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This constitutes the Research~Plan for which Board approval is sought so that C' Cetus will actLally give Standard two noti;ces - one for $5,000,000, and a=_ formal application can be made to Standard Oil Company .(Indiana) for additional investment in Cetus common stock. If this plan is approved by the Board, Cetus will immediately give Standard notice of Cetus' intent to sell $6,000,000 of common stock. As required by Section 10.2 of the Debenture Purchase Agreement, second for $1,000,000. The expected date of sale is June 1, 1978. fiscal o~ year. and for which Management was given the implementation "go-ahead for its first This Research Plan and its accompanying projec ioas reprsent , in condensed form, the relevant parts of the budgetapproved by the=Board on February 10, It is for this reason that we now seek additio~alo equity ~thout delay. ~ to continue to build as quickly as our abilities and_,financial resources permit. the first stages of the budget as presented. This-is an~ambitious.but prudent plan. Given adequate financing, it enables Cetus to continue its demonstrated leadership in the commercialization of molecular biology. Our visibility and success to date have already stimulated activity in some large companies, and we have also witnessed the spawning of "me-too" competitors. Our challenge is Research Plan At its February 10, 1978, meeting, the Cetus Board of Directors approved a plan covering the next three fiscal years and directed Management to proceed with minent development. It has been configuring its limited resources to address this challenge; we must continue to identify the most important opportunities and act on them. It is our dedicated conviction that biology, with its profound advances of the past generation, will revolutionize a variety of industries. Cetus presently holds a leadership position in identifying opportunities arising from this im- component of the"Research PLan"at the conclusion of this presentation. o`~b Z -Cetus Proprietary Projects and'Processes •,,~ ~, - and its long-term.potential. It will be further described, nonetheless, as a .:,- - The first category is the;`self-sustaining business in which we have been occupied since inception. It::is not the reason why we seek more funds, nor do we believe it to be the reason~-why large companies have expressed so much interest in Cetus and Facilities)"'to Implement 1. and 2. 1~a~t° "~ ly 3. On-going Development of In-house Capabilities (Expertise, Instrumentation, , 1. Contract Work for Clients. 2. • The Development of Processes of Pivotal Significance to a Variety of - Industries and Proprietary to Cetus. Cetus activities can~be conveniently g three areas: c~aracterized as covering ti- and pharmaceutical industries - In the main, we wish to do this for our own account. A number of technological opportunities have already been identified in the budget. In addition~, we have begun to work on some seLf-funded'projects which could result in processes owned by Cetus and which are expected to have major impact on the chemical, energy, .., . _.. ., 3r i" ~i ~~•'' ~` -~"r .F?~i`~ ~~•,C~. ~i ~e~.~,,.. ~t•~nL...'~.f1+.Y~.a+M+.a,.a.s,x;sir..•.Fir:~',.N~i-''N'~....S.~i;....`.`;.~x+rL:~•~A.., t~aGt. .7ali•'~~1'_;'.i.~ ~~'ll~~`~.~+~aC~•l~9~!/C~ "; '_'~

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It is important to note that we are in no way restricting our attention to the drug industry in which we began. The view of the popular press, which invariably reports the significance of recent breakthroughs in molecular biology in medical terms, vastly underestimates the true significance of biology to industry. catapuit Cetus into the dominant position which we covet ~~` never result in proprietary technology breakthroughs of sufficient magnitude to { activity, given the alertness_and the self-interest of intelligent clients, can a successful activity, and one which we are proud to have pioneered. But this ::~~ (see below) will continue to expand for we certainly have no intention to stifle . tiAA. would be reckless to expand this proportion. Our contract business for clients total effort. In the absence of significant additional equity unding, it.. Cetus has done as much as it can, consistent with prudence, to develop se f- funded projects. At present, this activity represents only about 10% of our . .. ' - ~ . .. . . . .:w~. and the initiation of several more over the next three or four years. For rea- tional equity, involves increased funding of a number of these existing programs Therefore, our forward plan, for which we immediately seek $6,000,000 in addi- sons of security, details of these programs are'not spelled out here, but some of them have been referred to in the larger plan and'tYie directors are aware of the strategic intentions of the company. .. ~v 0S ..~•a,.~~s',:.'-,?,: .~ The financial projections attached hereto assumethe fund ng of these projects. These include: ~ w r" U C A patentable, economic enzymatic>process for producinq a family of commez=1-,-j cially important, ~nter-relatea*'commodity chemicas__ heretofore not pro- ;" &duced by biological means. his process is under intense in-house investi- gation; it should lead to attractive licensing and/or joint venture oppor- 4 tunities for Cetus 2. Basic research into new'`jmmobilization techniques.to render enzymes and view this work as essential'if biosystems are to replace traditional chemi- cal conversion or'food processing procedures under the most favorable econ- J cells more useful for industrial, continuous process applications. We omic conditions,~ ~ c'~ Qo ~ ~, K a 3. assured that_$2:65 million of these costs will be allocated to client con- rojected for,the"July '78 through June '81 period, Cetus is reasonably must maintain its dominant position. While funding of $3.5 million is Fundamental research directed cted toward building expertise in the fast devel- oping and highly publicized fie1_d of recombinant molecular bioloqy. Cetus tracts with'~royalty-bearing potential. t ra4 been made-inour understanding of how the brain is able to process informa- t 1 4. Research dn neuropepti.des. in the past four years, major advances have ion re ated to pain and pleasure and or now opiate drugs exert their remark- t- Q.,A,y, able effects. This research~has culminated in the discovery of normally occurring opiatelike substances in the brain. These opioid peptides, re- ferred to as enkephalins and endorphins, appear to be neurotransmitters, 9~ or chemical messengers, of specific nerve pathways in the brain that pro- v `~ cess info ti 1 t' t 1 rma on re a in o t b h rocesses known to be affected by opiates. is understanding opens the possibility of enormous medical and social to furnish and finance hospital facilities. benefits, to say nothing of the economic impact of any product which may affect the total number of mental patients for whom society presently has - 2 - g pain, emo iona e ,~A avior, and other bodily

