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copy of the audited statement for the fiscal.year ending June 30, 1974. ..... ~~ ,.... Please find e-nclos . . ed an unaudited statement for the fiscal year ending June 30, 1975. For comparison purposes, please also examine the enclosed The current statement reflects our present operating position. Your and initiation of new projects have resulted in higher revenue levels. tion into an operational break-even configuration. Contract negotiations and at the same time it has moved out of the initial stages of organiza- make significant contributions to the field of indtistrial microbiology company has been engaged in genetic Improvement of strains of antibiot-ic- producing microorganisms for clients in the drug industry since the fall of 1973. During that period the company has shown that its technology can and the microorganism is actually used in regular (as opposed to trial) production. year for at least five years on work we have already completed. Whenever we turn an organism over to a client drug company there is a necessary period of testing in the drug company's facilities which may take several months and our rewards do not begin until this testing has been compl'eted' ... Letter to the Shareholders Cetus-developed microorganisms are currently being tested in large scale drug company production facilities, and it is possible that within the coming year we may begin to receive royalties in excess of $1,000,000 a are under way with potential clients not only in the pharmaceutical industry, but in the chemical and other industries as well. ~ Cetus is now looking at additional projects which could be even more exciting than those on which we are presently succeeding. Discussions A word about the financials: 1. Until Yast fiscal year we used the so-called 5-A accounting. Since we are now an operating company with contract revenue, we si'iitched on July 1, 1973, to the more conventiona]. accounting presentation. 2. The contract revenue amount for fiscal 1974 does not include $342,823 which was received~, but not yet recognized as income. This amount is shown as a contract advance in the liabilities section of the balance sheet of June 30, 1974; it has been included in revenue for fiscal 1975. C 3. The financial statements reflect conservative accounting princi- ples. All R & D costs are expensed as well as the labor portion of in-house instrumentation. Those material components of our biological system which are capitalized are depreciated over

s. We continue to maintain a cash balance of just about $':,000,000, and we feel that the company is ideally situated to'weather the present worldwide economic uncertainty and to emerge as a predominant force in the new .lndustry of genetic engineering and biosyntr.esis " .. , .. r . .. , ...._. .. _ _„ _ ~ , ,. ~. • .: .._. . .:.IiA ~~+f.i. .i. .L :c' . .~:. .. - - . u. . ,. ..'.r _._..; i:.. .c.:~..._!. .~._ ... ,_ . . . . .. ., ... ~ .... ,. . ... .:!..~ _ . . .... f. .. .. Chairman of the Boar ', ~ 4 ~.. a~i af+ ! c- i J.at. r i t; s. ~ Letter to the Shareholders July 7, 1975 Page 2 frw Enclosures 0 ~:.. , „.:~ ,.. . ~ . .... ?' - <. :._ s: . ._ i .,::: . . _.. .._.. 'Ronald E. Cape, Ph.D. ' President Moshe b1aLi ,~.. ~ _... .. .._ .. :,J W 11 M I &I f t I two years. A11 this tends to exaggerate our expenses and u'nderstate-