UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

                    For the fiscal year ended December 31, 2004

OR

                    For the transition period from                      to                     

Commission file number 000-31167

Genencor International, Inc.

925 Page Mill Road
Palo Alto, California 94304
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (650) 846-7500

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01
(Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     The aggregate market value (based upon the closing price on the Nasdaq Stock Market on June 30, 2004) of the 9,291,059 shares of voting stock held by non-affiliates as of June 30, 2004 was approximately $152,094,636.

     As of March 1, 2005, there were 60,119,648 shares of Common Stock, par value $0.01 per share, outstanding.

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TABLE OF CONTENTS

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     Unless otherwise specified, all references to “Genencor,” “the Company,” “we,” “us,” “our,” and “ourselves” refer to Genencor International, Inc. or Genencor International, Inc. and its subsidiaries collectively, as appropriate in the context of the disclosure.

     This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements concerning plans, objectives, goals, strategies, future events or performance and all other statements which are other than statements of historical fact, including without limitation, statements containing the words “believes,” “anticipates,” “expects,” “estimates,” “intends,” “plans,” “projects,” “will,” “may,” “might,” and words of a similar nature. The forward-looking statements contained in this Report reflect the Company’s current beliefs and expectations on the date of this Report. Actual results, performance or outcomes may differ materially from those expressed in the forward-looking statements. Some of the important factors which, in the view of the Company, could cause actual results to differ from those expressed in the forward-looking statements are discussed in Items 1, 7, and 7A of this Report. The Company disclaims any obligation to update any forward-looking statement to reflect facts or circumstances after the date hereof.

PART I.

Item 1. Business

Company Overview, Recent Developments and History

     We are a diversified biotechnology company that develops and delivers products and services for the industrial, consumer and agri-processing markets, which we refer to as our Bioproducts segment. In addition, we are developing products for the health care market in our Health Care segment. Using an integrated set of technology platforms, including gene discovery and functional genomics, molecular evolution and design, and human immunology, we develop products that deliver innovative and sustainable solutions to many of the problems of everyday life.

     Our strategy is to apply our proven and proprietary technologies, manufacturing capabilities and resources to expand sales in our existing markets and to address new opportunities in both bioproducts and health care. Our Bioproducts formulations contain enzymes that are used in applications as diverse as removing stubborn stains from clothing, converting corn starch to the sweeteners used in many foods and beverages, and enhancing the nutritional value of grains for animal feed. We own or lease eight Bioproducts manufacturing and distribution facilities and eleven stand-alone Bioproducts distribution centers, making up a global supply chain spanning four continents. In addition, we own a therapeutics production facility to support our preclinical and clinical Health Care efforts.

     We have a strong commitment to research as an essential component of our product development effort, and we are developing a number of other products independently as well as through collaborations. We focus our research and development activities in our technology platforms to discover, optimize, produce and deliver products to our target markets. An important part of our research and development effort is undertaken through third-party collaborations that contribute significant technology and other resources to the development and commercialization of products. We believe this aspect of our research and development effort will continue to be important as we expand into health care and other new markets.

     On January 27, 2005, we entered into an Acquisition Agreement (the Acquisition Agreement) with Danisco A/S (Danisco) and DH Subsidiary Inc., an indirect wholly-owned subsidiary of Danisco (Acquisition Sub), providing for a cash tender offer (the Offer) to acquire all of our outstanding shares of common stock not otherwise owned by Danisco or its subsidiaries for $19.25 per share, net to the seller in cash, to be followed by a merger (the Merger) of Acquisition Sub with and into the Company, with the Company to continue as the surviving corporation. A Special Committee comprised solely of our independent directors, and our Board of Directors, each has determined that the Offer and the Merger are fair to, and in the best interests of, our stockholders (other than Danisco, Eastman and their respective affiliates).

     In connection with the Acquisition Agreement, Danisco has entered into a definitive stock purchase agreement (Stock Purchase Agreement) with Eastman Chemical Company (Eastman), the holder of approximately 25 million shares of our common stock and 485 shares of our series A preferred stock, under which Danisco will acquire all of the outstanding shares of our common stock held by Eastman for $15 per share in cash and all of the outstanding shares of our series A preferred stock held by Eastman for $44 million in

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cash. In the stock purchase agreement with Danisco, Eastman has agreed not to tender in the Offer the shares of our common stock held by Eastman.

     The Acquisition Agreement is subject to certain conditions, including the tender of a majority of the outstanding shares of our common stock other than those held by Danisco, Eastman, the officers and directors of the Company and its subsidiaries and the respective affiliates of each of the foregoing, receipt of regulatory approvals and other conditions set forth in the Acquisition Agreement. Subject to those conditions, we currently expect the acquisition to be completed by May 31, 2005.

     If consummated, at the effective time of the Merger, all outstanding stock options, stock appreciation rights, shares of restricted stock and restricted stock units outstanding under our 2002 Omnibus Incentive Plan and its predecessor plan, whether or not such awards have otherwise become vested or exercisable, will be cashed out in a lump sum payment based upon the price of $19.25 or such higher price as may be paid pursuant to the Offer. In certain instances, a “change in control price” may be payable under the applicable plan if that price is higher than the price paid in the Offer. During the pendency of the Offer, we have suspended the right to exercise stock options.

     During 2004, our Bioproducts segment continued to generate all of our product revenues through the sales of existing products as well as the commercialization of new products. As discussed elsewhere in Item 1 of this Report, the Bioproducts segment also made important strides in its progress on new applications including efforts to develop low cost enzymes for cellulosic biomass conversion to ethanol, the advancement of our proprietary enzyme system for the elimination of prion infectivity and our work with Dow Corning on the Silicon Biotechnology platform. In addition, in November we launched our Defenz enzymes, a new line of decontamination enzymes to combat nerve gas agents and organophosphate-based pesticides. Licensed from the U.S. Army Edgewood Chemical Biological Center, these enzymes are believed to have advantages over traditional chemical decontaminants such as being water soluble, non-flammable and non-corrosive. We are now marketing this line to the military and civilian first responders such as fire departments, police departments and hazardous materials teams.

     Our Bioproducts segment has been working to expand in certain key geographic areas including, most notably, the Asia Pacific region. During 2004 we acquired majority ownership and assumed a controlling interest in our Japanese joint venture, which has been renamed Genencor Kyowa Co. Ltd. In January 2005 we announced plans to replace our current facility in Wuxi, China with a new manufacturing facility in the Wuxi China National New and High Tech Industrial Development Zone. We expect to operate this facility as a wholly-owned entity, and are in the process of purchasing the remaining approximately 15 percent interest in our Chinese subsidiary from our joint venture partner. The construction is expected to commence in the middle of 2005 with completion and operations transfer from our existing Chinese facility expected to begin in late 2006. The obligation to consummate this transaction is subject to certain conditions precedent including, but not limited to, the receipt of Chinese governmental approvals.

     This year saw major activity within our Health Care segment as well. Early in the first quarter, we initiated our first clinical trial of a therapeutic candidate, a Phase I safety and immunogenicity study for a DNA-based therapeutic vaccine to treat hepatitis B. In March, we sold our entire therapeutic vaccine program to Belgian biotechnology company Innogenetics N.V. We recognized $10 million in license fees associated with this transaction and have the potential of receiving up to $87 million in development milestones as Innogenetics advances this vaccine program. In the event these vaccine products reach commercialization, we also would receive royalty payments on product sales.

     With this transaction, our Health Care segment focused on building and advancing its targeted biotherapeutics pipeline focused on cancer treatment. We then advanced our first product candidate, GCR-8886/2141, for treating cancer into Investigational New Drug (IND) enabling development with the launch of a formal development project. This candidate is based on Protein Activated Chemotherapy (PACT), which is our proprietary version of the Antibody Directed Enzyme Prodrug Therapy (ADEPT) platform for directing anti-cancer drugs to tumors. GCR-8886/2141 targets significant unmet medical needs in colorectal and pancreatic carcinoma. In December, we added to this pipeline through an exclusive worldwide patent license agreement from the Public Health Service giving us the right to develop and commercialize two therapeutic product candidates for cancer. These candidates were under development by the National Cancer Institute. The first candidate, GCR-3888, is currently in a Phase II clinical study for the treatment of hairy cell leukemia and in a Phase I clinical study in subsets of treatment-refractory pediatric acute lymphoblastic leukemia, chronic lymphocytic leukemia and non-Hodgkin’s lymphoma. The second candidate, GCR-8015, is an improved second-generation candidate in the IND enabling stage of development for expanded subsets of patients with these hematologic malignancies.

     We trace our history to 1982 when Genencor, Inc. was formed as a joint venture between Genentech, Inc. and Corning, Inc. In 1987, Eastman Kodak Company acquired a 25% interest in Genencor, Inc. Genencor International, Inc. was incorporated in Delaware in 1989 and commenced operations in 1990 when Cultor Ltd. and Eastman Kodak formed a joint venture in the industrial biotechnology area and acquired Genencor, Inc. In 1993, Eastman Kodak transferred its 50% interest in Genencor International, Inc. to

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Eastman Chemical Company. In 1999, Danisco A/S acquired Cultor Ltd., which is now known as Danisco Finland OY. After our initial public offering and continuing to the present, Eastman Chemical Company and its affiliates and Danisco A/S and its affiliates each own in excess of 40% of our outstanding common stock as well as all of our outstanding preferred stock.

Our Marketed Products

     Our Bioproducts segment currently competes in four core areas serving our industrial, consumer and agri-processing markets: cleaning, textiles, grain processing, and food, feed and specialties. In addition to the products we have developed for our core markets, we have also developed one product for the personal care market and are working to develop others. Within these markets, and taking into account our 2004 acquisition of a majority interest in Genencor Kyowa Co. Ltd., our Bioproducts segment recognized $389.8 million in product revenues in 2004 through the sale of approximately 420 products and formulations in more than 80 countries. We manufacture these products at our eight Bioproducts manufacturing facilities located in the United States, Finland, Belgium, China and Argentina. We market these products primarily through our direct sales organizations in the United States, the Netherlands, Singapore, Japan, China, the United Kingdom, Argentina and Brazil, as well as through other distribution channels in selected markets and geographic areas.

Cleaning Products

     Our cleaning products include protein degrading enzymes, such as proteases; starch degrading enzymes, such as amylases; and cellulose degrading enzymes, such as cellulases and a guar degrading mannanase enzyme. These products are formulated in granular, liquid, tablet and gel forms. Our commercially available cleaning products include the following:

Textiles Products

     Our textiles products include cellulase, amylase and protease enzymes for applications such as denim finishing, biofinishing of cotton and cellulosics, and desizing and treatment of wool and silk. Additionally, we market catalase enzymes used to remove hydrogen peroxide during the textile dyeing process. These products are available in a variety of formulations, including liquid and granular forms, and at various concentrations useful under altered conditions, such as high or low temperature and high or low pH conditions. Our commercially available textiles products include the following:

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Grain Processing Products

     We market our grain processing products to customers who process agricultural raw materials such as barley, corn, wheat and soybeans to produce animal feed, food ingredients, industrial products, sweeteners and renewable fuels. Our grain processing products are used to make products as diverse as beer, sweeteners and fuel ethanol. Subsets of these products are referred to in this Report as: sweeteners or carbohydrate processing and fuel ethanol or fermentation alcohol. Our commercially available grain processing products include the following:

Food, Feed and Specialties Products

     Our food, feed and specialties products are used in the food industry for such purposes as to improve baking, to process proteins more efficiently and to preserve foods. Additionally, we sell products to improve animal feed and pet food, to treat animal hides in the leather industry, to recover silver residue in photographic film processing, to improve pulp and paper processing, and to decontaminate certain nerve gas agents and organphosphate-based pesticides. Our commercially available food, feed and specialties products include the following:

Personal Care Products

     We also currently market a high-performance protease used in Dawn Special Care, a hand dish care product sold by The Procter & Gamble Company offering skin-softening benefits to consumers.

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Products in Development

     The continued success of our business depends on our ability to develop innovative products that meet our customers’ needs in our target markets. Our ability to develop products for our targeted markets, including health care, may be limited by our resources, our ability to develop and maintain strategic alliances, and the licensing and development of necessary technology. To date, we have financed operations and product development from the sale of products, the sale of stock, research and development funding from our strategic partners, government grants, and short-term and long-term borrowings.

Bioproducts

     We currently have numerous product development programs ongoing in the target markets associated with our Bioproducts segment. Our most important programs include the following:

     Silicon Biotechnology. Our alliance with the Dow Corning Corporation seeks to combine our expertise in biotechnology and Dow Corning’s expertise in silicon chemistry to create a new, proprietary Silicon Biotechnology platform. We plan to jointly commercialize products developed by the alliance. The alliance has filed important patent applications and established a business unit to pursue its biosensor market opportunities. The patent applications have been filed in three strategic areas that we expect to define the initial fields of the alliance’s activity. The first is in biotransformations, where the tools of biotechnology are used to modify silicon to create new materials with unique attributes or to create new, more environmentally efficient processes for existing silicon-based materials. The second area covers delivery systems where silicon and biological materials are combined to deliver active ingredients for application in a wide spectrum of markets, such as cleaning, health care and personal care. The third area covers nano-scale systems for biosensing devices and performance materials. The alliance also established its first business venture to pursue opportunities for biosensors in the fields of consumer in-home medical tests, drug discovery, biowarfare threat analysis, veterinary diagnostics, and environmental and home monitoring of air, water and food. The alliance is expected to pursue commercialization opportunities alone and in partnership with market leaders in these target markets.

     Personal Care. We are developing enzyme, protein and peptide ingredients for incorporation into skin, hair and oral personal care products. As part of the path to the market, we have entered into exclusive development collaborations with two major personal care companies. Additionally, we are developing a series of products for the entire market. At least six of these products have passed initial safety and toxicology screening. Some of these have also completed preliminary in vivo or in vitro performance testing and are being sampled to selected potential customers.

     Prion Infectivity. In August 2001, we announced an exclusive collaboration with the predecessor of the United Kingdom’s Health Protection Agency to develop technology to eliminate prions, the infectious agent thought to cause mad cow disease as well as the human form of that disease, and our research and development activities are continuing. The collaboration is primarily focused on developing an enzyme-based method for treating surgical equipment, rendered animal material and blood products to eliminate prion infectivity. Though incineration and high caustic treatments of infected material have shown some degree of prion inactivation, these conditions are not suitable for general applications due to incompatability with most materials and worker safety issues. Previously published results have shown our proprietary enzymes can decrease immunoreactive prion particles under more user-friendly conditions consistent with enzyme applications. More recent in vivo studies using mouse model systems have confirmed that the proprietary proteases can reduce the infectivity of prion particles in both infected mouse brain homogenate as well as meat and bone meal spiked with infectious prions. We are currently awaiting regulatory approval in the European Union for the decontamination of surgical instruments. Specifically, a data package covering this application has been assembled in anticipation of a CE certification in the European Union for the product.

     Biomass Conversion to Ethanol. The agricultural industry produces a vast amount of waste product known as biomass. Some examples include cornstalks, rice hulls and corn stover. Currently, the agricultural industry cannot economically convert biomass on a large scale into useful chemicals such as ethanol. In 2000, we were awarded an initial three-year $17.0 million partial matching funds contract by the National Renewable Energy Laboratory (NREL) to continue our efforts in developing a low cost enzyme system for the economic conversion of biomass to ethanol. In April 2003, we announced we had exceeded our project goal of using our integrated technology platforms to deliver a 10-fold improvement in the economics of breaking down biomass into fermentable sugars. We completed our work with NREL in July 2004 delivering approximately a 30-fold improvement based upon the original NREL metrics. We are continuing our efforts in this area with a focus on application of the technology to new product opportunities.

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Health Care

     In 2001, we commenced implementation of our health care business strategy. Since this is a more recent initiative for us, our product pipeline is not as mature as in the bioproducts area. We expect to continue investing in internal research programs, external collaborations and other strategic investments in order to increase our development pipeline. With the sale of our therapeutic vaccine program to Innogenetics, we have focused our efforts on targeted biotherapeutics for the treatment of cancer.

     Targeted Biotherapeutics. We believe the protein therapeutics market is growing significantly, and we believe we have identified opportunities to use our molecular biology, immunology, protein engineering and manufacturing skills to address key problems typically associated with protein therapeutics and to discover and develop new protein therapeutics.

