FINANCIAL STATEMENTS

DELTAGEN, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

DELTAGEN, INC.

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

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

DELTAGEN, INC.

CONSOLIDATED CASH FLOW

(UNAUDITED)

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

DELTAGEN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THIRD QUARTER 2006

September 30, 2006

1.  Basis of Presentation

The accompanying consolidated financial statements of Deltagen, Inc. ("Deltagen" or the "Company") for the three months ended September 30, 2006 are unaudited, but have been prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. 

These consolidated financial statements have been prepared so that they present fairly, in the opinion of management, the Company's financial position and its results of operations and its cash flows for the period presented.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. 

The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures.  Although these estimates are based on the Company's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ materially from the estimates.

Operating results for the three-month period ended September 30, 2006 or any other quarter are not necessarily indicative of the results that may be expected or achieved for the year ended December 31, 2006.

Under our revenue recognition policy, revenues are recognized when a definitive agreement with a determinable price exists, product delivery and/or invoicing (in each case where there is reasonable assurance of meeting customer-specified criteria) have occurred, and collectibility is reasonably assured.

Cash and cash equivalents include cash in banks and money market mutual funds with a maturity of three months or less when purchased.

Property and equipment are recorded at cost less accumulated depreciation and amortization.  Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets ranging from three to seven years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expenses as incurred.  When an asset is sold or retired, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss on disposition is recognized in the current year.

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.  In the calculation of the deferred tax assets, the Company established a 98% valuation allowance due to uncertainties relating to future income and the realization of such deferred tax assets.  The Company currently intends to evaluate and adjust on an ongoing basis, based on expected income, the recoverability of the deferred tax assets and the level of the valuation allowance.  Based on the net income amount for the quarter ended September 30, 2006, no provision for income taxes is reflected in the accompanying financial statements and no change in the valuation allowance was made.

The Company has incurred expenditures relating to the pursuit of patent rights covering certain of its products and technologies.  These expenditures have not been capitalized because, in the Company's opinion, the probability of future benefits from such patent rights cannot at present be reasonably assessed and/or the useful life of such assets cannot be reasonably estimated.

For further information, refer to the financial statements and related notes posted on the Company's website (www.deltagen.com).

2.   Treatment of Subsidiaries

The consolidated financial statements include the accounts and activities of the Company's subsidiaries, Deltagen Research Laboratories, L.L.C., Deltagen Europe, S.A. and Xenopharm, Inc.  Intercompany transactions and balances are eliminated in consolidation.  The Company uses the U.S. dollar as the functional currency for its foreign subsidiary.  Accordingly, gains and losses from the translation of foreign currency amounts reflected on the balance sheet into U.S. dollars are included in the results of operations.  

3.   Stock-Based Compensation

The Company's stock awards are governed by its 2000 Stock Incentive Plan (a qualified stock option plan under Internal Revenue Code), as amended (the "Plan"). The exercise price of stock options under the Plan is determined by the Compensation Committee of the Board of Directors of the Company (the "Committee"). No incentive stock option is exercisable after 10 years from the date of grant.

Prior to January 1, 2006, the Company accounted for the Plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation, which did not require that compensation cost be recognized for the Company's stock options provided the option exercise price was established at the common stock fair market value on the date of grant.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), by which the compensation cost for all stock-based payments granted subsequent to January 1, 2006 are based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R).  The Company adopted this statement using the modified prospective transition method, which applies to the compensation expenses recognition provision to new awards and to any awards modified, repurchased or cancelled after the January 1, 2006 adoption date. Additionally, for any unvested awards outstanding at the option date, the company will recognize the compensation expenses over the remaining vesting period. Stock-based compensation is recognized on the straight-line basis.

On March 30, 2006, the Company issued stock options to certain directors and officers of the Company.  For more information on these stock option grants, please refer to Management's Discussion & Analysis for the first quarter of 2006, which is posted on the Company's website.

As a result of adopting Statement 123(R) on January 1, 2006, the Company's net income for the three-month period ended September 30, 2006 is approximately $123,000 lower than it would have been had the Company continued to account for stock-based compensation under APB Opinion No. 25.