidation or liquidation, the
board of directors has discretion to provide that each right to purchase common
stock will be assumed or an equivalent right substituted by the successor
corporation or the board of directors may provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to such
merger or other transaction. The board of directors has the authority to amend
or terminate the purchase plan, provided, however, that no such action may
adversely affect any outstanding rights to purchase common stock.

53
<PAGE>

EMPLOYMENT AGREEMENTS

In August 1994, we entered into an employment offer letter with Jay M.
Short, Ph.D., our President, Chief Executive Officer and Chief Technology
Officer. Pursuant to his employment offer letter, Dr. Short's annual
compensation was initially set at a base salary of $200,000 and a target bonus
of 20% of his base salary. The 20% bonus was guaranteed for the first year. We
also paid Dr. Short a signing bonus of $75,000. In addition, we granted Dr.
Short 56,847 shares of our common stock and he also received a stock option
under our 1994 plan to purchase 34,108 shares of common stock at an exercise
price of $0.03 per share. This option vested 25% in September 1995, with the
remainder vesting annually over the following three years. In the event
Dr. Short's employment is terminated without cause, he will receive severance
compensation equal to six months' salary.

In June 1998 we entered into a second letter agreement with Dr. Short under
which we paid Dr. Short a bonus of $500,000 in each of June 1998 and June 1999
and granted him a stock option under our 1997 plan to purchase 1,001,744 shares
of our common stock at an exercise price of $0.58 per share. This option vested
25% in June 1999 with the remainder vesting in equal quarterly installments
over the following three years. However, vesting this option will be
accelerated in full upon the sale of Diversa or upon Dr. Short's termination of
employment without cause. This second offer letter also provides that if Dr.
Short's employment is terminated without cause at any time prior to June 25,
2000 he will receive severance compensation equal to twenty-four months'
salary. After June 25, 2000, Dr. Short's severance will revert to six months'
salary as described in his original offer letter. In January 2000, we granted
Dr. Short a stock option under our 1997 plan to purchase 206,453 shares of
common stock at an exercise price equal to the initial public offering price.
This option vests 25% at the first anniversary of the grant date, with the
remainder vesting over the following three years.

In February 1997, we entered into an employment offer letter with R. Patrick
Simms, our Senior Vice President, Operations. Pursuant to his employment offer
letter, Mr. Simms' annual compensation was initially set at a base salary of
$165,000 and a bonus of up to 20% of his base salary. The calculation of each
annual bonus is based on both Mr. Simms' job performance as well as our
performance. In addition, we granted Mr. Simms a stock option under our 1997
plan to purchase 69,429 shares of our common stock at an exercise price of
$0.43 per share. This option vests 25% on the first anniversary of the date of
grant with the remainder vesting quarterly over the following three years. Mr.
Simms was also offered the right to purchase up to $50,000 of our series B
preferred stock on the same terms offered to our other series B preferred stock
investors. Mr. Simms exercised this right in May 1997 and acquired 39,147
shares of our series B preferred stock in exchange for $25,000 in cash and
delivery of a promissory note for $25,000. The note carries an interest rate of
6.64%, is payable in four equal annual installments commencing in March 1998
and is secured by his shares of series B preferred stock. Mr. Simms also was
reimbursed $25,000 for relocation costs. In the event that Mr. Simms'
employment is terminated without cause, he will receive severance compensation
equal to six months' base salary and benefits until he commences new
employment.

In July 1997, we entered into an employment offer letter with William H.
Baum, our Senior Vice President, Business Development. Pursuant to his
employment offer letter, Mr. Baum's annual compensation was initially set at a
base salary of $195,000 and a target bonus of 20% of his base salary, with a
guaranteed bonus of $13,000 for 1997 only. We also paid him a hiring bonus of
$30,000, paid in two equal installments on September 1, 1997 and March 1, 1998.
In addition, we granted Mr. Baum a stock option under our 1997 plan to purchase
95,466 shares of our common stock at an exercise price of $0.43 per share. This
option vests 25% on the first anniversary of his date of hire with the
remainder vesting quarterly over the following three years. In the event Mr.
Baum's employment is terminated without cause, he will receive severance
compensation equal to six months of his then-current base salary and we will
continue to pay his employee benefits until he commences new employment. Mr.
Baum was reimbursed $50,000 for relocation costs. Mr. Baum was offered the
right to purchase up to $50,000 of our series D preferred stock on the same
terms offered to our other series D preferred stock investors. Mr. Baum
exercised this right in October 1997 and acquired 58,824 shares of our series D
preferred stock in exchange for delivery of a promissory note for $50,000. The
note carries an interest

54
<PAGE>

rate of 6.64%, is payable in four equal annual installments commencing in
October 1998 and is secured by his shares of series D preferred stock.

In April 1999, we entered into an employment offer letter with Karin
Eastham, our Senior Vice President, Finance and Chief Financial Officer.
Pursuant to her employment offer letter, Ms. Eastham's annual compensation was
initially set at a base salary of $210,000 and a target bonus of 20% of her
base salary. The 20% bonus was guaranteed for the first year. In addition, we
granted Ms. Eastham a stock option under our 1997 plan to purchase 208,289
shares of our common stock at an exercise price of $1.73 per share. This option
vests 25% at the earlier of the first anniversary of the date of hire or the
closing of this initial public offering, with the remainder vesting quarterly
over three years.

For a description of recent severance agreements with Terrance J. Bruggeman
and Kathleen H. Van Sleen, see the descriptions provided under the caption
"Certain Transactions -- Agreements with Officers and Directors."

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents, to the fullest extent permitted by law. We have also
entered into agreements to indemnify some of our directors and executive
officers. We believe that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. At present,
there is no pending litigation or proceeding involving any director, officer,
employee or agent where indemnification will be required or permitted. We are
not aware of any threatened litigation or proceeding that might result in a
claim for such indemnification. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or
persons controlling our company pursuant to the foregoing provisions, we have
been informed that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.

55
<PAGE>

CERTAIN TRANSACTIONS

SALES OF STOCK AND NOTES

Series B Preferred Stock Financing. In May 1997, Mr. Simms, our Senior Vice
President, Operations, and Ms. Van Sleen, our former Chief Financial Officer,
Vice President, Finance and Administration and Secretary, exercised rights to
purchase 37,879 and 75,758 shares, respectively, of our series B preferred
stock at a price of $0.66 per share. The shares of series B preferred stock
issued to Mr. Simms and Ms. Van Sleen will automatically convert into an
aggregate of 39,449 shares of common stock upon the closing of this offering.
Mr. Simms paid for a portion of his shares and Ms. Van Sleen paid for all of
her shares by delivering full-recourse promissory notes in the amount of
$25,000 and $50,000, respectively. The notes are payable over four years in
equal annual installments commencing on March 30, 1998, and bear interest at
6.64% per year. In 1999, we forgave the then outstanding balance under the note
receivable from Ms. Van Sleen, $37,500, pursuant to the terms of a severance
agreement more fully described below.

Bridge Loan Financing. In September 1997, we issued and sold $3,432,804 of
secured convertible promissory notes to 15 accredited investors. The promissory
notes carried an interest rate of 8.0% per year and under their terms
automatically converted into 4,038,592 shares of series D preferred stock in
October 1997. This series D preferred stock will automatically convert into an
aggregate of 1,401,996 shares of common stock upon the closing of this
offering. Investors owning 5% or more of our capital stock and directors and
officers who participated in this transaction include:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF SHARES OF COMMON STOCK
SERIES D PREFERRED UPON CONVERSION
STOCK UPON OF SERIES D
INVESTOR PROMISSORY NOTE CONVERSION PREFERRED STOCK
-------- --------------- ------------------- ---------------
<S> <C> <C> <C>
HealthCare Ventures
Entities................. $1,001,162 1,177,837 408,885
Patricof & Co. Ventures
Entities................. 1,000,000 1,176,470 408,411
Rho Management Trust II... 410,153 482,532 167,510
Donald D. Johnston........ 500,000 588,235 204,205
Melvin I. Simon, Ph.D. ... 20,000 23,529 8,168
</TABLE>

Dr. Cavanaugh, one of our directors, is a general partner of HealthCare
Partners III, L.P., HealthCare Partners IV, L.P. and HealthCare Partners V,
L.P., which are the general partners of HealthCare Ventures III, L.P.,
HealthCare Ventures IV, L.P. and HealthCare Ventures V, L.P., respectively.
Together, these partnerships own greater than 10% of our capital stock. In this
prospectus we refer to HealthCare Ventures III, L.P., HeathCare Ventures IV,
L.P. and HealthCare Ventures V, L.P., collectively, as entities affiliated with
HealthCare Ventures.

Ms. Cloherty, one of our directors, is a special limited partner of funds
managed by Patricof & Co. Ventures, Inc., including APA Pennsylvania Partners
II, L.P., APA Excelsior IV, L.P. and APA Excelsior IV/Offshore, L.P. APA
Pennsylvania Partners II, L.P. is the general partner of The P/A Fund, L.P.
Patricof & Co. Managers, Inc. is the general partner of APA Excelsior IV
Partners, L.P., the general partner of Patricof Private Investment Club, L.P.
Collectively, APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P., The P/A
Fund, L.P. and Patricof Private Investment Club, L.P. own greater than 10% of
our capital stock, and are collectively referred to in this prospectus as
entities affiliated with Patricof & Co. Ventures.

Mr. Leschly, one of our directors, is a managing director of Rho Management
Company, Inc., which serves as the investment advisor to Rho Management Trust
II.

Mr. Johnston and Dr. Simon are members of our board of directors.

Series D Preferred Stock Financing. In October 1997, we issued 24,809,555
shares of series D preferred stock for $0.85 per share to 27 accredited
investors. The series D preferred stock will automatically convert

56
<PAGE>

into an aggregate of 8,612,620 shares of common stock upon the closing of this
offering. Investors owning 5% or more of our shares and directors and officers
who participated in this transaction include:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF COMMON STOCK
INVESTOR SERIES D SHARES UPON CONVERSION
-------- --------------- ---------------
<S> <C> <C>
HealthCare Ventures Entities.................... 6,206,103 2,154,446
Patricof & Co. Ventures Entities................ 2,184,999 758,519
Rho Management Trust II......................... 2,336,042 810,856
State of Michigan............................... 5,882,353 2,042,058
William H. Baum................................. 58,824 20,420
Donald D. Johnston.............................. 588,235 204,205
Melvin I. Simon, Ph.D. ......................... 23,529 8,168
</TABLE>

Mr. Baum is our Senior Vice President, Business Development.

Series E Preferred Stock Financing. In connection with our entering into a
collaboration agreement with Novartis Agribusiness Biotechnology Research, Inc.
in January 1999, we sold 5,555,556 shares of series E preferred stock to
Novartis for $1.32 per share under the terms of a series E preferred stock
purchase agreement. The series E preferred stock will automatically convert
into an aggregate of 1,928,610 shares of common stock upon the closing of this
offering. The stock purchase agreement designates a portion of the total
proceeds received of $12.5 million as a technology access fee and another
portion as advance payments for research support under the collaboration
agreement.

The shares of series E preferred stock were subsequently transferred to
Novartis Seeds AG, an affiliate of Novartis Agribusiness Biotechnology
Research, Inc. In December 1999, we entered into a joint venture agreement with
Novartis Seeds AG. For a further description of this joint venture and the
collaboration agreement, see "Business--Current Alliances and Other
Agreements."

Registration Rights. In connection with the preferred stock financings, we
granted registration rights to all of our preferred stockholders. See
"Description of Capital Stock--Registration Rights" for a more complete
description of registration rights we granted to our stockholders.

AGREEMENTS WITH OFFICERS AND DIRECTORS

In May 1994, we entered into a four year consulting agreement with Melvin I.
Simon, Ph.D. under which Dr. Simon agreed to provide us with at least 20 days
of service each year. Under his agreement, Dr. Simon will serve as a member and
chairman of our scientific advisory board, serve on our board of directors and
provide other consulting services. His compensation initially was set at
$75,000 per year, payable quarterly. We amended Dr. Simon's consulting
agreement in October 1996 to limit Dr. Simon's services to attendance at up to
three scientific advisory board meetings and 12 board and board committee
meetings per year and reducing his annual compensation to $25,000 per year. In
addition, we granted Dr. Simon a stock option to purchase 6,942 shares of our
common stock under our 1994 plan in consideration for his agreement to amend
the original agreement. This initial 6,942 share option was fully vested and
exercisable upon its grant to Dr. Simon and carried an exercise price of $0.42
per share. We also granted Dr. Simon a second stock option to purchase 20,828
shares of common stock having an exercise price of $0.42 per share that vested
over a period of three years. This second option grant was fully vested
effective as of October 1999.

We amended Dr. Simon's consulting agreement a second time in October 1999.
This second amendment provides that Dr. Simon's annual compensation will
continue at $25,000 per year for an additional three year term. This second
amendment also provides that Dr. Simon will attend up to six board meetings and
one scientific advisory board meeting per year. We will pay Dr. Simon an
additional $1,000 per day for any additional service he performs. We also
granted Dr. Simon a stock option to purchase 22,564 shares of our

57
<PAGE>

common stock under our 1997 plan, with 8,678 shares vesting in October 2000 and
6,943 shares in each of the following two years.

In December 1999, we granted Dr. Simon a stock option under our 1997 plan to
purchase 173,574 shares of our common stock with an exercise price of $8.64 per
share. One third of the shares subject to this option were vested upon grant
and the remaining shares vest in equal annual installments over a period of two
years.

In August 1997, we granted Daniel T. Carroll a stock option under our 1997
plan to purchase 5,207 shares of our common stock with an exercise price of
$0.43 per share. One-third of the shares vested on October 1, 1997 and one-
twelfth vested quarterly thereafter until fully vested. In February 1998 we
granted Mr. Carroll a second stock option under our 1997 plan to purchase 5,207
shares of our common stock with an exercise price of $0.58 per share. This
option vests in equal annual installments over a period of three years. In
December 1999 we granted Mr. Carroll a third stock option under our 1997 plan
to purchase 17,357 shares of our common stock with an exercise price of $8.64
per share. This option was fully vested upon grant.

In August 1997, we granted Donald D. Johnston a stock option under our 1997
plan to purchase 5,207 shares of our common stock with an exercise price of
$0.43 per share. One-third of the shares vested on October 1, 1997 and one-
twelfth vested quarterly thereafter until fully vested. In February 1998 we
granted Mr. Johnston a second stock option under our 1997 plan to purchase
5,207 shares of our common stock with an exercise price of $0.58 per share.
This option vests in equal annual installments over a period of three years. In
December 1999 we granted Mr. Johnston a third stock option under our 1997 plan
to purchase 17,357 shares of our common stock with an exercise price of $8.64
per share. This option was fully vested upon grant.

In February 1999, we entered into a Separation Agreement with Terrance J.
Bruggeman, our former Chief Executive Officer. Under this agreement, we agreed
to continue to make severance payments to Mr. Bruggeman in the form of
continuation of his base salary until the earlier of 12 months following his
final day of employment or the date on which he begins employment with another
company. We further agreed to pay Mr. Bruggeman an additional $50,000 as an
additional severance payment, reimburse him up to an additional $25,700 for
various other expenses and pay for up to 18 months of continued health and
dental insurance following his final day of employment. In addition, effective
as of his last day of employment, we accelerated the vesting of options to
purchase an aggregate of 142,892 shares of our common stock having an exercise
price of $0.43 per share. In conjunction with this agreement modification, the
Company recorded a charge to compensation expense of $557,000.

In March 1999, we entered into a Separation Agreement with Kathleen H. Van
Sleen, our former Chief Financial Officer, Vice President, Finance and
Administration, Treasurer and Secretary. Under this agreement, we paid Ms. Van
Sleen $224,000 and forgave outstanding indebtedness of $42,000. We further
agreed to pay for up to 12 months of health, dental and life insurance. In
addition, we agreed that the term and vesting of options to purchase an
aggregate of 208,289 shares of our common stock will continue until March 30,
2000, after which Ms. Van Sleen will have 90 days to exercise her vested
options. The extension of vesting on those options will result in the vesting
of an additional 62,920 options with an average exercise price of $0.46 per
share. In conjunction with this agreement modification, the Company recorded a
charge to compensation expense of $225,000.

In December 1999, we granted Peter Johnson a stock option under our 1997
plan to purchase 41,657 shares of our common stock with an exercise price of
$5.76 per share. This option vests in equal annual installments over a period
of three years.

All of the shares of preferred stock and promissory notes described under
this section were issued in reliance upon the exemption provided by Section
4(2) of the Securities Act and/or Regulation D under the Securities Act. With
respect to the issuance of options described under this section, exemption from
registration was not necessary in that the transactions did not involve a
"sale" of securities as that term is used in Section 2(a)(3) of the Securities
Act.

58
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of our common stock as of December 31, 1999, and after the sale of
shares in this offering, by:

. Each person who is known by us to own beneficially more than 5% of our
outstanding common stock;

. Each named executive officer;

. Each of our directors; and

. All of our current directors and executive officers as a group.

Except as indicated below, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where
applicable. Unless otherwise indicated, the address for each stockholder is c/o
Diversa Corporation, 10665 Sorrento Valley Road, San Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Percentage of beneficial ownership is based on 25,779,401 shares of common
stock outstanding as of December 31, 1999 and assuming 32,311,401 shares of
common stock outstanding after completion of this offering.

The table assumes no exercise of the underwriters' over-allotment option. If
the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of 975,000 shares of our common stock, and up to 33,286,401
shares of common stock will be outstanding after completion of this offering.