     We are leveraging our key capabilities and technologies in an important area of focus, discovery and development of protein-based drugs for cancer treatment. We are using our expertise in exploiting natural and synthetic diversity to develop new methods for targeting therapeutics to cancer cells as opposed to healthy cells. For example, pursuant to our agreement with Seattle Genetics, we are developing tumor-targeted enzymes that convert relatively non-toxic prodrugs into cytotoxic drugs. The enzyme is concentrated specifically at the tumor site through either an antibody or a novel protein that targets a specific antigen expressed on the tumor cells. The catalytic activity of the enzyme then leads to a significantly increased concentration of the cytotoxic moiety and increased cell death at the tumor site. We refer to this approach as PACT, which is our proprietary version of a platform widely known as ADEPT. In addition, with the execution of a license and Cooperative Research and Development Agreement (CRADA) with the Public Health Service and National Cancer Institute, we are developing immunotoxins targeted to hematologic cancers expressing the CD22 antigen. We are also undertaking early stages of research to leverage the immunotoxin technology and create leads directed against other cancer types.

     We are also exploring opportunities to leverage our expertise in protein expression and manufacturing for production of protein therapeutics. We completed construction and have made substantial progress in the validation of a clinical manufacturing facility designed to satisfy the current Good Manufacturing Practice (cGMP) regulations of the U.S. Food and Drug Administration (FDA) in order to meet the needs of our Health Care drug discovery portfolio and to provide strategic partnering opportunities.

     Another area of activity is protein engineering services for the pharmaceutical industry, which addresses problems ranging from immunogenicity to pharmacokinetics. For example, using our i-mune assay, we can identify epitopes in a protein that may be responsible for initiating an immune response. Then, through protein engineering, these problematic epitopes can be modified, prior to human testing thereby reducing the risk of an adverse immune response. We are applying such approaches primarily to enhance our internal research and development programs. In 2004, we also conducted studies under funded agreements with a pharmaceutical company to evaluate that company’s proprietary molecules using the i-mune assay.

Research and Development

     We have a strong commitment to proprietary research as an essential component of our product development effort. Technology developed in collaborations with third parties, as well as technologies licensed from third parties, are also important sources of potential products for us.

     We have developed several related technology platforms that we apply in an integrated approach we call i-biotech to the discovery, optimization, production and delivery of our products. Our technology platforms supported the development of current commercial products, and we believe that application of these technology platforms may also generate new product candidates in our target markets. Our technology platforms include the following:

Gene Discovery and Functional Genomics

     Gene discovery is a series of techniques used to identify diverse genes whose encoded proteins are capable of solving customer needs or treating a target disease. We identify genes either on the basis of their sequence or on the basis of the function of their encoded protein products. With this information, we identify and develop potential products. Identifying genes of interest can start with the analysis of genes found in diverse culture collections, analysis of genes that are expressed under differentially defined conditions or direct analysis of the proteins expressed in a cell or culture. We apply all three approaches to gene discovery.

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Molecular Evolution and Design

     Molecular evolution and design is the process or set of tools by which we accelerate the natural evolutionary process in order to engineer or optimize gene products for their intended use, including bioproducts market applications as well as second-generation biopharmaceutical candidates. Using integrated tools for assay development, library generation, and robotic sample handling, we can rapidly develop and screen diversity libraries for activities or gene expression. These technologies are being applied to ongoing internal projects, including, for example, our personal care, cancer therapeutics, and biomass conversion projects.

     In nature, evolution occurs at a very slow rate. We accelerate the evolutionary process to engineer and evolve, or optimize, the function of the protein we identify in the discovery process. We optimize a gene by changing or mutating its DNA sequence to produce a variant protein with a modified function. This process is known as mutagenesis. We alter proteins at a single site, at multiple sites or randomly over the entire length of the protein sequence. We employ several advanced chemical and enzymatic methods for mutating the DNA sequence of genes. We insert these altered genes into our proprietary host production organisms so that we can screen the variant proteins they produce for the identification of product leads.

Human Immunology

     The potential for human allergic response limits the application of some engineered enzymes. To address this limitation, we have developed our human immunology, or i-mune, platform. This platform centers on an assay that determines the human immune response to proteins.

     The human immune system is an extraordinary defense mechanism capable of rapidly responding to invading pathogens and other foreign molecules. Our i-mune assay recreates the first steps of the human immune response in an automated assay format. We take a target protein and divide it into a series of small, easily synthesized pieces. Using our assay, we determine if the protein contains any pieces capable of causing an immune response. We then use the tools of our molecular evolution and design platform to modulate the response. We have shown that we can decrease the allergenic potential of specific proteases and have in vivo evidence, which means occurring within a living organism, that the in vitro assay, which means occurring outside a living organism, accurately predicts human allergenic results.

     We believe the human immunology platform will allow us to determine the allergenic potential of proteins, including those of therapeutic value, to recommend ways to reduce their allergenic potential and, using our molecular evolution and design platform, to develop new materials with reduced allergenic response profiles without human testing. We believe these technology platforms may potentially lead to products in our target markets.

Biomaterial Production Systems

     The term “biomaterial” refers to traditional biocatalysts, chemicals produced through biological routes and novel biological materials, such as repeat sequence proteins or biosensors. A key element of our i-biotech approach is the concurrent application of our biomaterial production systems platform with our other technology platforms. Biomaterial production systems consist of host production organisms that we have adapted to accept genes from other organisms, or foreign genes, and produce the proteins encoded by these foreign genes together with a proprietary process for growing our host production organisms, which we refer to as our proprietary fermentation processes. We grow, or ferment, our host production organisms under controlled conditions, allowing these organisms to grow, divide and efficiently produce optimized proteins. We have developed numerous host production organisms backed by patented technology and process know-how.

Metabolic Pathway Engineering

     Metabolic pathway engineering is a process we use to modify our host production organisms to produce small molecules and chemicals, or biochemicals. Microorganisms make biochemicals through sequences of enzyme-catalyzed reactions, referred to as pathways. In order to produce these biochemicals, we often add new pathways or parts of pathways from a variety of organisms into our host production organisms.

     Our approach to metabolic pathway engineering, referred to as DesignPath, is the integration of a variety of tools including genomics and functional genomics. We begin with the known metabolic pathways of our host production organisms and then reconstruct the pathways based upon our analysis. Then we add new genes, identified through our gene discovery and functional genomics platform and optimized through our molecular evolution and design platform. Additionally, we are applying these tools to develop more efficient production hosts by designing strains that have better carbon utilization and less by-product formation during

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the fermentation cycle. These programs integrate our discovery technologies into a powerful solution to improve expression levels of products and the utilization of raw materials.

Formulation Delivery Systems

     Once we have developed a desired biomaterial, we typically formulate it in a manner customized for the intended use of the customer. Our patented formulations range from stable liquids to multi-layer granular formulations, including our Enzoguard granular products, which have sophisticated properties such as delayed release and oxidation barriers. These formulations protect biomaterials against harsh chemical and environmental conditions. In addition, we have designed and developed highly efficient fluidized coating equipment and processes to make our formulated products.

Strategic Alliances

     A key part of our strategy has been and we expect will continue to be forming strategic alliances with industry leaders in our target markets. In forming commercial alliances, we seek partners that share our desire and commitment to grow, hold or have access to significant market share in the target market and are willing to fund or participate in research and development efforts. We also fund external alliances to access, apply and develop technologies that are strategic to our target markets. Some of our key strategic alliances are as follows:

Bioproducts

     The Procter & Gamble Company. Our alliance with The Procter & Gamble Company began with our predecessor company in 1984 and continues to the present. Through this relationship, we have conducted joint research and development leading to the commercialization of five engineered protease enzymes. This relationship has enabled the launch of major new brand initiatives involving their flagship detergent products Tide and Ariel.

     Our alliance with The Procter & Gamble Company is based currently upon two principal agreements. First, we are party to a master collaboration agreement, dated October 31, 2003, which expires on October 31, 2006. This agreement provides a framework for cooperation in numerous areas as mutually agreed, particularly laundry and cleaning products. Second, in November 2001, we announced the signing of a five-year worldwide supply contract with The Procter & Gamble Company to provide protease enzymes for laundry and dish detergents. The contract extends our two decade long relationship and further solidifies our position with respect to the innovation and commercialization of protease enzymes for liquid and dry formulation.

     Dow Corning Corporation. In October 2001, we entered into an agreement with Dow Corning Corporation seeking to combine our expertise in biotechnology with Dow Corning’s expertise in silicon chemistry. In June 2004, the parties amended the agreement, among other things extending the collaboration through 2005. The program is attempting to develop unique materials combining the inorganic and biological worlds and to address customer needs in markets we serve today as well as create opportunities in the nanotechnology, photonics and electronics markets. To date, the companies have explored product opportunities in markets both companies serve and anticipate that the alliance will see some of its first successes through the introduction of new, biologically mediated silicon-based products for the life sciences, personal care, cleaning and textiles markets. We have achieved certain milestones, and the alliance has established its first business venture to pursue opportunities for biosensors in the fields of consumer in-home medical tests, drug discovery, biowarfare threat analysis, veterinary diagnostics, and environmental and home monitoring of air, water and food.

     Danisco A/S. In October 2000, we entered into a four-year minimum term research and development agreement with Danisco, one of the world’s leading food ingredients companies. The collaboration is directed at the development and production of innovative biotechnology derived products for use in the food industry. The first joint project target reached commercialization in July 2004.

     NatureWorks LLC. In September 2003, Cargill Dow, now known as NatureWorks LLC, chose us to be its partner to create advanced enzyme systems for a biomass project supported by the United States Department of Energy. This project builds on our previous work with NREL to develop enabling enzyme systems essential for the enzymatic conversion of biomass to ethanol.

Health Care

     Seattle Genetics, Inc. In January 2002, we formed a collaboration with Seattle Genetics, Inc. to discover and develop a class of cancer therapeutics based on tumor-targeted enzymes that activate prodrugs. In July 2003, we paid Seattle Genetics an extension fee

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and extended the agreement for two additional years under modified terms. Under terms of the amended agreement, we have a nonexclusive license to Seattle Genetics’s proprietary ADEPT technology for multiple targets, and each company may independently develop products utilizing the other party’s applicable technology. We expect to continue accessing Seattle Genetics’s novel prodrug program in support of our Health Care development efforts. Seattle Genetics may continue its research and development efforts of its lead ADEPT molecule, SGN-17/19, without further funding from us.

     National Cancer Institute. In December 2004, we signed a license agreement and CRADA with the Public Health Service and National Cancer Institute to develop and possibly commercialize two product candidates for hematologic malignancies, GCR-3888 (formerly BL22) and GCR-8015 (formerly HA22) and possibly follow-on lead molecules. This program builds on our strengths in protein engineering, preclinical development, manufacturing and clinical development and on the National Cancer Institute’s clinical development capabilities.

Research Expenses

     A major portion of our operating expenses has been related to the research and development of products. During the years ended December 31, 2004, 2003, and 2002, our total research and development expenses were $75.8 million, $72.5 million, and $70.2 million, respectively. Of these expenses, an estimated $7.6 million, $13.1 million, and $15.4 million, respectively, represent total expenses incurred in conjunction with research collaborations partially funded by our various partners.

     Our research and development efforts have been a primary source of our products and represent an essential component of our business strategy. As of December 31, 2004, we had 253 employees involved full-time in our research and development efforts (including research and development, regulatory and therapeutics production facility personnel), 72 of whom hold Ph.D. degrees and three of whom hold M.D. degrees.

Competition

     We face significant competition in the enzyme markets in which we currently compete. As we develop products for the health care market and new sectors of the bioproducts markets, we face a host of new competitors, including, for example, biotechnology and pharmaceutical companies.

     In the industrial and consumer markets, some competitors may have a stronger market position and greater financial resources than we do. Specifically, in cleaning enzymes, we believe that Novozymes A/S, our largest competitor, may have more product offerings and a greater market share than we do. In food and feed enzymes, we believe that DSM N.V. and Novozymes A/S have greater market shares and more product offerings than we do.

     Our products and development programs target the bioproducts and health care markets. There are many commercially available products for each of these markets and for the specific consumer problems and the specific diseases we may attempt to address in product development. A large number of companies and institutions are spending considerable amounts of money and resources to develop products in our target markets.

Competition in our current and target markets is primarily driven by:

•	the ability to establish and maintain long-term customer relationships;

•	the ability to develop, maintain and protect proprietary products and technologies;

•	technology advances that lead to better products;

•	product performance, price, features and reliability;

•	in the case of health care products, clinical efficacy, safety, convenience, and compatibility with other drug products;

•	timing of product introductions;

•	manufacturing, sales and distribution capabilities;

•	technical support and service; and

•	breadth of product line.

     Any product we make in the future will also likely compete with products offered by our competitors. If our competitors introduce data that show improved characteristics of their products, improve or increase their marketing efforts or lower the price of their products, sales of our products could decrease. We cannot be certain that any products we develop in the future will compare favorably to products offered by our competitors or that our existing or future products will compare favorably to any new products that are developed by our competitors. Our ability to be competitive also depends upon our ability to attract and retain qualified personnel, obtain patent protection and otherwise develop proprietary products or processes.

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Proprietary Rights

     The protection of our proprietary technologies and products is important to the success of our business. We rely on a combination of patents, licenses, trade secrets and trademarks to establish and protect our proprietary rights in our technologies and products. Our intellectual property portfolio includes rights in technologies including specific Bioproducts and Health Care products and product candidates and methods of use, production technology, and technology covering research tools such as high-throughput gene discovery, molecular evolution, immunological screens and metabolic pathway engineering. In 2004, we filed 74 new and continuation in part utility patent applications in the U.S. Patent and Trademark Office. Of the new filings, 54 were directed primarily at technology in the Bioproducts arena and 11 were directed primarily to technology in the Health Care field. The remaining nine new filings were directed to basic technology relevant across our programs. In addition, as evidence of the emphasis we place on the protection of our intellectual property, we owned or controlled 24 patents granted by the U.S. Patent and Trademark Office and 23 patents granted from the European Patent Office in 2004. As of December 31, 2004, our worldwide intellectual property portfolio included 484 issued U.S. patents and 855 pending U.S. patent applications.

     Despite our existing portfolio, we may not be able to obtain the patents or licenses to technologies that we will need to develop products for our target markets. Patents may be issued that would block our ability to obtain patents or to operate our business. In addition, patents have a limited duration. Generally, patents issued in the United States have a term of 17 years from the date of issue for patents issued from applications submitted prior to June 8, 1995. Patents issued in the United States from applications submitted on or after June 8, 1995 have a term of 20 years from the date of filing of the application. Patents in most other countries have a term of 20 years from the date of filing the patent application. Patent applications are usually not published until 18 months after they are filed. The publication of discoveries in scientific or patent literature tends to lag behind actual discoveries by at least several months. As a result, there may be patent applications or scientific discoveries of which we are not currently aware.

Raw Materials

     The raw materials that we use are commercially available products from a number of independent sources. Based on total raw material expenditures, more than 65% of them have alternate sources of supply, with the remaining supply base being commercially available and interchangeable. Our top twenty suppliers of raw materials account for approximately 72% of the total raw material purchases we make to support our global manufacturing operations.

Manufacturing and Supply Capabilities

     We own or lease eight Bioproducts manufacturing and distribution facilities and eleven stand-alone Bioproducts distribution centers, making up a global supply chain spanning four continents. Our supply organization has a proven capability to meet customer demands. This involves quality certification, such as ISO 9001:2000, multi-site product qualification, delivery capabilities and special custom supply requirements. We strive to produce materials in locations and with processes that allow us to minimize manufacturing and distribution costs, inventory and capital investment. We also have a therapeutics production facility to support our preclinical and clinical Health Care efforts. Finally, we recently announced plans for the construction of a new manufacturing facility in Wuxi, China to replace our existing Bioproducts facility in that region.

Trademarks

     The following are our trademarks: GENENCOR, GENENCOR INTERNATIONAL, INDIAGE, PRIMAFAST, OPTISIZE, PURAFECT, PROPERASE, PURASTAR, PURADAX, PURABRITE, SPEZYME, G-ZYME, OPTIDEX, DISTILLASE, OPTIMAX, FERMENZYME, GENSWEET, OPTIMALT, CLARASE, MULTIFECT, MULTIFRESH, FERMCOLASE, LAMINEX, OXYGO, I-MUNE, I-BIOTECH, DEFENZ, DESIGNPATH, DESTIGEN, OXYGONE, PACT, PRIONZYME, PROTEX and ENZOGUARD. SILICON BIOTECHNOLOGY is a trademark of the Dow Corning Corporation and us. The following trademarks are owned by the individual companies: DAWN SPECIAL CARE, TIDE and ARIEL (The Procter & Gamble Company); ADEPT (Seattle Genetics, Inc.).

