2006 annual report annual 2006

MAKING CELLULOSIC ETHANOL A COMMERCIAL REALITY

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Making Cellulosic Ethanol A Commercial Reality Table of Contents

LETTER TO THE SHAREHOLDERS 2 DIVERSA — A PIONEER IN INDUSTRIAL BIOTECHNOLOGY 4 MEETING THE WORLD’S ENERGY CHALLENGE 6 CORN ETHANOL: TODAY’S ALTERNATIVE FUEL IN THE U.S. 8 CELLULOSIC ETHANOL: FUELING THE FUTURE 10 THE CELUNOL MERGER 12 SPECIALTY INDUSTRIAL PROCESSES 14 HEALTH & NUTRITION 15 FINANCIAL HIGHLIGHTS 16 CORPORATE INFORMATION 17 page 1 LETTER TO THE SHAREHOLDERS

BIOFUELS: THE ROAD TO A GREENER, CLEANER, MORE SECURE ENERGY FUTURE

Biofuels, AND in particular cellulosic ethanol, have Enzymes are one of the key enabling technologies attracted a critical mass of attention and support across to economically convert cellulosic biomass to biofuels. the entire political spectrum as a solution to high oil Diversa has been developing new enzymes within its prices, energy security issues, global climate change biofuel programs to convert starch and pre-treated and rural economic development. In the U.S., demand biomass to sugars which can then be fermented to for ethanol, which is currently produced primarily ethanol. Within the cellulosic ethanol space, Diversa has from starch, has driven prices for corn to record highs. been working with DuPont to develop a new “cocktail” Although an important source of fuel, corn alone can of enzymes to convert corn stover to ethanol within an only provide a relatively small portion integrated, corn-based biorefinery. of our country’s long-term energy needs. We have been working with Syngenta The production of cellulosic ethanol Enzymes are one of the to develop new enzyme cocktails — fuel made from the leaves, stems, key enabling technologies to convert sugarcane bagasse, the and stalks of plants — is now widely to economically sugarcane fiber remaining after believed by many energy policy and extraction of sugar juice from the market experts to offer our nation the convert cellulosic sugarcane, to cellulosic ethanol. We most promising strategy to meet our biomass to biofuels have also signed an agreement with growing demand for transportation the government laboratories of New fuels. Unlike oil, biomass feedstocks Zealand to help them achieve energy for cellulosic ethanol production, such as corn stover, independence by utilizing their vast forest resources as wood waste, and dedicated energy crops, are renewable, a feedstock for biofuels. We have internal or partnered sustainable, and abundant. In addition, the production enzyme development programs in place or in the works of ethanol from cellulosic biomass uses significantly covering each major cellulosic biomass feedstock, less energy than the production of ethanol from corn or including bagasse, switchgrass, wood chips, and corn the production of gasoline from oil. stover, among others. page 2 In addition to developing enzymes, Diversa has health and nutrition. We have significantly increased been actively evaluating a number of other strategic our product revenue compared to previous years and opportunities within biofuels to obtain more value for have begun to launch our initial biofuel products for our stockholders than we believed we could achieve as a starch ethanol and biodiesel to complement our other supplier of enzymes alone. We identified and announced commercialized products in health and nutrition and a strategy centered around vertical integration within specialty industrial processes. biofuels for two main reasons: first, to serve as a means Upon completion of the merger between Diversa to gain significant additional value, and second, to and Celunol, I will be handing over the reins of the obtain more control over the technology development combined company to Carlos Riva, the current CEO of process and thereby accelerate the development of Celunol. As a result, I would like to take this opportunity our own novel cocktails of enzymes to break down to personally thank both our shareholders for their cellulosic biomass. The ultimate objective of our vertical support and all of the employees who have worked so integration was to develop new, feedstock-specific tirelessly over the years to bring Diversa to the brink of enzyme cocktails and to provide integrated solutions to what we believe will be one of the great achievements the emerging cellulosic ethanol industry. This strategy of the modern era — the economic production of fuel led to our announcement of the execution of a definitive from renewable resources. It has truly been a pleasure to merger agreement between Diversa and Celunol Corp. serve with all of you, and I wish the combined company By combining the two companies, Diversa and Celunol the best of luck in this noble endeavor. expect to accelerate the economic commercialization of cellulosic biofuels beyond what would have been possible by either company on its own. In late 2005 and through 2006, we sharpened our Edward T. Shonsey focus not only on biofuels but also within our two other CEO strategic areas — specialty industrial processes and Diversa Corporation

page 3 DIVERSA — A PIONEER IN INDUSTRIAL BIOTECHNOLOGY The “Indiana Jones” of biotech discovers and evolves specialized enzymes to make new products, increase manufacturing efficiencies, and enable cleaner manufacturing processes