Funds Affiliated with Patricof & Co.
Ventures, Inc. (2)............................ 4,616,965 -- -- 17.9% 14.3%
445 Park Avenue, 11th Floor
New York, New York 10022

Rho Management Trust II (3).................... 2,353,438 20,461 -- 9.1% 7.3%
767 Fifth Avenue, 43rd Floor
New York, New York 10153

State of Michigan ............................. 2,042,058 -- -- 7.9% 6.3%
Department of Treasury, Treasury Building
30 West Allegan
East Lansing, Michigan 48922

Novartis Seeds AG ............................. 1,928,610 -- -- 7.5% 6.0%
Schwarzwaldallee 215
CH-4002 Basel
Switzerland

Jay M. Short, Ph.D............................. 712,994 338,615 61,803 2.7% 2.2%
Terrance J. Bruggeman.......................... 428,676 -- -- 1.7% 1.3%
William H. Baum................................ 120,225 4,339 41,767 * *
Karin Eastham.................................. 69,429 -- 69,429 * *
R. Patrick Simms............................... 110,138 77,456 -- * *
Kathleen H. Van Sleen.......................... 153,440 127,461 -- * *
</TABLE>

59
<PAGE>

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
BENEFICIAL OWNERSHIP PRIOR TO OFFERING OWNED
------------------------------------------------ -----------------
SHARES ISSUABLE SHARES DIVERSA
PURSUANT TO MAY REPURCHASE
NUMBER OF OPTIONS AND WITHIN 60 DAYS
SHARES WARRANTS EXERCISABLE OF
NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY WITHIN 60 DAYS DECEMBER 31, BEFORE AFTER
OWNER OWNED OF DECEMBER 31, 1999 1999 OFFERING OFFERING
- ------------------------------ ------------ -------------------- -------------- -------- --------
<S> <C> <C> <C> <C> <C>
James H. Cavanaugh, Ph.D. (1).. 5,744,544 139,265 -- 22.2% 17.7%
Daniel T. Carroll.............. 26,035 26,035 -- * *
Patricia M. Cloherty (2)....... 4,616,968 -- -- 17.9% 14.3%
Peter Johnson.................. -- -- -- * *
Donald D. Johnston............. 621,667 26,035 -- 2.4% 1.9%
Mark Leschly (3)............... 2,353,438 20,461 -- 9.1% 7.3%
Melvin I. Simon, Ph.D. ........ 219,048 57,858 22,564 * *
All executive officers and
directors as a group (11
persons)...................... 14,594,486 690,064 195,563 55.1% 44.2%
</TABLE>
- --------
* Less than one percent.

(1) Includes:

. 3,229,005 shares held by HealthCare Ventures III, L.P., including
107,659 shares issuable upon exercise of warrants exercisable within 60
days of December 31, 1999, which represents 12.5% and 10.0%,
respectively, of the total number of shares outstanding before and
after this offering.

. 949,145 shares held by HealthCare Ventures IV, L.P., including 31,606
shares issuable upon exercise of warrants exercisable within 60 days of
December 31, 1999, which represents 3.7% and 2.9%, respectively, of the
total number of shares outstanding before and after this offering.

. 1,566,394 shares held by HealthCare Ventures V, L.P., which represents
6.1% and 4.9%, respectively, of the total number of shares outstanding
before and after this offering.

James H. Cavanaugh, Ph.D. is a managing member of the general partner of
each of the above-listed investment funds, and shares investment and
voting power over these shares with the other managing members of each of
the general partners of these funds, none of whom are affiliated with us.
Dr. Cavanaugh disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.

(2) Includes:

. 3,049,566 shares held by APA Excelsior IV, L.P., which represents 11.8%
and 9.4%, respectively, of the total number of shares outstanding
before and after this offering.

. 969,468 shares held by The P/A Fund, L.P., which represents 3.8% and
3.0%, respectively, of the total number of shares outstanding before
and after this offering.

. 537,510 shares held by APA Excelsior IV/Offshore, L.P., which
represents 2.1% and 1.7%, respectively, of the total number of shares
outstanding before and after this offering.

. 60,422 shares held by Patricof Private Investment Club, L.P., which
represents less than 1% of the total number of shares outstanding both
before and after this offering.

Patricia M. Cloherty is a special limited partner of APA Excelsior IV,
L.P., The P/A Fund, L.P., APA Excelsior IV/Offshore, L.P. and Patricof
Private Investment Club, L.P., and shares investment and voting power over
these shares with the other managing members or general partners of the
funds, none of whom are affiliated with us. Ms. Cloherty disclaims
beneficial ownership of such shares except to the extent of her pecuniary
interest therein.

(3) Mark Leschly is a managing director of Rho Management Company, Inc.,
financial advisor to Rho Management Trust II. Mr. Leschly disclaims
beneficial ownership of the shares held by Rho Management Trust II except
to the extent of his pecuniary interest therein.

60
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, our authorized capital stock, after
giving effect to the conversion of all outstanding preferred stock into common
stock, will consist of 65,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of preferred stock, $0.001 par value.

The following is a summary of various provisions of our common stock,
preferred stock, amended and restated certificate of incorporation and bylaws.

COMMON STOCK

As of December 31, 1999, there were 2,945,390 shares of common stock
outstanding, held by approximately 115 stockholders of record. An additional
22,834,011 shares of our common stock will be issued upon conversion of all
outstanding shares of the preferred stock on the closing of this offering and
an estimated 32,000 shares will be issued related to dividends payable to the
holders of our series A, B and D preferred stock for the period between
December 21, 1999 and the completion of this offering. All outstanding shares
of common stock are, and the common stock to be issued in this offering will
be, fully paid and nonassessable.

The following summarizes the rights of holders of our common stock:

. Each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;

. There are no cumulative voting rights;

. The holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any;

. Upon our liquidation, dissolution or winding up, the holders of shares
of common stock will be entitled to share ratably in the distribution of
all of our assets remaining available for distribution after
satisfaction of all our liabilities and the payment of the liquidation
preference of any outstanding preferred stock; and

. The holders of commons stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are they entitled to the
benefits of any redemption or sinking fund provisions.

PREFERRED STOCK

Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Our certificate of incorporation authorizes our board of
directors to create and issue one or more series of preferred stock and
determine the rights and preferences of each series within the limits set forth
in our certificate of incorporation and applicable law. Among other rights, the
board of directors may determine, without further vote or action by our
stockholders:

. The number of shares constituting the series and the distinctive
designation of the series;

. The dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;

. Whether the series will have voting rights in addition to the voting
rights provided by law, and if so, the terms of the voting rights;

. Whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;

. Whether or not the shares of the series will be redeemable or
exchangeable, and, if so, the dates, terms and conditions of redemption
or exchange, as the case may be;

. Whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and

61
<PAGE>

. The rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.

Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change in
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.

REGISTRATION RIGHTS

The holders of the 22,866,011 outstanding shares of our common stock which
will be issued upon conversion of the preferred stock on the closing of this
offering, which are referred to below as our preferred investors, have the
right to cause us to register their shares under the Securities Act as follows:

. DEMAND REGISTRATION RIGHTS: Each class of our preferred investors,
excluding the holders of the series E preferred stock, may make one
demand for registration by providing a written demand from the holders
of at least 50% of the shares of common stock issued upon conversion of
such class of preferred stock demanding registration. All of our
preferred investors, including the holders of the series E preferred
stock, acting as a single class may make two demands for registration by
providing, in each instance, a written demand from the holders of at
least 50% of the shares of common stock issued upon conversion of all of
the preferred stock. We must use our best efforts to effect such
registration as soon as possible after receipt of notice.

. PIGGYBACK REGISTRATION RIGHTS: Our preferred investors can request to
have their shares registered any time we file a registration statement
to register any of our securities for our own account. Such registration
opportunities are unlimited but the number of shares that can be
registered may be eliminated entirely or cut back by the underwriters.

. S-3 REGISTRATION RIGHTS: After we have qualified for registration on
Form S-3, our preferred investors can request us to register their
shares if the aggregate price of the shares to the public is not less
than $500,000. Except for former holders of our series E preferred stock
who are limited to only three such registrations, such registration
opportunities are unlimited. However, we are not obligated to register
the shares of any single stockholder on Form S-3 more than once during
any single calendar year.

We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for
us and adversely affect any future equity or debt offerings.

POSSIBLE ANTI-TAKEOVER MATTERS

Certificate of Incorporation and Bylaws

Our certificate of incorporation authorizes our board of directors to
establish one or more series of undesignated preferred stock, the terms of
which can be determined by the board of directors at the time of issuance. See
"--Preferred Stock" for a description of our preferred stock. Our certificate
of incorporation also provides that all stockholder action must be effected at
a duly called meeting of stockholders and not by a consent in writing. Our
bylaws provide that our board of directors will be classified into three
classes of directors. Please see "Management--Classified Board" for a list of
our directors and the class to which they belong. Our bylaws also require that
stockholders give advance notice to our secretary of any nominations for
director or other business to be brought by stockholders at any stockholders'
meeting and require a

62
<PAGE>

supermajority vote of members of our board of directors and/or stockholders to
amend some bylaw provisions. These provisions of our certificate of
incorporation and our bylaws could discourage potential acquisition proposals
and could delay or prevent a change in control. Such provisions may also have
the effect of preventing changes in our management.

Delaware Anti-Takeover Statute

We are subject to Section 203 of the Delaware General Corporation Law which,
subject to specified exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder--defined as any
person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock--for a period of three years following the time that
such stockholder became an interested stockholder, unless:

. Prior to that time, the corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;

. Upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the corporation's voting stock outstanding at the time the
transaction commenced, excluding, for purposes of determining the number
of shares outstanding, those shares owned by persons who are directors
and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; and

. At or subsequent to such time, the business combination is approved by
the corporation's board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the interested stockholder.

Section 203 defines business combination to include:

. Any merger or consolidation involving the corporation and the interested
stockholder;

. Any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder and 10% or more of the
assets of the corporation;

. Subject to specified exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;

. Any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; and

. The receipt by the interested stockholder of the benefit of any loans,
advance, guarantees, pledges or other financial benefits provided by or
through the corporation.

NASDAQ NATIONAL MARKET

We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "DVSA."

TRANSFER AGENT AND REGISTRAR

The stock transfer agent and registrar for our common stock is American
Stock Transfer & Trust Company.

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<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale described
below, sales of substantial amounts of common stock in the public market after
the restrictions lapse could adversely affect the prevailing market price and
our ability to raise equity capital in the future.

Upon completion of this offering, we will have outstanding 32,311,401 shares
of common stock, assuming no exercise of the underwriters' over-allotment
option. Of these shares, the 6,500,000 shares sold in this offering will
generally be freely tradable without restriction or further registration under
the Securities Act. Of the remaining 25,811,401 shares, all may be sold in the
public market upon expiration of lock-up agreements 180 days after the date
this prospectus is declared effective, subject to the volume and other
restrictions of Rule 144.

In general, under Rule 144 as currently in effect, our affiliates and other
stockholders who have beneficially owned restricted shares for at least one
year will be entitled to sell in any three-month period a number of shares that
does not exceed the greater of:

. 1% of the then outstanding shares of our common stock; or

. The average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the SEC.

Sales pursuant to Rule 144 are subject to requirements relating to manner of
sale, notice, and the availability of current public information about us. A
stockholder who is not deemed to have been an affiliate of ours at any time
during the 90 days immediately preceding the sale and who has beneficially
owned restricted shares for at least two years is entitled to sell those shares
under Rule 144(k) without regard to the limitations described above.

Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 of the Securities Act, as currently in effect, may
be relied upon with respect to the resales of securities originally purchased
from us by our employees, directors, officers, consultants or advisors prior to
the date we become subject to the reporting requirements of the Securities
Exchange Act, pursuant to written compensatory benefit plans or written
contracts relating to the compensation of those persons. In addition, the SEC
has indicated that Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements of the Exchange
Act, along with the shares acquired upon exercise of such options, including
exercises after the date of this prospectus. Securities issued in reliance on
Rule 701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its minimum holding period requirements.

Shortly after this offering, we may also file a registration statement under
the Securities Act covering shares of common stock reserved for issuance under
our equity incentive plans. Such registration statement will cover
approximately 6,187,096 shares. Shares registered under this registration
statement will, subject to Rule 144 volume limitations applicable to
affiliates, be available for sale in the open market, unless such shares are
subject to the lock-up agreements described above.

64
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives, Bear, Stearns & Co. Inc., Deutsche Bank Securities Inc. and
Hambrecht & Quist LLC, has severally agreed to purchase from us the aggregate
number of shares of our common stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<S> <C>
Bear, Stearns & Co. Inc. ...........................................
Deutsche Bank Securities Inc. ......................................
Hambrecht & Quist LLC...............................................
-----------
Total........................................................... 6,500,000
===========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of our common stock if any are purchased.

PUBLIC OFFERING PRICE

The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus and
at that price less a concession not in excess of $ per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $ per share of common stock to
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common stock is offered
subject to receipt and acceptance by the underwriters and subject to other
conditions, including the right to reject orders in whole or in part. The
underwriters have informed us that the underwriters do not expect to confirm
sales of common stock to any accounts over which they exercise discretionary
authority.

The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.

<TABLE>
<CAPTION>
TOTAL
-------------------------
WITHOUT WITH
OVER- OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- ------------ ------------
<S> <C> <C> <C>
Public offering price..................... $ $ $
Underwriting discounts and commissions
payable by us............................
Proceeds, before expenses, to us..........
</TABLE>

The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.

We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $1.2 million.

65
<PAGE>

OVER-ALLOTMENT OPTION TO PURCHASE ADDITIONAL SHARES

We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 975,000 additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.

INDEMNIFICATION AND CONTRIBUTION

The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.

LOCK-UP AGREEMENTS

Our directors and officers and stockholders holding 25,594,411 shares have
agreed that they will not offer, sell or agree to sell, directly or indirectly,
or otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus.

In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of common
stock, except that we may issue, and grant options to purchase, shares of
common stock under our stock option plans and employee stock purchase plan and
shares issuable upon exercise of outstanding options granted outside our plans.
During this lock-up period, subject to various conditions, we may also issue
additional equity securities in connection with collaborative and licensing
arrangements or to pay for possible acquisitions, so long as the recipients of
such securities are also subject to the 180 day lock-up period.

NASDAQ NATIONAL MARKET QUOTATION

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations, the
primary factors will be our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable
companies. We have applied for approval for the quotation of our common stock
on the Nasdaq National Market, under the symbol "DVSA." We cannot assure you,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public market subsequent to
this offering at or above the initial offering price.

STABILIZATION, SYNDICATE SHORT POSITION AND PENALTY BIDS

In order to facilitate this offering, persons participating in this offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we have
actually sold to them. The underwriters may elect to cover any such short
position by purchasing shares of common stock in the open market and may impose
penalty bids, under which selling concessions allowed to syndicate members or
other broker-dealers participating in this offering are reclaimed if shares of
common stock previously distributed in this offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the common stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.

66
<PAGE>

RESERVED SHARE PROGRAM

At our request, the underwriters have reserved for sale at the initial
public offering price up to 325,000 shares of common stock to be sold in this
offering for sale to our directors, officers, employees, business associates,
vendors and related persons. Purchases of reserved shares are to be made
through an account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns
& Co. Inc.'s procedures for opening an account and transacting in securities.
The number of shares available for sale to the general public will be reduced
to the extent that any reserved shares are purchased. Any reserved shares not
purchased by our directors, officers, employees, business associates, vendors
and related persons will be offered by the underwriters to the general public
on the same terms as the other shares offered by this prospectus.

LEGAL MATTERS

Cooley Godward llp, San Diego, California will pass on the validity of the
shares of common stock offered by this prospectus for us and certain other
legal matters. Upon the completion of this offering, attorneys with Cooley
Godward llp, through an investment partnership, will beneficially own a total
of 12,252 shares of our common stock.

Brobeck, Phleger & Harrison LLP, San Diego, California will pass on legal
matters in connection with this offering for the underwriters.

EXPERTS

The audited financial statements included in this prospectus have been
audited by Ernst & Young LLP, independent auditors, as described in their
report. We have included our financial statements in this prospectus in
reliance upon Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.

CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS

In August 1999, we dismissed PricewaterhouseCoopers LLP as our independent
accountants. The former independent accountants' report did not contain an
adverse opinion, a disclaimer of opinion or any qualifications or modifications
related to uncertainty, limitation of audit scope or application of accounting
principles. The former independent accountants' report does not cover any of
our financial statements in this registration statement. There were no
disagreements with the former public accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to our financial statements up through the time of
dismissal that, if not resolved to the former accountants' satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their report. In August 1999, we retained Ernst & Young LLP as
our independent public accountants. The decision to retain Ernst & Young LLP
was approved by resolution of the audit committee of the board of directors.
Prior to retaining Ernst & Young LLP, we had not consulted with Ernst & Young
LLP regarding accounting principles.

67
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act, with respect to
the common stock offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules to the registration statement. For further information with
respect to us and our common stock, reference is made to the registration
statement and the exhibits and schedules filed as part of the registration
statement. Statements contained in this prospectus as to the contents of any
contract or document filed as an exhibit to the registration statement are
qualified by reference to the applicable exhibit as filed.

A copy of the registration statement, and the exhibits and schedules to the
registration statement, as well as reports and other information filed by us
with the SEC may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from those offices upon
the payment of the fees prescribed by the SEC. You can obtain information about
the operation of the public reference facilities by calling the SEC at 1-800-
SEC-0330. In addition, registration statements and other filings we make with
the SEC through its electronic data gathering, analysis and retrieval, or
EDGAR, system, including our registration statement, are publicly available
through the Internet. The SEC maintains a web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the SEC. The SEC's web site is http://www.sec.gov.

As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with the Exchange
Act, will file periodic reports, proxy statements and other information with
the SEC.

68
<PAGE>

DIVERSA CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................... F-2

Balance Sheets as of December 31, 1998 and 1999......................... F-3

Statements of Operations for the years ended December 31, 1997, 1998 and
1999................................................................... F-4

Statement of Stockholders' Deficit for the years ended December 31,
1997, 1998 and 1999.................................................... F-5

Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999................................................................... F-6

Notes to Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Diversa Corporation

We have audited the accompanying balance sheets of Diversa Corporation as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' deficit, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diversa Corporation at
December 31, 1998 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

ERNST & YOUNG LLP

San Diego, California

January 12, 2000, except for Note 11, as to which the

date is , 2000.

- --------------------------------------------------------------------------------

The foregoing report is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 11 to the
financial statements.