Major Customers

     Our five largest customers collectively accounted for approximately 51% of our 2004 product revenues, with our largest customer, The Procter & Gamble Company, accounting for more than 32% of such revenues. Our five largest customers in 2004 were a collection of related purchasers in the grain processing area that we identify as The Broin Group; Danisco Animal Nutrition – the feed ingredients business unit of Danisco A/S, which was formerly known as Finnfeeds; Cargill, Incorporated; The Procter & Gamble Company; and Reckitt Benckiser, plc.

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Geographical and Product Class Information

     The financial information concerning geographical areas and product class revenues set forth in Note 15 of the financial statements contained in Item 8 of this Report is incorporated herein by reference.

Regulatory Environment

Product Regulation — Bioproducts

     Regulatory agencies regulate our products according to their intended use. The FDA regulates food, feed, cosmetic and pharmaceutical products based on their application. The FDA and the U.S. Environmental Protection Agency (EPA) regulate non-drug biologically derived products. The U.S. Department of Agriculture regulates plant, plant pest and animal products. The EPA regulates biologically derived chemicals not within the FDA’s jurisdiction or the jurisdiction of other regulatory agencies. Although the food and industrial regulatory process can vary significantly in time and expense from application to application, the timelines generally are shorter in duration than the drug regulatory process and range from three months to three years.

     The European Union (EU) has attempted to replace national regulatory procedures for biologically derived products with a consistent EU regulatory standard. However, some national regulatory oversight remains. Regulation of enzymes used as processing aids is currently accomplished through such national oversight although the EU Commission is pursuing regulations covering all food use enzymes at the EU level. For enzymes used as additives in food or feed, centralized legislation exists requiring review of the product application by the European Food Safety Authority.

     Regulatory review of our products in Pacific Rim and Asian countries having approval or registration processes ranges from three months to two years. Currently, enzymes used in food require approval in Japan, Korea and Australia/New Zealand and registrations in several other countries. Certain Asian countries and some countries in Latin America rely on United States and European product registrations.

Product Regulation — Health Care

     In the United States, all phases of the development and commercialization of pharmaceuticals are regulated primarily under federal law and subject to rigorous FDA review and approval processes. Before a pharmaceutical candidate can be tested in humans, it must be studied in laboratory experiments and in animals to provide data to support its potential safety, and clinical supplies must be produced under the FDA’s cGMP regulations. These data are submitted to the FDA in an IND for review and authorization to study the pharmaceutical product in humans. Only after the FDA finds the IND enabling data to be acceptable can a company commence clinical trials in humans designed to demonstrate that a pharmaceutical product is safe and effective for its intended use.

     These clinical trials are subject to federal regulations, are very expensive and usually take many years. These studies are divided into three separate phases. In Phase I, studies are conducted with a relatively small number of healthy human subjects or patients to assess the safety of the product, dose tolerance, pharmacokinetics, metabolism, distribution and excretion. In Phase II, the product is given to a limited target patient population to further assess safety and to begin to assess efficacy and dose safety. If the results of these first two phases are favorable, then Phase III studies are conducted in the target patient population with a number of subjects large enough to statistically establish safety and efficacy of the product. Concurrent to the clinical development, a company needs to also generate data on the manufacture and controls of the pharmaceutical product. Upon the successful completion of Phase III and demonstration of the ability to produce the product under cGMP conditions, a New Drug Application (NDA) or a Biologics License Application (BLA) is submitted to the FDA. The clinical and manufacturing information submitted with the application is reviewed by the FDA, which will approve the product for marketing if it judges that, pursuant to current regulations, the data contained in the application support the safety and efficacy claims and the manufacturing and controls data demonstrate the quality, purity, safety and identity of the product. On average, it takes the FDA six to twelve months to review and approve an NDA or BLA. Significant changes in manufacturing and controls of the product or additional labeling claims pursued after approval of the initial application is obtained will require submission of additional data to the FDA for review and approval.

     Regulatory procedures for licensing drug products in Europe are generally comparable to those in the United States. Biologic products are reviewed through a centralized procedure that leads to granting of a single license for the entire EU.

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Environmental Regulation

     We are subject to national, state, and local environmental laws and regulations, including those governing the handling and disposal of hazardous wastes, wastewater, solid waste and other environmental matters. Our research, development and manufacturing activities involve the controlled use of hazardous materials, including chemical, radioactive and biological materials. Although we believe that our safety procedures for handling and disposing of these materials comply with applicable regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for resulting damages. We do not expect that compliance with the environmental regulations to which we are subject will have a material effect on our capital expenditures, earnings or competitive position.

Genetically Modified Microorganisms

     Genetically modified microorganisms and products derived from these organisms are regulated in many countries around the world. In the United States, we voluntarily comply with the National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules at all of our research and development facilities. We also comply with the EPA’s regulation of intergeneric microorganisms under the Toxic Substances Control Act. We design our production organisms and processes to comply with regulatory principles and practices in both manufacturing and commercial venues regardless of the location. By using production organisms that are classified as Good Industrial Large Scale Practice or Biosafety Class I organisms, we are able to maximize environmental and employee safety while minimizing regulatory concerns. Through this strategy, we have been successful in gaining regulatory clearance to use our genetically modified microorganisms in our manufacturing factories in the United States, Belgium and Finland and in our research facilities in the United States and the Netherlands.

Compliance

     To be able to commercialize our products around the world, we must ensure that they are safe and suitable for their intended use and meet applicable regulatory requirements. Their manufacture also must comply with all existing regulations at our manufacturing sites. In order to meet this need, we have an experienced internal regulatory and environmental health and safety department that is involved in projects from the earliest possible stage.

Animal Welfare Act

     The Animal Welfare Act governs the humane handling, care, treatment and transportation of certain animals used in research activities in the United States. Mice are currently not subject to regulation under the Animal Welfare Act. However, the U.S. Department of Agriculture, which enforces the Animal Welfare Act, is presently considering changing the regulations issued under the Animal Welfare Act to include mice within its coverage. The Animal Welfare Act imposes a wide variety of specific regulations on producers and users of animal subjects, including specifications for the safe handling, care, treatment and transport of animals covered. Currently, we house no animals at our facilities. We believe that our housing facility vendors and external toxicology laboratories are in compliance with the Animal Welfare Act.

Employees

     As of December 31, 2004, we had 1,271 active employees in our consolidated entities, including 83 with Ph.D. degrees and four with M.D. degrees. We may expand our research and development and business operations and hire additional staff as we expand our technology and market opportunities and establish new strategic alliances and customer relationships. We continue to search for qualified individuals with interdisciplinary training and flexibility to address the various aspects and applications of our technologies. None of our United States employees were represented by a labor union as of December 31, 2004. Employees at several of our foreign locations are covered by collective labor agreements, including employees in Argentina, Belgium, Finland, France, Germany and the Netherlands. We strive to maintain strong working relationships with all the employee representatives.

Website Access To Reports

     Through our Internet website, we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (SEC). Our website address is www.genencor.com, and these reports can be accessed through the Investor Relations section of our website. By including our website address in this Annual Report on Form 10-K, we do not intend to include or incorporate by reference the information on our website into this Annual

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Report on Form 10-K, and under no circumstances shall such information be deemed to be included in or incorporated by reference into this Annual Report on Form 10-K.

Risk Factors

     Biotechnology and especially the development of products for the health care market are areas of intense competition and high risk. Accordingly, significant risk factors, including those described below could harm our business, financial condition, and/or results of operations.

Risks Related to Our Business

If we fail to develop products for the health care and bioproducts markets, we may not achieve an acceptable return on our research and development expenditures or realize product revenues from these markets.

     Our future success will depend in part on continuous, timely development and introduction of new products that address evolving market requirements and are attractive to customers. We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product, and may be reluctant to switch thereafter. In addition, our Health Care segment is a relatively new business strategy for us and our future success in this segment will depend upon our ability to utilize our technologies for the development and delivery of new products to the health care market. We intend to continue to invest heavily in research and development to develop products for both our Bioproducts and Health Care segments. To the extent that we fail to introduce new products, we could fail to obtain an adequate return on these investments and could lose market share to our competitors, which may be difficult to regain.

     The successful development of these products is highly uncertain and is dependent on numerous factors, many of which are beyond our control, and may include the following:

	•	the product may be ineffective or have undesirable side effects in preliminary and commercial testing or, specifically in the health care area, in preclinical and clinical trials;
	•	the product may fail to receive necessary governmental and regulatory approvals, or such regulatory approvals may be delayed significantly;
	•	the product may not be economically viable because of manufacturing costs or other factors, which are not known to us at this time;
	•	the product may not gain acceptance in the marketplace or we may fail to adequately address our customers’ requests for modifications and improvements on our existing products;
	•	our competitors may successfully introduce competing products into the market and develop substantial market share before we are able to introduce our products; or
	•	the proprietary rights of others or competing products or technologies for the same application may preclude us from commercializing the product.

     As a result of these factors and others, we may experience delays in the development and introduction of new products in our existing bioproducts markets. Also due to these factors we may never achieve an acceptable return on our research and development expenditures or realize product revenues from our Health Care segment or in new bioproducts markets that we are targeting, such as personal care products.

We have yet to commercialize a Health Care product, our Health Care segment has a history of losses and we expect to continue to incur losses in that segment for the foreseeable future.

     We have yet to commercialize a Health Care product, and our Health Care segment has incurred net losses since we commenced implementation of our Health Care business strategy in 2001, including net losses of $24.1 million in 2001, $40.9 million in 2002, $33.6 million in 2003 and $23.3 million in 2004. We expect to incur additional losses for the foreseeable future as a result of our research and development costs, including costs associated with conducting preclinical development and clinical trials, which will continue to be substantial. Because of the numerous risks and uncertainties associated with developing products in the Health Care segment, we are unable to predict the extent of any future losses or when this segment will become profitable, if ever.

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If we fail to enter into strategic alliances with partners in our target markets or if our existing strategic alliances terminate, we may not have the resources necessary to capitalize on all of the market opportunities available to us.

     We do not currently possess the resources necessary to independently develop and commercialize products for all of the market opportunities that may result from our technologies. We have in the past and expect to continue to form strategic alliances with industry leaders in our target markets to gain access to funding, research and development and distribution channels. We may fail to enter into the necessary strategic alliances or our existing strategic alliances may terminate, each of which would limit our product development efforts and market opportunities. In addition, our present or future strategic alliance partnerships could be harmed if:

	•	we fail to meet our agreed upon research and development or other business objectives;
	•	we disagree with our strategic partners over material terms of the alliances, such as manufacturing and distribution rights and the ownership and commercialization of intellectual property resulting from the alliance; or
	•	we enter into a new strategic alliance or ownership structure that conflicts with the business objectives of a pre-existing strategic alliance partner.

Our strategic alliance partners may determine not to develop our products or may develop products that compete with our products.

     In many cases, we have limited or no control over the resources that a strategic alliance partner or collaborator may devote to our products. Our strategic alliance partners or collaborators may not develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing, or sale of these products. In addition, a strategic alliance partner may determine to develop products that compete with our products. If any of these situations were to occur, our product development efforts could be adversely affected, particularly where we have given the strategic alliance partner exclusive rights with respect to the development of a product.

If we fail to independently raise additional capital when needed, we may be forced to delay, reduce or eliminate some of our product development efforts.

     Developing and commercializing products for the bioproducts and health care markets requires significant financial resources. To continue to capitalize on the existing and future market opportunities we have identified, we may need to seek additional capital, which may occur through the incurrence of indebtedness and/or private or public offerings of equity and debt securities. Due to economic, market, geopolitical and other conditions beyond our control, we may not be able to raise additional capital when needed for our business on acceptable terms or conditions, if at all. If adequate financing is not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs.

If the demand for our cleaning market enzymes decreases, our revenues could significantly decline.

     Our cleaning market enzymes accounted for approximately 47% of our 2004 product revenues. If the demand for cleaning enzymes decreases or alternative enzymes render our products noncompetitive, our revenues could significantly decline.

We are dependent on sales to a relatively small number of significant customers, and the loss of any one of these customers could cause a significant decline in our revenues and profitability.

     Our five largest customers collectively accounted for approximately 51% of our product revenues in 2004 with our largest customer, The Procter & Gamble Company, accounting for more than 32% of such revenues in 2004. Any one of these customers may reduce their level of business with us. Should The Procter & Gamble Company or any of our other large customers decide to reduce or terminate business with us, our revenues and profitability could decline significantly.

We generally do not enter into long-term supply contracts with our customers, and changes in our relationships with our customers could significantly harm our business and operating results.

     While we do have arrangements of various durations with some of our customers, we generally do not enter into long-term supply agreements with our customers. As a result, we are routinely involved in discussions with customers regarding the status of our relationships. These discussions may lead to extensions or new commercial arrangements or may be unsuccessful. Our customer relationships involve uncertainty by virtue of economic conditions, customer needs, competitive pressures, our production capabilities and other factors. Consequently, we expect that our customer base will continue to change over time as will the nature of our

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relationships with individual customers, including major customers. These changes may significantly harm our business and operating results.

If our competitors are better able to develop and market products, it could reduce sales of our products.

     We face significant competition in the markets in which we currently compete. As we develop products for the bioproducts and health care markets, we face a host of new competitors, including, for example, biotechnology and pharmaceutical companies. In the bioproducts markets, some competitors may have a stronger market position and greater financial resources than we do. Specifically, in cleaning enzymes, we believe that Novozymes A/S, our largest competitor, may have more product offerings and a greater market share than we do. In food and feed enzymes, we believe that DSM N.V. and Novozymes A/S have greater market shares and more product offerings than we do.

Competition in our current and target markets is primarily driven by the following:

	•	ability to establish and maintain long-term customer relationships;
	•	ability to develop, maintain and protect proprietary products and technologies;
	•	technology advances that lead to better products;
	•	product performance, price, features and reliability;
	•	in the case of health care products, clinical efficacy, safety, convenience, and compatibility with other drug products;
	•	timing of product introductions;
	•	manufacturing, sales and distribution capabilities;
	•	technical support and service; and
	•	breadth of product line.

     Any product we make in the future will also likely compete with products offered by our competitors. If our competitors introduce data that show improved characteristics of their products, improve or increase their marketing efforts or lower the price of their products, sales of our products could decrease. We cannot be certain that any products we develop in the future will compare favorably to products offered by our competitors or that our existing or future products will compare favorably to any new products that are developed by our competitors. Our ability to be competitive also depends upon our ability to attract and retain qualified personnel, obtain patent protection and otherwise develop proprietary products or processes.

We intend to acquire businesses, technologies and products; however, we may fail to realize the anticipated benefits of such acquisitions and we may incur costs that could significantly negatively impact our profitability.

     We intend to acquire other businesses, technologies and products in the future that we believe are a strategic fit with our business. These transactions could include mergers, acquisitions, strategic alliances and licensing agreements. If we undertake any transaction of this sort, we will face a number of risks that may adversely impact our business, financial condition and results of operations, including the following:

	•	Integration Difficulties and Costs. The acquisition of another company may require us to integrate our products, services and technologies with those of the acquired company. We may not be able to successfully manage this integration or it may result in significant and/or unexpected additional costs. Integration may also result in a substantial distraction to our senior management and this distraction may delay or prevent us from successfully pursuing our existing business strategies.
	•	Transaction Costs and Charges. As a result of acquiring businesses or entering into other significant transactions, we have previously experienced significant charges to earnings for merger and related expenses that may include transaction costs, closure costs or costs related to the write-off of acquired in-process research and development. Similar costs and charges could arise in future transactions and have a material adverse impact on our results of operations for quarterly or annual periods and possibly have an adverse impact upon the market price for our common stock.
	•	Loss of Employees. If we acquire another business, we could experience disruptions in our employee base due to a variety of factors, including changes in compensation, reporting relationships, future prospects and the direction and strategy of our business. As a result of these disruptions and the general uncertainty often inherent in an acquisition, key employees of both our business and the acquired company may seek employment elsewhere, including with our competitors.
	•	Failure to Obtain Anticipated Benefits. When we acquire any business, product or technology, we may not be able to create the technological, operating and other advantages that our management initially expected. Failure to obtain anticipated benefits

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		from an acquisition can result from many factors, including unanticipated contingent and other liabilities, overlap among product and service lines, conflicts with customers and suppliers and the inability to profitably utilize acquired technologies. These types of failures could negatively impact both our profitability and the market price for our common stock.
	•	Adverse Impact of Acquisition Financing. If we use our common stock to finance any such future acquisitions, our existing stockholders’ interest in us could be diluted. If we use indebtedness to fund future acquisitions, the servicing of this indebtedness may negatively impact our results of operations and the agreements governing such indebtedness may contain financial, operating and other covenants that impose significant restrictions on our business.