page 4 ENZYME DISCOVERY & EVOLUTION

SAMPLE LABORATORY APPLICATIONS COLLECTION ANALYSIS TESTING

SINCE 1994, DIVERSA, the “Indiana Jones” of biotech, penetration of existing enzyme markets, as well as the has traveled to diverse and often extreme ecosystems launch of new enzyme products, we plan to increase around the globe in search of novel microbial DNA product-related revenues and related profit margins to develop high-performance specialty enzymes during the next several years. Our goal is to develop a for industrial applications. As a pioneer in industrial profitable business with prospects for sustainable long- biotechnology, Diversa has assembled the world’s term growth. broadest array of enzymes derived from biodiverse environments, as well as patented genomic technologies DIVERSA TECHNOLOGY to optimize these enzymes for industrial use. Our goal Discovery. Diversa taps into a wide variety of extreme is to discover and evolve specialized enzymes to make ecosystems, such as volcanoes, rain forests, and deep new products, increase manufacturing efficiencies, and sea hydrothermal vents, collecting small samples from enable cleaner manufacturing processes. the environment to uncover novel enzymes produced While our technologies have the potential to serve by the microbes that dwell there. Because the harsh many large markets, we have focused temperature and pH conditions in our internal product development which these “extremophiles” live efforts on two main fronts: (1) As a pioneer in industrial often mimic those found in today’s developing integrated solutions for biotechnology, we have industrial processes, they are a rich the production of biofuels, especially source of potential products. Through cellulosic ethanol, and (2) developing assembled the world’s the use of proprietary and patented enzymes for specialty industrial broadest array of enzymes technologies, Diversa extracts processes and health and nutrition microbial DNA directly from collected markets. samples to avoid the slow and often Diversa’s product portfolio currently includes impossible task of trying to grow the microbes in a enzymes to produce biofuels such as ethanol and laboratory. Diversa then mines this huge collection of biodiesel, and to improve specialty industrial processes, microbial genes, numbering in the billions, using ultra such as edible oil refining. We have also developed high-throughput screening technologies with the goal enzymes in the health and nutrition market segment to of discovering unique enzymes. increase the efficiency of animal feed. This portfolio of Optimization. Once a candidate enzyme is identified, commercialized products generated almost $16 million Diversa can apply its patented DirectEvolution® in revenues for Diversa in 2006. platform, Gene Site Saturation Mutagenesis™ (GSSM™) To complement our internal product development and GeneReassembly™ technologies, to enhance key efforts, we have formed alliances with market leaders performance characteristics. This combined discovery such as BASF, Bunge Oils, Cargill Health and Food and optimization approach allows Diversa to make Technologies, DSM, DuPont Bio-Based Materials, rapid and comprehensive changes to the DNA of novel Syngenta AG, and Xoma. enzymes, which often leads to products well-suited for Through a combination of increased sales and demanding commercial applications.

page 5 MEETING THE WORLD’S ENERGY CHALLENGE Biofuels hold the greatest promise in solving the world’s need for energy security, economic growth, and a quality environment

IN THE COMING DECADE, the world is facing three emissions from burning fossils fuels are harming the enormous energy-related challenges: increased and environment and fostering global climate change by sustained energy demand, energy security, producing significant levels of greenhouse gasses. and climate protection. One solution In the United States, an increasing number of is rising to the forefront — biofuels — local, state, and federal policies and initiatives are alternative liquid transportation fuels, aimed at reducing the dependence on imported such as ethanol and biodiesel, made sources of oil. In 2006, the U.S. produced a record from renewable agricultural resources. 4.9 billion gallons of ethanol. In 2007, President Experts believe the use of biofuels such as Bush called for a mandate to reduce gasoline ethanol, rather than fossil fuels, can lead usage by 20% in the next 10 years. To achieve our country, and the world, to a cleaner, this, the President urged the use of 35 billion greener, and more secure energy future. gallons of renewable and alternative fuels in The United States imports over 65% of the United States by 2017. The Energy Policy the oil it consumes, and most of this is Act of 2005 requires the production of 7.5 BGY from unstable or unfriendly parts of the (billion gallons per year) of biofuels by 2012. The world. Our ever-increasing appetite for Governors’ Ethanol Coalition is promoting an imported petroleum is only exceeded by initiative requiring 60 billion gallons of ethanol the developing countries of the world, by 2030. in particular, China and India. Since Currently, almost half of all gasoline sold in the the global economy is so tightly tied to U.S. contains ethanol, most as E10, a blend of 10% petroleum-based products and oil imports, ethanol and 90% gasoline. Ethanol is used largely a disruption, or the threat of disruption, could have as a replacement for the oxygenate MTBE, which was profound economic and social consequences. The energy found to pollute ground water. By June 2006, ethanol had dilemma is further compounded by rising concerns that successfully replaced MTBE in virtually every gallon of

page 6 DOESN’T IT TAKE MORE ENERGY TO PRODUCE ETHANOL THAN THE AMOUNT OF ENERGY ETHANOL ACTUALLY CONTAINS?