/s/ ERNST & YOUNG LLP

January 19, 2000

F-2
<PAGE>

DIVERSA CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
-------------------------- DECEMBER 31,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 4,473,000 $ 2,490,000
Short-term investments............. 1,079,000 2,594,000
Accounts receivable, net of
allowance of $6,000 and $1,000 at
December 31, 1998 and 1999,
respectively...................... 48,000 15,571,000
Other current assets............... 410,000 659,000
------------ ------------
Total current assets............. 6,010,000 21,314,000
Property and equipment, net.......... 2,622,000 3,096,000
Other assets......................... 74,000 5,121,000
------------ ------------
Total assets......................... $ 8,706,000 $ 29,531,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable................... $ 235,000 $ 668,000
Accrued liabilities................ 1,530,000 1,653,000
Deferred revenue................... 301,000 4,491,000
Notes payable...................... 552,000 --
Other current liabilities.......... -- 298,000
Current portion of capital lease
obligations....................... 922,000 600,000
------------ ------------
Total current liabilities........ 3,540,000 7,710,000
------------ ------------

Capital lease obligations, less
current portion..................... 2,202,000 2,677,000
Deposit from sublessee............... 300,000 300,000
Long-term deferred revenue........... -- 14,324,000
Other long-term liabilities.......... -- 2,024,000

Commitments and contingencies (Note
7)

Redeemable Convertible Preferred
Stock--$0.001 par value;
60,718,183 shares authorized,
60,220,183 shares issued and
outstanding at December 31, 1998
and 1999; no shares issued and
outstanding pro forma............. 48,402,000 48,402,000 $ --

Stockholders' equity (deficit):
Series E Convertible Preferred
Stock--$0.001 par value; 5,555,556
shares authorized, issued and
outstanding at December 31, 1999;
5,000,000 shares authorized, no
shares issued and outstanding
pro forma.......................... -- 6,000 --
Common stock--$0.001 par value;
28,630,349 shares authorized,
1,856,343 and 2,945,390 shares
issued and outstanding at December
31, 1998 and 1999, respectively;
65,000,000 shares authorized,
25,779,401 shares issued and
outstanding pro forma.............. 2,000 3,000 26,000
Additional paid-in capital.......... 267,000 15,747,000 64,132,000
Deferred compensation............... -- (5,237,000) (5,237,000)
Notes receivable from stockholders.. (93,000) (36,000) (36,000)
Accumulated deficit................. (45,916,000) (56,372,000) (56,372,000)
Accumulated other comprehensive
income (loss)...................... 2,000 (17,000) (17,000)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (45,738,000) (45,906,000) $ 2,496,000
------------ ============ ============
Total liabilities and
stockholders' equity (deficit).. $ 8,706,000 $ 29,531,000
============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE>

DIVERSA CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Collaborative revenue............. $ 669,000 $ 625,000 $ 9,166,000
Grant and product revenue......... 486,000 722,000 1,106,000
------------ ------------ ------------
Total revenue....................... 1,155,000 1,347,000 10,272,000
Operating expenses:
Research and development.......... 7,996,000 10,182,000 11,727,000
Write-off of acquired patents..... -- -- 3,106,000
Selling, general and
administrative................... 4,774,000 3,354,000 6,044,000
------------ ------------ ------------
Total operating expenses............ 12,770,000 13,536,000 20,877,000
------------ ------------ ------------
Loss from operations................ (11,615,000) (12,189,000) (10,605,000)
Other income (expense).............. (25,000) 99,000 79,000
Interest income..................... 288,000 553,000 527,000
Interest expense.................... (355,000) (308,000) (391,000)
------------ ------------ ------------
Net loss............................ (11,707,000) (11,845,000) (10,390,000)
Dividends payable to preferred
stockholders....................... -- -- (66,000)
------------ ------------ ------------
Net loss applicable to common
stockholders....................... $(11,707,000) $(11,845,000) $(10,456,000)
============ ============ ============
Historical net loss per share, basic
and diluted........................ $ (7.29) $ (6.70) $ (4.44)
============ ============ ============
Shares used in calculating
historical net loss per share,
basic and diluted.................. 1,606,000 1,768,000 2,353,000
Pro forma net loss per share........ $ (0.52) $ (0.42)
============ ============
Shares used in calculating pro forma
net loss per share................. 22,673,000 25,187,000
</TABLE>

See accompanying notes.

F-4
<PAGE>

DIVERSA CORPORATION

STATEMENT OF STOCKHOLDERS' DEFICIT

<TABLE>
<CAPTION>
SERIES E
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE OTHER
----------------- ----------------- PAID-IN DEFERRED FROM ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT INCOME (LOSS)
--------- ------ --------- ------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ -- $ -- 1,576,978 $2,000 $ 190,000 $ -- $ (50,000) $(22,298,000) $ --
Issuance of notes
receivable from
stockholders
related to sale
of preferred
stock .......... -- -- -- -- -- -- (113,000) -- --
Stock options
exercised....... -- -- 50,847 -- 18,000 -- -- -- --
Dividends........ -- -- -- -- -- -- -- (66,000) --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- (11,707,000) --
--------- ------ --------- ------ ----------- ----------- ---------- ------------ --------
Balance at
December 31,
1997............ -- -- 1,627,825 2,000 208,000 -- (163,000) (34,071,000) --
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- -- (11,845,000) --
Unrealized gain
on available-
for-sale
securities..... -- -- -- -- -- -- -- -- 2,000
Comprehensive
loss........... -- -- -- -- -- -- -- -- --
Stock options
exercised....... -- -- 228,518 -- 59,000 -- -- -- --
Payments received
on notes
receivable...... -- -- -- -- -- -- 70,000 -- --
--------- ------ --------- ------ ----------- ----------- ---------- ------------ --------
Balance at
December 31,
1998............ -- -- 1,856,343 2,000 267,000 -- (93,000) (45,916,000) 2,000
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- -- (10,390,000) --
Unrealized loss
on available-
for-sale
securities..... -- -- -- -- -- -- -- -- (19,000)
Comprehensive
loss........... -- -- -- -- -- -- -- -- --
Issuance of
preferred stock,
net of issuance
costs of
$71,000......... 5,555,556 6,000 -- -- 7,248,000 -- -- -- --
Issuance of stock
options to
former employee
as part of
severance
agreement....... -- -- -- -- 782,000 -- -- -- --
Stock options
exercised....... -- -- 1,089,047 1,000 607,000 -- -- -- --
Payment of note
receivable from
stockholders.... -- -- -- -- -- -- 13,000 -- --
Forgiveness of
notes receivable
related to
employee
terminations.... -- -- -- -- -- -- 44,000 -- --
Dividends payable
to preferred
stockholders.... -- -- -- -- -- -- -- (66,000) --
Deferred
compensation
related to stock
options......... -- -- -- -- 6,843,000 (6,843,000) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 1,606,000 -- -- --
--------- ------ --------- ------ ----------- ----------- ---------- ------------ --------
Balance at
December 31,
1999............ 5,555,556 $6,000 2,945,390 $3,000 $15,747,000 $(5,237,000) $ (36,000) $(56,372,000) $(17,000)
========= ====== ========= ====== =========== =========== ========== ============ ========
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
--------------
<S> <C>
Balance at
December 31,
1996............ $(22,156,000)
Issuance of notes
receivable from
stockholders
related to sale
of preferred
stock .......... (113,000)
Stock options
exercised....... 18,000
Dividends........ (66,000)
Net loss and
comprehensive
loss............ (11,707,000)
--------------
Balance at
December 31,
1997............ (34,024,000)
Comprehensive
income (loss):
Net loss........ (11,845,000)
Unrealized gain
on available-
for-sale
securities..... 2,000
--------------
Comprehensive
loss........... (11,843,000)
Stock options
exercised....... 59,000
Payments received
on notes
receivable...... 70,000
--------------
Balance at
December 31,
1998............ (45,738,000)
Comprehensive
income (loss):
Net loss........ (10,390,000)
Unrealized loss
on available-
for-sale
securities..... (19,000)
--------------
Comprehensive
loss........... (10,409,000)
Issuance of
preferred stock,
net of issuance
costs of
$71,000......... 7,254,000
Issuance of stock
options to
former employee
as part of
severance
agreement....... 782,000
Stock options
exercised....... 608,000
Payment of note
receivable from
stockholders.... 13,000
Forgiveness of
notes receivable
related to
employee
terminations.... 44,000
Dividends payable
to preferred
stockholders.... (66,000)
Deferred
compensation
related to stock
options......... --
Amortization of
deferred
compensation.... 1,606,000
--------------
Balance at
December 31,
1999............ $(45,906,000)
==============
</TABLE>

F-5
<PAGE>

DIVERSA CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss applicable to common
stockholders....................... $(11,707,000) $(11,845,000) $(10,456,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 842,000 1,178,000 1,498,000
Loss on disposal of property and
equipment......................... 86,000 -- --
Dividends payable to Series A, B
and D preferred stockholders...... -- -- 66,000
Amortization of deferred
compensation...................... -- -- 1,606,000
Issuance of stock options to former
employees......................... -- -- 782,000
Forgiveness of notes receivable.... -- -- 44,000
Change in operating assets and
liabilities:
Accounts receivable, net........... (61,000) 233,000 (523,000)
Other current assets............... (64,000) (137,000) (609,000)
Other assets....................... 48,000 78,000 (47,000)
Accounts payable................... (10,000) (294,000) 433,000
Accrued liabilities................ (312,000) (335,000) 123,000
Deferred revenue................... -- 301,000 533,000
------------ ------------ ------------
Net cash used in operating
activities........................ (11,178,000) (10,821,000) (6,550,000)
Investing activities:
Purchases of property and
equipment.......................... (1,310,000) (1,234,000) (1,421,000)
Proceeds from release of restricted
investment securities.............. 263,000 405,000 --
Purchases of investments............ -- (21,710,000) (26,943,000)
Maturities of investments........... -- 20,633,000 25,426,000
Deposit from sublessee.............. 300,000 -- --
------------ ------------ ------------
Net cash used in investing
activities........................ (747,000) (1,906,000) (2,938,000)
Financing activities:
Advances under capital lease
obligations........................ 1,024,000 1,624,000 1,075,000
Principal payments on capital
leases............................. (978,000) (1,146,000) (922,000)
Proceeds from repayment of notes
receivable from stockholders....... 1,402,000 70,000 13,000
Payments on long-term debt/note
payable............................ (15,000) (14,000) (552,000)
Proceeds from sales of preferred and
common stock, net of issuance
costs.............................. 22,125,000 59,000 7,891,000
Payments of preferred stock
dividends.......................... (66,000) -- --
------------ ------------ ------------
Net cash provided by financing
activities........................ 23,492,000 593,000 7,505,000
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents.................... 11,567,000 (12,134,000) (1,983,000)
Cash and cash equivalents at
beginning of period................. 5,040,000 16,607,000 4,473,000
------------ ------------ ------------
Cash and cash equivalents at end of
period.............................. $ 16,607,000 $ 4,473,000 $ 2,490,000
============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid....................... $ 363,000 $ 368,000 $ 451,000
============ ============ ============
Supplemental schedule of noncash
activities:
Conversion of bridge notes to
preferred stock.................... $ 3,433,000 $ -- $ --
============ ============ ============
Conversion of Series I preferred
stock to Series D preferred stock.. $ 668,000 $ -- $ --
============ ============ ============
</TABLE>

See accompanying notes.

F-6
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Diversa Corporation (the "Company") was incorporated under the laws of the
State of Delaware on December 21, 1992 and received initial funding to commence
its operations in May 1994. The Company discovers and develops novel enzymes
and other biologically active compounds from diverse environmental sources for
use in agricultural, chemical processing, industrial and pharmaceutical
applications.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within three
months from the date of purchase. The Company generally invests its excess cash
in U.S. Government securities and investment grade corporate obligations.

Short-term Investments

The Company applies Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities, to its
investments. Under SFAS No. 115, the Company classifies its short-term
investments as "Available-for-Sale" and records such assets at estimated fair
value in the balance sheet, with unrealized gains and losses, if any, reported
in stockholders' equity (deficit).

At December 31, 1998, all short-term investments consisted of investments in
U.S. government treasury securities. At December 31, 1999, short-term
investments consisted of the following:

<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN (LOSS)
--------- ------ -----------
<S> <C> <C> <C>
Corporate debt securities.......................... $1,505 $1,496 $ (9)
Obligations of U.S. Government agencies............ 1,106 1,098 (8)
------ ------ ----
$2,611 $2,594 $(17)
====== ====== ====
</TABLE>

These investments all mature in less than one year.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
short-term investments. The Company limits its exposure to credit loss by
placing its cash and investments with high credit quality financial
institutions.

During the years ended December 31, 1997, 1998 and 1999, the Company had
collaborative research agreements that accounted for 58%, 46%, and 89%,
respectively, of total revenue.

F-7
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Property and Equipment

Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (generally three to five years) using the straight-
line method. Amortization of leasehold improvements is computed over the
shorter of the lease term or the estimated useful life of the related assets.

Impairment of Long-Lived Assets

The Company assesses potential impairment of its long-lived assets when
there is evidence that events or changes in circumstances indicate that assets
may be impaired. An impairment loss would be recognized when the sum of the
expected future cash flows is less than the carrying amount of the assets.
During the years ended December 31, 1997, 1998 and 1999, no such indicators of
impairment were identified and no impairment losses were recorded, except for
certain patent rights acquired in November 1999 from Terragen Discovery Inc. as
disclosed in Note 3.

Fair Value of Financial Instruments

Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, are carried at cost,
which management believes approximates fair value because of the short-term
maturity of these instruments.

Revenue Recognition

Strategic alliance revenues are earned and recognized on a percentage of
completion basis as research costs are incurred in accordance with the
provisions of each strategic alliance agreement. Fees paid to initiate research
projects are deferred and amortized over the project period in accordance with
SEC Staff Accounting Bulletin (SAB) No. 101. Milestone payments are recognized
as revenue upon the completion of the milestone. Revenue from grants is
recognized on a percentage of completion basis as related costs are incurred.
Revenue from product sales is recognized at the time of shipment to the
customer. The Company recognizes revenue only on payments that are non
refundable, and defers revenue recognition until performance obligations have
been completed. None of the strategic alliances or grants require scientific
achievement as a performance obligation.

Research and Development

Expenditures relating to research and development are expensed in the period
incurred.

Income Taxes

Current income tax expense (benefit) is the amount of income taxes expected
to be payable (receivable) for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax bases of assets and liabilities, as well as the
expected future tax benefit to be derived from tax loss and credit
carryforwards. Deferred income tax expense is generally the net change during
the year in the deferred income tax asset or liability. Valuation allowances
are established when realizability of deferred tax assets is uncertain. The
effect of tax rate changes is reflected in tax expense (benefit) during the
period in which such changes are enacted.

Stock-Based Compensation

As permitted by SFAS No. 123, the Company accounts for common stock options
granted to employees using the intrinsic value method and, thus, recognizes no
compensation expense for options granted with exercise prices equal to or
greater than the fair value of the Company's common stock on the date of the
grant. In 1999, the Company recognized deferred stock compensation related to
certain stock option grants (see Note 5).

F-8
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred compensation for options granted to non-employees has been
determined in accordance with SFAS No. 123 and EITF 96-18 as the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred charges for options granted to
non-employees are periodically remeasured as the underlying options vest.

Comprehensive Income (Loss)

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its components; the Company has
disclosed its comprehensive income (loss) as a component of its statement of
stockholders' equity (deficit).

Net Loss Per Share

Basic and diluted net loss per common share are presented in conformity with
the SFAS No. 128, Earnings per Share, and SAB 98, for all periods presented.
Under the provisions of SAB 98, common stock and convertible preferred stock
that has been issued or granted for nominal consideration prior to the
anticipated effective date of the initial public offering must be included in
the calculation of basic and diluted net loss per common share as if these
shares had been outstanding for all periods presented. To date, the Company has
not issued or granted shares for nominal consideration.

In accordance with SFAS No. 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the years ended December 31, 1998 and 1999
as described above, and also gives effect to the assumed conversion of
preferred stock which will automatically convert to common stock immediately
prior to the completion of the Company's initial public offering (using the "as
if converted" method) from the original date of issuance. The pro forma shares
have been adjusted to give effect to the 1-for-2.8806 reverse stock split
contemplated in Note 11.

The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common
stockholders....................... $(11,707,000) $(11,845,000) $(10,456,000)

Basic and diluted net loss per
share.............................. $ (7.29) $ (6.70) $ (4.44)
============ ============ ============
Weighted-average shares used in
computing historical net loss per
share, basic and diluted........... 1,606,000 1,768,000 2,353,000

Pro forma:
Net loss.......................... $(11,845,000) $(10,456,000)
Pro forma net loss per share, basic
and diluted (unaudited)............ $ (0.52) $ (0.42)
============ ============

Shares used above................... 1,768,000 2,353,000
Pro forma adjustment to reflect
weighted-average effect of
assumed conversion of convertible
preferred stock (unaudited)...... 20,905,000 22,834,000
------------ ------------
Shares used in computing pro forma
net loss per share, basic and
diluted (unaudited).............. 22,673,000 25,187,000
</TABLE>

F-9
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Company has excluded all convertible preferred stock, outstanding stock
options and warrants, and shares subject to repurchase from the calculation of
diluted loss per common share because all such securities are antidilutive for
all applicable periods presented. The total number of shares excluded from the
calculations of diluted net loss per share, prior to application of the
treasury stock method for options and warrants, was 23,620,000, 24,231,000 and
25,959,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Such securities, had they been dilutive, would have been included in the
computation of diluted net loss per share.

Segment Reporting

As of January 1, 1998, the Company adopted SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. The Company has determined that it operates in only one
segment. Accordingly, the adoption of this statement had no impact on the
Company's financial statements.

Effect of New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which will be
effective January 1, 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company
believes the adoption of SFAS No. 133 will not have a material effect on the
financial statements.

2. BALANCE SHEET DETAILS

Accounts receivable consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
------- -----------
<S> <C> <C>
Trade.................................................. $13,000 $ 23,000
Grants................................................. 41,000 204,000
Partnership alliances.................................. -- 15,345,000
------- -----------
54,000 15,572,000
Allowance for doubtful accounts........................ (6,000) (1,000)
------- -----------
Total.................................................. $48,000 $15,571,000
======= ===========
</TABLE>

The partnership alliance receivable consists primarily of a receivable from
Novartis related to the joint venture discussed in Note 3. This receivable was
recorded upon the commencement of the related research efforts in December 1999
after the agreement was signed, and the payment of the receivable is due by
February 2000.