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,.,, . ...~yyit . _ .. ..,~,.:.:' • . • This po~t ' 1 breakthrough with totally new products which our technology f can uniquely take from the status of rare chemicals to real products o commerce is our present target. However, it merely serves to illustrate how markets of great magnitude will undoubtedly arise from several lines of biological research as Cetus grows. We intend to be sufficiently strong to be able to pick and choose among them. General Capability, Facilities, and Instrumentation Development capability was deleted from the budget by the Board of Directors and is not in- cluded in this plan. The assumption is that such investments, along with any decisions to further integrate forward into small scale production should be handled on a case-by-case basis, examining in each case the economic potential, Cetus proprietary rights, and the capability of a prospective client or partner to perform the scale-up role. Such capability may in fact represent their con- tribution to a joint venture. about it. This contYasts with the pharmaceutical industry, which has historic- ally been familiar with fermentation. Thus, we must develop our capacity at the level of small-scale,°computer-controlled, simulated, fermentation facilities. This is also included in the budget. To avoid confusion, it should be specific- ally pointed oiit that the building of any "pilot plant" fermentation development aware that fermentation-may revolutionize them and yet know almost nothing Further, our mandate is~to'address industries which are becoming increasingly equipment to consolidate our;world recognized lead in this field. `< The attached projections assume an aggressive rate of building staff and an accelerated rate of providing it with-the best-in facilities. The disparity between some of the instrumentation`and facilities with which we began and that which we are now producing i;Ca harbinger of what we are capable of accom- plishing if the present momentum`can be'preserved. There are certain areas in which we wish to continue this dynamic growth. They include the on-going development of our"highly regarded containment facilities and other laboratories for recombinant molecular research~and the continuing improvement of our truly'unique environmental chambers (unobtainable and undu- plicated anywhere)~ in j~qhich microorganisms are grown for our massive screening. operations. Furthermore, we anticipate new generations of screening and assay of this expansion requires significant additional,_funding.,;V without peer in any laboratory in the world. Once again, however, the thrust through several iterations and some of our present,self-made facilities are Our first generation of instrumentation was crude but unique. It has gone generated by the conspicuous and unique nature of what wehave already assembled but, without adequate additional funding, we will have to"curtail these efforts. Our initial years, characteristic of start-up operations, saw the assembling of the best group of people in the world to focus on our selected objectives. Venture capital investment funds were stretched as far as possible to develop and construct necessary instrumentation and facilities. What we accomplished was satisfactory (and in some sense unprecedented),-but was clearly not of the caliber of which we are capable given adequate funding. We wish to add signi- ficantly to our excellent staff; this is already under way. We have momentum Contract Work for Clients ing decades. We undertake no work of this kind unless the client agrees to a_p_.;.r.~ Hopefully, our past success will result in meaningful royalty streams in the com- ~== Cetus began by carrying out productivity improvement projects for drug companies. -kil.

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royalty-like reward to Cetus for success. We are more flexible now, however, and will entertain alternative means of getting "a piece of the action," such as via joint ventures. industries. pated contracts from billion-dollar companies in the food, chemical and energy successfully completed a major drug company program which provided significant front-end revenues for over four years. The Research Plan anticipates diverse replacements for this revenue, and we have already secured most of the antici- This is a sound business, and the Research Plan anticipates its growth. We have bilities. The presumptuous growth of Cetus will depend largely omthe other two aspects of the business (see above); resources, facilities, manpower and capital This business will continue to grow, but we do not want it to swamp our capa- must be reserved for that growth. operations, it is also true that these operations in turn will not generate the By the same token, while additional,funds are not needed for client-related tween the end of one contract and the'beginning of a new one and decisions to spend in excess of the contract amounts'if potential royalties and needs dictate. inherent in this area: the characteristic;-necessity for expenditures to lead revenues with some clients, gaps,I~n revenues and reconfiguration expenses be- pricing, are an example of this policy.Management beLieves it will be able to price contracts to cover costs and thus';the request for-additional financing does not include any funds for facilitating~`projects for clients. Our existing cash reserves function well as a cusliion against some ofthe short-term strains ti• ~, ing agreements, etc. Our interactions with Standard, including low front-end Specifically, the Research Plan as it relates to.work for clients, stipulates a pricing policy which will maximize long-term returns. The implementation of this strategy may require low, front-end pricing if that"is necessary for Cetus to maintain an optimum share of proprietary rights,and^participation in poten- tially very large downstream returns through royalties, joint'ventures, licens- cash required to fund the major,expansion desired. Board. An essential component of that plan is the sale of $6,000,000 in new The building of in-hou'se expertise and development of proprietary technology is implicit in the mandate from our shareholders and in the budget approved by the common stock now. Goq~~aZ fi 2fi G fi ot y G~ p. , r,•O ~p• ..~fi¢' ~•~' afiQ ~ a