VARIAGENICS INC, 424B1, 2000-07-21

VARIAGENICS INC
424B1, 2000-07-21

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<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-33558

5,000,000 Shares

[LOGO]

Common Stock

---------

This is our initial public offering of shares of our common stock. Prior to
this offering, there has been no public market for our common stock. Our common
stock has been approved for quotation on The Nasdaq Stock Market's National
Market under the symbol "VGNX."

The underwriters have an option to purchase up to a maximum of 750,000
additional shares to cover over-allotments of shares.

Investing in our common stock involves risks. See "Risk Factors" on page 8.

<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Variagenics
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share............................................ $14.00 $0.98 $13.02
Total................................................ $70,000,000 $4,900,000 $65,100,000
</TABLE>

Delivery of the shares of common stock will be made on or about July 26,
2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

Credit Suisse First Boston

Chase H&Q

SG Cowen

The date of this prospectus is July 21, 2000.
<PAGE>
[LOGO]
<PAGE>
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 4
RISK FACTORS.......................... 8
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 18
TRADEMARKS............................ 18
USE OF PROCEEDS....................... 19
DIVIDEND POLICY....................... 19
CAPITALIZATION........................ 20
DILUTION.............................. 21
SELECTED FINANCIAL DATA............... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
BUSINESS.............................. 30
MANAGEMENT............................ 44
</TABLE>

TRANSACTIONS WITH EXECUTIVE OFFICERS,
DIRECTORS AND FIVE PERCENT
STOCKHOLDERS........................ 56
PRINCIPAL STOCKHOLDERS................ 57
DESCRIPTION OF CAPITAL STOCK.......... 60
SHARES ELIGIBLE FOR FUTURE SALE....... 63
U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-UNITED STATES HOLDERS........... 65
UNDERWRITING.......................... 69
NOTICE TO CANADIAN RESIDENTS.......... 72
LEGAL MATTERS......................... 73
EXPERTS............................... 73
WHERE YOU CAN FIND MORE INFORMATION... 73
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>

--------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.

DEALER PROSPECTUS DELIVERY OBLIGATION

UNTIL AUGUST 15, 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

3
<PAGE>
PROSPECTUS SUMMARY

THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD CONSIDER
BEFORE BUYING SHARES IN THE OFFERING. THEREFORE, YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY.

OVERVIEW

We are a leader in the development and commercialization of technologies
related to pharmacogenomics. Pharmacogenomics is the study of the correlation
between an individual's genetic differences, or genetic variability, and his or
her specific response to a drug. The most common form of this genetic
variability is called a single nucleotide polymorphism, or SNP. We use our
technology, expertise and proprietary data to improve and enhance the effects of
drugs in development and develop new drug targets, and we also intend to use our
technology to bring high-value diagnostic products to market. We are a
pharmacogenomics company offering a full range of solutions to support key steps
of the drug discovery and development process, extending from drug target
identification through clinical trials to commercialization. We intend to
establish multiple sources of revenue, which will include collaboration
revenues, license fees, milestone payments and royalties on products
commercialized using our technology.

CHALLENGES

We expect the methods pharmaceutical companies use to develop new drugs and
to improve existing drugs to undergo substantial change to account for genetic
variation among individuals. The pharmacogenomics field is based on the concept
that the effect a drug has on an individual can be a function of that
individual's unique genetic make-up. Pharmacogenomics may allow pharmaceutical
companies to substantially reduce development failures for drug targets, and to
better understand the appropriate target population for each given drug.
Pharmacogenomics is therefore expected to increase efficiency, reduce the cost
of drug development and improve patient treatment. We believe pharmaceutical
companies will be able to develop a new generation of high-value diagnostic
products in connection with drugs improved and enhanced through
pharmacogenomics. We expect that the medical community will use these diagnostic
products to guide treatments for individuals based on their likely responses to
these drugs.

To commercialize pharmacogenomics, we must address three main challenges:

- sorting, interpreting and prioritizing the enormous amount of genomics
data in a cost-effective fashion and in a method practical for use in
clinical testing;

- implementing technologies and genetic tests, or assays, to identify SNPs
in a manner practical for routine testing suitable for clinical research;
and

- combining the development of pharmacogenomically-enhanced drugs with the
development of corresponding diagnostic tests.

VARIAGENICS' SOLUTIONS

We believe that we are positioned to enable pharmaceutical, biotechnology
and diagnostic companies to meet these challenges because:

- We believe that our proprietary SNP database is the most comprehensive
collection of genetic variability data specific to pharmacogenomics and
relevant to major drug targets in development, including targets for
cancer, cardiovascular, central nervous system and inflammatory disorders.

- Our Variagenic-Registered Trademark- Impact Program family of technologies
includes five complementary and proprietary discovery tools to identify
the most critical genetic information relevant to drug activity.

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- We intend to analyze targeted genetic information utilizing our
proprietary NuCleave-TM- DNA analysis technology that we are developing
and commercializing with our clinical collaborators. Our NuCleave-TM- DNA
analysis technology enables mass spectrometry, a highly-accurate tool used
to measure molecular weight, for SNP detection.

- We intend to develop internally new diagnostic products and possibly
enhanced drug products, including those developed through our
Variagenic-Registered Trademark- Targeting Program. We may choose to
implement these programs on our own or in collaborations with other
companies.