F-10
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Laboratory equipment............................... $ 4,228,000 $ 5,720,000
Computer equipment................................. 1,735,000 2,112,000
Furniture and fixtures............................. 274,000 322,000
Leasehold improvements............................. 77,000 132,000
----------- -----------
6,314,000 8,286,000
Accumulated depreciation and amortization.......... (3,692,000) (5,190,000)
----------- -----------
Total.............................................. $ 2,622,000 $ 3,096,000
=========== ===========
</TABLE>

At December 31, 1999, other assets primarily consisted of a $5.0 million
long-term receivable from the Novartis joint venture (See Note 3). This
receivable is due in June 2001.

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Compensation........................................... $ 855,000 $ 929,000
Professional fees...................................... 334,000 287,000
Property taxes......................................... 67,000 85,000
Other.................................................. 274,000 352,000
---------- ----------
$1,530,000 $1,653,000
========== ==========
</TABLE>

3. SIGNIFICANT STRATEGIC ALLIANCES

Novartis Agribusiness Biotechnology Research

In January 1999, the Company entered into a strategic alliance with Novartis
Agribusiness Biotechnology Research Inc. ("Novartis"). Under the agreement, the
Company will receive research funding from Novartis to conduct multiple
independent research projects with the intention of identifying and developing
biomolecules that meet the scientific specifications of Novartis. In
conjunction with the transaction, Novartis purchased 5,555,556 shares of Series
E Convertible Preferred Stock for gross proceeds of $7.3 million, paid a
technology access fee of $3.0 million, and provided project research funding of
$2.2 million to the Company, for aggregate total proceeds of $12.5 million. The
Company is recognizing the research payments and the technology access fee on a
percentage of completion basis as research is performed. The only obligation of
the Company under this agreement is to perform research activities; Novartis
did not acquire any rights or privileges other than as disclosed in Note 4 as
an owner of Series E preferred stock.

All of the research required under the collaboration was completed by
December 31, 1999, and accordingly the entire technology access fee of $3.0
million and the research funding of $2.2 million were recognized in 1999. The
Company has no further performance obligations related to this alliance.

Novartis Joint Venture

In December 1999, the Company formed a five-year, renewable strategic
alliance with Novartis Seeds AG ("Novartis"). Through a contract joint venture,
the Company and Novartis will jointly pursue opportunities in the field of
animal feed and agricultural product processing. Both parties will share in the
management of the venture and fund a portion of the sales and marketing costs
of this venture. Under the agreements, Novartis receives exclusive, worldwide
rights in the field of animal feed and project exclusive, worldwide rights in
the

F-11
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

field of agricultural product processing. Novartis will pay for the license
granted under this agreement, of which $15.0 million is due by February 2000
and an additional $5 million due in June 2001. Additionally, the Company will
receive minimum research funding over five years of $33.9 million, as well as
milestone payments upon achievement of project objectives totalling up to $7.7
million and license and commercialization fees for any resulting products. The
Company will receive a share of the profits in the form of royalties on any
product sales.

Revenue recognized under the Novartis contract joint venture agreement was
$0.8 million for the year ended December 31, 1999, consisting of research
funding of $0.5 million and amortization of the license fee of $0.3 million.

The Dow Chemical Company

In July 1999, the Company expanded its existing strategic alliance with The
Dow Chemical Company ("Dow"). Under the expanded agreement, the Company will
seek to identify and develop enzymes that can be utilized by Dow to manufacture
chemical compounds. The three-year agreement requires Dow to make technology
development payments totaling $4.5 million. Dow will fund the research costs
for the duration of the contract totaling $10.8 million. The Company will
receive milestone payments of up to $2.7 million upon achievement of
established objectives and license and commercialization fees for any resulting
products. The Company will receive royalties on product sales. The Company is
amortizing the technology development fees over the minimum guaranteed period
of the agreement.

Revenue recognized under the strategic alliance with Dow was approximately
$2.5 million (27% of total collaborative revenues) for the year ended December
31, 1999, consisting of research funding of $1.9 million, and amortization of
technology development fees of $0.6 million.

In June 1997, the Company entered into an initial agreement with Dow to
develop an enzyme to be used in a Dow industrial process. As of December 31,
1998, the Company had successfully achieved the three technical milestones as
outlined in the agreement.

Finnfeeds International Limited

In May 1996, the Company entered into a strategic alliance with Finnfeeds
International Limited ("Finnfeeds") to jointly discover new enzymes for the
animal feed market. In conjunction with the agreement, the Company issued
844,444 shares of its Series C Redeemable Convertible Preferred Stock to
Finnfeeds for $1,900,000. The Company received and recognized as revenue $0.8
million in research funding over the period from May 1996 through December 31,
1998. The only obligation of the Company under this agreement is to perform
research activities; Finnfeeds did not acquire any rights or privileges other
than as disclosed in Note 4 as an owner of Series C preferred stock.

In December 1998, the Company and Finnfeeds entered into a license agreement
to commercialize an enzyme developed under the strategic alliance. Under the
terms of the agreement, the Company granted Finnfeeds an exclusive license to
manufacture, use and sell the developed enzyme. In consideration for the
license, the Company will be paid a royalty on related product sales made by
Finnfeeds.

Terragen Discovery Inc.

In November 1999, the Company signed a license agreement with Terragen
Discovery Inc. ("Terragen") under which Terragen and the Company agreed to
cross license certain technologies. Under the terms of the

F-12
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

agreement, the Company made an initial payment of $2.5 million in 1999 and
agreed to make annual maintenance payments of $100,000 to Terragen for the
remaining patent life. The Terragen license was acquired to enhance the
Company's intellectual property position in combinational libraries and may
reduce the risk of possible future patent infringement claims. As the Company's
scientists have elected to pursue the Company's existing technology, and are
not pursuing the Terragen patents for existing or alternative future uses, the
Company recorded a charge of $3.1 million in the fourth quarter related to the
entire cost of the license. This charge consisted of the initial payment of
$2.5 million and the present value of the remaining annual maintenance
payments.

Other Agreements

The Company has signed various agreements with research institutions,
governmental and commercial entities. Generally these agreements call for the
Company to pay research support, cost reimbursement and, in some cases,
subsequent royalty payments in the event a product is commercialized. The
financial impact of these agreements on the Company is not significant.

4. PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Initial Public Offering

In December 1999, the board of directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is closed under the terms presently
anticipated, all of the preferred stock outstanding will automatically convert
into 22,834,011 shares of common stock. Unaudited pro forma stockholders'
equity, as adjusted for the assumed conversion of the preferred stock, is set
forth on the balance sheet.

Authorization of Preferred Stock

In December 1999, the board of directors approved an amendment to the
Company's articles of incorporation to authorize an additional 5,000,000 shares
of undesignated preferred stock, for which the board of directors is authorized
to fix the designation, powers, preferences, and rights, and authorized an
additional 5,000,000 shares of common stock.

Characteristics and Terms Applicable to Preferred Stock

The Company has Series A, B, C, D and E preferred stock (the "Preferred
Stock") outstanding at December 31, 1999. All outstanding shares of Preferred
Stock automatically convert into Common Stock upon the effective date of an
initial public offering ("IPO") with gross proceeds exceeding $25 million and a
price per share of not less than $3.00. The Preferred Stock is convertible at
any time into Common Stock of the Company at a conversion ratio (one to one)
determined based on a formula provided in the Company's Restated Certificate of
Incorporation. The conversion ratio will be adjusted to 1-for-2.8806 when the
reverse stock split discussed in Note 11 is effected. The Company has reserved
the full number of shares of Common Stock issuable upon conversion of the
Preferred Stock.

F-13
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

A summary of convertible preferred stock issued and outstanding as of
December 31, 1999 is as follows:

<TABLE>
<CAPTION>
LIQUIDATION
SHARES PREFERENCE
---------- -----------
<S> <C> <C>
Series A............................................ 10,000,000 $10,000,000
Series B............................................ 24,566,184 16,873,681
Series C............................................ 844,444 --
Series D............................................ 24,809,555 21,088,122
Series E............................................ 5,555,556 4,722,223
---------- -----------
65,775,739 $52,684,026
========== ===========
</TABLE>

The liquidation preference on the Series C Preferred Stock is determined by
the board of directors of the Company, and is based on the board's
interpretation of the value of the intellectual property rights related to the
genes and gene-sequencing technology developed under the Finnfeeds
collaboration agreement.

Dividends are payable when and if declared by the board of directors for
the Series A, B and D Stockholders. Such dividends will be declared so that
each of these Stockholders participates equally. From December 21, 1999 until
the date of the consummation of the first sale of common shares in an IPO, the
Series A, B and D Preferred Stockholders are entitled to a 5% dividend per
annum. The Company has accrued $66,000 in dividends payable, as of December
31, 1999, and will continue to accrue approximately $6,500 per day through the
completion of an initial public offering. The Company intends to settle the
dividend payable through the issuance of shares of common stock valued at the
IPO price. The dividend for the Series A, B and D Preferred stock is $0.05,
$0.033, and $0.0425 per share, respectively, or such greater amount of
dividends as the Preferred Stockholders would be entitled to if converted into
Common Stock. Dividends are payable when and if declared by the board of
directors on the Series C and E Preferred Stock, but are junior to the
dividends on the Series A, B and D Preferred Stock.

The Preferred Stockholders have voting rights on an "as if converted" basis
on most matters; however, the approval of a majority of the Preferred
Stockholders voting as a separate class is required for certain transactions.

In the event of a liquidation, the Series A, B and D Preferred Stockholders
are entitled to receive on a pro rata basis a liquidation payment in an amount
equal to the original issuance price of the Preferred Stock plus any unpaid
cumulative dividends plus declared but unpaid dividends, as well as a pro rata
distributive share of any remaining assets on an "as if fully converted" basis
with the Common Stock.

The Company will be required to redeem the Series A, B, C and D Preferred
Stock on and after May 2001, upon a written request of the Preferred
Stockholders representing not less than 75% of the combined voting power of
the Preferred Stock. The redemption price of the Preferred Stock is equal to
the original issuance price, plus unpaid cumulative dividends and declared but
unpaid dividends. The Series C Preferred Stock will be redeemed only after
full redemption of the Series A, B and D Preferred Stock.

Series A Redeemable Convertible Preferred Stock

During 1994 and 1995, the Company issued a total of 10,000,000 shares of
Series A Redeemable Convertible Preferred Stock for aggregate net proceeds of
$9,927,000.

Series B Redeemable Convertible Preferred Stock

In May 1996, the Company issued 18,939,394 shares of Series B Redeemable
Convertible Preferred Stock (the "Series B Preferred Stock") for aggregate net
proceeds of $11,947,000. In December 1996, the Company

F-14
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

issued an additional 4,545,455 shares of Series B Redeemable Convertible
Preferred Stock for aggregate proceeds of $3,000,000. In conjunction with the
issuance of Series B Redeemable Convertible Preferred Stock, rights were
granted to certain key employees and consultants to purchase an additional
1,272,727 shares of Series B Preferred Stock for $840,000. In December 1996,
certain of these individuals exercised their rights and purchased 967,698
shares of Series B Preferred Stock for $640,000.

In May 1997, two key employees exercised their rights and purchased a total
of 113,637 shares of Series B Preferred Stock for $0.66 per share in exchange
for promissory notes aggregating $75,000. The notes are payable over four years
in equal annual installments commencing March 30, 1998, and bear interest at
6.64% per annum. These notes have been recorded as a separate component of
stockholders' equity (deficit). The right to purchase an additional $125,000 in
Series B Preferred Stock expired in May 1997. In 1999, the Company forgave
$44,000 related to notes receivable from certain employees, and recorded
compensation expense for the forgiveness.

Series C Redeemable Convertible Preferred Stock

In July 1997, the Company issued 844,444 shares of Series C Redeemable
Convertible Preferred Stock (the "Series C Preferred Stock") to Finnfeeds for
$2.25 per share in conjunction with a collaboration agreement (Note 3). Total
issuance costs of $10,000 were netted against the cash proceeds. The rights of
the Series C Preferred Stock are junior to the rights of Series A, B and D
Preferred Stock, and on par with the Series E Preferred Stock.

Series D Redeemable Convertible Preferred Stock

In October 1997, the Company issued 24,809,555 shares of Series D Redeemable
Convertible Preferred Stock (the "Series D Preferred Stock") for $0.85 per
share. The $21,088,000 total issuance price of the Series D Preferred Stock
included the conversion of bridge notes in the amount of $3,433,000, the
exchange of Series I Preferred Stock in the amount of $688,000 and a $50,000
note receivable from a key employee which is payable over four years in equal
annual installments commencing December 1997, and bears interest at 6.64% per
annum. Total issuance costs of $165,000 were netted against the cash proceeds.

Series E Convertible Preferred Stock

In January 1999, in conjunction with a strategic alliance signed with
Novartis (Note 3), the Company sold 5,555,556 shares of Series E Convertible
Preferred Stock. The terms of the stock purchase agreement designate a portion
of the proceeds as a technology access fee, a portion of the proceeds as
advance payments for research support under the collaboration agreement, and
$7,333,000 for the Series E Convertible Preferred Stock ($1.32 per share). The
rights of the Series E Convertible Preferred Stock are junior to the rights of
Series A, B and D with respect to dividends and liquidation preferences.

5. STOCK OPTION PLANS AND WARRANTS

1999 Employee Stock Purchase Plan

In December 1999, the board of directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 416,579 shares of the Company's
common stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees to purchase common stock at a
discount, but only through payroll deductions, during defined offering periods.
The price at which stock is purchased under the Purchase Plan is equal to 85%
of the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. The initial offering period will commence
on the effective date of the

F-15
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

offering. In addition, the Purchase Plan provides for annual increases of
shares available for issuance under the Purchase Plan beginning with fiscal
2001.

1999 Nonemployee Directors Stock Option Plan

In December 1999, the Company adopted the 1999 Nonemployee Directors Stock
Option Plan and reserved a total of 277,719 shares of common stock for issuance
thereunder. Each nonemployee director who becomes a director of the Company
will be automatically granted a nonstatutory stock option to purchase 27,772
shares of common stock on the date on which such person first becomes a
director. At each board meeting immediately following each annual stockholders
meeting beginning with the first board meeting after the 1999 Annual
Stockholders Meeting, each nonemployee director will automatically be granted a
nonstatutory option to purchase 1,736 shares of common stock. The exercise
price of options under the director plan will be equal to the fair market value
of the common stock on the date of grant. The maximum term of the options
granted under the director plan is ten years. Each initial grant under the
director plan will vest as to 25% of the shares subject to the option one year
after the date of grant and at a rate of 25% of the shares at the end of each
year. Each subsequent grant will vest in full one year after the date of grant.
The director plan will terminate in September 2009, unless terminated earlier
in accordance with the provisions of the director plan.

The 1997 Equity Incentive Plan

In August 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan") which provides for the granting of incentive or non-statutory
stock options, stock bonuses, and rights to purchase restricted stock to
employees, directors, and consultants as administered by the human resources
committee of the board of directors. Unless terminated sooner by the board of
directors, the 1997 Plan will terminate in August 2007.

The incentive and non-statutory stock options are granted with an exercise
price of not less than 100% and 85%, respectively, of the estimated fair value
of the underlying common stock as determined by the board of directors. The
1997 Plan allows a purchase price for each restricted stock purchase that is
not less than 85% of the estimated fair value of the Company's common stock as
determined by the board of directors.

Options granted under the 1997 Plan vest over periods ranging up to four
years and are exercisable over periods not exceeding ten years. The aggregate
number of shares which may be awarded under the 1997 Plan is 5,836,468, and an
equal number of shares of common stock are reserved for the exercise of these
options. This aggregate number includes 3,020,204 shares which were authorized
by the board of directors in October 1999.

The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan

The Restated 1994 Employee Incentive and Non-Qualified Stock Option Plan
(the "1994 Plan") provides for the granting of incentive or non-qualified stock
options to employees and consultants as administered by the human resources
committee of the board of directors. The incentive stock options are granted
with an exercise price of not less than the estimated fair value of the
underlying common stock as determined by the board of directors. The non-
qualified stock options are granted with an exercise price of not less than
$0.03.

Options granted under the 1994 Plan vest over periods ranging up to four
years and are exercisable over periods not exceeding ten years. Options to
purchase 951,902 shares have been granted under the 1994 Plan and 110,000
options remain outstanding related to the 1994 Plan. In August 1997, this Plan
was terminated and there are no options available for future grant.

F-16
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Information with respect to the plans is as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at January 1, 1997...................... 1,279,000 $0.40
Granted....................................... 1,203,000 $0.43
Exercised..................................... (51,000) $0.35
Cancelled..................................... (81,000) $0.46
----------
Balance at December 31, 1997.................... 2,350,000 $0.43
Granted....................................... 1,185,000 $0.58
Exercised..................................... (228,000) $0.26
Cancelled..................................... (346,000) $0.43
----------
Balance at December 31, 1998.................... 2,961,000 $0.49
Granted....................................... 1,515,000 $3.14
Exercised..................................... (1,089,000) $0.55
Cancelled..................................... (262,000) $0.49
----------
Balance at December 31, 1999.................... 3,125,000 $1.73
==========
</TABLE>

At December 31, 1999, options under the plans to purchase approximately
3,125,000 shares were exercisable and approximately 2,368,000 shares remain
available for grant.

Following is a further breakdown of the options outstanding under the plans
as of December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHED AVERAGE EXERCISE
OPTIONS REMAINING LIFE AVERAGE EXERCISE OPTIONS PRICE OF OPTIONS
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE EXERCISABLE
------------------------ ----------- -------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03--$0.49............ 469,000 7.0 $0.40 469,000 $0.40
$0.58................... 1,331,000 8.4 $0.58 1,331,000 $0.58
$1.73--$8.64............ 1,325,000 9.7 $3.43 1,325,000 $3.43
--------- ---------
$0.03--$8.64............ 3,125,000 8.8 $1.73 3,125,000 $1.73
========= =========
</TABLE>

The Company has outstanding an option to purchase 13,937 shares of common
stock with an exercise price of $0.03 per share that was issued in 1994 to a
founder of the Company as consideration for waiving certain rights in
conjunction with a previous financing. This option was issued outside of the
1994 and 1997 plans. The option expires at the earlier of the 10th anniversary
of the option or eighteen months after the completion of an IPO.

Adjusted pro forma information regarding net loss and net loss per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options and stock purchase plan under the
fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using the "Minimum Value" method for option
pricing with the following assumptions for 1997, 1998 and 1999; risk-free
interest rates of 6.50%; dividend yield of 0%; and a weighted-average expected
life of the options of five years.