If we are unable to secure or maintain adequate intellectual property protection or become involved in an intellectual property dispute, it could significantly harm our financial results and ability to compete.

     Our success depends in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies in the United States and globally. In addition to protecting our own intellectual property rights, we must also avoid infringing patent and other intellectual property rights of third parties, for example misappropriation of third party owned trade secrets, and not breach any licenses, non-disclosure or other agreements that we have entered into with third parties regarding technologies and products. However, the patent and other intellectual property rights of biotechnology companies can be highly uncertain and involve complex legal and factual questions, and, therefore, enforceability is uncertain.

     We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that we protect our technologies with valid and enforceable patents or as trade secrets. We file patent applications in the United States and in foreign countries as part of our strategy to protect our proprietary products and technologies. The loss of significant patents or the failure of patents to issue from pending patent applications that we consider significant could impair our operations or cause a loss of license derived income. In addition, third parties could successfully challenge, invalidate or circumvent our issued patents or patents licensed to us, for example through court, reexamination or opposition proceedings. Further, we must make judgments regarding which aspects of our research and development activities to protect with patents. Because we often must apply for patents significantly in advance of when we attempt to develop and commercialize particular products, we may fail to apply for adequate patent protection in a sufficiently timely manner for these products. As a result, we may not obtain the patents or licenses to technologies that we will need to develop products for our target markets. In addition, the laws of some foreign countries may also not protect our intellectual property rights to the same extent as United States law or we may be unable to obtain any patent protection in some foreign countries. Also, our patent portfolio includes patents that are nearing the end of their period of protection. While we do not expect to experience a material adverse effect related to patent expirations in the near term, the expiration of patents may submit us to new competition and price pressures that may lead to a significant loss of product revenue.

     We also rely in part on trade secret protection for our confidential and proprietary information by entering into confidentiality agreements and non-disclosure policies with our employees, consultants and customers. Nonetheless, unauthorized use or disclosure of our confidential and proprietary information may occur in the future, and others may independently develop substantially equivalent information and techniques or otherwise gain access to our trade secrets. We typically file patent applications in countries that require publication of patent applications within 18 months of the filing date which can diminish the value of trade secrets described in the patent application.

     Extensive litigation regarding patents and other intellectual property rights is common in the biotechnology industry and many companies in this industry have employed intellectual property litigation as a way to gain competitive advantage. In the ordinary course of business, we periodically receive notices of potential infringement of patents or misappropriation of trade secrets owned by others and patent applications that may mature to patents held by others. The impact of such claims of potential infringement, as may from time to time become known to us, are difficult to assess. In the event of an intellectual property dispute, we may become involved in litigation. The outcome of any such litigation is inherently uncertain. Even if we are successful, the litigation can be costly in terms of dollars spent and diversion of management time.

     If a third party successfully claims an intellectual property right to technology we use, it may force us to discontinue an important product or product line, alter our products and processes, pay license fees, pay damages for past infringement or cease certain activities. Under these circumstances, we may attempt to obtain a license to this intellectual property. However, we may not be able to do so on commercially reasonable terms or at all. In addition, regardless of the validity of such a claim, its mere existence may affect the willingness of one or more or our customers to use or continue to use our products and, thereby, materially impair our business and results of operations.

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     Those companies with which we have entered or may enter into strategic alliances encounter similar risks and uncertainties with respect to their intellectual property. To the extent that any such alliance companies suffer a loss or impairment of their respective technologies, we may suffer a corresponding loss or impairment that may materially and adversely affect our investments.

If we lose our key personnel or are unable to attract and retain qualified personnel as necessary, it could delay our product development programs and harm our research and development efforts.

     Our success depends to a significant degree upon the continued contributions of our executive officers, management, and scientific staff. If we lose the services of one or more of these people, we may be unable to achieve our business objectives. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our strategic alliances in a timely fashion or to support our internal research and development programs or our manufacturing and distribution requirements. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on acceptable terms.

Our international operations are subject to a number of risks that could be costly in terms of dollars spent, diversion of management’s time and revenues and profits.

     In 2004, we derived approximately 58% of our product revenues from our foreign operations. In addition, we have significant operations in a number of foreign countries, including Argentina, Belgium, China, Finland and the Netherlands. We expect to continue to operate in foreign countries and that our international sales will continue to account for a significant percentage of our revenues. As such, we are subject to certain risks arising from our international business operations that could be costly in terms of dollars spent, diversion of management’s time and revenues and profits, including:

	•	difficulties and costs associated with staffing and managing foreign operations;
	•	unexpected changes in regulatory requirements;
	•	difficulties of compliance with a wide variety of foreign laws and regulations;
	•	disputes with governmental agencies and other bodies regarding our business, operations and facilities in foreign jurisdictions;
	•	changes in our international distribution network and direct sales forces;
	•	political trade restrictions and exchange controls;
	•	political, social, or economic unrest including armed conflict and acts of terrorism;
	•	labor disputes including work stoppages, strikes and embargoes;
	•	inadequate and unreliable services and infrastructure;
	•	import or export licensing or permit requirements; and
	•	greater risk on credit terms and long accounts receivable collection cycles in some foreign countries.

Foreign currency fluctuations could cause our revenues and profits to decline.

     Our foreign operations generate sales and incur expenses in local currency. As a result, we are exposed to market risk related to foreign currency exchange rate fluctuations. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations between the U.S. Dollar and the currencies in which we do business could cause our revenues and profits to decline. For example, product revenues denominated in Euros accounted for approximately 40% of our total product revenues in 2004, and the fluctuations in the currency exchange rate against the U.S. Dollar can have a significant impact on our reported product revenues.

Opposition to genetically engineered products could result in our inability to commercialize products.

     We produce a significant amount of our products from genetically modified microorganisms. We cannot predict public attitudes and acceptance of existing or future products made from genetically modified microorganisms, particularly in the food and feed sectors. If we are not able to overcome concerns relating to safety and environmental hazards of genetic engineering, the general public may not accept our products or third party products that contain our products. This may also prevent us from commercializing certain new products. In addition, negative public attitudes in a number of countries toward genetically engineered products, particularly those in the EU, may negatively influence laws and regulations governing the ownership or use of genetic material.

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If we become subject to a costly product liability damage claim or award, our profits could decline.

     We may be held liable if any product we develop, or any product that a third party makes with the use or incorporation of any of our products, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Our current product liability insurance may not cover our potential liabilities. Our inability to obtain sufficient insurance coverage in the future at an acceptable cost or otherwise to protect against potential liability claims could prevent or inhibit the commercialization of products developed by us or our strategic partners. If a third party sues us for any injury caused by our products, our liability could exceed our insurance coverage amounts and total assets and our profits could decline.

If we are subject to costly environmental liability due to the use of hazardous materials in our business, our profits could decline.

     We lease or own approximately 34 facilities throughout the world. Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive and biological materials. Our operations also generate potentially hazardous waste, which must be transported to approved storage, treatment and disposal sites and facilities. We cannot eliminate entirely the risk of contamination or the discharge of hazardous materials and any resultant injury from these materials and wastes. Federal, state, local and foreign laws and regulations govern the use, manufacture, storage, handling, transportation and disposal of these materials and wastes. Third parties may sue us for any injury or contamination resulting from our use or a third party’s use of these materials. Any accident could partially or completely shut down our affected facilities and operations. In addition, if we are required to comply with any additional applicable environmental laws and regulations, we may incur additional costs, and any such current or future environmental regulations may impair our research, development or production efforts.

Legal restraints and required government approvals could delay or prevent our introduction of products.

     Regulatory agencies regulate our products according to their intended use. The FDA regulates food, feed, cosmetic and pharmaceutical products based on their application. The FDA and the EPA regulate non-drug biologically derived products. The U.S. Department of Agriculture regulates plant, plant pest and animal products. The EPA regulates biologically derived chemicals not within the FDA’s jurisdiction or the jurisdiction of other regulatory agencies. Although the food and industrial regulatory process can vary significantly in time and expense from application to application, the timelines generally are shorter in duration than the drug regulatory process and range from three months to three years. Regulation of enzymes used as processing aids in Europe is currently through national oversight. However, the European Union Commission is presently drafting regulations covering all food use enzymes at the EU level. In Pacific Rim and Asian countries that have approval or registration processes, these processes range from three months to two years. Certain Asian countries and some countries in Latin America rely on United States and European product registrations.

     In the United States, all phases of the development and commercialization of pharmaceuticals are regulated primarily under federal law and subject to rigorous FDA review and approval processes. The manufacturing process for pharmaceutical products is highly regulated, and regulators may shut down manufacturing facilities that they believe do not comply with regulations. The FDA’s cGMP are extensive regulations governing manufacturing processes, stability testing, record-keeping and quality standards. Regulatory procedures for licensing drug products in Europe are comparable to those in the United States. Biologic products are reviewed through a centralized procedure that leads to a single license for the entire EU. In addition, each product must receive individual pricing approvals before it can be marketed. The process of obtaining these approvals is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved.

     These regulations may delay or prevent our introduction of new products, particularly with respect to any health care products we develop, as we have limited experience with respect to the laws and regulations relating to these products.

Before we commercialize and sell any of our product candidates in our Health Care segment, we must conduct clinical trials, which are expensive and have uncertain outcomes.

     Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products in our Health Care segment, we must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We have incurred and will continue to incur substantial expense for, and we have devoted and expect to continue to devote a significant amount of time to, preclinical testing and clinical trials.

     Historically, companies have found that the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. Similarly, a number of new drugs and biologics have shown promising results in clinical

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trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of product development.

Our own ability to manufacture health care products is uncertain, which may make it more difficult for us to develop and sell our products.

     In addition to the many other risks in developing health care products, if we determine to manufacture our own health care products, we may encounter problems with the following:

	•	production yields;
	•	quality control and assurance;
	•	availability of qualified personnel;
	•	adequate training of new and existing personnel;
	•	on-going compliance with our standard operating procedures;
	•	on-going compliance with FDA regulations;
	•	production costs; and
	•	development of advanced manufacturing techniques and process controls.

Risks Related to Ownership of Our Common Stock

If the ownership of our common stock continues to be highly concentrated with Danisco A/S and Eastman Chemical Company, it may prevent our other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

     After our initial public offering and continuing to the present, Eastman and Danisco and their affiliates, which we refer to as our major stockholders, each own approximately 42% of our outstanding common stock. Moreover, pursuant to a stockholder agreement among Eastman, Danisco and us, each of our major stockholders also has the right to nominate three of our ten directors. As a result of their ownership percentage and their board nomination rights, the significant stockholders have the ability, in the event they act together, to significantly influence fundamental corporate transactions and other important issues, including the election of our directors, the approval of merger transactions involving us, acquisitions and sales of assets, amendments to our certificate of incorporation and bylaws, the incurrence of indebtedness and the strategic direction of our business. Even if the major stockholders act independently of each other, each has significant influence over corporate transactions requiring stockholder approval. The concentration of ownership of our common stock may have the effect of either delaying or preventing a change to our control favored by our other stockholders or accelerating or approving a change to our control opposed by our other stockholders. As the major stockholders’ interests may be different than ours and those of our stockholders, the influence of these stockholders could create conflicts of interest between them and us with respect to the allocation of corporate opportunities and between the major stockholders and other stockholders.

If stockholders sell large numbers of shares of our common stock, our stock price could decline.

     The market price of our common stock could decline as a result of sales of our stock into the public market or the perception that these sales could occur. Our two major stockholders, for example, each hold approximately 42% of our common stock. These stockholders are not subject to any contractual restrictions on future sales of their shares. In addition, subject to limitations regarding offering frequency and size, these stockholders may require us to file registration statements to resell their shares under the Securities Act of 1933 (Securities Act) or to sell their shares pursuant to any registration statement that we file on our own behalf.

     In addition, we have stock options, stock appreciation rights and restricted stock outstanding with certain of our directors, officers, employees and consultants pursuant to our 2002 Omnibus Incentive Plan, approved by our stockholders in May 2002, and its predecessor plan. We have filed registration statements with respect to these plans and, as a result, the shares received upon exercise of these options generally may be sold in the public market, subject to limitations imposed by Rule 144 under the Securities Act that may apply to our affiliates.

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Our common stock price has been, and may continue to be, volatile, which may adversely affect the value of an investment in our common stock.

     The stock market, from time to time, has experienced significant price and volume fluctuations that are unrelated to the operating performance of companies. The market prices for securities of biotechnology companies, including ours, have been highly volatile in the period since our initial public offering in July 2000 and may continue to be highly volatile in the future. Our common stock may be affected by this type of market volatility, as well as by our own performance. During the 12-month period ended December 31, 2004, the closing price of our common stock on the Nasdaq Stock Market ranged from $12.35 to $16.96. The following factors, among other risk factors, may have a significant affect on the market price of our common stock:

	•	developments in our relationships with current or future strategic partners;
	•	conditions or trends in the biotechnology industry;
	•	announcements of technological innovations or new products by us or our competitors;
	•	announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	•	developments in patent or other intellectual proprietary rights or announcements relating to these matters;
	•	investor concern regarding the public acceptance of the safety of biotechnology products or announcements relating to these matters;
	•	litigation or governmental proceedings or announcements relating to these matters;
	•	economic and other external factors, such as natural disasters or acts of terrorism;
	•	future royalties from product sales, if any, by our licensees; and
	•	sales of our common stock or other securities in the open market.

     In the past, stockholders have often instituted securities class action litigation after periods of volatility in the market price of a company’s securities. Recently, we have been named in several lawsuits regarding the Acquisition Agreement, and we could incur substantial legal fees in connection with, and our management’s attention and resources could be diverted from operating our business to respond to, these suits and any other litigation involving us.

We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, causing investor losses.

     A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed and difficult to reduce quickly in a cost effective manner. Accordingly, if product revenue declines or does not grow as we anticipate or non-product revenue declines due to the expiration or termination of strategic alliance agreements or the failure to obtain new agreements or grants, we may not be able to correspondingly reduce our operating expenses in any particular quarter. As a result of these and other factors, our quarterly revenue and operating results have fluctuated in the past and are likely to do so in the future. If our operating results in some quarters fail to meet the expectations of stock market analysts and investors, our stock price would likely decline. Some of the factors that could cause our revenue and operating results to fluctuate include the following:

	•	the ability and willingness of strategic partners to commercialize products derived from our technology or containing our products on expected timelines;
	•	our ability to successfully commercialize products developed independently and the rate of adoption of such products;
	•	fluctuations in consumer demand for products containing our technologies or products, such as back to school sales of blue jeans and other denim products, resulting in an increase in the use of textile processing enzymes, and fluctuations in laundry detergent use due to promotional campaigns run by consumer products companies;
	•	fluctuations in geographic conditions including currency and other economic conditions such as economic crises in Latin America or Asia and increased energy and related transportation costs; and
	•	fluctuations in fees and royalty revenues due to the timing of milestone and other payments.

     We also have incurred significant infrequently occurring charges within given quarters, such as those incurred in conjunction with restructuring activities and recognized investment income/expense from available-for-sale marketable securities.

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Item 2. Properties

     We lease or own 34 facilities throughout the world. Our nine global manufacturing facilities, with eight currently serving our Bioproducts segment and one constructed to serve our Health Care segment, are located in Cedar Rapids, Iowa; Rochester, New York; Beloit, Wisconsin; Hanko and Jamsankoski, Finland; Brugge, Belgium; Jiangsu Province, China and Province De Cordoba, Argentina, represent approximately four million liters of fermentation capacity and provide the base for our 19 global distribution centers. We also have 14 administrative and sales offices included in the 34 facilities. We lease our principal offices located in 154,783, 43,944, and 29,000 square feet of space in Palo Alto, California, Rochester, New York, and Leiden, the Netherlands, respectively, and each site serves both of our business segments. The leases for these facilities expire in 2017, 2009 and 2019, respectively. We believe that our facilities are in good operating condition and that all real property owned or leased is adequate for all present and near term uses.

     Information concerning each of our manufacturing facilities is as follows:

     In January 2005 we announced our plans to build a new manufacturing facility in the Wuxi China National New and High Tech Industrial Development Zone to replace our current facility in Wuxi, China. The new site is approximately 20 acres, which includes room for future expansion, and is expected to house sales support, customer service, technical and logistical support and warehouse operations in addition to manufacturing operations.