Figure 1 11

10 10.3 9 8 >1 positive 7 FOSSIL ENERGY RATIO (FER) = FER Energy Delivered to Customer reformulated gasoline where it was still being used. 6 Fossil Energy Used The production and availability of flexible fuel 5 vehicles (FFVs) — vehicles capable of operating on 4 gasoline with a greater than 10% proportion of ethanol — is increasing in the U.S., along with the number of 3 filling stations offering biofuel blends. There are over 2 six million FFVs on the road today and over 1,000 filling 1 <1 stations that offer E85, a blend of 85% ethanol and 15% 1.36 0.81 negative 0 0.45 FER gasoline. Although these trends are relatively modest in Cellulosic Corn Gasoline Electricity comparison to Brazil where seven out of ten new cars are Ethanol Ethanol FFVs, nevertheless, they are good indicators of the long- Projected Current term viability of U.S. biofuel-based transportation. As the U.S. looks to move beyond the hydrocarbon This is a common misconception. The question economy for answers to our energy challenge, experts can be answered by looking at how much fossil fuel at the U.S. Department of Energy (DOE) are focused energy is used to produce ethanol (see Figure 1). We can compare various energy products by using on biofuels. A 2006 DOE report titled “Biofuels Joint the fossil energy-replacement ratio (FER), which is Roadmap” states, “Biofuels, especially corn-derived and the energy delivered to the customer divided by the cellulosic ethanol, constitute the only renewable liquid amount of fossil fuel required to produce it. An FER transportation fuel option that can be readily integrated above 1 (breakeven) means a particular energy source with petroleum-based fuels, fleets, and infrastructure.” provides more energy than it took to produce it. An Ethanol is viewed as the most practical and attractive FER below 1 indicates that the product provides less alternative fuel on the horizon. It has the potential to energy than it took to produce it. The greater the FER “provide substantial benefits to national energy security, is above 1, the more net positive the energy product economic growth, and environmental quality.” that is delivered. The data displayed in Figure 1 above shows that ethanol derived from cellulosic biomass has the greatest potential net energy balance (10.3), delivering over ten times more energy for each unit of fossil fuel energy required to make it. Corn ethanol (1.36) also has a net positive FER although at lower The United States imports over levels than ethanol produced from biomass. However, 65% of the oil it consumes, and gasoline (0.81) and electricity (0.45) both have a net negative energy balance, since it takes more fossil most of this is from unstable or fuel energy to produce these than is gained in the unfriendly parts of the world final product. (Source: Biofuels Joint Roadmap, June 2006, DOE; data derived from Brinkman et al. 2005)

page 7 CORN ETHANOL: TODAY’S alternative FUEL IN THE U.s. In 2006, U.S. corn-based refineries produced a record level of ethanol to become the world leader in ethanol production

TODAY, WE SEE A WORLDWIDE resurgence in Ethanol in the U.S. is most commonly produced in a the popularity of ethanol, or ethyl alcohol, as a dry mill where the corn is ground and converted into transportation fuel. The use of fuel ethanol in the U.S. sugars which are then fermented into alcohol. According can be traced back to the turn of the last century when to the Renewable Fuels Association (RFA), the national Henry Ford built his first automobile, the quadricycle, trade association for the United States ethanol industry, to run on pure ethanol. Ford’s Model T’s were the first as of January 1, 2007, there were 110 ethanol plants in flexible fuel vehicles that could run on ethanol, gasoline, the U.S. with a combined production capacity of over or a combination of both. World War I drove up ethanol 5.4 billion gallons of ethanol per year (see Figure 3). demand to 50-60 million gallons per There were 73 ethanol refineries and year. Demand continued to climb 8 expansions under construction that until the end of World War II when are anticipated to add over 6 billion the reduced need for war materials In 2006, the U.S. ethanol gallons of new annual production and the low price of fossil fuel caused industry produced capacity by 2009. a drastic reduction in ethanol use as a record 4.9 billion While the growth in the production a fuel. From the late 1940’s until the gallons of fuel ethanol of ethanol from corn is expected to late 1970’s, virtually no commercial grow substantially from its current fuel ethanol was available in the U.S. levels, recent studies suggest that Between 1980 and 1991, less than 1 ethanol produced from corn grown billion gallons of ethanol were produced annually in in the U.S. would realistically be able to provide only the United States. In 2006, the U.S. ethanol industry a small proportion, 12 – 15 BGY or about 10%, of total produced a record 4.9 billion gallons of fuel ethanol gasoline demand. Other studies and news articles (see Figure 2). suggest that, well before this level of production could Due to its abundance and price, corn is the main be achieved, the price of corn would begin to negatively feedstock used for ethanol production in the United impact the costs of animal feed and food based on States. Brazil, which blazed the trail for ethanol- corn. powered vehicles, uses sugarcane juice as their primary What is the solution to our need for more abundant, feedstock for ethanol production. renewable feedstocks for ethanol production? Cellulosic biomass — the most abundant source of sugars on earth.