F-17
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Adjusted pro forma net loss...... $(11,781,000) $(11,907,000) $(10,622,000)
Adjusted pro forma basic net loss
per share....................... $ (7.34) $ (6.73) $ (4.51)
</TABLE>

The pro forma effect on net loss for 1997, 1998 and 1999 is not likely to
be representative of the pro forma effects on reported net income or loss in
future years because these amounts reflect less than four years of vesting.

During the years ended December 31, 1998 and 1999, in connection with the
grant of certain stock options to employees, the Company recorded deferred
stock compensation totaling approximately $6.8 million, representing the
difference between the exercise price and the fair value of the Company's
common stock as estimated by the Company's management for financial reporting
purposes on the date such stock options were granted. Deferred compensation is
included as a reduction of stockholders' equity and is being amortized to
expense over the vesting period of the options. During the year ended December
31, 1999, the Company recorded amortization of deferred stock compensation
expense of approximately $1.6 million.

The Company has a total of approximately 364,000 warrants outstanding,
consisting of approximately 174,000 warrants to purchase Series A Preferred
Stock at $2.88 per share, and approximately 190,000 warrants to purchase
common stock at between $0.03 and $0.43 per share. The common stock warrants
were issued in previous years in connection with certain debt and equity
financing transactions, and expire through 2006. The Series A Preferred Stock
warrants were issued in conjunction with a lease financing agreement, and
expire at the later of February 2005, or the fifth anniversary of the
completion of an initial public offering.

At December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:

<TABLE>
<S> <C>
Conversion of convertible preferred stock......................... 22,834,000
1994 and 1997 Stock Option Plan................................... 5,493,000
Option issued to a founder of the Company......................... 14,000
Warrants.......................................................... 364,000
----------
28,705,000
==========
</TABLE>

Employee Terminations

During 1999, the Company agreed to separation terms with two former
officers. In conjunction with these agreements, the Company agreed to
accelerate one year's unvested options for one officer, and extend the vesting
period for one year for the other officer. The Company considered each
modification to require a remeasurement of the options and accordingly
recorded an expense of $782,000 related to the option modifications. The
expense was recorded at the time of the separation as the former officers will
perform no services on behalf of the Company after the separation date.

6. BENEFIT PLAN

The Company has a 401(k) plan which allows participants to defer a portion
of their income through contributions. Such deferrals are fully vested and are
not taxable to the participant until distributed from the plan upon
termination, retirement, permanent disability or death. During the years ended
December 31, 1997, 1998 and 1999, the Company made discretionary contributions
of approximately $39,000, $45,000 and $54,000, respectively.

F-18
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. COMMITMENTS AND CONTINGENCIES

The Company leases office and laboratory space as well as equipment under
noncancelable leases as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31:
2000................................................ $ 943,000 $ 563,000
2001................................................ 1,012,000 580,000
2002................................................ 1,035,000 49,000
2003................................................ 817,000 --
2004................................................ 296,000 --
Thereafter............................................ 45,000 --
---------- ----------
Total minimum lease payments.......................... 4,148,000 $1,192,000
==========
Amount representing interest.......................... 871,000
----------
Present value of minimum capital lease obligations.... 3,277,000
Current portion....................................... 600,000
----------
Long-term capital lease obligation.................... $2,677,000
==========
</TABLE>

The operating lease commitment includes rental payments due under the
Company's San Diego facility lease and excludes approximately $390,000 in
payments due related to a previously occupied facility for which the Company
has sublessee rental commitments to meet substantially all required lease
payments, and has received a $300,000 deposit from the sublessee. For the years
ended December 31, 1997, 1998, and 1999, rent and administrative service
expense under operating leases for the San Diego facility was approximately
$413,000, $516,000, and $533,000, respectively.

Equipment acquired under capital leases is included in property and
equipment, and amounted to $4,971,000 and $6,075,000 (net of accumulated
amortization of $2,421,000 and $1,916,000) as of December 31, 1998 and December
31, 1999, respectively. The Company's capital lease obligations mature at
various dates through 2004 with interest rates ranging from 9.5% to 15.7%. As
of December 31, 1999, the Company has $828,000 available under lease financing
lines.

8. NOTES PAYABLE

In March 1995, the Company issued a $600,000 note payable with a 9% per
annum interest rate payable in connection with the acquisition of fixed assets.
The note was paid in full in 1999.

9. RELATED PARTY TRANSACTIONS

Included in the statement of operations are consulting fees and reimbursed
expenses to various stockholders, amounting to approximately $275,000 and
$413,000 for the year ended December 31, 1998 and 1999, respectively.

F-19
<PAGE>

DIVERSA CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES

Significant components of the Company's deferred tax assets are shown below.
A valuation allowance of $19,269,000 and $22,605,000 has been recognized to
offset the deferred tax assets at December 31, 1998 and 1999, respectively, as
realization of such assets is uncertain.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 16,584,000 $ 17,724,000
Deferred revenue.................................. -- 1,155,000
Licenses.......................................... -- 1,266,000
Start-up costs.................................... 556,000 278,000
Allowances and accrued liabilities................ 574,000 349,000
Federal and state tax credits..................... 1,391,000 1,669,000
Depreciation...................................... 164,000 164,000
------------ ------------
Total deferred tax assets......................... 19,269,000 22,605,000
Valuation allowance............................... (19,269,000) (22,605,000)
------------ ------------
Net deferred tax assets............................. $ -- $ --
============ ============
</TABLE>

At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $45,817,000 and $28,901,000, respectively.
The federal net operating loss carryforwards will begin to expire in 2009. The
California net operating loss carryforwards will continue to expire in 2000
(approximately $760,000 expired in 1999). The Company also has federal and
California tax credits of approximately $1,242,000 and $657,000, respectively,
which will expire in 2009.

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of
the Company's net operating loss and credit carryforwards may be limited in the
event of a cumulative change in ownership of more than 50%. However, the
Company does not believe such limitation will have a material effect upon the
utilization of these carryforwards.

11. SUBSEQUENT EVENTS

In January 2000, the Company expects to receive stockholder consent for a 1-
for-2.8806 reverse stock split of the Company's common stock, to be effective
upon the completion of the initial public offering. All share data have been
retroactively restated to reflect the reverse stock split. In conjunction with
the expected reverse stock split, the certificate of incorporation will be
amended to authorize 65,000,000 shares of common stock and 5,000,000 shares of
preferred stock.

F-20
<PAGE>

[LOGO OF DIVERSA]
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.

Until , 2000, all dealers that effect trans- actions of these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

---------------------

TABLE OF CONTENTS

---------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Special Statement Regarding Forward-Looking Statements................... 16
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Corporate Information.................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Information........................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 26
Management............................................................... 44
Certain Transactions..................................................... 56
Principal Stockholders................................................... 59
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 65
Legal Matters............................................................ 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 68
Index to Financial Statements............................................ F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

[LOGO OF DIVERSA]

6,500,000 SHARES

COMMON STOCK
-------------------------

PROSPECTUS

-------------------------

BEAR, STEARNS & CO. INC.

CHASE H&Q

DEUTSCHE BANC ALEX. BROWN

, 2000

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses payable by the Registrant in
connection with the sale of the common stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing
fee.

<TABLE>
<S> <C>
Registration fee.................................................... $ 22,400
NASD filing fee..................................................... 9,000
Nasdaq National Market listing fee.................................. 95,000
Printing and engraving expenses..................................... 200,000
Legal fees and expenses............................................. 450,000
Accounting fees and expenses........................................ 250,000
Blue Sky fees and expenses.......................................... 10,000
Transfer agent and registrar fees................................... 10,000
Miscellaneous....................................................... 153,600
----------
Total........................................................... $1,200,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Bylaws require that directors and officers be indemnified to
the maximum extent permitted by Delaware law.

The Delaware General Corporation Law (the "Delaware GCL") provides that a
director or officer of a corporation (i) shall be indemnified by the
corporation for all expenses of litigation or other legal proceedings when he
is successful on the merits, (ii) may be indemnified by the corporation for the
expenses, judgments, fines and amounts paid in settlement of such litigation
(other than a derivative suit) even if he is not successful on the merits if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and, in the case of a
criminal proceeding, had no reason to believe his conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses of a derivative suit
(a suit by a stockholder alleging a breach by a director or officer of a duty
owed to the corporation), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, provided that no such
indemnification may be made in accordance with this clause (iii) if the
director or officer is adjudged liable to the corporation, unless a court
determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses. The
indemnification described in clauses (ii) and (iii) above shall be made upon
order by a court or a determination by (i) a majority of disinterested
directors or by such committee such disinterested directors may designate, (ii)
if there are no such directors or if such directors so direct, by independent
legal counsel in a written opinion or (iii) the stockholders that
indemnification is proper because the applicable standard of conduct is met.
Expenses incurred by a director or officer in defending an action may be
advanced by the corporation prior to the final disposition of such action upon
receipt of an undertaking by such director or officer to repay such expenses if
it is ultimately determined that he is not entitled to be indemnified in
connection with the proceeding to which the expenses relate. The Company's
Certificate of Incorporation includes a provision eliminating, to the fullest
extent permitted by Delaware law, director liability for monetary damages for
breaches of fiduciary duty.

The Company has entered into indemnity agreements (the "Indemnity
Agreements") with each director or officer designated by the Board of
Directors. The Indemnity Agreements require that the Company indemnify

II-1
<PAGE>

directors and officers who are parties thereto in all cases to the fullest
extent permitted by our bylaws and by Delaware law. Under the Delaware GCL,
except in the case of litigation in which a director or officer is successful
on the merits, indemnification of a director or officer is discretionary rather
than mandatory. Consistent with the Company's Bylaw provision on the subject,
the Indemnity Agreements require the Company to make prompt payment of
litigation expenses at the request of the director or officer in advance of
indemnification provided that he undertakes to repay the amounts if it is
ultimately determined that he is not entitled to indemnification for such
expenses. The advance of litigation expenses is mandatory; under the Delaware
GCL such advance would be discretionary. Under the Indemnity Agreements, the
director or officer is permitted to bring suit to seek recovery of amounts due
under the Indemnity Agreements and is entitled to recover the expenses of
seeking such recovery if such suit for recovery is successful in whole or in
part. Without the Indemnity Agreements, the Company would not be required to
pay the director or officer for his expenses in seeking indemnification
recovery against the Company. Under the Indemnity Agreements, directors and
officers are not entitled to indemnity or advancing of expenses (i) if such
director or officer has recovered payment under an insurance policy for the
subject claim, or has otherwise been indemnified against the subject claim,
(ii) for actions initiated or brought by the director or officer and not by way
of defense (except for actions seeking indemnity or expenses from the Company),
(iii) if the director or officer violated section 16(b) of the Exchange Act or
similar provisions of law, (iv) if a court of competent jurisdiction determines
that the director or officer failed to act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Company or, with respect to any proceeding which is of a criminal nature,
determines that the director or officers' conduct was knowingly fraudulent,
deliberately dishonest or constituted willful misconduct or (v) if
indemnification is unlawful. Absent the Indemnity Agreements, indemnification
that might be made available to directors and officers could be changed by
amendments to the Company's Certificate of Incorporation or Bylaws.

The underwriting agreement provides that the underwriters are obligated,
under some circumstances, to indemnify our directors, officers and controlling
persons against specified liabilities, including liabilities under the
Securities Act. Reference is made to the form of underwriting agreement filed
as Exhibit 1.1 to this registration statement.

In addition, we have an existing directors and officers liability insurance
policy.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since January 1, 1997, the Registrant has sold and issued the following
unregistered securities:

(a) On July 14, 1997, the Registrant issued and sold 844,444 shares of its
Series C Preferred Stock to Finnfeeds International Limited for a purchase
price of $1,900,000, in connection with the Registrant's Collaboration
Agreement with Finnfeeds International Limited. The Registrant relied on the
exemption provided by Section 4(2) and/or Regulation D promulgated under the
Securities Act. The sale was made without general solicitation or advertising.
The purchaser was a sophisticated investor with access to all relevant
information necessary to evaluate the investment and represented to the
Registrant that the securities were being acquired for investment.

(b) On September 2, 1997, the Registrant issued to 15 investors, secured
promissory notes for an aggregate of $3,432,804 that were convertible into
shares of the Registrant's Series D Preferred Stock. The Registrant relied on
the exemption provided by Section 4(2) and/or Regulation D promulgated under
the Securities Act. The issuances were made without general solicitation or
advertising. Each investor was a sophisticated investor with access to all
relevant information necessary to evaluate the investment and represented to
the Registrant that the securities were being acquired for investment.

(c) On October 22, 1997, the Registrant issued and sold an aggregate of
24,809,555 shares of its Series D Preferred Stock to 27 investors for an
aggregate purchase price of $21,088,122, which reflected the conversion of all
of the Registrant's outstanding Series I Preferred Stock and convertible,
secured promissory notes into Series D Preferred Stock. The Registrant relied
on the exemption provided by Section 4(2) and/or

II-2
<PAGE>

Regulation D promulgated under the Securities Act. The sales were made without
general solicitation or advertising. Each purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment and represented to the Registrant that the securities were being
acquired for investment.

(d) On January 25, 1999, the Registrant issued and sold 5,555,556 shares of
its Series E Preferred Stock to Novartis Agribusiness Biotechnology Research,
Inc. for a purchase price of $7,333,334 in connection with a Collaboration
Agreement between the parties. The Registrant relied on the exemption provided
by Section 4(2) and/or Regulation D promulgated under the Securities Act. The
sale was made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate the investment and represented to the Registrant that the securities
were being acquired for investment.

(e) From time to time since January 1, 1997, the Registrant has granted
stock options to purchase shares of its common stock to various employees and
consultants pursuant to its 1994 Employee Incentive and Non-Qualified Stock
Option Plan. With respect to all grants of options, exemption from registration
was unnecessary in that the transactions did not involve a "sale" of securities
as that term is used in Section 2(a)(3) of the Securities Act.

(f) From time to time since August 28, 1997, the Registrant has granted
stock options to purchase shares of its common stock to various employees and
consultants pursuant to its 1997 Equity Incentive Plan. With respect to all
grants of options, exemption from registration was unnecessary in that the
transactions did not involve a "sale" of securities as that term is used in
Section 2(a)(3) of the Securities Act.

(g) As of December 31, 1999, the Registrant had issued and sold, in the
aggregate, 62,949 shares of its common stock for per share exercise prices
ranging from $0.58 to $2.02 to employees and consultants pursuant to their
exercise of stock options granted under the Registrant's 1994 Employee
Incentive and Non-Qualified Stock Option Plan. The Registrant relied on the
exemption provided by Rule 701 under the Securities Act.

(h) As of December 31, 1999, the Registrant had issued and sold, in the
aggregate, 702,386 shares of its common stock for per share exercise prices
ranging from $0.04 to $1.73 to employees and consultants pursuant to their
exercise of stock options granted under the Registrant's 1997 Equity Incentive
Plan. The Registrant relied on the exemption provided by Rule 701 under the
Securities Act.

The common stock amounts and per share exercise prices in the descriptions
above reflect the 1-for-2.8806 reverse stock split of the Registrant's common
stock which will take place prior to effectiveness of this offering. The
recipients of the above-described securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates issued in
such transactions. All recipients had adequate access, through employment or
other relationships, to information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriter's Agreement.

3.1** Registrant's Certificate of Incorporation, as amended, as currently in
effect.

3.2** Registrant's Bylaws, as amended, as currently in effect.

3.3** Form of Amended and Restated Certificate of Incorporation, to be filed
prior to the Closing.

3.4** Form of Registrant's Amended and Restated Certificate of
Incorporation, to be effective upon the closing of this offering.

3.5** Form of Registrant's Amended and Restated Bylaws, to be effective upon
the closing of this offering.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
4.1 Form of Common Stock Certificate of Registrant.

5.1* Opinion of Cooley Godward LLP.

10.1** Form of Indemnity Agreement entered into between the Company and its
directors and executive officers.

10.2** 1994 Employee Incentive and Non-Qualified Stock Option Plan, as
amended.

10.3** Form of Stock Option Agreement under the 1994 Employee Incentive and
Non-Qualified Stock Option Plan.

10.4** 1997 Equity Incentive Plan.

10.5** Form of Stock Option Grant Notice and Stock Option Agreement under the
1997 Equity Incentive Plan.

10.6** 1999 Non-Employee Directors' Stock Option Plan.

10.7** Form of Stock Option Grant Notice and Related Stock Option Agreement
under the 1999 Non-Employee Directors' Stock Option Plan.

10.8** 1999 Employee Stock Purchase Plan.

10.9** Amended and Restated Stockholders' Agreement by and among the Company
and the Stockholders identified therein, dated January 25, 1999.+

10.10** Form of Warrant Agreement to purchase Series A Preferred Stock (with
schedule of holders attached).

10.11** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).

10.12** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).

10.13** Multi-Tenant Office R&D Building Lease by and between the Company and
Sycamore/San Diego Investors, dated September 24, 1996.

10.14** Master Lease Agreement by and between the Transamerica Business Credit
Corporation and the Company, dated April 4, 1997.

10.15** License Agreement by and between the Company and The Dow Chemical
Company, dated July 20, 1997 and July 22, 1997.+

10.16** Collaborative Research Agreement by and between the Company and The
Dow Chemical Company, dated July 20, 1999 and July 22, 1999.+

10.17** License Agreement by and between the Company and Finfeeds
International Limited, dated December 1, 1998.+

10.18** Collaboration Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as
amended.+

10.19** Stock Purchase Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999.+

10.20** Collaboration Agreement by and between the Company and Rhone-Poulenc
Animal Nutrition S.A., dated June 28, 1999.+

10.21** License Agreement by and between the Company and Invitrogen
Corporation, dated March 29, 1999.+

10.22** License Agreement by and between the Company and Mycogen Corporation,
dated December 1997, as amended on March 6, 1998 and December 19,
1997.+

10.23** Patent Cross-License Agreement by and between the Company and Terragen
Discovery Inc., dated November 18, 1999.+
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ---------------------------------------------------------------------
<C> <S>
10.24** Joint Venture Agreement by and between the Company and Novartis Seeds
AG, dated December 1, 1999.+

10.25** Research Lease by and between the Company One Cell Systems, Inc.,
dated February 16, 1999.+

10.26** Research and Development Agreement by and between the Company and
Novartis Enzymes, Inc., dated December 1, 1999.+

10.27** Employment Offer Letter to Patrick Simms, dated February 3, 1997.