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Item 3. Legal Proceedings

Proceedings Related to the Danisco Acquisition

     On January 27, 2005, Genencor, certain of its officers and directors and Danisco were named in a purported class action complaint filed in the Court of Chancery of the State of Delaware. The case was captioned Zappolla v. Genencor International, Inc. et al., No. 1052-N. This complaint alleged that defendants entered into the Acquisition Agreement without having engaged in fair and open negotiations with all potential bidders, without having performed an active market check and/or open auction for sale of Genencor, and that the consideration to be paid pursuant to the Acquisition Agreement is inadequate. The complaint also alleged that the individuals named as defendants have acted and are acting contrary to their fiduciary duty to seek to maximize stockholder value. The plaintiff sought to, among other things, enjoin the proposed acquisition of Genencor by Danisco. As described below, this case was subsequently consolidated and the plaintiffs and defendants have entered a memorandum of understanding that, if approved by the Delaware Chancery Court, will result in a dismissal with prejudice of all claims in the consolidated case.

     A second purported class action complaint was filed against Genencor, certain of its officers and directors, Danisco and Eastman in the Court of Chancery of the State of Delaware on January 27, 2005. The case is captioned Mirfred Partners LLC v. Genencor International, Inc. et al., No. 1053-N. This complaint alleged that the consideration to be paid pursuant to the Acquisition Agreement is inadequate and was fixed arbitrarily by Genencor’s major stockholders. The plaintiff sought to enjoin the proposed acquisition of Genencor by Danisco, or alternatively sought rescission and putting aside of the proposed acquisition or awarding rescissory damages if the proposed acquisition were completed, and awarding compensatory damages and other relief. As described below, this case was subsequently consolidated and the plaintiffs and defendants have entered a memorandum of understanding that, if approved by the Delaware Chancery Court, will result in a dismissal with prejudice of all claims in the consolidated case.

     A third purported class action complaint was filed on January 27, 2005 against Genencor and certain of its officers and directors in the Superior Court of the State of California, County of Santa Clara. The case is captioned Rice v. Genencor International, Inc., et al., No. 105CV 034734. This complaint alleges that Genencor’s directors violated their fiduciary duties in connection with the proposed acquisition and that the plaintiff and other members of the purported class will not receive their fair portion of the value of Genencor’s assets and business and will be prevented from obtaining the real value of their equity ownership of Genencor. The plaintiff seeks, among other things, to enjoin the proposed acquisition of Genencor by Danisco. Genencor is defending the claims alleged in this lawsuit.

     A fourth purported class action was filed on February 4, 2005 against Genencor and its directors, Eastman and Danisco in the Court of Chancery of the State of Delaware. The case is captioned Sloboda v. Genencor International, Inc. et al., No. 1072-N. This complaint alleged that the consideration to be paid pursuant to the Acquisition Agreement is inadequate, does not reflect Genencor’s improving potential, is based on access by Danisco and Eastman to internal financial information about Genencor, and that Danisco and Eastman have material conflicts of interest and that they and the Genencor directors are breaching their fiduciary duties. The plaintiff sought to enjoin the proposed acquisition of Genencor by Danisco, or alternatively sought rescission and putting aside of the proposed acquisition or awarding rescissory damages if the proposed acquisition were completed, and awarding compensatory damages and other relief including attorneys’ and experts’ fees and expenses. As described below, this case was subsequently consolidated and the plaintiffs and defendants have entered a memorandum of understanding that, if approved by the Delaware Chancery Court, will result in a dismissal with prejudice of all claims in the consolidated case.

     A fifth purported class action was filed on February 8, 2005 against Genencor, certain of its officers and directors, and Danisco in the Superior Court of the State of California, County of Santa Clara. The case is captioned John Baker, On Behalf of Himself and All Others Similarly Situated vs. Genencor International, Inc., et al., No. 105CV 035309. This complaint alleges that Genencor’s directors violated their fiduciary duties in connection with the proposed acquisition and that the plaintiff and other members of the purported class will not receive their fair portion of the value of Genencor’s assets and business and will be prevented from obtaining the real value of their equity ownership of Genencor. The plaintiff seeks, among other things, to enjoin the proposed acquisition of Genencor by Danisco. Genencor is defending the claims alleged in this lawsuit.

     On February 17, 2005, the Delaware Chancery Court consolidated the Zappolla, Mirfred, and Sloboda actions into a single consolidated action captioned In re Genencor International Inc. Shareholders Litigation, No. 1052-N. On February 24, 2005, the plaintiffs in the consolidated Delaware action filed an amended complaint containing the same allegations as were in the Zappolla, Mirfred, and Sloboda complaints, as well as additional allegations that disclosure documents filed with the SEC failed to adequately disclose all material information related to Danisco’s tender offer.

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     On March 9, 2005, the plaintiffs and defendants in this consolidated Delaware action executed a memorandum of understanding that, subject to Chancery Court approval, will result in a dismissal with prejudice of all claims by the plaintiffs. The memorandum of understanding provides for supplemental disclosures related to the Offer and the Merger, requests that the Chancery Court certify (for settlement purposes only) a class of plaintiffs consisting of all record holders of shares of the Company’s common stock from January 26, 2005 through the effective time of the Merger (the Class), and contains a release of all claims by members of the Class asserted in the amended complaint in this consolidated Delaware action and related to the Acquisition Agreement, the Stock Purchase Agreement, the Offer, the Merger, or any public disclosures by the defendants related to the foregoing.

     Genencor, its chief executive officer, and certain of its directors named as defendants filed a motion to stay the Rice and Baker actions in California on February 28, 2005. Following full briefing by both plaintiffs and defendants, the California Superior Court is scheduled to hear that motion on May 10, 2005.

Other Proceedings

     Broin and Associates filed a complaint in U.S. District Court South Dakota, Southern Division, against Genencor on December 15, 2004 alleging misappropriation of trade secrets, breach of contract and unjust enrichment in connection with Genencor’s development and commercialization of raw starch hydrolysis technology for fuel ethanol production. The case is captioned Broin and Associates, Inc. v. Genencor International, Inc. No. 04-4202. A First Amended Complaint was filed with the same court and served on Genencor on January 25, 2005. The First Amended Complaint purports to allege seven causes of action including misappropriation of trade secrets, breach of express contract, breach of implied agreement of confidentiality, tortious interference with business expectancy, conversion, deceit, fraud and unjust enrichment. Broin’s prayer for relief requests a preliminary and permanent injunction against Genencor, compensatory and economic damages, punitive damages, disgorgement of profits, costs and attorney’s fees. On February 14, 2005, Genencor filed a motion to dismiss certain of the alleged causes of action on the ground that Broin’s allegations fail to state a claim. Genencor is defending the claims alleged in this lawsuit.

     On or about July 16, 2004, three former employees of Genencor in Rochester, New York commenced a lawsuit in the United States District Court for the Western District of New York in which they alleged that Genencor had discriminatorily discharged each of them in violation of the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, and the New York Human Rights Law. The case is captioned Kerry Kourofsky, Wayne Newman, and William Speer v. Genencor International, Inc. No. 04-CV-6327L(F). In the lawsuit, the plaintiffs are seeking an award from the court that includes compensation for the value of lost back pay and benefits, front pay, compensatory damages, punitive damages and attorneys’ fees. Genencor is defending the claims alleged in this lawsuit.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders during the fourth quarter of 2004.

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PART II.

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Our common stock is traded on the Nasdaq Stock Market under the symbol “GCOR.” The following table sets forth the high and low sale prices per share of common stock, as reported on the Nasdaq Stock Market, during the periods indicated.

     The number of shares of our common stock outstanding as of March 1, 2005 was 60,119,648. As of such date there were approximately 5,000 holders of our common stock. Our two largest stockholders, Eastman and Danisco, owned, in the aggregate, 50,000,000 shares of our common stock.

     We did not pay any dividends on our common stock in 2003 or 2004. While we are permitted to pay dividends, we currently expect to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends to our common stockholders in the foreseeable future.

     We had outstanding promissory notes of $14.6 million at December 31, 2001. This amount related to the exercise of stock options and purchase of restricted shares by our executive officers during April 2000. In November 2001, we allowed our executive officers to surrender 349,910 vested, restricted shares to us at a value of $5.6 million, to pay principal and interest due on these notes. On August 21, 2002, in order to eliminate all stock-related loans, the executive officers surrendered 1,429,864 restricted shares at a value of $10.77 per share, to make full payment of the outstanding principal and accrued interest on their obligations under these notes. We hold the surrendered shares as treasury stock.

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Item 6. Selected Financial Data

     The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, the notes to our consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Report. We derived the statement of operations and balance sheet data for the five-year period ended December 31, 2004 from our audited consolidated financial statements. Historical results are not necessarily indicative of future results.

A number of items impact the comparability of the selected consolidated financial data:

• In 2004, our Health Care segment sold its therapeutic vaccine program to Innogenetics N.V. Upon transfer of certain intellectual property, contractual relationships and technologies to Innogenetics, we recognized fees during the quarter ended June 30, 2004 totaling $10.0 million.

• In 2004, we assumed majority ownership and controlling interest of our Japanese joint venture, now known as Genencor Kyowa Co. Ltd., in which we have had an equity position since 1996. The financial position, results of operations and cash flows of the joint venture have been included in our consolidated financial statements beginning April 1, 2004.

• In 2003, we sustained damage to our finished bioproducts inventory in the second quarter of 2003 as a result of an accident in a third party warehouse in Rotterdam, the Netherlands. At the end of the first quarter of 2004, we reached a final settlement of our accident-related claim with our insurer totaling approximately $21.0 million and recorded a net gain of $8.3 million.

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• In 2002, we implemented a plan to restructure our supply infrastructure which included our manufacturing facilities in Elkhart, Indiana and Argentina, which resulted in restructuring and related charges of $16.4 million. This plan was completed in 2002.

• In 2002, we acquired Genencor International Wisconsin, Inc., formerly known as Enzyme Bio-Systems Ltd. (EBS), for $35.8 million. We also acquired the brewing and enzyme business of Rhodia Food UK Limited for $8.9 million.

• In 2002, our executive officers surrendered 1.4 million restricted shares with a value $10.77 per share to eliminate all stock-related loans.

• In 2002, we paid our first of five annual installments of $28.0 million on long-term debt on March 30.

• In 2001, $28.0 million of long-term debt which was due March 30, 2002 was reclassified to current maturities of long-term debt.

• In 2000, we completed an initial public offering of 8.05 million shares of common stock at a price of $18.00 per share, including 7.0 million shares of common stock issued July 28, 2000 in the initial offering and 1.05 million shares of common stock issued August 25, 2000 pursuant to the exercise of the underwriters’ over-allotment option. The combined net proceeds raised from the initial offering and the over-allotment option were $132.7 million.

• In 2000, we realized a gain on the sale of marketable equity securities of $16.6 million, $10.2 million tax-effected, and recognized back royalties in connection with a settlement of patent infringement claims of $3.5 million, $2.1 million tax-effected.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Item 8 of this Report. In addition to disclosing results for the years ended December 31, 2004 and 2003 that are determined in accordance with United States’ Generally Accepted Accounting Principles (GAAP), the Company also discloses non-GAAP financial measures that exclude the effects of restructuring and related charges recorded in the 2002 period on consolidated net income available to common stockholders and diluted earnings per share and on the operating income of its Bioproducts segment. The Company is presenting non-GAAP financial measures excluding the effects of the restructuring and related charges because the Company believes it is useful for investors in assessing the Company’s financial results compared to the same period in the prior year. Within the text, in connection with each non-GAAP financial measure presented, the Company has presented the most directly comparable financial measure calculated in accordance with GAAP and has provided a reconciliation of the differences between the non-GAAP financial measure with its most directly comparable financial measure calculated and presented in accordance with GAAP.

Executive Summary

     Leveraging over twenty years of experience, we use our molecular technologies to develop products and deliver services for varied markets, some on a global basis. Since our research and commercial expertise and competencies are at the molecular level, we can produce products and deliver services to many different types of industries. Our current revenues result primarily from the sale of enzyme products as ingredients or processing aids to the cleaning, textiles, carbohydrate processing (formerly referred to as sweeteners), fermentation alcohol and food, feed and specialties markets, and from research funding, fees and royalties. In 2004, we expended $48.4 million on our Bioproducts research and development programs. In addition to developing products for our current Bioproducts markets, we are also involved in Bioproducts research projects and programs that are directed toward providing new products and services in the emerging fields of biomaterials, biochemicals and nanobiotechnology. Furthermore, we expended $27.4 million in 2004 on our Health Care research and development programs. We believe that this diversification of our research and development expenditures will increase the probability of achieving success in our commercial portfolio and result in increased value for our stockholders.

     For the year ended December 31, 2004 net income available to common stockholders was $18.9 million, or $0.31 per diluted share, compared to $15.5 million or $0.26 per diluted share during the same period in 2003. Product revenues increased by 8% to $389.8 million, compared to $362.1 million in 2003. Total revenues for 2004 were $410.4 million, compared to $383.2 million for the same period in 2003. Fees and royalty revenues were $20.6 million in 2004 as compared to $21.0 million in the prior year. For the year ended December 31, 2004, we generated $33.1 million in operating income and $62.6 million in cash flow from operations. We also

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invested $25.3 million in purchases of property, plant and equipment and made our third annual installment payment of $28.0 million on our senior debt.

     Our Bioproducts segment continues to generate all of our product revenues. In 2004, our Bioproducts segment set a product revenue record for the Company, driven by increased revenue in the North American, European and Asia Pacific regions. Particular strength was seen in the fermentation alcohol, carbohydrate processing and the food, feed and specialties markets. We manufacture our products at our eight Bioproducts manufacturing facilities located in the United States, Finland, Belgium, China and Argentina. We conduct our sales and marketing activities through our direct sales organizations in the United States, the Netherlands, Singapore, Japan, China, United Kingdom, Argentina and Brazil and through other distribution channels in selected markets and geographies. In 2004, we derived approximately 58% of our revenues from our foreign operations.

     To meet anticipated market expansion in China and other Asia Pacific countries, we recently announced plans to build a new manufacturing facility in Wuxi, China. Once completed, the Bioproducts segment plans to transfer operations and personnel from its existing facility in downtown Wuxi to the new manufacturing complex. In April 2004, we also assumed majority ownership and controlling interest of our Japanese joint venture with Kyowa Hakko Kogyo Co. Ltd. This venture has been renamed Genencor Kyowa Co. Ltd.

     During 2004, we continued to make significant progress on new applications within the Bioproducts segment. Our progress in developing low cost enzymes for cellulosic biomass conversion to ethanol has exceeded the contractual goals of NREL and the Department of Energy. Based upon NREL’s model, our scientists have achieved an estimated 30-fold improvement in enzyme cost for the process. As biorefineries come on line, we expect to be ready with technology instrumental to bioethanol production. We continued our progress in commercializing new products for the safety and protection opportunities within our specialty business category. Licensed from the U.S. Army Edgewood Chemical Biological Center, the Defenz line of enzymes neutralize specific nerve agents and organophosphate-based pesticides. These products have a potential customer base among military and civilian first responders such as hazardous materials teams, and fire and police departments. Prionzyme, a proprietary enzyme for the elimination of prion infectivity, is currently awaiting EU regulatory review. Prions are widely seen as the causative agent for Bovine Spongiform Encephalopathy, commonly known as mad cow disease, and its human form, Cruetzfelt-Jacob Disease. Once approved, we expect to commercialize the product for use in decontaminating surgical instruments. Efforts also continued in other Bioproducts projects, including personal care and the Silicon Biotechnology platform.

     In our Health Care segment, we recognized $10.0 million in fees during 2004 from the technology transfer of our therapeutic vaccine program to Innogenetics N.V. As further discussed under the heading “Technology Transfer” within this Item 7, we sold our therapeutic vaccine program to Innogenetics in March 2004. During the second quarter, we completed the transfer to Innogenetics of sponsorship of the IND and Phase I clinical trial for our lead hepatitis B product candidate, plus intellectual property, research compounds and various third party relationships. This transaction has the potential to generate additional milestone and royalty revenues for us in the future. The Health Care segment is now focused entirely on discovery, in-licensing and development of therapeutic products for the oncology market.

     Accordingly, our Health Care segment continued to make progress in 2004 focusing its attention and resources on targeted cancer biotherapeutics. As previously announced, we advanced our first product candidate for treating cancer into IND enabling development earlier this year. The lead product candidate is intended to target significant unmet medical needs in colorectal and pancreatic cancer.