Figure 2 Figure 3 U.S. ETHANOL PRODUCTION U.S. ETHANOL PRODUCTION FACILITIES 200 5.0 Built 4.5 4.0 150 Expansions 3.5 Under Construction 3.0 2.5 100

2.0 Plants # U.S. 1.5 50 Ethanol (billions of gallons) Ethanol 1.0 0.5 0 0 1980 1985 1990 1995 2000 2006 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Source: Renewable Fuels Association, Diversa page 8 WILL USING FOOD, SUCH AS CORN, FOR FUEL DIVERSA ENZYME GREATLY IMPROVES THE CAUSE FOOD SHORTAGES EFFICIENCY OF CORN ETHANOL PRODUCTION AND INFLATE COSTS? Fuelzyme™-LF enzyme is a new, next-generation alpha amylase enzyme designed and marketed by Diversa to significantly improve Today, most ethanol in the U.S. is made from the efficiency and economics of ethanol production from corn and corn and, as demand for corn has increased, corn prices have spiked — but there is currently other starch sources. no shortage of corn. The U.S. is not only the This new product dramatically lowers the viscosity of the corn largest corn producer in the world, but it is also starch stream and operates at high temperature and at a lower pH the largest corn exporter. Presently, about 17% than other commercially available enzymes, all of which offers ethanol of the U.S. corn harvest goes towards ethanol, producers the potential for substantial throughput advantages and about 60% is used for food consumption cost savings. It works in concert with other enzymes to efficiently (including animal feed), and the remaining 20- convert the starch present in corn and other sources into sugars that 25% is exported to mostly high-income OECD can then be processed into ethanol. (Organisation for Economic Co-operation and We estimate that the addressable market for this product is in excess Development) countries. of $100 million in the United States alone and is currently growing in Two factors will boost U.S. corn harvests excess of 25% per year. over time and its availability for both food and fuel. First, with higher corn prices, more acreage will be dedicated for planting corn. In CORN AMYLASE 2007 U.S. farmers intend to plant 90.5 million ENZYME GROWN IN CORN KERNEL WILL IMPROVE acres, 15% more corn acres than in 2006 ECONOMICS OF CORN ETHANOL PRODUCTION and the largest area since 1944, according to the Prospective Plantings report released Our partner, Syngenta, is developing a genetically modified strain in March 2007 by the U.S. Department of of corn that expresses high levels of alpha amylase—a thermal- Agriculture’s National Agricultural Statistics tolerant enzyme developed by Diversa that helps to turn the corn’s Service. According to the Renewable Fuels starch into sugar for ethanol. The engineered plants are designed to Association, such a harvest would produce reduce costs by eliminating the need for mills to add liquid alpha- ample corn supplies to economically meet the amylase enzymes. needs of all the sectors that rely on it. Secondly, advances in seed, fertilizer, and ™ other technology should continue to improve the yield of corn per acre. The yield of corn has increased from about 86 bushels per acre in BIODIESEL PRODUCTION FROM VEGETABLE OIL: 1978 to almost 150 bushels per acre today. ECONOMICS IMPROVED BY DIVERSA ENZYME Seed companies are predicting 300 bushels Diversa has developed the Purifine™ enzyme to improve the per acre by 2025. processing of oilseeds into vegetable oils. Since vegetable oils can While corn production will continue to also be processed into biodiesel, Purifine™ can also improve the improve, corn alone will not be able to meet production of this alternative biofuel. our long-term needs for biofuels. According to Biodiesel is the name of a clean-burning alternative fuel that can Vinod Khosla, co-founder of Sun Microsystems be produced from renewable resources such as soybeans, canola, and and founder of Khosla Ventures, “Corn ethanol other oilseeds. Biodiesel contains no petroleum, but it can be blended has served us well and has paved the way for our future energy security. It has shown with petroleum diesel to create a biodiesel blend. It can be used in America that we do have alternatives to oil. But diesel engines with little or no modifications. Biodiesel is simple to corn ethanol can only supply about 10% of our use, biodegradable, and nontoxic. gasoline needs. We need cellulosic biofuels to According to the National Biodiesel Board, as of January 31, 2007, win the war on oil.” there were 105 companies producing 864 million gallons of biodiesel per year. Within the next 18 months, additional capacity coming online is estimated to yield another 1.7 billion gallons per year.

page 9 CELLULOSIC ETHANOL: FUELING THE FUTURE Scientific breakthroughs are enabling the economic production of ethanol from a renewable and inexpensive energy source — plant waste materials

WHAT IF WE COULD CONVERT not only corn, but to the structural integrity of the plant. Hemicellulose is also corn stover — the leaves, stalks, and cob — into a more random and amorphous structure of connected ethanol? What if we could transform sugarcane bagasse sugars. If technology would permit us to efficiently to transportation fuel? Could poplar and pine trees, gain access to these sugars locked up in plants, we wheat and rice straw, or even municipal waste become would have a wealth of raw materials for the production a sustainable source of biofuels? If so, energy crops like of ethanol and other potential biomaterials, such as fiber cane, switchgrass, and miscanthus could become plastics, adhesives, and paints, that would otherwise be our country’s strategic “oil” reserve, and Oklahoma made from petrochemicals (see Figure 4). could be the next member of OPEC. In the past, scientists There are several technical and economic challenges using traditional chemistries have been unable to associated with the large-scale production of ethanol cost-effectively convert these residual plant products from cellulosic biomass, including collection and and energy crops to ethanol. Now, recent advances in transport of the biomass raw material, preprocessing industrial biotechnology are providing powerful new or “pretreatment”, enzymatic conversion of pretreated tools to solve this historic challenge. plant material to sugars, and the fermentation of a There are at least five advantages to using cellulosic mixed sugar stream. Many advances have been made