10.28** Employment Offer Letter to Jay Short, dated August 30, 1994.

10.29** Employment Offer Letter to Karin Eastham, dated April 2, 1999.

10.30** Employment Offer Letter to William H. Baum, dated July 31, 1997.

10.31** Separation Agreement by and between the Company and Terrance J.
Bruggeman, effective as of April 12, 1999.

10.32** Separation Agreement by and between the Company and Kathleen H. Van
Sleen, effective as of May 10, 1999.

10.33** Letter Agreement with Jay M. Short, Ph.D., dated June 25, 1998.

16.1* Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission, dated January , 2000.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.

24.1** Power of Attorney. Reference is made to pages II-7 and II-8.

27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.

** Previously filed as an exhibit to this Registration Statement.

+ Confidential Treatment will be requested with respect to portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.

(b) Schedules

All schedules are omitted because they are not required, are not applicable
or the information is included in the financial statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

II-5
<PAGE>

The undersigned Registrant hereby undertakes:

(1) That, for purposes of determining any liability under the Act, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(2) That, for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.

(3) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

II-6
<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of San Diego, County of San Diego, State of
California, on the 20th day of January, 2000.

By:/s/ Karin Eastham
-----------------------------------
Karin Eastham
Senior Vice President, Finance and
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jay M. Short* President, Chief Executive January 20, 2000
_________________________________ Officer, Chief Technology
Jay M. Short, Ph.D. Officer and Director
(Principal Executive
Officer)

/s/ Karin Eastham Senior Vice President, January 20, 2000
____________________________________ Finance and Chief Financial
Karin Eastham Officer (Principal Financial
Officer)
/s/ James H. Cavanaugh* Director January 20, 2000
____________________________________
James H. Cavanaugh, Ph.D.

/s/ Daniel T. Carroll* Director January 20, 2000
____________________________________
Daniel T. Carroll
/s/ Patricia M. Cloherty* Director January 20, 2000
____________________________________
Patricia M. Cloherty
/s/ Donald D. Johnston* Director January 20, 2000
____________________________________
Donald D. Johnston
/s/ Mark Leschly* Director January 20, 2000
____________________________________
Mark Leschly
/s/ Melvin I. Simon* Director January 20, 2000
____________________________________
Melvin I. Simon, Ph.D.
/s/ Peter Johnson* Director January 20, 2000
____________________________________
Peter Johnson
*By: /s/ Karin Eastham
____________________________________
Karin Eastham
Attorney-in-Fact and Agent
</TABLE>

II-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriter's Agreement.

3.1** Registrant's Certificate of Incorporation, as amended, as currently in
effect.

3.2** Registrant's Bylaws, as amended, as currently in effect.

3.3** Form of Amended and Restated Certificate of Incorporation, to be filed
prior to the Closing.

3.4** Form of Registrant's Amended and Restated Certificate of
Incorporation, to be effective upon the closing of this offering.

3.5** Form of Registrant's Amended and Restated Bylaws, to be effective upon
the closing of this offering.

4.1 Form of Common Stock Certificate of Registrant.

5.1* Opinion of Cooley Godward LLP.

10.1** Form of Indemnity Agreement entered into between the Company and its
directors and executive officers.

10.2** 1994 Employee Incentive and Non-Qualified Stock Option Plan, as
amended.

10.3** Form of Stock Option Agreement under the 1994 Employee Incentive and
Non-Qualified Stock Option Plan.

10.4** 1997 Equity Incentive Plan.

10.5** Form of Stock Option Grant Notice and Stock Option Agreement under the
1997 Equity Incentive Plan.

10.6** 1999 Non-Employee Directors' Stock Option Plan.

10.7** Form of Stock Option Grant Notice and Related Stock Option Agreement
under the 1999 Non-Employee Directors' Stock Option Plan.

10.8** 1999 Employee Stock Purchase Plan.

10.9** Amended and Restated Stockholders' Agreement by and among the Company
and the Stockholders identified therein, dated January 25, 1999.+

10.10** Form of Warrant Agreement to purchase Series A Preferred Stock (with
schedule of holders attached).

10.11** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).

10.12** Form of Warrant Agreement to purchase Common Stock (with schedule of
holders attached).

10.13** Multi-Tenant Office R&D Building Lease by and between the Company and
Sycamore/San Diego Investors, dated September 24, 1996.

10.14** Master Lease Agreement by and between the Transamerica Business Credit
Corporation and the Company, dated April 4, 1997.

10.15** License Agreement between the Company and The Dow Chemical Company,
dated July 20, 1997 and July 22, 1997.+

10.16** Collaborative Research Agreement by and between the Company and The
Dow Chemical Company, dated July 20, 1999 and July 22, 1999.+

10.17** License Agreement by and between the Company and Finfeeds
International Limited, dated December 1, 1998.+

10.18** Collaboration Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999, as
amended.+

10.19** Stock Purchase Agreement by and between the Company and Novartis
Agribusiness Biotechnology Research, Inc., dated January 25, 1999.+
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
NUMBER
EXHIBIT DESCRIPTION OF DOCUMENT
------- ----------------------------------------------------------------------

<C> <S>
10.20** Collaboration Agreement by and between the Company and Rhone-Poulenc
Animal Nutrition S.A., dated June 28, 1999.+

10.21** License Agreement by and between the Company and Invitrogen
Corporation, dated March 29, 1999.+

10.22** License Agreement by and between the Company and Mycogen Corporation,
dated December 1997, as amended on March 6, 1998 and December 19,
1997.+

10.23** Patent Cross-License Agreement by and between the Company and Terragen
Discovery Inc., dated November 18, 1999.+

10.24** Joint Venture Agreement by and between the Company and Novartis Seeds
AG, dated December 1, 1999.+

10.25** Research Lease by and between the Company One Cell Systems, Inc.,
dated February 16, 1999.+

10.26** Research and Development Agreement by and between the Company and
Novartis Enzymes, Inc., dated December 1, 1999.+

10.27** Employment Offer Letter to Patrick Simms, dated February 3, 1997.

10.28** Employment Offer Letter to Jay Short, dated August 30, 1994.

10.29** Employment Offer Letter to Karin Eastham, dated April 2, 1999.

10.30** Employment Offer Letter to William H. Baum, dated July 31, 1997.

10.31** Separation Agreement by and between the Company and Terrance J.
Bruggeman, effective as of April 12, 1999.

10.32** Separation Agreement by and between the Company and Kathleen H. Van
Sleen, effective as of
May 10, 1999.

10.33** Letter Agreement with Jay M. Short, Ph.D., dated June 25, 1998.

16.1* Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission, dated January , 2000.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.

24.1** Power of Attorney. Reference is made to pages II-7 and II-8.

27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.

** Previously filed as an exhibit to this Registration Statement.

+ Confidential Treatment will be requested with respect to portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.

<PAGE>

EXHIBIT 1.1

____________ Shares of Common Stock

Diversa Corporation

UNDERWRITING AGREEMENT
----------------------

__________, 2000

BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
HAMBRECHT & QUIST LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167

Ladies and Gentlemen:

Diversa Corporation, a corporation organized and existing under the laws of
Delaware (the "Company"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the several underwriters named in Schedule I hereto
(the "Underwriters") an aggregate of _________ shares (the "Firm Shares") of its
common stock, par value $0.001 per share (the "Common Stock"), and, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional ________ shares
(the "Additional Shares") of Common Stock. The Firm Shares and any Additional
Shares purchased by the Underwriters are referred to herein as the "Shares." The
Shares are more fully described in the Registration Statement referred to below.

1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriters that:

(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") in accordance with the provisions of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations of the Commission
thereunder (the "Regulations") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-1 (No. 333-92853), for the
registration of the Shares under the Act. All of the Shares have been duly
registered under the Act pursuant to the initial registration statement, or if
an abbreviated registration statement has been, or is proposed to be, filed
pursuant to Rule 462(b) of the Regulations (the "Rule 462 Registration
Statement"), all of the Shares have been or will be, on the date of this
Agreement, duly registered under the Act pursuant to the initial registration
statement and the Rule 462 Registration Statement. Such registration statement,
including the prospectus, financial statements and schedules, exhibits and all
other documents
<PAGE>

filed as a part thereof, as amended at the time of effectiveness of the
registration statement, including any information deemed to be a part thereof as
of the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434
of the Regulations, is herein called the "Registration Statement" and the
prospectus, in the form first filed with the Commission pursuant to Rule 424(b)
of the Regulations or filed as part of the Registration Statement at the time of
effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called
the "Prospectus". If the Company has filed or proposes to file a Rule 462
Registration Statement, then any reference herein to the term "Registration
Statement" shall include such Rule 462 Registration Statement. The term
"preliminary prospectus" as used herein means a preliminary prospectus as
described in Rule 430 of the Regulations. Neither the Commission nor the Blue
Sky or securities authority of any jurisdiction has issued a stop order
suspending the effectiveness of the Registration Statement, preventing or
suspending the use of any preliminary prospectus, the Prospectus, the
Registration Statement or any amendment or supplement thereto, refusing to
permit the effectiveness of the Registration Statement or suspending the
registration or qualification of the Shares, nor, to the Company's knowledge,
has any of such authorities instituted or threatened to institute any
proceedings with respect to a stop order.

(b) At the time of the effectiveness of the Registration Statement,
and Rule 462(b) Registration Statement or the effectiveness of any post-
effective amendment to the Registration Statement, when the Prospectus is first
filed with the Commission pursuant to Rule 424(b) or Rule 434 of the
Regulations, when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing Date, if any
(as hereinafter respectively defined), the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto (including any
prospectus wrapper) complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and does not or will not
contain an untrue statement of a material fact and does not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the Prospectus, in light of the circumstances
under which they were made, not misleading, and the Prospectus, any preliminary
prospectus and any supplement thereto or prospectus wrapper prepared in
connection therewith, at their respective times of issuance and at the Closing
Date, complied and will comply in all material respects with any applicable laws
or regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of the Directed Shares (as
hereinafter defined). When any related preliminary prospectus was first filed
with the Commission (whether filed as part of the registration statement for the
registration of the Shares or any amendment thereto or pursuant to Rule 424(a)
of the Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such preliminary prospectus and any amendments
thereof and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. No representation and warranty is made in this subsection (b),
however, with respect to any information contained in or omitted from the
Registration Statement or the Prospectus or any related preliminary prospectus
or any

2
<PAGE>

amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in connection with
the preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.

(c) Ernst & Young, LLP, who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.

(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company ("Material Adverse Change"),
whether or not arising from transactions in the ordinary course of business, and
since the date of the latest balance sheet presented in the Registration
Statement and the Prospectus, the Company has not incurred or undertaken any
liabilities or obligations, direct or contingent, which are material to the
Company, except for liabilities or obligations which are reflected in the
Registration Statement and the Prospectus.

(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company, and this Agreement has been duly and
validly executed and delivered by the Company and is enforceable against the
Company in accordance with its terms, except as rights to indemnity may be
limited by federal or state securities laws relating thereto and except as
enforcement (i) may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights and
remedies generally and (ii) is subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or law).

(f) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company
pursuant to, any agreement, instrument, franchise, license or permit to which
the Company is a party or by which it or any of its properties or assets may be
bound, which breach, default, lien, charge or encumbrance could result in a
Material Adverse Effect (as that term is hereinafter defined) or (ii) violate or
conflict with any provision of the certificate of incorporation or the by-laws
of the Company or any judgment, decree, order, statute, rule or regulation of
any court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its properties or assets. No consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or any of its properties or assets is
required for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby, including the issuance,
sale and delivery of the Shares to

3
<PAGE>

be issued, sold and delivered by the Company hereunder, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits as may be
required under state securities or Blue Sky laws or foreign equivalents of such
regulations or statutes, where applicable, in connection with the purchase and
distribution of the Shares by the Underwriters.

(g) Upon the sale of the Firm Shares on the Closing Date, the only
shares of capital stock of the Company issued and outstanding (other than the
Shares) will be _________________ shares of Common Stock. All of the outstanding
shares of capital stock of the Company are duly and validly authorized and
issued, fully paid and nonassessable, and none of such shares was issued in
violation of or is now subject to any preemptive or similar rights. The Shares
have been duly authorized for issuance and sale to the Underwriters pursuant to
this Agreement and, when issued, delivered and sold in accordance with this
Agreement, will be duly and validly issued and outstanding, fully paid and
nonassessable and will not have been issued in violation of or be subject to any
preemptive or similar rights. The Company had, at December 31, 1999, an
authorized and outstanding capitalization as set forth in the Registration
Statement and the Prospectus. The authorized capital stock of the Company,
including the Firm Shares and the Additional Shares, conforms to the description
thereof contained in the Registration Statement and the Prospectus. Except as
disclosed in the Registration Statement and the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of, and
no commitments, obligations, plans or arrangements to issue, any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company. The outstanding stock options relating to the
Common Stock have been duly authorized and validly issued and conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.

(h) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation. The Company is duly qualified to transact business and is in good
standing as a foreign corporation in each jurisdiction in which the nature of
its properties or conduct of its business makes such qualification necessary,
except where the failure to so qualify would not have a material adverse effect
(considered individually or when aggregated with other such instances) on the
business, prospects, properties, operations, condition (financial or other) or
results of operations of the Company (a "Material Adverse Effect"). The Company
has all requisite power and authority and, except as described in the
Registration Statement and Prospectus, all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses and permits
(collectively, "Governmental Licenses") of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties and
conduct its business as now being conducted and as described in the Registration
Statement and the Prospectus and each such Governmental License is valid and in
full force and effect. No such Governmental License contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus, and the Company has not received any notice of proceedings
relating to the revocation of any such Governmental Licenses. The Company is in
compliance with all applicable laws, orders, rules, regulations, ordinances and
directives, except where the failure to be in compliance could not have a
Material Adverse Effect. The Company does not have any

4
<PAGE>

subsidiaries as defined in Rule 405 of the Regulations. The Company does not
presently own or control, directly or indirectly, any interest in any other
corporation, association or other business entity.

(i) The Company is not in violation of any provision of its
certificate of incorporation or of its by-laws or in breach of, or in default
under (nor has any event occurred that with notice, lapse of time, or both,
would constitute a breach of, or default under), except where such breach or
default would not have a Material Adverse Effect, any provision of any
agreement, instrument, franchise, license or permit to which the Company is a
party or by which any of its properties or assets may be bound or effected or
any judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over the
Company or any of its properties or assets.

(j) There is no litigation, arbitration, proceeding, investigation or
claim to which the Company is a party or to which any property or assets of the
Company is subject or which is pending or, to the knowledge of the Company,
threatened or contemplated against the Company which might result in any
Material Adverse Effect or any development involving a Material Adverse Effect
or which is required to be disclosed in the Registration Statement and the
Prospectus.

(k) Neither the Company nor, to the Company's knowledge after due
inquiry, any of its directors or officers has taken or will take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares or a violation of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").

(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the financial position of the Company as of the dates indicated
and the results of its operations for the periods specified; said financial
statements have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and the supporting schedules included
in the Registration Statement present fairly the information required to be
stated therein; and the selected financial data and the summary financial
information included in the Registration Statement and the Prospectus present
fairly the information shown therein and have been compiled on a basis
consistent with that of the financial statements included in the Registration
Statement and the Prospectus.

(m) Except as described in the Registration Statement and the
Prospectus and except for rights that have been effectively waived in writing
(complete and accurate copies of which have been provided to the Underwriters
prior to the date of this Agreement) which waivers are in full force and effect,
no holder of securities of the Company has any rights to cause the Company to
issue to it, or register pursuant to the Act, any securities of the Company
because of the filing of the Registration Statement or otherwise, in connection

5
<PAGE>

with the sale of the Shares contemplated hereby or otherwise. No holder of
securities of the Company has preemptive rights or other rights to purchase any
of the Shares.

(n) The Company is not, and upon consummation of the transactions
contemplated hereby and the application of the proceeds therefrom as described
in the Prospectus will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.

(o) The Common Stock of the Company, including the Shares, have been
approved for quotation on the National Association of Securities Dealers
Automated Quotation National Market System.

(p) The Company owns or possesses valid and enforceable licenses or
other rights to use all inventions, patents, patent applications, trademarks,
service marks, trade names, copyrights, technology, software, databases,
Internet domain names, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures) proprietary techniques (including processes and substances) and
other intellectual property rights used in, or necessary to conduct, the
business now conducted by the Company or presently contemplated to be conducted
as described in the Registration Statement and the Prospectus ("Intellectual
Property"), free and clear of all liens, claims and encumbrances, except where
the failure to own or possess such rights would not reasonably be expected to
have a Material Adverse Effect; other than as described in the Registration
Statement and the Prospectus: (i) there are no third parties who have any rights
in the Intellectual Property that could preclude the Company from conducting its
business as currently conducted or as presently contemplated to be conducted as
described in the Registration Statement and the Prospectus; (ii) there are no
pending or threatened actions, suits, proceedings, investigations or claims by
others challenging the rights of the Company or (if the Intellectual Property is
licensed) the licensor thereof in any Intellectual Property owned or licensed to
the Company; (iii) neither the Company nor (if the Intellectual Property is
licensed) the licensor thereof has infringed, or received any notice of
infringement of or conflict with, any rights of others with respect to the
Intellectual Property; and (iv) there is no dispute between it and any licensor
with respect to any Intellectual Property. True and correct copies of all
licenses and other agreements between the Company and any third party relating
to the Intellectual Property, and all amendments and supplements thereto, have
been provided to the Underwriters.

(q) The Company has timely filed all federal, state, local and foreign
income and franchise tax returns and reports required to be filed and has paid
all taxes shown thereon and all assessments received by it to the extent that
such taxes have become due and are not being contested in good faith, and there
is no tax deficiency that has been or, to the Company's knowledge, might be
asserted or threatened against the Company that might have a Material Adverse
Effect; and all tax liabilities are adequately provided for on the books of the
Company.