     In December 2004, we signed an exclusive worldwide patent license agreement giving us the right to develop and commercialize two therapeutic product candidates from the Public Health Service and the National Cancer Institute. One of the proteins is currently in Phase II clinical studies for the treatment of hairy cell leukemia. Also underway is Phase I clinical testing in subsets of treatment-refractory pediatric acute lymphoblastic leukemia, chronic lymphocytic leukemia and non-Hodgkin’s lymphoma. The other protein, for expanded subsets of patients with these hematologic malignancies, is in the IND-enabling stage of development. A CRADA between Genencor and the Public Health Service and National Cancer Institute was also executed in support of advancing the two product candidates and follow-on research initiatives.

     As more completely discussed under the heading “Warehouse Inventory Loss” within this Item 7, we settled our insurance claim from the 2003 third-party warehouse accident, resulting in a net gain of $8.3 million, which is included in other income for 2004.

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Acquisition by Danisco

     On January 27, 2005, we entered into the Acquisition Agreement with Danisco and Acquisition Sub, providing for the Offer to acquire all of the outstanding shares of common stock of the Company not otherwise owned by Danisco or its subsidiaries for $19.25 per share, net to the seller in cash, to be followed by the Merger of Acquisition Sub with and into the Company, with the Company to continue as the surviving corporation. A Special Committee comprised solely of our independent directors, and our Board of Directors, each has determined that the Offer and the Merger are fair to, and in the best interests of, our stockholders (other than Danisco, Eastman and their respective affiliates).

     In connection with the Acquisition Agreement, Danisco has entered into a definitive stock purchase agreement with Eastman, the holder of approximately 25 million shares of our common stock and 485 shares of our series A preferred stock, under which Danisco will acquire all of the outstanding shares of our common stock held by Eastman for $15 per share in cash and all of the outstanding shares of our series A preferred stock held by Eastman for $44 million in cash. In the stock purchase agreement with Danisco, Eastman has agreed not to tender in the Offer the shares of our common stock held by Eastman.

     The Acquisition Agreement is subject to certain conditions, including the tender of a majority of the outstanding shares of our common stock other than those held by Danisco, Eastman, the officers and directors of the Company and its subsidiaries and the respective affiliates of each of the foregoing, receipt of regulatory approvals and other conditions set forth in the Acquisition Agreement. Subject to those conditions, we currently expect the acquisition to be completed by May 31, 2005.

     If consummated, at the effective time of the Merger, all outstanding stock options, stock appreciation rights, shares of restricted stock and restricted stock units outstanding under our 2002 Omnibus Incentive Plan and its predecessor plan, whether or not such awards have otherwise become vested or exercisable, will be cashed out in a lump sum payment based upon the price of $19.25 or such higher price as may be paid pursuant to the Offer. In certain instances, a “change in control price” may be payable under the applicable plan if that price is higher than the price paid in the Offer. During the pendency of the Offer, we have suspended the right to exercise stock options.

Critical Accounting Policies and Estimates

     Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparation of those financial statements, we apply various accounting policies. We also make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although our accounting policies and certain estimates and assumptions are disclosed within the notes to our consolidated financial statements, the following is a discussion of the accounting policies, estimates and assumptions we believe are most critical.

Principles of Consolidation

     Our consolidated financial statements include the accounts of all majority-owned subsidiaries. Investments in affiliates in which we have the ability to exercise significant influence, but not control, are accounted for by the equity method, which means that our investment in those entities is adjusted at each balance sheet date to reflect capital contributions made, dividends received and our respective share of such affiliate’s earnings or losses. All other investments in affiliates, which are not material to our financial statements, are carried at cost. In the normal course of business, we engage in transactions among our affiliated entities. These intercompany transactions are eliminated in our consolidated financial statements. All of our investments are in operating or corporate holding companies, some of which may qualify under the definition of variable interest entities as defined in Financial Accounting Standards Board (FASB) Interpretation No. 46R “Consolidation of Variable Interest Entities.” While we have no material investments in variable interest entities, all such investments have been appropriately reflected in the consolidated financial statements or otherwise disclosed in the notes thereto.

Revenue Recognition

     Our revenues consist of product revenues and fees and royalty revenues. Fees and royalty revenues consist primarily of funded research, technology and license fees and royalties. Our revenues are heavily influenced by business with our major customers. Please refer to the discussion under the heading “Major Customers” included in Item 1 of this Report.

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Product Revenue

     Revenue from product sales is recognized upon shipment to customers. We can group our existing products into three general categories: enzymes that break down protein, enzymes that break down starch and enzymes that break down cellulose.

Funded Research

     Research funding revenues result from collaborative agreements with various parties, including the U.S. Government, whereby we perform research activities and receive revenues that partially reimburse expenses incurred. Under such agreements we retain a proprietary interest in the products and technology developed. These expense reimbursements primarily consist of direct expense sharing arrangements and milestone payments. Revenues related to expense sharing arrangements are recorded as the underlying expenses are incurred. Milestone payments are contingent upon successful completion of research activities and are recognized upon satisfaction of those contingencies. Upfront research funding payments are recognized as revenues on a straight-line basis over the term of the underlying research agreement. Our funded research revenues are fully dependent upon our progress on the underlying collaborative research projects and can vary from period to period.

Technology and License Fees

     Fees from the sale of technology are recognized upon completion of the required technology transfer and substantial satisfaction of any performance related responsibilities. License fees are recognized on a straight-line basis over the term defined in the license agreement. In the event there is no defined term, such as with permanent licenses, license fees are recognized upon substantial satisfaction of any performance related responsibilities. Our technology and license fees can vary from period to period as a result of the number and timing of such transactions.

Royalty Revenue

     Royalty revenue is recognized in accordance with the underlying contract terms.

Research and Development

     We expense research and development costs as incurred. Research and development expenses include, but are not limited to, expenses for services rendered related to our funded research activities. Accordingly, in the event our funded research revenues fluctuate from period to period, the related research and development expenses may also fluctuate.

Investments In Equity Securities

     We hold minority interests in equity securities of certain publicly traded and privately held companies having operations or technology within our strategic areas of focus. While we are selective in making such investments, once we have obtained the securities, we are at risk for fluctuations in their fair market value. If these securities experience declines in value which we consider to be other than temporary, we will record an impairment charge to the extent of that decline in value. Poor operating results experienced by these entities or adverse changes in market conditions in the future may cause losses or an inability to recover our carrying value of these investments. In 2003, we recorded an investment loss of $1.0 million as a result of such circumstances.

Long-Lived Assets

     Our long-lived assets consist primarily of property, plant and equipment, goodwill, and other intangible assets. Other intangible assets primarily include patents, licenses, technology, and customer lists. Investments in long-lived assets are initially recorded at acquisition cost. We recognize depreciation on all property, plant and equipment, except land, using the straight-line method over the estimated useful lives of the assets, which range from 3-40 years. We also amortize our other intangible assets, except technology, on a straight-line basis over estimated lives of 5-20 years. Land, goodwill and technology are considered to have indefinite useful lives and are therefore not subject to depreciation or amortization. At least annually, we evaluate whether the remaining useful lives of our depreciable and amortizable assets are appropriate. Changes in these useful lives can result in either increases or decreases in the amount of depreciation and amortization expense recorded in our statement of operations, reflecting shorter or longer lives, respectively.

     In addition, we regularly assess all of our long-lived assets for impairment when events or circumstances indicate their carrying amounts may not be recoverable. This is accomplished by comparing the expected undiscounted future cash flows of the assets with

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the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated either through independent valuation or as the present value of expected future cash flows. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized.

     Our judgments related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. While we believe the long-lived asset amounts recorded in our balance sheet are properly stated as of December 31, 2004, as we make future assessments of the ongoing expected cash flows and carrying amounts of our long-lived assets these factors could cause us to realize material impairment charges.

Defined Benefit Pension and Postretirement Plans

     As part of our overall employee benefits program, we have defined benefit pension plans and a defined benefit postretirement plan. The assets, liabilities and related expense of these plans are determined on an actuarial basis and are affected by the estimated market-related value of plan assets, estimates of the expected return on plan assets, discount rates, rates of increase of health care costs, rates of future compensation increases and other assumptions inherent in these valuations. Our actuarial consultants also use subjective factors such as withdrawal and mortality rates. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. We annually review the assumptions underlying the actuarial calculations and make changes to these assumptions as necessary.

Stock-Based Compensation

     The Genencor International, Inc. 2002 Omnibus Incentive Plan (the OI Plan) became effective on May 30, 2002 upon approval by the stockholders at our Annual Meeting of Stockholders. Employees, outside directors, consultants, advisors and independent contractors retained by us are eligible to participate in the OI Plan. The OI Plan allows for the grant, at not less than 100% of the market value as of the date of grant, of non-qualified and incentive stock options to purchase our common stock and stock appreciation rights (SARs), based on the underlying value of the our common stock. The OI Plan also allows for the grant of restricted and unrestricted stock awards, performance shares (stock or stock-based awards contingent upon attaining performance objectives) or performance units (units valued by reference to chosen criteria). Under the terms of the OI Plan, we have the ability to grant awards representing up to 6.8 million shares of common stock. In addition, any shares remaining, or shares that become available under the predecessor plan will be available for grant of awards under the OI Plan. Generally, stock options and SARs vest and become exercisable, ratably over a three-year period and expire 10 years from their grant date. Restrictions, if any, on stock awards generally expire at the end of a three-year period.

     We currently use the intrinsic value method to account for stock-based employee compensation in accordance with Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees.” Under the intrinsic value method, no compensation expense is recorded for grants of stock-based awards when the grants have an exercise price equal to the fair market value of our common stock at the date of grant. Should the exercise price be below the fair market value on the date of grant, we record this difference as a component of stockholders’ equity and amortize it as a charge to operations over the vesting period of the stock-based award. For more information regarding our stock-based awards, including pro forma disclosures of compensation expense had we employed the fair value method under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition Disclosure,” please refer to Note 13 – Employee Benefit Plans included within Item 8 of this Report. In addition, as discussed below under the heading “New Accounting Standards,” in December 2004 the FASB issued a revision to SFAS No. 123, effective for interim and annual periods beginning after June 15, 2005, which will require a change to accounting for stock-based employee compensation under a fair value method in the third quarter of 2005.

Income Taxes

     The provision for/(benefit from) income taxes included within our statements of operations is based upon pretax financial accounting income and is calculated using the liability method. Deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant estimates are required in determining our provision for/(benefit from) income taxes. Various internal and external factors may have favorable or unfavorable effects on our future consolidated effective tax rate. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing laws or regulations, future acquisitions or mergers, future levels of research and development spending, future levels of capital expenditures,

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and changes in overall levels of pretax earnings. Furthermore, we operate within multiple taxing jurisdictions and are subject to audit by regulatory authorities in these jurisdictions. These tax audits can involve complex issues, which may require an extended period of time to resolve. We believe that we have appropriately calculated our provision for/(benefit from) income taxes in light of these uncertainties.

     Furthermore, as described in Note 14 – Income Taxes included within Item 8 of this Report, our results of operations for the year ended December 31, 2004 do not reflect the impact of the American Jobs Creation Act of 2004 (the Jobs Act). We have not completed the process of evaluating our position with respect to the indefinite reinvestment of foreign earnings to take into account the possible election of the repatriation provisions contained in the Jobs Act.

Summary of Results

     In 2004, we reported net income available to common stockholders of $18.9 million, or $0.31 per diluted share, compared to net income available to common stockholders of $15.5 million, or $0.26 per diluted share for 2003.

Results of Operations

Comparison of the Years Ended December 31, 2004 and 2003

     Revenues. Total revenues for the year ended December 31, 2004 increased $27.2 million, or 7%, to $410.4 million from the year ended December 31, 2003, due to an increase in product revenues.

     Product Revenues. Product revenues for the year ended December 31, 2004 increased $27.7 million, or 8%, to $389.8 million from the year ended December 31, 2003. For the year ended December 31, 2004, unit volume/mix grew 6% along with a positive currency impact of 4%, while average prices fell 2%. Volume/mix increased primarily in our food, feed and specialties, fermentation alcohol, cleaning and carbohydrate processing markets.

     Regionally, North American product revenues for the year ended December 31, 2004 increased $5.9 million, or 4%, to $158.8 million from the year ended December 31, 2003, driven primarily by increased sales to our fermentation alcohol, carbohydrate processing and food, feed and specialties markets, partially offset by decreased sales to our cleaning and textiles markets. Product revenues in Europe, Africa and the Middle East for the year ended December 31, 2004 increased $20.8 million, or 14%, to $167.6 million from the year ended December 31, 2003, driven primarily by increased sales to our cleaning, textiles, carbohydrate processing and food, feed and specialties markets, partially offset by decreased sales to our fermentation alcohol markets. Our product revenues for the year ended December 31, 2004 in Latin America decreased $1.8 million, or 13%, to $12.4 million from the year ended December 31, 2003, due primarily to decreased sales to our cleaning, food, feed and specialties and carbohydrate processing markets, partially offset by increased sales to our textiles market. Product revenues in the Asia Pacific region for the year ended December 31, 2004 increased $2.8 million, or 6%, to $51.0 million from the year ended December 31, 2003, driven primarily by increased sales to our food, feed and specialties, cleaning, carbohydrate processing and fermentation alcohol markets, partially offset by a decrease in sales to our textiles market.

     Fees and Royalty Revenues. Fees and royalty revenues decreased $0.4 million, or 2%, to $20.6 million for the year ended December 31, 2004 from the year ended December 31, 2003.

     Funded research revenues decreased $11.2 million, or 58%, to $8.2 million for the year ended December 31, 2004 from the year ended December 31, 2003. Revenues generated by research funding result from collaborative agreements with various parties, including the U.S. Government, whereby we perform research activities and receive revenues that partially reimburse us for expenses incurred. Under such agreements, we retain a proprietary interest in the products and technology developed. Our funded research revenue as it relates to U.S. Government collaborations increased $1.3 million, or 46%, to $4.1 million for the year ended December 31, 2004 from the year ended December 31, 2003 primarily due to funding pursuant to our work with Cargill Dow, now known as NatureWorks LLC, on a U.S. Department of Energy supported biorefinery project and funding provided by NREL to develop an enzymatic process to convert biomass into ethanol. Funded research revenues provided by customers decreased $12.5 million, or 75%, to $4.1 million for the year ended December 31, 2004 from the year ended December 31, 2003 due primarily to a reduction in funding from our strategic alliance with the Dow Corning Corporation.

     Royalty revenues are based on the sales of licensees’ products produced using our technology. These royalties increased $0.2 million, or 14%, to $1.6 million for the year ended December 31, 2004 from the year ended December 31, 2003.

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     License fees for the year ended December 31, 2004 increased $0.6 million, to $0.8 million from the year ended December 31, 2003. These fees are related to the sale of rights to third parties for the use of our technology and patents to manufacture products.

     Other fees were $10.0 million for the year ended December 31, 2004, due to the recognition of $10.0 million from the technology transfer of our therapeutic vaccine program to Innogenetics N.V., as more completely discussed within this Item 7 under the heading “Technology Transfer.”

Operating Expenses

     Cost of Products Sold. Cost of products sold increased $18.2 million, or 9%, to $225.7 million for the year ended December 31, 2004 from the year ended December 30, 2003. Our expanded sales volume/mix increased costs by $8.0 million, along with increases of $7.7 million due to the impact of the U.S. Dollar against foreign currencies, primarily the Euro and increases of $2.5 million due to higher unit production costs.

     Gross Profit and Margins from Products Sold. Gross profit from products sold increased $9.5 million, or 6%, to $164.1 million for the year ended December 31, 2004 from the year ended December 31, 2003. The overall increase was primarily driven by a favorable product/volume mix and a $7.3 million increase due to impact of the U.S. Dollar against foreign currencies, primarily the Euro. These increases were partially offset by a reduction in average prices and increased production costs. Gross margin on product revenue decreased to 42.1% for the year ended December 31, 2004 from 42.7% for the year ended December 31, 2003, primarily driven by the impact of lower average selling prices.

     Research and Development. Research and development expenses primarily consist of the personnel-related, consulting, and facilities costs incurred in connection with our research activities in Palo Alto, California, and Leiden, the Netherlands. These expenses increased $3.3 million, or 5%, to $75.8 million for the year ended December 31, 2004 from the year ended December 31, 2003, due primarily to an increase in personnel-related costs, including salaries, benefits, travel expenses and other costs of $3.9 million, facilities expense of $0.6 million and other expenses that totaled $0.6 million, partially offset by a decrease in incentive compensation costs of $0.2 million and outside services of $1.6 million. As a part of total research and development expenses, estimated expenses related to research collaborations partially funded by customers decreased $5.5 million, or 42%, to $7.6 million for the year ended December 31, 2004 from the year ended December 31, 2003.