Enzymatic Conversion to Fermentation Material Sugars of Sugars Recovery

Biomass Ethanol Pretreatment BIOREFINERY Figure 4: According to the National Renewable Energy Laboratory, “a biorefinery is a facility that integrates biomass conversion processes and equipment to produce fuels, power, and chemicals from biomass. The biorefinery concept is analogous to today’s petroleum refineries, which produce multiple fuels and products from petroleum. Industrial biorefineries have been identified as the most promising route to the creation of a new domestic biobased industry.”

biomass as the raw material for biofuels: (1) use of non- in each of these areas over the past several years, greatly food crops, (2) relatively low feedstock cost, (3) use of improving the likelihood that cellulosic ethanol will marginal lands for feedstock growth, (4) beneficial net become a commercial reality in the very near future. energy balance, and (5) less fertilizer and water usage. In particular, Diversa has developed and continues to Biomass is a complex material composed of cellulose develop cocktails of novel, high-performance enzymes, (30–50%), hemicellulose (20–40%), and lignin (15–30%). under the brand name Fuelzyme™-CX, that convert The exact composition varies from plant to plant. Since a variety of plant materials to fermentable sugars. it is found in nearly all plant life, cellulose is the most Towards this goal, we have formed a partnership abundant molecule on earth. Like the starch found in with a U.S. Department of Energy (DOE)-sponsored corn kernels, cellulose is a polymer of the sugar glucose. consortium to develop an economical, commercial- It forms part of the cell wall and is designed to contribute scale process to convert starch and cellulosic biomass page 10 Diversa has developed Fuelzyme™-CX enzymes to aid in the PARTNERSHIPS IN THE ENZYMATIC conversion of cellulosic biomass, the most undervalued and CONVERSION OF BIOMASS underutilized energy asset on the planet, to ethanol. Our Diversa, through strategic partnerships, has made proprietary discovery and evolution technologies have yielded considerable progress in the development and testing “cocktails” of enzymes to address the complex tasks of cost- of enzymes for the production of cellulosic biofuels. effectively transforming a variety of biomass feedstocks into sugars for fermentation into fuel ethanol.

into fuel ethanol and other value-added chemicals. Diversa has also formed a research program with DOE JOINT GENOME INSTITUTE two New Zealand Crown Research Institutes, Scion US DEPARTMENT OF ENERGY OFFICE OF SCIENCE and AgResearch, which could ultimately see New Zealand’s entire vehicle fleet running on New Zealand- grown and manufactured biofuels. Through a DOE- Cellulosic Enzymes sponsored program, we continue to investigate the from Termites termite gut to identify enzymes to convert wood into sugars. Our collaborations with Syngenta have focused on enzymatically converting bagasse into biofuels. Other organizations are making technological strides in other areas along the production path. Celunol Corp., an emerging leader in the production of cellulosic ethanol, is using proprietary and unique micro-organisms, called ethanologens, to ferment cellulose and hemicellulose from multiple feedstocks into ethanol. Integrated Corn Are there enough land resources in the U.S. to Biorefinery supply our growing need for biofuels? A 2005 report from the DOE and U.S. Department of Agriculture (USDA) concludes that the U.S. is capable of producing a sustainable supply of 1.3 billion tons per year of cellulosic biomass. According to the report, 1 billion tons of cellulosic biomass would be sufficient to displace 30% or more of our present petroleum consumption. In addition, the Natural Resources Defense Council agresearch reported in 2004 that cellulosic biofuels could supply more than half of the current transportation fuel needs in the United States by 2050, without decreasing the New Zealand production of food and animal feed. Biofuels In June 2006, the DOE published a research roadmap for the advanced technologies needed to produce ethanol from cellulosic biomass. The DOE set a goal of producing 60 billion gallons of biofuels for transportation fuel — meeting 30% of current U.S. demand — by 2030. At current ethanol prices of approximately $2.00 per gallon, this would translate into an addressable market of a minimum of over $100 billion annually, not including market opportunities for cellulosic ethanol outside of the United States. Bagasse Conversion

