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... ... ~ ....J ... ~,.. . ` December 13, 1976 .;:. ' ° c.}'.4, ~. . .: . .,.-.. - .- ..... ~ - -~ LLL~ . .~~ Our Shareholders t sW=_ ~ a ,'~a period since the MSeptember meeting of the shareholders •Yj, ~~`has been characterized by several developments which we hope fhx will accelerate our progress toward our major corporate goal. ` This oal is to est blish C tus a e a a d t f 4,rj, g s ominan , inanci.allv come to'fruition, nevertheless we believe that significant ;.~,.~.very significance we intend to help shape. While there is no :~~~,,assurance that any of the possibilities discussed below will secure factor in the world of microbiology, a world whose hc,s gress has been made in the Company. LL- ;;:`..a.Jenhancing productivity of an important antibiotic-producing : ....., During the last three months, we have made further gains in , organism tor,a major v'•5• company. This organism produces a initially modest in amount, for years on this new family of client's production vessels, and we could receive royalties, .together with sales of its derivatives, comprise a major - corporate thrust for our client.- Our organism is now in the = new antibiotic, just being introduced in Europe, whose sales, antibiotics. .Another client drug company (this one in Europe) has begun to scale up testing on one of our organisms and could go into production with it in 1977. C ..: L (. `:.. enzymes, and industrial chemicals. We had~hoped to begin to work on a contract for pesticide production, but the potential s:.. pletely outside the drug field, we hope to begin work on foods, '; -'~ yield improvements in the production of a vitamin, and, com- t' companies here and abroad regarding discovery of new antibiotics, ment programs continue and we are currently negotiating with Our efforts to expand our scope beyond antibiotic yield improve- C:11Ci1L r{rc:~iiuy caCC.:.LC.i'eu tnctL Lne ena proau~ctt potentlal Ciid not justify the effort. commercially is by using gene-stitching techniques. Our work in the dramatic new field of recombinant DNA ("gene- stitching") will be very visible, and we will keep you informed. We should like to call your attention to an article by Gene Bylinsky on the drugs of the future in the December issue of Fortune magazine. These drugs are mainly products of the human body and, as such, the only conceivable way to make many of.them Cetus Corporation, 600 Bancroft Way, Berkeley, California 94710 Phone: (415) 549-3300

Cetus has 119 employees, and our expanding program plans I}ave ; resulted in the requirement for new space. 'The ambitious and profound nature of some of our newer projects ~ has caused us to look more actively in recent months for ways -:a .in which to increase the capital strength of the company. Until 'rrecently;`we carefully husbanded our reserves, waiting for the appropriate time to apply them to clearly seen opportunities. =~ ya nki thitt Wlo for th fit le areow mangese commmens..le are as,ers time, examining the development of proprietary microbiological ~ processes. These programs ultimately will require more capital 'N th itlilbl tdti th ;#i ans preseny avaaeo us, an we mus rasee neces- '.sary funds to carry them to fruition.' Nevertheless, we have :decided to.start these programs with our own funds.-This is a measure of our conviction and we intend to convey that conviction to sources of new funds. 4, ` Such decisions,~along with our "pricing" policies'"in programs ~ _4',for antibiotic clients (relying onfuture rewards from current successes for our real pay-offs) may result in operations close f~_to "break-even" for the immediate future. This policy was I explained in my letter preceding the annual meeting. As a ..Ymatter of fact, unaudited results through November 30, 1976, show that for the five-month period since the beginning of the current fiscal year we show a net loss of $217,137, and a negative cash flow of $106,694. Our financial condition remains ,,strong. The unaudited November 30 balance sheet is attached. .... .. .. ,.... .., ~ - In summary, Management is very optimistic and we regard 1977 as a year of scale-up and investment in the future. We reason- :.ably expect to report successes in science, in marketing, and in financial strength during the coming year. .. . ., :._ , . . At the last shareholders meeting it was decided to make a con- version offer to holders of Series A Preferred Stock, and to split the Common Stock 20 to 1. Details regarding the imple- mentation of these decisions are enclosed. Enclosures '\ { kt.".W