(r) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts (i) generally deemed
adequate for its

6
<PAGE>

business and consistent with insurance coverage maintained by similar companies
in similar businesses and (ii) required under any of the Company's agreements,
licenses or other contracts, all of which insurance is in full force and effect;
the Company has no reason to believe that it will not be able to renew its
existing insurance as and when such coverage expires or to obtain similar
insurance with similar insurers adequate and customary for its business and
sufficient to satisfy any requirements of its contracts at a cost that would not
have a Material Adverse Effect.

(s) The Company is in compliance with all applicable federal, state,
local or foreign laws, regulations, rules, ordinances, orders or directives
relating to pollution or (in connection therewith) protection of human health
and safety, the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"); to the Company's knowledge, no material expenditures are
or will be required to comply with the Environmental Laws, and the Company holds
all permits, licenses and approvals required to conduct its business thereunder
and is in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance or failure to comply with the terms
and conditions of, or failure to receive, such permits, licenses or approvals
will not in the aggregate have a Material Adverse Effect; to the Company's
knowledge, all properties and assets leased or owned, including, without
limitation, all structures, contents, soil, subsoil and groundwater, do not
contain Hazardous Materials; and, to the Company's knowledge, the Company has no
liability or obligation, whether to any governmental authority or to any other
person or entity, for damages, claims, penalties, forfeitures or otherwise, as a
consequence of the generation, transportation or disposal of any Hazardous
Materials or otherwise under the Environmental Laws.

(t) As of the date of this Agreement and except as described in the
Registration Statement and the Prospectus, the Company is not required to file
or obtain any registration, application, license, request for exemption, permit
or other regulatory authorization with the U.S. Food and Drug Administration
(the "FDA") or any other federal, state, local or foreign regulatory body in
order to conduct its business as described in the Registration Statement and
Prospectus.

(u) The Company has good and marketable title to all properties (real
and personal) owned by the Company, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any kind
except such as do not, singly or in the aggregate, materially affect the value
of such property and do not materially interfere with the use made and proposed
to be made of such property by the Company; and all properties held under lease
or license by the Company are held under valid, existing and enforceable leases
or licenses.

(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with

7
<PAGE>

management's general and specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with management's
general or specific authorizations, and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.

(w) No labor dispute with the employees of the Company is pending, or,
to the Company's knowledge, is imminent; and the Company is not aware of any
existing, threatened or imminent labor disturbance by the employees of any of
its principal suppliers, strategic partners, manufacturers or contractors that
could result in any Material Adverse Effect.

(x) There are no contracts or other documents which are required to be
described in the Registration Statement and the Prospectus or filed as exhibits
to the Registration Statement by the Act or by the Regulations which have not
been described in the Registration Statement and the Prospectus or filed as
exhibits to the Registration Statement.

(y) Each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Securities Act of 1974, as amended ("ERISA"),
that is maintained, administered or contributed to by the Company for employees
or former employees of the Company has been maintained in compliance with its
respective terms and the requirements of any applicable statutes, orders, rules
and regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"). No prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with
respect to any such plan that could result in liability to the Company,
excluding transactions effected pursuant to a statutory or administrative
exemption. For each such plan that is subject to the funding rules of Section
412 of the Code or Section 302 of ERISA, no "accumulated funding deficiency," as
defined in Section 412 of the Code, has been incurred, whether or not waived,
and the fair market value of the assets of each such plan (excluding for these
purposes accrued but unpaid contributions) exceeds the present value of all
benefits accrued under such plan determined using reasonable actuarial
assumptions.

(z) The Company has reviewed its operations and those of any third
parties with which the Company has a material relationship to evaluate the
extent to which the business or operations of the Company will be affected by
the Year 2000 Problem (as defined herein). As a result of such review, the
Company has no reason to believe, and does not believe, that the Year 2000
Problem will have a Material Adverse Effect or result in any material loss or
interference with the Company's business or operations. The "Year 2000 Problem"
as used herein means any significant risk that computer hardware or software
used in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000.

8
<PAGE>

(aa) The statistical and market-related data included in the
Registration Statement and the Prospectus are derived from sources which the
Company reasonably and in good faith believes to be accurate, reasonable and
reliable, and such data agree with the sources from which they were derived.

(bb) No relationship, direct or indirect, exists between or among
the Company or any of its affiliates on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Registration Statement and the
Prospectus that is not so described.

2. Purchase, Sale and Delivery of the Shares.

(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of [$_____], the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.

(b) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the office of Cooley Godward LLP, 4365
Executive Drive, Suite 1100 San Diego, CA 92121-2128, or at such other place as
shall be agreed upon by you and the Company, at 7:00 A.M.(San Diego time) on the
third or fourth business day (as permitted under Rule 15c6-1 under the Exchange
Act) (unless postponed in accordance with the provisions of Section 9 hereof)
following the date of the effectiveness of the Registration Statement (or, if
the Company has elected to rely upon Rule 430A of the Regulations, the third or
fourth business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the Shares), or
such other time not later than ten business days after such date as shall be
agreed upon by you and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). Payment shall be made to the Company by
wire transfer of immediately available funds, against delivery to you at the
offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, CA
92121-2128, or at such other place as shall be agreed upon by you and the
Company, for the respective accounts of the Underwriters of certificates for the
Firm Shares to be purchased by them. Certificates for the Firm Shares shall be
registered in such name or names and in such authorized denominations as you may
request in writing at least two full business days prior to the Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Closing Date.

(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to [_______] Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part, on or before the thirtieth day

9
<PAGE>

following the date of the Prospectus, by written notice by you to the Company.
Such notice shall set forth the aggregate number of Additional Shares as to
which the option is being exercised and the date and time, as reasonably
determined by you, when the Additional Shares are to be delivered (such date and
time being herein sometimes referred to as the "Additional Closing Date");
provided, however, that the Additional Closing Date shall not be earlier than
the Closing Date or earlier than the second full business day after the date on
which the option shall have been exercised nor later than the eighth full
business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date.

(d) The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same ratio to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to the [__________] Firm
Shares being purchased from the Company, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.

(e) Payment of the purchase price for the Additional Shares shall be
made by wire transfer of immediately available funds at the offices of Cooley
Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, CA 92121-2128, or at
such other place as shall be agreed upon by you and the Company, upon delivery
of the certificates for the Additional Shares to you for the respective accounts
of the Underwriters.

3. Offering.
--------

(a) Upon your authorization of the release of the Firm Shares, the
Underwriters propose to offer the Shares for sale to the public upon the terms
set forth in the Prospectus.

(b) The Company and the Underwriters hereby agree that up to
[_________] percent ([__]%) of the Firm Shares to be purchased by the
Underwriters (the "Directed Shares") shall be reserved for sale by the
Underwriters to certain eligible employees of, and certain persons designated
by, the Company (the "Directed Shares Purchasers") as part of the distribution
of the Shares by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. and all other applicable laws, rules and regulations,
provided, however, that under no circumstances will Bear Stearns & Co. Inc. or
- -------- -------
any other Underwriter be liable to the Company or to any of the Directed Shares
Purchasers for any action taken or omitted in good faith in connection with
transactions effected with regard to the Directed Shares Purchasers. To the
extent that such Directed Shares are not orally confirmed for purchase by such
persons by the

10
<PAGE>

end of the first day after the date of this Agreement, such Directed Shares will
be offered to the public as part of the offering contemplated hereby.

4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:

(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.

The Company will notify you immediately (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission and
(vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for that purpose. If the
Commission shall propose or enter a stop order at any time, the Company will
make every reasonable effort to prevent the issuance of any such stop order and,
if issued, to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement, make any filing under
Rule 462(b) of the Regulations or file any amendment of or supplement to the
Prospectus (including the prospectus required to be filed pursuant to Rule
424(b) or Rule 434) that differs from the prospectus on file at the time of the
effectiveness of the Registration Statement before or after the effective date
of the Registration Statement to which you shall reasonably object in writing
after being timely furnished in advance a copy thereof.

(b) The Company will comply with the Act and the Regulations so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If at any time when a prospectus relating to the
Shares is required to be delivered under the Act any event shall have occurred
as a result of which the Prospectus as then amended or supplemented would, in
the judgment of the Underwriters or the Company, include an untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or

11
<PAGE>

supplement (in form and substance reasonably satisfactory to you) which will
correct such statement or omission and will use its best efforts to have any
amendment to the Registration Statement declared effective as soon as possible.

(c) The Company will promptly deliver to you three signed copies of
the Registration Statement, as initially filed with the Commission, and all
amendments thereto (including exhibits) and will maintain in the Company's files
manually signed copies of such documents for at least five years from the date
of filing. The Company will promptly deliver to each of the Underwriters such
number of copies of any preliminary prospectus, the Prospectus, the Registration
Statement, and all amendments of and supplements to such documents, if any, as
you may reasonably request, and the Company hereby consents to the use of such
copies for purposes permitted by the Act.

(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process. The Company will promptly advise you of the
receipt by the Company of any notification with respect to suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and will use every reasonable
effort to obtain the withdrawal of any order of suspension as soon as possible.

(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.

(f) During the period of 180 days from the date of the Prospectus, (i)
the Company will not, without the prior written consent of Bear, Stearns & Co.
Inc., directly or indirectly, issue, sell, offer or agree to sell, grant any
option warrant or other right to purchase or otherwise sell or dispose of (or
announce any offer of sale, contract of sale, sale, grant of any option, warrant
or other right to purchase or other sale or disposition of), pledge, make any
short sale or maintain any short position, establish or maintain a "put
equivalent position" (within the meaning of Rule 16-a-1(h) under the Exchange
Act), enter into any swap, derivative transaction or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Common Stock (whether any such transaction is to be settled by
delivery of Common Stock, other securities, cash or other consideration) or
otherwise dispose of, any Common Stock (or any securities convertible into,
exercisable for or exchangeable for Common Stock) or interest therein of the
Company, and (ii) the Company will obtain the undertaking of each of its
officers and directors and all of its stockholders having beneficial ownership
at least 25,000 shares of the outstanding Common Stock of the Company, as of the

12
<PAGE>

time of the closing of the sale of the Firm Shares hereunder on the Closing
Date, not to engage in any of the aforementioned transactions on their own
behalf, other than the Company's sale of Shares hereunder.

(g) During a period of three years from the date of the Prospectus,
the Company will furnish to you and, upon request, to each of the other
Underwriters (i) copies of any reports or other communications that the Company
shall send to its stockholders or shall from time to time publish or publicly
disseminate, (ii) copies of all reports, financial statements and proxy or
information statements filed by the Company with the Commission or any national
securities exchange or automated quotation system, and (iii) such other
information as you may reasonably request regarding the Company, subject to the
provisions of any written agreement that, in the opinion of outside counsel to
the Company, prohibit the Company from furnishing such information under any
circumstances including, without limitation, an agreement by you to be subject
to the provisions of such written agreement.

(h) The Company will apply the proceeds from the sale of the Shares as
set forth under "Use of Proceeds" in the Prospectus.

(i) The Company will use its best efforts to cause the Shares to be
included in the National Association of Securities Dealers Automated Quotation
National Market System and to maintain such quotation so long as any of the
Shares are outstanding.

(j) The Company will file with the Commission in its periodic reports
pursuant to Section 13 or 15 of the Exchange Act such information as may be
required pursuant to Rule 463 of the Regulations.

(k) The Company, during the period when the Prospectus is required to
be delivered under the Act or the Exchange Act, will file all documents required
to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange
Act within the time periods required by the Exchange Act and the rules and
regulations thereunder.

(l) The Company hereby agrees that it will ensure that the Directed
Shares are restricted as required by the National Association of Securities
Dealers, Inc. rules from sale, transfer, assignment, pledge or hypothecation for
a period of three months following the date of this Agreement. The Underwriters
will notify the Company as to which persons will need to be so restricted. At
the request of the Underwriters, the Company will direct the transfer agent to
place a stop transfer restriction upon such securities for such a period of
time. Should the Company release, or seek to release, from such restrictions any
of the Directed Shares, the Company agrees to reimburse the Underwriters for any
reasonable expenses (including without limitation legal expenses) they incur in
connection with such release.

(m) The Company will use its reasonable best efforts to do and perform
all things required or necessary to be done and performed under this Agreement
by the Company prior to or after the Closing Date or any Additional Closing
Date, as the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.

13
<PAGE>

5. Payment of Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement, the Master Agreement Among Underwriters and the Master Selling
Agreement) and all other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as hereinabove
stated), (ii) the issuance, transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
qualification of the Shares under state or foreign securities or Blue Sky laws
or regulations, including the costs of printing and mailing a preliminary and
final "Blue Sky Survey" and the fees of counsel for the Underwriters and such
counsel's disbursements in relation thereto, (iv) quotation of the Shares on the
National Association of Securities Dealers Automated Quotation National Market
System, (v) filing fees of the Commission and the National Association of
Securities Dealers, Inc., (vi) the cost of printing certificates representing
the Shares (vii) the cost and charges of any transfer agent or registrar for the
Shares and (viii) all costs and expenses of the Underwriters, including the fees
and disbursements of counsel for the Underwriters, in connection with matters
related to the Directed Shares which are designated by the Company for sale to
certain employees of and certain persons designated by the Company.

6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Brobeck, Phleger & Harrison
LLP ("Underwriters' Counsel") pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and to
the following additional conditions:

(a) The Registration Statement, including any Rule 462(b) Registration
Statement, shall have become effective and all necessary approvals of the
National Association of Securities Dealers Automated Quotation National Market
System shall have been received, not later than, if pricing pursuant to Rule
430A, 5:30 P.M., New York time, on the date of this Agreement, if pricing
pursuant to a pricing amendment, 12:00 Noon, New York time, on the date an
amendment to the Registration Statement containing the public offering price has
been filed with the Commission, or at such later time and date as shall have
been consented to in writing by you; if the Company shall have elected to rely
upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall have been
filed with the Commission in a timely fashion in accordance with Section 4(a)
hereof; and, at or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment

14
<PAGE>

thereof shall have been issued and no proceedings therefor shall have been
initiated or threatened by the Commission.

(b) At each Closing Date you shall have received the opinion of Cooley
Godward LLP, counsel for the Company, dated the date of such Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:

(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation. The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a material adverse
effect on the Company and its subsidiaries taken as a whole. The Company has all
requisite corporate authority to own, lease and license its respective
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus. As of the date hereof, the
Company does not have any subsidiaries as defined in Rule 405 of the
Regulations.

(ii) The Company has an authorized capital stock as set forth in
the Registration Statement and the Prospectus. All of the outstanding shares of
Common Stock are duly and validly authorized and issued, are fully paid and
nonassessable and were not issued in violation of or subject to any preemptive
rights. The Shares to be delivered on the Closing Date have been duly and
validly authorized and, when delivered by the Company in accordance with this
Agreement, will be duly and validly issued, fully paid and nonassessable and
will not have been issued in violation of or subject to any preemptive rights.
The Common Stock, the Firm Shares and the Additional Shares conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.

(iii) The Shares have been approved (upon issuance as
contemplated by the Underwriting Agreement) for quotation in the Nasdaq National
Market System.

(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.

(v) We do not know of any litigation or governmental or other
action, suit, proceeding or investigation before any court or before or by any
public, regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or business
of, the Company or any of its subsidiaries, which is of a character required to
be disclosed in the Registration Statement and the Prospectus which has not been
properly disclosed therein, or of any statute, regulation, contract or other
document that is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described or filed as required.

15
<PAGE>

(vi) The execution, delivery, and performance of this Agreement
and the consummation of the transactions contemplated hereby by the Company do
not and will not (A) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any of its subsidiaries pursuant to, any agreement, instrument,
franchise, license or permit known to such counsel to which the Company or any
of its subsidiaries is a party or by which any of such corporations or their
respective properties or assets may be bound or (B) contravene any provision of
applicable law or violate or conflict with any provision of the certificate of
incorporation or bylaws of the Company or any of its subsidiaries, or, to the
best knowledge of such counsel, any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental, or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance of this Agreement
or the consummation of the transactions contemplated hereby, except for (1) such
as may be required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters (as to which
such counsel need express no opinion) and (2) such as have been made or obtained
under the Act.

(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial statements
and schedules and other financial data derived therefrom, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations.

(viii) The Company has the corporate power and authority to enter
into the Underwriting Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder.

(ix) The information in the Prospectus under the caption
"Description of Capital Stock," to the extent that it constitutes matters of law
or legal conclusions, has been reviewed by us and is a fair summary of such
matters and conclusions; and the form of certificate evidencing the Common Stock
and filed as an exhibit to the Registration Statement complies with the laws of
the State of Delaware.

(x) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.

(xi) The Registration Statement is effective under the Act, and,
to the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no

16
<PAGE>

proceedings therefor have been initiated or threatened by the Commission and all
filings required by Rule 424(b) of the Regulations have been made.

In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents and the Prospectus and related
matters were discussed and, no facts have come to the attention of such counsel
which would lead such counsel to believe that either the Registration Statement
at the time it became effective (including the information deemed to be part of
the Registration Statement at the time of effectiveness pursuant to Rule 430A(b)
or Rule 434, if applicable), or any amendment thereof made prior to the Closing
Date as of the date of such amendment, contained an untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus as of its date (or any amendment thereof or supplement thereto made
prior to the Closing Date as of the date of such amendment or supplement) and as
of the Closing Date contained or contains an untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements and
schedules and other financial data derived therefrom).

In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel.
The opinion of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.

(c) At the Closing Date, you shall have received the opinion of
Sterne, Kessler, Goldstein & Fox, PLLC patent counsel for the Company, dated the
Closing Date addressed to the Underwriters and in the form and substance
satisfactory to the Underwriters' Counsel as attached hereto as Exhibit A.

(d) At the Closing Date, you shall have received the opinion of Gray
Cary Ware & Freidenrich, LLP, patent counsel for the Company, dated the Closing
Date addressed to the Underwriters and in the form and substance satisfactory to
the Underwriters' Counsel as attached hereto as Exhibit B.

17
<PAGE>

(e) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.

(f) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date to the effect that (i) the condition set forth in subsection (a) of
this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are true and correct, (iii) as of the Closing Date the
obligations of the Company to be performed hereunder on or prior thereto have
been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not sustained any loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any Material Adverse Change, or any
development involving a Material Adverse Effect, except in each case as
described in or contemplated by the Prospectus.