page 11 THE MERGER Diversa and Celunol are joining forces to accelerate the commercialization of cellulosic ethanol from a variety of feedstocks IN JANUARY 2007, DIVERSA announced a new strategy and technology-driven company that is directing its to pursue integrated solutions for the commercialization integrated technologies to the production of low-cost of cellulosic biofuels. The goal of this move was twofold. cellulosic ethanol from a variety of biomass sources. First, increase our ability to capture value from the Celunol has built a pilot-scale plant for the integrated potential multi-billion dollar market opportunity production of ethanol from sugarcane bagasse and other represented by the emerging cellulosic ethanol industry. feedstocks. In February 2007, Celunol broke ground on Second, obtain greater control over the technology construction of a 1.4 million gallons-per-year plant in development process to accelerate the development Jennings, Louisiana, the first demonstration-scale plant of our own novel cocktails of enzymes to break down in the U.S. for the production of cellulosic ethanol. cellulosic biomass. If the merger receives the required regulatory and Converting biomass into biofuels requires the stockholder approval (anticipated before the end of successful integration of three developing technologies: the second quarter of 2007), we believe the combined (1) chemical preparation of the cellulosic biomass company would represent the first company to possess (pre-treatment), (2) conversion of pre-treated an end-to-end, integrated technology solution for the cellulosic biomass into fermentable production of cellulosic ethanol. sugars by cocktails of efficient enzymes Converting biomass to The combined company’s headquarters (saccharification), and (3) the development biofuels requires the will be located in Cambridge, of novel micro-organisms to ferment the successful integration Massachusetts, and Celunol’s CEO and sugars into ethanol or other fuels cost- CFO will become the CEO and CFO of the effectively (fermentation). of developing combined company. To date, Diversa has focused primarily technologies To date, there is no known process on the development of novel, high- that has been commercialized to make performance enzyme cocktails for saccharification cellulosic ethanol in a cost-effective manner. A number targeted to a variety of cellulosic biomass feedstocks as of companies, academic or government institutions, and part of our specialty enzyme business. other non-profit organizations are actively pursuing We believe that in addition to developing robust one or more aspects of the production process, although enzyme cocktails, our existing technology platform can relatively few of these efforts are being conducted in be applied throughout the cellulosic ethanol production the context of a fully-integrated process similar to the process, especially to improve the micro-organisms Celunol process (see Figure 5). Diversa has been part used for fermentation. Ultimately, our goal is to improve of one such integrated program with DuPont, involving the economics and efficiency of production of cellulosic the use of corn stover. ethanol at commercial scale for multiple feedstocks. Diversa and Celunol believe that the combined On February 12, 2007, Diversa announced that we company will have several potential advantages. By had signed a definitive merger agreement with Celunol becoming one of the first movers within this emerging Corp. of Cambridge, Massachusetts. Celunol is a science- industry, we expect to gain enhanced opportunities for

1 2 3 4 5

Images from the ground breaking of Celunol’s new demonstration-scale cellulosic ethanol production facility, located in Jennings, Louisiana. In attendance were: (1) Gregory W. Luli, PhD, Celunol Vice President of Research with guests; (2) John Howe, Celunol Vice President of Public Affairs, Matthew Hartwig, Renewable Fuels Association Communications Director, and Carlos Riva, Celunol President and CEO; (3) Ground breaking honorees; (4) Hon. Douglas Faulkner, Deputy Undersecretary for the U.S. Department of Agriculture; and (5) Louisiana Governor Kathleen Babineaux Blanco. page 12 Figure 5 CELUNOL’S PROCESS FLOW DIAGRAM FOR THE PRODUCTION OF CELLULOSIC ETHANOL

Biomass Handling Acid Hydrolysis Cellulose (C6) Enzyme Delivery & Storage & Prep of Hemicellulose Fermentation Production Fiber Residue (Cellulose + Lignin) BW34 Hemi- partnering with landowners and feedstock suppliers, cellulose Syrup KO11 licensing and setting industry standards. In addition, we believe the synergy of Diversa’s feedstock- and Pentose (C5) Beer Fermentation pretreatment-specific enzyme cocktails, coupled with Celunol’s fermentation organisms, operating plant, and engineering strengths, will enable the combined Residue company’s accelerated penetration of the biofuels to Boiler marketplace. Distillation Storage Ethanol Transported Together, we intend to develop cellulosic ethanol to Market production facilities at incremental volumes to validate a feedstock-specific production process before scaling up to commercial plants each with the capacity to produce approximately 25 to 30 million gallons of cellulosic ethanol per year (see Figure 6). The combined company intends to build, own, and operate multiple commercial-scale plants utilizing multiple feedstocks/processes throughout the world, either independently or with strategic and financial equity partners. Diversa and Celunol also expect that, particularly for regions outside of the United States, the combined company will enter into licenses and/ or strategic partnerships for our licensees and/or partners to deploy our technologies and processes in plants that they will build, own, and operate and from which we would derive royalties, profit-sharing, or other revenues. Celunol’s pilot-scale Our strategy to develop integrated solutions for the cellulosic ethanol production facility in emerging cellulosic industry does not replace our goal Jennings, Louisiana of establishing a high-growth, profitable specialty enzyme business. Rather, we intend to leverage our leadership in the discovery and evolution Figure 6 of novel, high- BUSINESS STRATEGY FOR p e r f o r m a n c e DEVELOPING BIOREFINERIES enzymes to TO PRODUCE CELLULOSIC ETHANOL enhance the Next-Generation development Commercial-Scale 25-50+ MGY of integrated (multiple feedstocks First- & regions) s o l u t i o n s Generation Commercial- to cellulosic Scale ethanol production. 25-30 MGY (multiple Our technology advantages will allow us to First- feedstocks) Generation address both the estimated $3 billion dollar per year Commercial- Scale global market for biofuel enzymes in 2020, as well 25-30 MGY as the estimated $100 billion per year global market Demo- (initial Scale feedstock) Lab- Pilot- for cellulosic ethanol production in 2020. (Source: Scale Scale 1-2 MGY McKinsey & Company, March 2007.)