     Sales, Marketing and Business Development. Sales, marketing and business development expenses primarily consist of the personnel-related and marketing costs incurred by our global sales force. These expenses increased $5.2 million, or 15%, to $38.9 million for the year ended December 31, 2004 from the year ended December 31, 2003, due primarily to increased personnel-related costs, including salaries, benefits and travel expenses of $3.6 million, outside services of $0.6 million, supplies of $0.2 million, facilities costs and other expenses that totaled $0.8 million, partially offset by a decrease in incentive compensation costs of $0.1 million.

     General and Administrative. General and administrative expenses include the costs of our corporate executive, finance, information technology, legal, human resources, and communications functions. In total, these expenses increased $6.9 million, or 21%, to $40.5 million for the year ended December 31, 2004 from the year ended December 31, 2003 due primarily to increased outside services of $4.7 million, personnel-related costs, including salaries, benefits, and travel expenses of $2.2 million.

     Amortization of Intangible Assets. We amortize our definite-lived intangible assets, consisting primarily of patents, licenses and customer lists, on a straight-line basis over their estimated useful lives. Amortization expense decreased $1.0 million, or 18%, to $4.7 million for the year ended December 31, 2004 from the year ended December 31, 2003 due primarily to certain assets becoming fully amortized by year end 2004.

     Other Income and Expense. Other income for the year ended December 31, 2004 increased $6.3 million, to $8.4 million from the year ended December 31, 2003. The primary driver of this increase was the $8.3 million net gain recorded during the quarter ended March 31, 2004, resulting from the final settlement of our insurance claim related to the third party warehouse accident in Rotterdam, the Netherlands that occurred in the second quarter of 2003. For the year ended December 31, 2003, we recorded a net gain of $1.9 million related to the settlement of certain commercial matters with a customer.

     Deferred Compensation. We measure deferred compensation for options granted to employees as the difference between the grant price and the fair value of our common stock on the date we granted the options.

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     We measure deferred compensation for restricted stock and stock based awards granted to employees based on the number of granted restricted shares and the fair market value on the grant date. These amounts are recorded as a component of stockholders’ equity and amortized as a charge to operations over the vesting period of the awards.

     In total, amortization of deferred stock-based compensation expense was $0.7 million and $0.8 million in 2004 and 2003, respectively, and was reported in our Consolidated Statements of Operations as follows (in millions):

Non Operating Expense and Income

     Investment Expense. We recorded an investment loss of $1.0 million for the year ended December 31, 2003, as a result of our assessment of an “other than temporary” decline in the fair market value of an investment in certain common stock.

     Interest Income. Interest income decreased $0.4 million, or 10%, to $3.6 million for the year ended December 31, 2004 from the year ended December 31, 2003 due mainly to lower interest rates associated with U.S. Dollar and the Euro.

     Income Taxes. The effective income tax rate for the year ended December 31, 2004 was 18%, compared to 20% for the year ended December 31, 2003. Factors affecting the Company’s estimated annual effective income tax rate include increased operating expenses, the statutory income tax rates in foreign jurisdictions and the relative amount of income in each jurisdiction, certain items which are not deductible for tax purposes, and research and experimentation tax credits. In addition, the annual effective rate for both years includes the effect of estimated valuation allowances on certain deferred tax assets.

Comparison of the Years Ended December 31, 2003 and 2002

     Revenues. Total revenues for the year ended December 31, 2003 increased $33.1 million, or 9%, to $383.2 million from the year ended December 31, 2002, due to an increase in product revenues and fees and royalty revenues.

     Product Revenues. Product revenues for the year ended December 31, 2003 increased $32.8 million, or 10%, to $362.1 million from the year ended December 31, 2002. For the year ended December 31, 2003, unit volume/mix grew 7% along with a positive currency impact of 7%, while average prices fell 4%. The volume/mix increase was primarily driven by increased sales to our food, feed and specialties markets. Also, we had increased volume/mix sales to our cleaning, fuel ethanol, sweetener and textiles markets.

     Regionally, North American product revenues for the year ended December 31, 2003 decreased $3.8 million, or 2%, to $152.9 million from the year ended December 31, 2002, driven primarily by decreased sales to our sweetener, cleaning and textiles markets, partially offset by increased sales to our fuel ethanol and food, feed and specialties markets. Product revenues in Europe, Africa and the Middle East for the year ended December 31, 2003 increased $28.7 million, or 24%, to $146.8 million from the year ended December 31, 2002, driven primarily by increased sales to our food, feed and specialties, cleaning, sweetener and textiles markets, partially offset by decreased sales to our fuel ethanol market. Our product revenues for the year ended December 31, 2003 in Latin America increased $1.3 million, or 10%, to $14.2 million from the year ended December 31, 2002, due primarily to increased sales to our sweeteners, food, feed and specialties and textiles markets, partially offset by decreased sales to our cleaning market. Product revenues in the Asia Pacific region for the year ended December 31, 2003 increased $6.6 million, or 16%, to $48.2 million from the year ended December 31, 2002, driven primarily by increased sales to our cleaning, textiles, sweetener, food, feed and specialties and fuel ethanol markets.

     Fees and Royalty Revenues. Fees and royalty revenues increased $0.3 million, or 1%, to $21.0 million for the year ended December 31, 2003 from the year ended December 31, 2002.

     Funded research revenues decreased $0.1 million, or 1%, to $19.4 million for the year ended December 31, 2003 from the year ended December 31, 2002. Revenues generated by research funding result from collaborative agreements with various parties, including the U.S. Government, whereby we perform research activities and receive revenues that partially reimburse us for expenses incurred. Under such agreements, we retain a proprietary interest in the products and technology developed. Our funded research revenue as it relates to U.S. Government collaborations decreased $0.9 million, or 24%, to $2.8 million for the year ended December

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31, 2003 from the year ended December 31, 2002, primarily due to completion of our initial agreement with the NREL to develop improvements in the enzymatic process to convert biomass into ethanol. Funded research revenues provided by customers increased $0.8 million, or 5%, to $16.6 million for the year ended December 31, 2003 from the year ended December 31, 2002, primarily driven by funding from our strategic alliance with the Dow Corning Corporation.

     Royalty revenues are based on the sales of customers’ products produced using our technology. These royalties increased $0.3 million, or 27%, to 1.4 million for the year ended December 31, 2003 from the year ended December 31, 2002.

     License fees for the year ended December 31, 2003 increased $0.1 million to $0.2 million from the year ended December 31, 2002. These fees are related to the sale of rights to third parties for the use of our technology and patents to manufacture products.

Operating Expenses

     Cost of Products Sold. Cost of products sold increased $21.1 million, or 11%, to $207.5 million for the year ended December 31, 2003 from the year ended December 30, 2002. Our expanded sales volume/mix increased costs by $13.5 million, along with increases of $13.7 million due to the impact of the U.S. Dollar against foreign currencies, primarily the Euro. These increases were partially offset by lower unit production costs of $6.1 million.

     Gross Profit and Margins from Products Sold. Gross profit from products sold increased $11.7 million, or 8%, to $154.6 million for the year ended December 31, 2003 from the year ended December 31, 2002. This increase in gross profit was primarily driven by a $9.7 million favorable impact of the weaker U.S. Dollar against foreign currencies, primarily the Euro, lower unit production costs of $6.1 million and the sales volume/mix increase of 7%. These increases were partially offset by the 4% decline in average selling prices. As a result of these factors however, gross margin on product revenue decreased to 42.7% for the year ended December 31, 2003 from 43.4% for the year ended December 31, 2002, primarily driven by the impact of lower average selling prices.

     Research and Development. Research and development expenses primarily consist of the personnel-related, consulting, and facilities costs incurred in connection with our research activities in Palo Alto, California, and Leiden, the Netherlands. These expenses increased $2.3 million, or 3%, to $72.5 million for the year ended December 31, 2003 from the year ended December 31, 2002, due primarily to an increase in personnel-related costs, including salaries, benefits, travel expenses and other costs of $5.0 million and facilities expense of $0.5 million, partially offset by a decrease in incentive compensation costs of $0.5 million, outside services of $2.5 million and supply costs of $0.3 million. As a part of total research and development expenses, estimated expenses related to research collaborations partially funded by customers decreased $2.3 million, or 15%, to $13.1 million for the year ended December 31, 2003 from the year ended December 31, 2002.

     Sales, Marketing and Business Development. Sales, marketing and business development expenses primarily consist of the personnel-related and marketing costs incurred by our global sales force. These expenses increased $0.7 million, or 2%, to $33.7 million for the year ended December 31, 2003 from the year ended December 31, 2002, due primarily to increased personnel-related costs, including salaries, benefits and travel expenses of $0.8 million and other expenses that totaled $1.2 million, partially offset by a decrease in incentive compensation costs of $1.3 million.

     General and Administrative. General and administrative expenses include the costs of our corporate executive, finance, information technology, legal, human resources, and communications functions. In total, these expenses decreased $1.0 million, or 3%, to $33.6 million for the year ended December 31, 2003 from the year ended December 31, 2002 due primarily to decreased outside services of $2.4 million, incentive compensation costs of $0.9 million and advertising and promotions costs of $0.5 million, partially offset by a increase in personnel-related costs, including salaries, benefits, and travel expenses of $2.7 million.

     Amortization of Intangible Assets. We amortize our definite-lived intangible assets, consisting primarily of patents, licenses and customer lists, on a straight-line basis over their estimated useful lives. Amortization expense increased $0.1 million, or 2%, to $5.7 million for the year ended December 31, 2003 from the year ended December 31, 2002 due primarily to the purchase of intangible assets on December 31, 2002, discussed below under the heading “Acquisition,” partially offset by certain assets becoming fully amortized during 2003.

     Other Income and Expense. Other income and expense relates primarily to foreign currency exchange gains and losses on transactions denominated in other than the functional currency of the entity in which the transaction occurred. Other income for the year ended December 31, 2003 decreased $1.3 million, or 38%, to $2.1 million from the year ended December 31, 2002, primarily due to a decrease in the Argentine Peso and Euro-driven foreign currency transaction gains of $2.7 million from 2002, partially offset by a net gain of $1.9 million on settlement of certain commercial matters with a customer in 2003.

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     Deferred Compensation. We measure deferred compensation for options granted to employees as the difference between the grant price and the fair value of our common stock on the date we granted the options.

     On June 6, 2003, we granted 46,500 shares of restricted common stock to certain executive officers. These restricted shares were granted at fair market value at the date of grant and the restrictions on these awards expire three years from the date of grant. Deferred compensation expense of $0.7 million was recorded in connection with these awards and was determined based on the number of granted restricted shares and the fair market value on the grant date. This amount was recorded as a component of stockholders’ equity and will be amortized as a charge to operations over the vesting period of the awards.

     On November 6, 2002, we granted 75,000 shares of restricted common stock to our chief executive officer. These restricted shares were granted at fair market value at the date of grant and the restrictions on the award expire three years from the date of grant. Deferred compensation expense of $0.8 million was recorded in connection with the award and was determined based on the number of granted restricted shares and the fair market value on the grant date. This amount was recorded as a component of stockholders’ equity and will be amortized as a charge to operations over the vesting period of the award.

     In connection with the grant of stock options to employees during 2000, amortization of deferred compensation expense for the year ended December 31, 2003 was $0.4 million. For the year ended December 31, 2002, these awards resulted in an expense of $3.2 million, which included the acceleration of deferred compensation expense related to elimination of all stock-related loans resulting from the surrender to us of approximately 1.4 million restricted shares by certain executive officers.

     In total, amortization of deferred stock-based compensation expense was $0.8 million and $3.7 million in 2003 and 2002, respectively, and was reported in our Consolidated Statements of Operations as follows (in millions):

Non Operating Expense and Income

     Investment Expense. We recorded an investment loss of $1.0 million for the year ended December 31, 2003, as a result of our assessment of an “other than temporary” decline in the fair market value of an investment in certain common stock. For the year ended December 31, 2002 we recorded an investment loss of $1.5 million, resulting from an impairment loss on certain preferred stock.

     Interest Income. Interest income decreased $1.2 million, or 23%, to $4.0 million for the year ended December 31, 2003 from the year ended December 31, 2002 due mainly to lower interest rates associated with U.S. Dollar and the Euro.

     Income Taxes. The effective income tax rate for the year ended December 31, 2003 was a 20% tax expense, compared to a 143% tax benefit for the year ended December 31, 2002. Factors that affect our estimated annual effective income tax rate include increased research and development expenditures in the United States, the statutory income tax rates in foreign jurisdictions and the relative amount of income in each jurisdiction, other operating expense increases and other items which are not deductible for tax purposes, and research and experimentation tax credits. In addition, the estimated annual effective rate for the year ended December 31, 2003 includes the effect of estimated valuation allowances on certain U.S. tax credits. The effective rate for the year ended December 31, 2002 was driven by estimated annual tax benefits from operating losses in high tax jurisdictions, partially offset by taxes on operating income generated in low tax jurisdictions. The rate for the year ended December 31, 2002 also included the effect of the restructuring and related charges. The tax benefit related to these restructuring and related charges was approximately $6.1 million for the year ended December 31, 2002.

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Financial Results by Segment

     Our managerial financial reporting provides information that aligns with the two-segment structure of Bioproducts and Health Care. Accordingly, we have provided financial segment data for the years ended December 31, 2004, 2003 and 2002.

     The Bioproducts segment develops and delivers products and services for the industrial, consumer and agri-processing markets to a global customer base. All of our current product revenues are derived from this segment. For the years ended December 31, 2004, 2003 and 2002, the Bioproducts segment achieved operating income of $56.2 million, $65.4 million, and $44.6 million, respectively. For the year ended December 31, 2002, Bioproducts recorded restructuring and related costs of $16.4 million. Before these restructuring and related charges, the segment would have reported operating income of $61.0 million for the year ended December 31, 2002.

     The Health Care segment is primarily engaged in the performance of research and development, securing intellectual property and the establishment of strategic investments and collaborations in support of our product objectives in the health care market. For the years ended December 31, 2004, 2003 and 2002, the Health Care segment experienced operating losses of $23.3 million, $33.6 million, and $40.9 million, respectively. For the year ended December 31, 2004, the Health Care segment recognized fees totaling $10.0 million from the technology transfer of our therapeutic vaccine program to Innogenetics N.V.

Acquisitions

     On December 31, 2002, we acquired the brewing and enzyme business of Rhodia Food UK Limited for a total cash purchase price of $8.9 million. Due to the effect of foreign currency translation, additional acquisition costs and the sale of certain acquired assets, the adjusted purchase price was $10.5 million as of December 31, 2003. No facilities were included in the transaction. The acquisition has been accounted for under the purchase method in accordance with SFAS No. 141, “Business Combinations.” The results of operations of the acquired business were consolidated in our results of operations beginning January 1, 2003.

     During February 2002, we acquired EBS, now known as Genencor International Wisconsin, Inc., from Corn Products International, Inc. for a total cash purchase price of $35.8 million and the assumption of $1.0 million in debt. As part of this transaction, we entered into a seven-year supply agreement for a majority of Corn Products International, Inc.’s North American enzyme requirements. The acquisition has been accounted for under the purchase method.

Technology Transfer

     During March 2004, our Health Care segment sold its therapeutic vaccine program to Innogenetics N.V. Upon transfer of certain intellectual property, contractual relationships and technologies to Innogenetics, we recognized fees during the quarter ended June 30, 2004 totaling $10.0 million. We expect to receive further payments as development milestones are achieved. Once products are commercialized, we may receive royalty payments on future product sales.

Joint Venture

     On April 1, 2004 we assumed majority ownership and controlling interest of our Japanese joint venture with Kyowa Hakko Kogyo Co. Ltd., in which we have had an equity position since 1996. This ownership change resulted from the joint venture’s partial repurchase of the other owner’s share. This venture has been renamed Genencor Kyowa Co. Ltd. The financial position, results of operations and cash flows of the joint venture have been included in our consolidated financial statements beginning April 1, 2004.

Warehouse Inventory Loss

     We sustained damage to our finished bioproducts inventory in the second quarter of 2003 as a result of an accident in a third party warehouse in Rotterdam, the Netherlands. In the first quarter of 2004, we reached a final settlement of our accident-related claim with our insurer totaling approximately $21.0 million and recorded a net gain of $8.3 million.