(g) At the time this Agreement is executed and at the Closing Date,
<PAGE>

the applicable accounting requirements of the Act and the applicable published
rules and regulations of the Commission thereunder or that such unaudited
financial statements are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement and the Prospectus;
(B) with respect to the period subsequent to September 30, 1999 there were, as
of the date of the most recent available monthly financial statements of the
Company, if any, and as of a specified date not more than five days prior to the
date of such letter (provided that the letter delivered on the Closing Date
shall use a "cut-off" date not earlier than the date hereof), any changes in the
capital stock or long-term indebtedness of the Company or any decrease in the
current assets or shareholders' equity of the Company, in each case as compared
with the amounts shown in the most recent balance sheet presented in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter; or (C) that during the period from
September 30,1999 to the date of the most recent available monthly financial
statements of the Company, if any, and to a specified date not more than five
days prior to the date of such letter (provided that the letter delivered on the
Closing Date shall use a "cut-off" date not earlier than the date hereof), there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in revenues under collaboration and strategic alliance agreements,
government grants and from product sales, or increase in net loss, except for
decreases or increases, as the case may be, which the Registration Statement and
the Prospectus disclose have occurred or may occur or which are set forth in
such letter; and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company set forth in the Registration Statement
and the Prospectus, which have been specified by you prior to the date of this
Agreement, to the extent that such amounts, numbers, percentages, and
information may be derived from the general accounting and financial records of
the Company or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by you set forth in such letter, and found them
to be in agreement.

(h) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.

(i) You shall have received from each person who is a director or
officer of the Company or stockholder beneficially owning at least 25,000 shares
of the outstanding Common Stock of the Company, as of the time of the closing of
the sale of the Firm Shares hereunder at the Closing Date, an agreement to the
effect that such person will not, without the prior written consent of Bear,
Stearns & Co. Inc. on behalf of the Underwriters, during the period commencing
on the date of the Prospectus and ending 180 days thereafter, (1) issue, sell,
offer or agree to sell, grant any option for the sale of, pledge, make any short
sale or maintain any short position, establish or maintain a "put equivalent
position" (within the meaning of Rule 16-a-1(h) under the Exchange Act), (2)
enter into any swap, derivative transaction or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock (whether any such transaction is to

19
<PAGE>

be settled by delivery of Common Stock, other securities, cash or other
consideration) or otherwise dispose of, any Common Stock (or any securities
convertible into, exercisable for or exchangeable for Common Stock) or interest
therein of the Company or (3) make any demand for, or exercise his, her or its
rights, if any, to require the Company to register its Common Stock and to
receive notice thereof

(j) At the Closing Date, the Shares shall have been quoted on the
National Association of Securities Dealers Automated Quotation National Market
System.

If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, facsimile, telex or telegraph, confirmed in writing.

7. Indemnification.

(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all
losses, liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement for the registration of the Shares, as originally filed,
or any filed amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any supplement thereto or amendment thereof, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; or (ii) (A) the violation of any applicable laws or regulations
of foreign jurisdictions where Directed Shares have been offered and (B) any
untrue statement or alleged untrue statement of a material fact included in the
supplement or prospectus wrapper material distributed in connection with the
reservation and sale of the Directed Shares to eligible employees and certain
persons designated by the Company or the omission or alleged omission therefrom
of a material fact necessary to make the statements therein, when considered in
conjunction with the Prospectus or preliminary prospectus, not misleading;
provided, however, that the Company will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in

20
<PAGE>

reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through you expressly for use
therein. This indemnity agreement will be in addition to any liability which the
Company may otherwise have including under this Agreement.

(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed, or any filed amendment thereof, or any
related preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount and commission applicable to the
Shares purchased by such Underwriter hereunder. This indemnity will be in
addition to any liability which any Underwriter may otherwise have including
under this Agreement. The Company acknowledges that the statements set forth in
the last paragraph of the cover page and in the third and twelfth paragraphs and
the list of Underwriters and the number of shares listed opposite their
respective names in the first paragraph under the caption "Underwriting" in the
Prospectus constitute the only information furnished in writing by or on behalf
of any Underwriter expressly for use in the registration statement for the
registration of the Shares, as originally filed, or in any filed amendment
thereof, any related preliminary prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.

(c) In connection with the offer and sale of the Directed Shares, the
Company agrees, promptly upon a request in writing, to indemnify and hold
harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by it as a result of (i) the failure of
the Directed Shares Purchasers to pay for and accept delivery of the Directed
Shares which, by the end of the day following the date of this Agreement, were
subject to a properly confirmed agreement to purchase such Directed Shares or
(ii) the refusal of any Directed Shares Purchasers that are also employees of
the Company to

21
<PAGE>

properly confirm their respective agreements to purchase the Directed Shares
that they had agreed to purchase by the end of the first day after the date of
this Agreement.

(d) Promptly after receipt by an indemnified party under subsection
(a), (b)or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.

8. Contribution. In order to provide for contribution in circumstances in
which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and the Underwriters from the offering of the Shares or,
if such allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the

22
<PAGE>

relative benefits referred to above but also the relative fault of the Company
and the Underwriters in connection with the statements or omissions which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Underwriters shall be deemed to be in the same proportion as
(x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission or any
violation of the nature referred to in Section 7(a)(ii). The Company and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount and commission applicable to the Shares purchased by
such Underwriter hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 8. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 8 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
withheld.

9. Default by an Underwriter.
-------------------------

(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or

23
<PAGE>

Additional Shares with respect to which such default relates do not (after
giving effect to arrangements, if any, made by you pursuant to subsection (b)
below) exceed in the aggregate 10% of the number of Firm Shares or Additional
Shares, the Firm Shares or Additional Shares to which the default relates shall
be purchased by the non-defaulting Underwriters in proportion to the respective
proportions which the numbers of Firm Shares set forth opposite their respective
names in Schedule I hereto bear to the aggregate number of Firm Shares set forth
opposite the names of the non-defaulting Underwriters.

(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within five calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Sections 5, 7(a) and 8 hereof) or the Underwriters, but nothing
in this Agreement shall relieve a defaulting Underwriter or Underwriters of its
or their liability, if any, to the other Underwriters and the Company for
damages occasioned by its or their default hereunder.

(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares.

10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.

24
<PAGE>

11. Effective Date of Agreement; Termination.
----------------------------------------

(a) This Agreement shall become effective upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the sixth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you by
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.

(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges or on NASDAQ shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required, on
the New York or American Stock Exchanges or on NASDAQ by the New York or
American Stock Exchanges or NASDAQ or by order of the Commission or any other
governmental authority having jurisdiction; or (C) if a banking moratorium has
been declared by a state or federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares or the
Additional Shares, as the case may be, shall have become effective; (D) (i) if
the United States becomes engaged in hostilities or there is an escalation of
hostilities involving the United States or there is a declaration of a national
emergency or war by the United States or (ii) if there shall have been such
change in political, financial or economic conditions if the effect of any such
event in (i) or (ii) in your judgment makes it impracticable or inadvisable to
proceed with the offering, sale and delivery of the Firm Shares or the
Additional Shares, as the case may be, on the terms contemplated by the
Prospectus.

(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, facsimile, telex, or telegraph, confirmed in writing by letter.

(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel) incurred
by the Underwriters in connection herewith.

25
<PAGE>

12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, sent by facsimile, telexed or telegraph
and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, NY 10167, Attention: Equity Syndicate, facsimile number
(212) 272-3485; if sent to the Company, shall be mailed, delivered, sent by
facsimile, telex or telegraph and confirmed in writing to the Company, 10665
Sorrento Valley Road, San Diego, California, 92121, Attention: Jay M. Short,
Ph.D., Chief Executive Officer, facsimile number (858) 626-3700.

13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Sections 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.

14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.

15. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.

16. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
[Signature Page Follows]

26
<PAGE>

If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.

Very truly yours,

DIVERSA CORPORATION

By
------------------------------
Name: Jay M. Short, Ph.D.
Title: Chief Executive Officer

Accepted as of the date first above written

BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
HAMBRECHT & QUIST LLC

By BEAR, STEARNS & CO. INC.

By
-------------------------------
Name: Steven R. Frank
Title: Senior Managing Director

On behalf of themselves and the other
Underwriters named in Schedule I hereto.

<PAGE>

SCHEDULE I

Name of Underwriter Number of Firm Shares to be Purchased
- ------------------- -------------------------------------

Total.....................................
========

<PAGE>

EXHIBIT A

Opinion of Sterne, Kessler, Goldstein & Fox, PLLC

[ADDRESS]

Re: Diversa Corporation, Inc. Registration Statement and Prospectus

Dear [__]:

We represent Diversa Corporation ("Diversa"), a company organized under the
laws of Delaware (the "Company"), in connection with certain patent matters
involving certain issued patents, and have advised the Company from time to time
with regard to certain matters of intellectual property. The representation of
the Company by Sterne, Kessler, Goldstein & Fox, PLLC (the "Firm") concerning
patent matters is not exclusive. This letter is, accordingly, limited as
indicated herein. Such patent matters concern the issued patents listed on Annex
A hereto and any applications upon which they rely (the "Patents"). This letter
therefore relates only to such matters to the extent that they are discussed in
the above-referenced Registration Statement and Prospectus.

In addition to the analysis of the Patents, the Firm has also conducted an
analysis and provided an oral report to the Company on United States Patents
5,824,485 and 5,783,431, assigned to Chromaxome Corporation and, on information
and belief, licensed to Diversa. The Firm has also been retained by Diversa
concurring prosecution and foreign opposition matters.

In addition, we have examined the Prospectus and Registration Statement:
This letter opines only on those portions of the Prospectus and Registration
statement as they relate to intellectual property in the material under the
captions [__] (the "IP Portions"), and.

This letter also does not relate to other Diversa intellectual property
matters, such as trade secrets and know how. To the extent that a statement
refers to the belief of the Company, it is based upon discussions with in-house
Company officials and on no other source. Any reference in the Registration
Statement or the Prospectus to payments of fees or other monetary amounts
contained in the sections referenced below are not within the scope of this
letter.

Subject to the foregoing, pursuant to your request, we are providing the
following with respect to the above Registration Statement and Prospectus,
Form S-1.

(1) The statements in the IP Portions to our knowledge after
investigation are true and correct statements regarding the
matters set forth therein;

(2) To our knowledge after investigation, there are no presently pending
adverse legal proceedings related to the Patents, and to our
knowledge after investigation, no such proceedings are threatened or
contemplated against Diversa;

<PAGE>

(3) To our knowledge after investigation, there are no documents or
related litigation of a character required to be filed as an exhibit
to the Registration Statement or required to be described in the
Registration Statement or the Prospectus relating to the Patents
which are not filed or described;

(4) On December 15, 1999, we have provided competent written opinions
regarding the Patents, after investigation and examination of
relevant prior art. In such opinions we concluded that the Company
does not infringe, either literally or under the doctrine of
equivalents, any valid claim of the Patents. The Company shall be
able to reasonably rely on such written opinion to avoid any claim of
willful infringement of the Patents under applicable U.S. law.

Further, as of this writing, nothing has come to our attention that causes
us to believe that the statements made regarding the Patents in the IP Portions
in the Registration Statement and Prospectus contain any untrue statement of a
material fact, or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

This letter is provided solely in connection with the public offering of
the common stock and, without our prior written consent, may not be furnished
to, quoted, or relied upon by any other person, firm, or corporation for any
other purpose.

If any reference is made to this letter or any comments stated herein by
any of you, then the letter must be provided or quoted in its entirety or, if
quote in part, then prior written permission must be obtained from our firm.
This paragraph shall not convey any additional rights to use of this letter
outside of those rights set forth in the preceding paragraph.

30
<PAGE>

ANNEX A

Patent Number Title

[TO BE PROVIDED BY DIVERSA]

31
<PAGE>

EXHIBIT B

Opinion of Gray Cary Ware & Freidenrich, LLP

[ADDRESS]

Re: Diversa Corporation, Inc. Registration Statement and Prospectus

Dear [__]:

We represent Diversa Corporation ("Diversa"), a company organized under
the laws of Delaware (the "Company"), in connection with certain patent matters
involving the preparation and/or prosecution of certain patent applications and
issued patents, and have advised the Company from time to time with regard to
certain matters of intellectual property. The representation of the Company by
Gray Cary Ware & Freidenrich, LLP (the "Firm") concerning patent matters is not
exclusive. This letter is, accordingly, limited as indicated herein. Such patent
matters concern the issued patents listed on Annex A hereto and any applications
upon which they rely (the "Company Patents"), and issued patents listed on Annex
B hereto and any applications upon which they rely (the "Third Party Patents").
This letter therefore relates only to such matters to the extent that they are
discussed in the above-referenced Registration Statement and Prospectus.

[DESCRIPTION OF WHAT THE FIRM EXAMINED AND INVESTIGATED AS OUTSIDE
COUNSEL WITH REGARD TO THE PATENTS LISTED ON ANNEX A AND B, INCLUDING WITHOUT
LIMITATION ANY DOCUMENTS DEEMED APPROPRIATE BY THE FIRM (TO BE PREPARED BY GRAY
CARY)]

In addition, we have examined the Prospectus and Registration
Statement: This letter opines only on those portions of the Prospectus and
Registration statement as they relate to intellectual property in the material
under the captions [__] (the "IP Portions").

This letter also does not relate to other Diversa intellectual
property matters, such as trade secrets and know how. To the extent that a
statement refers to the belief of the Company, it is based upon discussions with
in-house Company officials and on no other source. Any reference in the
Registration Statement or the Prospectus to payments of fees or other monetary
amounts contained in the sections referenced below are not within the scope of
this letter.

Subject to the foregoing, pursuant to your request, we are providing
the following with respect to the above Registration Statement and Prospectus,
Form S-1.

(1) The statements in the IP Portions to our knowledge after
investigation are true and correct statements regarding the
matters set forth therein;

<PAGE>

(2) To our knowledge after investigation, there are no pending
adverse legal, governmental or administrative agency proceedings
related to the Third Party Patents, and to our knowledge after
investigation, no such proceedings are threatened or
contemplated by such agencies or others;

(3) To our knowledge after investigation, there are no documents or
related litigation of a character required to be filed as an
exhibit to the Registration Statement or required to be described
in the Registration Statement or the Prospectus relating to the
Patents which are not filed or described;

(4) To our knowledge after investigation, for inventions that are
the subject of a patent application owned by the Company, the
Company has the right to obtain, and has obtained, an assignment
of all right, title and interest from all named inventors;

(5) To our knowledge after investigation, no other entity or
individual has any rights or claims in the Company Patents or
any patent sought to be issued therefrom;

(6) To our knowledge, it is the Company's reasonable belief that it
is not violating any existing proprietary rights of others and it
is the Company's reasonable belief that no such existing rights
will materially affect its ability to develop and commercialize
products or technology as described in the Registration Statement
and Prospectus; and,

(7) On May [__], 1999, we have provided competent written opinions
regarding the Third Party Patents, after investigation and
examination of relevant prior art. In such opinions we
concluded that the Company does not infringe, either literally
or under the doctrine of equivalents, any valid claim of the
Third Party Patents. The Company shall be able to reasonably
rely on such written opinion to avoid any claim of willful
infringement of the Third Party Patents under applicable U.S.
law.

Further, as of this writing, nothing has come to our attention that
causes us to believe that the statements made regarding the Third Party Patents
or the Company Patents in the IP Portions in the Registration Statement and
Prospectus contain any untrue statement of a material fact, or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.

This letter is provided solely in connection with the public offering
of the common stock and, without our prior written consent, may not be furnished
to, quoted, or relied upon by any other person, firm, or corporation for any
other purpose.

If any reference is made to this letter or any comments stated herein
by any of you, then the letter must be provided or quoted in its entirety or, if
quote in part, then prior

33
<PAGE>

written permission must be obtained from our firm. This paragraph shall not
convey any additional rights to use of this letter outside of those rights set
forth in the preceding paragraph.

34
<PAGE>

ANNEX A

Patent Number Title

[TO BE PROVIDED BY DIVERSA]

35
<PAGE>

ANNEX B

Patent Number Title

[TO BE PROVIDED BY DIVERSA]

<PAGE>

EXHIBIT 4.1

===============================================================================

[LOGO OF DIVERSA CORPORATION]

COMMON STOCK COMMON STOCK
CM_______
NUMBER SHARES

INCORPORATED UNDER THE SEE REVERSE FOR CERTAIN
LAWS OF THE STATE DEFINITIONS
DELAWARE CUSIP

THIS CERTIFIES THAT

IS THE RECORD HOLDER OF

FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
$0.001 PAR VALUE OF

DIVERSA CORPORATION

transferable on the books of the Corporation in person or by duly authorized
attorney on surrender of this certificate properly endorsed. This certificate
shall not be valid until countersigned and registered by the Transfer Agent and
Registrar.

WITNESS the facsimile seal of the Corporation and the signatures of its duly
authorized officers.

Dated:___________________

[CORPORATE SEAL OF DIVERSA CORPORATION]

/s/______________________ /s/______________________
SECRETARY PRESIDENT

COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY_______________________________________________
AUTHORIZED SIGNATURE

================================================================================

<PAGE>

================================================================================

The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Such requests shall be made to the Corporation's Secretary at the principal
office of the Corporation.

KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE
CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common UNIF GIFT MIN ACT-.........Custodian.........
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JP TEN - as joint tenants with Minors Act..................
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT- .....Custodian (until age..)
common (Cust)
......under Uniform Transfer
(Minor)
to Minors Act...............
(State)

Additional abbreviations may also be used though not in the above list.

FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto

PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE

_____________________________

________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

_________________________________________________________________________ Shares
of the common stock represented by the within Certificate,
and do hereby irrevocably constitute and appoint

________________________________________________________________________Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.

Dated ____________________________

X __________________________________

X __________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed

By_________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected
Financial Information" and "Experts" and to the use of our report dated January
12, 2000, except for Note 11, as to which the date is , in Amendment No.
2 to the Registration Statement (Form S-1, Registration No. 333-92853) and
related Prospectus of Diversa Corporation for the registration of shares of its
common stock.

ERNST & YOUNG LLP

San Diego, California

January , 2000

- --------------------------------------------------------------------------------

The foregoing consent is in the form that will be signed upon the completion
of the restatement of the capital accounts described in Note 11 to the
financial statements.

/s/ ERNST & YOUNG LLP

January 19, 2000