page 13 SPECIALTY INDUSTRIAL PROCESSES Diversa enzymes enable more efficient industrial processes with eco-sensitive biotechnology

™

ENZYMES ENGINEERED TO IMPROVING THE COST AND QUALITY OF ENHANCE EDIBLE OIL PROCESSING PULP PROCESSING WITH NOVEL ENZYMES Diversa has developed the Purifine™ enzyme to create Luminase™ enzymes, a next-generation brand of new value in the $20 billion oil market by improving the robust xylanases, enhance the reactivity of pulp fiber to degumming of edible oils. Edible oil products include bleaching chemicals, such as chlorine dioxide, chlorine, vegetable and cooking oils, shortenings, margarines, and hydrogen peroxide. and other products derived from the processing of Luminase™ enzymes remain active over a wider soybeans, corn, rapeseed, and other oilseed plants. range of temperature and alkalinity (pH) compared It is estimated that in 2006 over 60 million metric tons to previous enzymes so they can be utilized by more of edible oils were produced from high-phosphorus pulp and paper mills. In addition, these novel enzymes oilseeds. Purifine™ enzyme improves the yield and can reduce the cost of producing pulp by substantially quality of oil produced from high phosphorus oilseeds reducing the need for bleaching chemicals. Luminase™ without requiring major changes to conventional enzymes also provide greater operational efficiencies, processing conditions. as they work faster than previous enzymes and thus Purifine™ enzyme has been approved by U.S. require less retention time. Luminase™ enzymes are regulatory agencies for food and non-food applications, effective for most types of pulp, thereby expanding the including increasing the efficiency of oilseed processing utility and benefit to the mill. for the production of biodiesel fuel.

page 14 HEALTH & NUTRITION Enzymes targeted to enhance the well-being of animals

DESIGNER PHYTASE ENZYME IMPROVES FEED NUTRITION WHILE REDUCING POLLUTION Phyzyme™ XP, a next-generation phytase enzyme launched in 2003, is playing an important role in improving the health of animals and protecting our environment. Developed by Diversa and marketed by Danisco Animal Nutrition, Phyzyme™ XP is currently Diversa’s best-selling and fastest-growing enzyme product. Phosphate is an essential nutrient for all living organisms, but poultry and pigs are very inefficient at releasing this key nutrient from the food they eat. The seeds in animal feed, in particular, represent an important source of both dietary phosphate and calories. Unfortunately, plants store about 75% of their seed phosphate as phytic acid, which passes through an animal’s digestive system and is excreted, which can cause significant pollution in the environment. Therefore, animal feed producers and farmers must add expensive inorganic phosphate to their poultry and pig feed — already the biggest single cost for these producers — to provide adequate nutrition. In addition, governments have mandated limits on the amounts of phosphorous released into the environment to safeguard water supplies. Phyzyme™ XP phytase improves the digestibility of phosphorus and other nutrients naturally contained in animal

feed. This provides producers with the opportunity to reduce feed costs by reducing usage of inorganic phosphorous while maintaining poultry and pig growth, as well as reducing the amount of phosphorous excreted into the environment. Phyzyme™ XP offers superior performance compared to competitor phytases sold in the U.S. Danisco Animal Nutrition recently launched a new highly-thermostable phytase, Phyzyme™ XP TPT, which Danisco believes is the most heat-stable phytase currently on the market. The new Thermo Protection Technology (TPT) developed by Danisco applies a coating to the phytase enzyme which delivers protection from the high temperatures that typically occur during the feed pelleting process, while rapidly releasing the enzyme activity in the animal’s gut, all without compromising animal performance. In order to expand market opportunities in the European Union, the single largest market opportunity for Phyzyme™ XP, Danisco has pursued and has recently been awarded additional regulatory approvals. According to Danisco, the worldwide market for phytase enzymes is estimated to be worth more than $200 million in 2007, and growing at over 5% per year.

page 15 FINANCIAL HIGHLIGHTS

TOTAL REVENUE NET LOSS

$60 $57.6 $10 $54.3 2002 2003 2004 2005 2006 $49.0 $49.2 $50 $-12

$40 $-34 ($28.0) $31.7 ($33.4) $30 ($39.3) $ Millions $ Millions $-56 $20 ($57.7)

$-78 $10 ($89.7) $0 $-100 2002 2003 2004 2005 2006 Share-based compensation, restructuring and/or impairment charges