China Expansion

     On January 6, 2005 we announced our plans to build a new manufacturing facility in the Wuxi China National New and High Tech Industrial Development Zone. We are in the process of purchasing the remaining approximately 15 percent interest in Genencor (Wuxi) Bio-Products Co. Ltd. from our joint venture partner, the Wuxi Enzyme Factory, and intend to operate the new facility as a wholly owned subsidiary. Once completed, we plan to transfer operations and personnel from our existing manufacturing facility in downtown Wuxi to the new facility. The new site is approximately 20 acres, which includes room for future expansion and is expected to feature upgraded equipment and provide significant fermentation capacity to produce a wide range of products in Genencor’s

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portfolio. The new facility is also expected to house sales support, customer service, technical and logistical support as well as warehouse operations.

Related Party Transactions

     Danisco A/S and its affiliates purchased products from us for approximately $19.0 million, $13.0 million and $11.0 million during the years ended December 31, 2004, 2003, and 2002, respectively. We purchased products from and/or through these related parties for approximately $10.0 million, $10.0 million, and $8.0 million during the years ended December 31, 2004, 2003 and 2002, respectively. In October 2000, we signed an exclusive agreement with Danisco for the development of innovative bioingredients for the food industry. During the years ended December 31, 2004, 2003 and 2002, we received approximately $0.4 million, $1.5 million and $1.1 million, respectively, in fees and royalty revenues under this agreement. Also, we received approximately $0.1 million in fees and royalty revenues from a Danisco affiliate during both 2004 and 2003, and approximately $0.4 million during 2002 under a collaboration agreement for the development and commercialization of enzymes for the animal feed market.

     At December 31, 2004 and 2003, we had amounts due from Danisco of approximately $2.3 million and $1.4 million, respectively. At December 31, 2004 and 2003, we had amounts due to Danisco of approximately $0.4 million and $0.5 million, respectively.

     We had outstanding relocation-related notes receivable with balances totaling $0.2 million and $3.4 million from our officers at December 31, 2004 and 2003, respectively. The notes are non-interest bearing and are due at the conclusion of five years from the date of issuance. Accordingly, interest income is imputed at 3.97% per year on the notes, with an offset recorded as compensation expense. The December 31, 2003 balance of $3.4 million included relocation-related notes receivable from certain of our officers, including a $1.2 million note from Richard J. Ranieri, Senior Vice President of Human Resources, and a $1.4 million note from Raymond J. Land, Senior Vice President and Chief Financial Officer. Both of these loans commenced in 2000, were non-interest bearing and were due five years from their date of issuance. During the third quarter of 2004, Genencor purchased the residences of Mr. Land and Mr. Ranieri and paid part of the purchase price of these properties by canceling the $1.4 million that Mr. Land was indebted to Genencor under a promissory note dated April 2000 and the $1.2 million that Mr. Ranieri was indebted to Genencor under a promissory note dated March 2000. The total purchase price for the Land residence was $2.8 million and the total purchase price for the Ranieri residence was $2.4 million. While third party appraisals were used to confirm that the purchase price for each residence approximated the fair market value of the property, the transactions resulted in deemed compensation of $0.1 million to Mr. Land and $0.1 million to Mr. Ranieri. Each of the two officers, together with his spouse, then entered into a lease with Genencor for his residence providing for a lease term of up to 36 months. Mr. Ranieri and his spouse elected to terminate their residential lease with Genencor in December 2004.

     On June 6, 2003, we granted 46,500 shares of restricted common stock to certain executive officers. These restricted shares were granted at fair market value at the date of grant and the restrictions on these awards expire three years from the grant date. Deferred compensation expense of $0.7 million was recorded in connection with these awards and was determined based on the number of granted restricted shares and the fair market value on the grant date. This amount was recorded as a component of stockholders’ equity and will be amortized as a charge to operations over the vesting period of the awards.

     During November 2002, we granted 75,000 shares of restricted common stock to our chief executive officer. These restricted shares were granted at fair market value at the date of grant and the restrictions on the award expire three years from the grant date. Deferred compensation expense of $0.8 million was recorded in connection with the award and was determined based on the number of granted restricted shares and the fair market value on the grant date. This amount was recorded as a component of stockholders’ equity and will be amortized as a charge to operations over the vesting period of the award.

     We also had outstanding promissory notes of $14.6 million at December 31, 2001. This amount related to the exercise of stock options and purchase of restricted shares by our executive officers during April 2000. In November 2001, we allowed these executive officers to surrender 349,910 vested, restricted shares at a value of $5.6 million to pay principal and interest due on these notes. On August 21, 2002, in order to eliminate all stock-related loans, our executive officers surrendered 1,429,864 restricted shares at a value of $10.77 per share to make full payment of the outstanding principal and accrued interest on their obligations under these notes. We are holding the surrendered shares as treasury stock.

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Liquidity and Capital Resources

     Our funding needs consist primarily of capital expenditures, research and development activities, sales and marketing expenses, and expenses for general corporate purposes. We have financed our operations primarily through cash from the sale of products, the sale of stock, research and development funding from partners, government grants, and short-term and long-term borrowings.

     We believe that our current cash and cash equivalent balances plus funds to be provided from our current year operating activities, together with those available under our line of credit, will satisfy our funding needs for at least the next twelve months. Factors that could negatively impact our cash position include, but are not limited to, future levels of product revenues, fees and royalty revenues, expense levels, capital expenditures, acquisitions, and foreign currency exchange rate fluctuations.

     As of December 31, 2004, cash and cash equivalents totaled $169.3 million. The funds were invested in short-term instruments, including, A-1/P-1 and A-2/P-2 rated commercial paper, certificates of deposit, AAA and AA rated medium term notes, institutional money market funds and bank deposits.

     Cash provided by operations was $62.6 million, $37.7 million and $38.5 million for the years ended December 31, 2004, 2003, and 2002, respectively. The increase of $24.9 million for the year ended December 31, 2004 from the year ended December 31, 2003 was generated principally by the receipt of cash from our insurer in settlement of our accident-related claim for damage sustained to our finished bioproducts inventory in the second quarter of 2003 as discussed above under the heading “Warehouse Inventory Loss” and the sale of our vaccine technology as discussed above under the heading “Technology Transfer,” partially offset by changes in operating assets and liabilities. The decrease of $0.8 million for the year ended December 31, 2003 from the year ended December 31, 2002 was driven by an increase in operating earnings, net of non-cash items such as depreciation and amortization, which was more than offset by changes in operating assets and liabilities, principally due to our efforts to rebuild inventories and settle our outstanding receivable relative to the warehouse accident that occurred in the second quarter of 2003.

     Cash used in investing activities was $19.6 million, $31.6 million and $65.7 million for the years ended December 31, 2004, 2003, and 2002, respectively. The decrease of cash used of $12.0 million for the year ended December 31, 2004 from the year ended December 31, 2003 was driven primarily by the recognition of cash and cash equivalents of our joint venture with Kyowa Hakko Kogyo Co. Ltd. of $3.8 million at April 1, 2004 due to our assumption of a controlling interest in that venture, as discussed above under the heading “Joint Venture.” Also impacting this decrease in cash used was a $7.5 million decrease in property, plant and equipment purchases for the year ended December 31, 2004 from the year ended December 31, 2003. During the third quarter of 2003, construction was completed on our facility for the clinical-scale manufacture of human therapeutic proteins in Rochester, New York. Overall, purchases of property, plant and equipment totaled $25.3 million, $32.8 million and $19.6 million for the years ended December 31, 2004, 2003, and 2002, respectively. A significant portion of this spending included process improvement projects at our manufacturing and research and development facilities and information technology enhancements. This spending also included the purchase of officers’ residences during the third quarter of 2004 as discussed above under the heading “Related Party Transactions.” Capital projects in process at December 31, 2004 relate primarily to further manufacturing process improvements and information technology system enhancements.

     Cash used in investing activities decreased $34.1 million for the year ended December 31, 2003 from the year ended December 31, 2002. This was driven primarily by the 2002 acquisitions of EBS and the brewing and enzyme business of Rhodia Food UK Limited totaling $44.7 million and the purchase of equity securities in 2002 of $4.5 million, partially offset by the increase in 2003 capital expenditures of $13.2 million. Also, cash used in investing activities for 2003 included $1.1 million in proceeds from the sale of certain acquired assets as discussed above in “Acquisitions.”

     Cash used in financing activities was $24.5 million, $20.4 million, and $26.7 million for the years ended December 31, 2004, 2003 and 2002, respectively, which reflects our $28.0 million annual installment payments made on our senior debt in each period. The increase in cash used of $4.1 million for the year ended December 31, 2004 from the year ended December 31, 2003 was driven primarily by payments on notes payable of one of our foreign affiliates and fewer stock option exercises. The decrease in cash used of $6.3 million for the year ended December 31, 2003 from the year ended December 31, 2002 was primarily a result of a 2003 increase in cash provided by the exercise of stock options.

     No dividends were paid to common stockholders during 2004, 2003, and 2002. While we are permitted to pay dividends, we currently intend to retain future earnings to finance the expansion of our business. Any future determination to pay cash dividends to our common stockholders will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, general business conditions and other factors that the board of directors may deem relevant, including covenants in our debt instruments that may limit our ability to declare and pay cash dividends on our capital stock. Covenants in our

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senior note agreement restrict the payment of dividends or other distributions in cash or other property to the extent the payment puts us in default of these covenants. Such covenants include, but are not limited to, maintaining a debt to total capitalization of no greater than 55% and a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of 3.5:1.

     At December 31, 2004 we had a $40.0 million revolving credit facility with a syndicate of banks, which is available for general corporate purposes. The credit facility, which consists of a credit agreement, makes available to us $40.0 million of committed borrowings and expires on December 23, 2006. The credit facility carries fees of 0.25% on the amount of unborrowed principal under the agreement. As of December 31, 2004, there were no borrowings under the facility.

     Our long-term debt consists primarily of the 6.82% senior notes issued in 1996 to certain institutional investors. The remaining principal amount of these notes is $56.0 million. Annual installment payments of $28.0 million commenced on March 30, 2002. We are currently in compliance with the financial covenants included in the senior note agreement.

Contractual Obligations

     The following table summarizes our contractual obligations as of December 31, 2004 (in millions):

     Notes to contractual obligations table:

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Off-Balance Sheet Arrangements

     An off-balance sheet arrangement includes any contractual obligation, agreement or transaction involving an unconsolidated entity under which we 1) have made guarantees, 2) have a retained or contingent interest in transferred assets, or a similar arrangement, that serves as credit, liquidity or market risk support to that entity for such assets, 3) have an obligation under certain derivative instruments, or 4) have any obligation arising out of a material variable interest in such an entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development services with us.

     We assess our contracts in accordance with FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Guarantees and claims arise during the ordinary course of business from relationships with suppliers, customers and strategic partners when we undertake an obligation to guarantee the performance of others if specified triggering events occur. Non-performance under a contract could trigger an obligation. These potential claims include actions based upon alleged exposures to products, intellectual property and environmental matters, and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, we are not aware of any such claims that we believe will have a material adverse effect on our consolidated financial statements.

     Furthermore, we have no arrangements of the types described in the other three categories that we believe may have a material current or future adverse effect on our consolidated financial statements.

New Accounting Standards

     In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” This Position supersedes FSP No. 106-1 of the same title, which was issued in January 2004. FSP No. 106-1 permitted employers that sponsor postretirement benefit plans which provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP No. 106-2 provides guidance on accounting for the effects of the new Medicare prescription drug legislation by employers whose prescription drug benefits are actuarially equivalent to the drug benefit under Medicare Part D. For all public companies that sponsor one or more plans with more than 100 participants, the Position is effective as of the first interim or annual period beginning after June 15, 2004. The adoption of FSP No. 106-2 had no material impact on the Company’s financial position or results of operations.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, chapter 4.” This Statement amends the guidance to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This statement requires that items such as idle facility expense, excessive spoilage, double freight and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “abnormal.” This statement requires that the allocation of fixed production overheads to the cost of conversion be based on the “normal capacity” of the production facility. This statement is effective for fiscal years beginning after June 15, 2005. We are currently assessing the impact of this new standard on our financial statements.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29.” This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for fiscal years beginning after June 15, 2005. We will apply the provisions of the statement to exchanges of nonmonetary assets after the effective date as they occur.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. The Statement also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Accordingly, it changes the required accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This

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Statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 and we will adopt the standard in the third quarter of fiscal 2005. The Statement provides three alternative transition methods we can apply upon adoption of the standard: the modified prospective method, which would require application of the requirements of the Statement to new or modified awards after the effective date, or the modified retrospective method, which would allow for application of the requirements of the Statement to awards for all prior years presented or to only prior interim periods in the year of adoption. While the pro-forma disclosures under the original version SFAS No. 123, which are included in Note 13 – Employee Benefit Plans within Item 8 of this Report, indicate that the impact of this new standard may be material to our consolidated financial statements upon adoption, we are currently in the process of assessing the impact on our consolidated financial statements as well as the transition method we will select upon adoption of the Statement.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Foreign currency risk and interest rate risk are the primary sources of our market risk. Foreign operations accounted for approximately 58% of our 2004 product revenues. We believe that we partially mitigate this risk by having manufacturing facilities located in several locations around the world, which means that our costs are often denominated in the same currency as our product revenues. We may manage the foreign currency exposures that remain through the use of foreign currency forward contracts, currency options and off-setting currency loans where deemed appropriate. We do not use these instruments for speculative purposes. At December 31, 2004 the Company had $7.0 million in forward exchange contracts outstanding. The contract maturities were no longer than three months. We recorded $0.1 million in foreign currency gains related to forward contracts in the statement of operations for the year ended December 31, 2004.

     As of December 31, 2004, cash and cash equivalents totaled $169.3 million. Of this amount, $95.9 million was denominated in Euros. The remainder, or $73.4 million, was primarily denominated in U.S. Dollars. Other than the third installment of $28.0 million due in March 30, 2005 under our 6.82% senior notes discussed under the heading “Liquidity and Capital Resources” in Item 7 of this Report, short-term debt outstanding at December 31, 2004 was not significant. To the extent U.S. Dollar and Euro interest rates fluctuate either up or down, the return on the cash investments will also fluctuate. To the extent such Euro cash investments remain outstanding, we will be subject to the risks of future foreign exchange fluctuations and the impact on the translation of these cash investments into U.S. Dollars.

Interest Rates

     Our interest income is sensitive to changes in the general level of short-term interest rates primarily in the United States and Europe. In this regard, changes in the U.S. Dollar and Euro currency rates affect the interest earned on our cash equivalents, short-term investments, and long-term investments. Our interest expense is generated primarily from fixed rate debt. The $56.0 million 6.82% senior notes outstanding at December 31, 2004 mature evenly in installments of $28.0 million per year. Annual installment payments commenced March 30, 2002 with two remaining annual installments due on March 30, 2005 and March 30, 2006.

Foreign Currency Exposure

     During the year ended December 31, 2004, we derived approximately 58% of our revenues from foreign operations. Economic conditions in countries where we conduct business and changing foreign currency exchange rates affect our financial position and results of operations. We are exposed to changes in foreign exchange rates in Europe, Latin America, and Asia. The Euro and Argentine Peso present our most significant foreign currency exposure risk. Changes in foreign currency exchange rates, especially the strengthening of the U.S. Dollar, may have an adverse effect on our financial position and results of operations as they are expressed in U.S. Dollars. Our manufacturing and administrative operations for Latin America are located in Argentina. A significant part of our Latin American revenues are denominated in U.S. Dollars. Net foreign exchange gains from U.S. Dollar/Euro and U.S. Dollar/Argentine Peso transactions were $0.1 million for the year ended December 31, 2004.

     Management monitors foreign currency exposures and may in the ordinary course of business enter into foreign currency forward contracts or options contracts related to specific foreign currency transactions or anticipated cash flows. These contracts generally cover periods of nine months or less and are not material. We recorded a gain of $0.1 million in the statement of operations for the year ended December 31, 2004 from foreign currency contracts. We do not hedge the translation of financial statements of consolidated subsidiaries that maintain their local books and records in foreign currencies.

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Other

     The risk factors discussed in Item 1 of this Report are incorporated herein by reference to the degree they address market risk.

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Genencor International, Inc.

We have completed an integrated audit of Genencor International, Inc. and subsidiaries’ 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Genencor International, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
San Jose, California
March 14, 2005

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial statements.

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of the consolidated financial statements.

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GENENCOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS