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

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

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

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

• our expected cash needs, our ability to manage our cash and expenses and our ability to access future financing;

• the expected benefits of our strategic partnership with BP;

• our ability to continue as a going concern;

• our expected future research and development expenses, sales and marketing expenses, and selling, general and administrative expenses;

• the effects of governmental regulation and programs on our business and financial results;

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

• our products and product candidates under development;

• investments in our core technologies and in our internal product candidates;

• the opportunities in our target markets and our ability to exploit them;

• our plans for managing the growth of our business;

• the benefits to be derived from our current and future strategic alliances;

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

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

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

• our exposure to market risk;

• the impact of litigation matters on our operations and financial results; and

• the effect of critical accounting policies on our financial results.

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

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

• the continued development of our pilot facility;

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

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

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

• our ability to use multiple feed stocks to produce cellulosic ethanol;

• our expectation regarding funding amounts from the U.S. Department of Energy; and

• the implied value of our biofuels business model.

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

• our ability to increase or maintain our product revenue and improve or maintain product gross margins; and

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

Overview

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

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

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

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

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

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

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

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

• maintaining our sales and marketing infrastructure to support our specialty enzyme business;

• our continued investment in manufacturing facilities necessary to meet anticipated demand for our products; and

• continued research and development expenses for our internal product candidates.

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

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

Recent Strategic Events

Our Strategic Partnership with BP

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

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

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

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

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

Results of Operations

Three Months Ended March 31, 2009 and 2008

Selected Segment Financial Data

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

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

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

                                              Three Months Ended March 31, 2009                          Three Months Ended March 31, 2008
                                                   Specialty                                                 Specialty
                                    Biofuels        Enzymes      Corporate        Total       Biofuels        Enzymes        Corporate        Total
Product revenues                    $      -      $    10,569   $        -      $  10,569     $      -      $    11,201     $        -      $  11,201
Collaborative and grant revenues        2,334           1,488            -          3,822            -            4,034              -          4,034

Total revenues                          2,334          12,057            -         14,391            -           15,235              -         15,235

Product gross profit                       -            4,814            -          4,814            -            3,324              -          3,324

Operating expenses (excluding
cost of goods sold)                    17,880           4,734         4,373        26,987         9,989           9,554           5,001     $  24,544

Operating income (loss)             $ (15,546 )   $     1,568   $    (4,373 )   $ (18,351 )   $  (9,989 )   $    (2,196 )   $    (5,001 )   $ (17,186 )

Capital expenditures                $   1,543     $       251   $        -      $   1,794     $  20,695     $       484     $       793     $  21,972

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

                                                     As of March 31, 2009
                                                    Specialty
                                       Biofuels      Enzymes      Corporate      Total
    Property, plant & equipment, net   $ 109,803   $     2,670   $     4,003   $ 116,476
    Cash and other assets                  1,650        22,289        22,522      46,461

    Total identifiable assets          $ 111,453   $    24,959   $    26,525   $ 162,937

                                                     As of December 31, 2008
                                                     Specialty
                                        Biofuels      Enzymes      Corporate      Total
   Property, plant and equipment, net   $ 109,030   $     3,502   $     4,739   $ 117,271
   Cash and other assets                      702        21,142        14,508      36,352

   Total identifiable assets            $ 109,732   $    24,644   $    19,247   $ 153,623