PRODUCT-RELATED REVENUE 2006 STOCK PERFORMANCE

$20 $12

$15.9 $10 $15 $8

$9.8 $10 $6 $ Millions $ Stock Price $ Stock $5.4 $4 $5 $3.1 $2

$0.3 $0 $0 2002 2003 2004 2005 2006 2006 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS CASH USED

$200 $10

2002 2003 2004 2005 2006 $163.1 $0 $150 $127.5 $125.5* $-10 ($13.5) $98.1 $100 $-20 $ Millions $ Millions $65.4 $-30 ($27.6) $51.9 ($29.4) $50 ($32.7) ($35.6) $-40

$0 $-50 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 03/31/07 (unaudited) * Includes net proceeds of $96.2M from convertible debt offering closed March 28, 2007; Note additional net proceeds of $19.3M received April 3, 2007 not included in graph

page 16 CORPORATE INFORMATION

CORPORATE STOCKHOLDER HEADQUARTERS INFORMATION Diversa Corporation Stock Information 4955 Directors Place Diversa’s Common Stock is traded on the San Diego, CA 92121-1609 National Global Market of the National p/858.526.5000 f/858.526.5551 Association of Securities Dealers Automated e/[email protected] Quotation System (NASDAQ) under the symbol “DVSA” MANAGEMENT Edward T. Shonsey Transfer Agent and Registrar Chief Executive Officer American Stock Transfer & Trust Company, Brooklyn, NY Anthony E. Altig Chief Financial Officer Independent Accountants Ernst & Young LLP, San Diego, CA William H. Baum Executive Vice President Corporate Counsel Cooley Godward Kronish LLP, San Diego, CA R. Patrick Simms Senior Vice President, Operations Investor Information BOARD OF DIRECTORS Diversa’s filings with the Securities and James H. Cavanaugh, Ph.D. (Chairman) Exchange Commission are available to President, HealthCare Ventures LLC stockholders, free of charge, upon request to the Investor Relations Department or through Peter Johnson Diversa’s website, www.diversa.com. They are Former CEO of Agouron Pharmaceuticals, Inc. also available through the SEC‘s EDGAR site Fernand Kaufmann, Ph.D. on the Internet at www.sec.gov. Former Senior Executive, DESIGN The Dow Chemical Company Michael Kulwiec, Mark Leschly Creative Director Managing Partner, Rho Capital Partners, Inc. Diversa Corporation [email protected] Melvin I. Simon, Ph.D. Anne P. and Benjamin E. Biaggini Professor PHOTO CREDITS of Biological Sciences, California Institute of Switchgrass (pages 10 & 11) Technology © Samuel Roberts Noble Foundation Cheryl A. Wenzinger Kamchatka (page 4), Kenya (page 5) Former Audit Partner, Deloitte & Touche LLP © Frans Lanting, www.lanting.com

FORWARD-LOOKING STATEMENTS . This report contains statements that are “forward-looking” and involve a high degree of risk and uncertainty. These include statements related to the ability of cellulosic ethanol to meet national and global fuel demands, our ability to commercialize cellulosic biofuels, the energy security, environmental benefits and economic potential of biofuels, the energy required to produce cellulosic ethanol, the costs and availability of feedstocks, including corn, for ethanol production and our ability to economically convert these feesdstocks into ethanol on a commercial scale, our pending merger with Celunol Corp. and planned operations as a combined company, investments in our core technologies, investments in our internal product candidates, our ability to enter into additional biodiversity access agreements, the discovery, development, and/or optimization of novel genes, enzymes, and other biologically active compounds, the development and commercialization of products and product candidates, the opportunities in our target markets, the benefits to be derived from our current and future strategic alliances, the benefits to be derived from our strategic reorganization in 2006, the benefits to be derived from our vertical integration strategy within biofuels, our plans for future business development activities, our plans for our discontinued programs and products, including our pharmaceutical programs, and our estimates regarding market sizes and opportunities, as well as our future revenue, product-related revenue, profitability, and capital requirements, all of which are prospective. Such statements are only predictions and reflect our expectations and assumptions as of March 16, 2007 based on currently available operating, financial, and competitive information. The actual events or results may differ materially from those projected in such forward-looking statements. Risks and uncertainties and the occurrence of other events could cause actual events or results to differ materially from these predictions. The risk factors set forth in Item 1A from our Form 10-K for the year ended December 31, 2006 and our Registration Statement on Form S-4 filed with the SEC on March 19, 2007, as amended, entitled “Risk Factors” should be considered carefully in evaluating us and our business. These forward-looking statements speak only as of March 16, 2007. Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. DIVERSA, DirectEvolution, Fuelzyme, GeneReassembly, Gene Site Saturation Mutagenesis, GigaMatrix, GSSM, Luminase, and Purifine are trademarks of Diversa Corporation. Phyzyme is a trademark of Danisco Animal Nutrition. This report also refers to trade names and trademarks of other organizations. Copyright © 1999-2007 Diversa Corporation. All rights reserved.

page 17 4955 Directors Place San Diego, CA 92121 p/858.526.5000 www.diversa.com

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