OUR COLLABORATIONS

We have formed collaborations with leaders in the life sciences and contract
research industries to support the commercialization of our technologies. We
currently generate our revenues from collaboration funding and government
grants, and we expect to earn additional revenues from milestone achievements
and royalties on drugs, diagnostic products and technology platforms as they are
launched. We also plan to earn royalties from sales through our collaborators of
our NuCleave-TM- DNA analysis technologies and kits to pharmaceutical companies
and clinical laboratories.

- We have a collaboration with Covance, Inc. to develop and launch clinical
tests to identify the presence of a SNP, known as genotyping, and groups
of SNPs, known as haplotyping. Under this collaboration, Covance provides
funding to us for assay development and will pay us royalties for
laboratory tests performed at Covance. We expect to place our NuCleave-TM-
DNA testing and analysis system in Covance's largest testing laboratory by
the end of 2000.

- We have a collaboration with Waters Technologies Corporation to develop
and launch the kits for mass spectrometry applications which incorporate
our NuCleave-TM- DNA analysis technology. As part of this collaboration,
we may receive up to $7 million in fees upon achievement of certain
milestones, as well as royalties on kit sales.

OUR HISTORY

We incorporated in Delaware on December 7, 1992. Our principal office is
located at 60 Hampshire Street, Cambridge, MA 02139 and our telephone number is
(617) 588-5300. Our Web site is located at HTTP://WWW.VARIAGENICS.COM. We do not
intend for the information contained on our Web site to be considered a part of
this prospectus.

5
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THE OFFERING

<TABLE>
<S> <C>
Common stock offered in the initial public
offering................................... 5,000,000 shares

Common stock offered in the concurrent
private placement.......................... 535,714 shares

Common stock to be outstanding after the
offerings.................................. 22,218,046 shares

Use of proceeds.............................. For general corporate purposes, including
research and development and potential
acquisitions. See "Use of Proceeds."

Nasdaq National Market symbol................ VGNX
</TABLE>

The number of shares to be outstanding after this offering is based on the
number of shares outstanding on June 22, 2000 and excludes:

- 2,750,280 shares that may be issued upon exercise of options outstanding
as of June 22, 2000 granted under our 1997 Employee, Director and
Consultant Stock Option Plan at a weighted average exercise price of
$0.99 per share; and

- 1,322,466 shares that may be issued upon exercise of warrants outstanding
as of June 22, 2000 at a weighted average exercise price of $3.06 per
share.

------------------------

Unless otherwise indicated, information in this prospectus assumes the
following:

- the conversion of all of our outstanding shares of redeemable convertible
preferred stock upon the closing of this offering, including 4,664,705
shares of Series F redeemable convertible preferred stock sold in
March 2000, into 14,931,289 shares of common stock;

- the purchase for $7.5 million by an affiliate of Waters Technologies
Corporation of 535,714 shares of common stock in a private placement
concurrent with the closing of the public offering;

- a 1.1895-for-1 stock split of the common stock completed prior to the
effectiveness of the offering;

- the filing of our amended and restated certificate of incorporation
concurrently with the closing of this offering; and

- no exercise of the underwriters' over-allotment option.

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................................. $ -- $ -- $ -- $ -- $ 399 $ 94 $ 127
Costs and expenses:
Research and development.......................... 909 1,298 2,234 5,071 8,602 1,725 2,712
General and administrative........................ 654 781 2,059 3,176 6,945 1,169 2,194
In-process research and development............... -- -- 674 -- -- -- --
------- ------- ------- ------- -------- ------- --------
Loss from operations............................ (1,563) (2,079) (4,967) (8,247) (15,148) (2,800) (4,779)
Other income (expense):
Interest income................................... 9 10 258 200 167 15 115
Interest expense.................................. (79) (32) (80) (98) (1,497) (525) (66)
Loss on investment in affiliate................... -- -- -- -- (250) (151) --
------- ------- ------- ------- -------- ------- --------
Net loss............................................ $(1,633) $(2,101) $(4,789) $(8,145) $(16,728) $(3,461) $ (4,730)
======= ======= ======= ======= ======== ======= ========
Dividend on redeemable convertible preferred
stock............................................. -- -- (153) -- (1,437) -- (20,749)
Net loss attributable to common stockholders........ $(1,633) $(2,101) $(4,942) $(8,145) $(18,165) $(3,461) $(25,479)
======= ======= ======= ======= ======== ======= ========
Net loss attributable to common stockholders per
share (basic and diluted)......................... $ (7.71) $ (8.22) $(13.48) $(16.13) $ (29.96) $ (6.43) $ (34.85)
Weighted average common shares outstanding (basic
and diluted)...................................... 212 256 367 505 606 539 731
Unaudited pro forma net loss per share (basic and
diluted).......................................... $ (2.54) $ (.38)
Shares used in computing unaudited pro forma basic
and diluted net loss per share.................... 6,594 12,304
</TABLE>

In the unaudited pro forma net loss per share (basic and diluted) we have
adjusted the shares used in computing unaudited pro forma weighted average
shares outstanding (basic and diluted) to give effect to the automatic
conversion of our redeemable convertible preferred stock outstanding at
December 31, 1999 and March 31, 2000 using the if converted method on their
respective dates of issuance.

In the Pro Forma column below, we have adjusted the actual balance sheet
data to give effect to the automatic conversion of each outstanding share of our
redeemable convertible preferred stock into 14,931,289 shares of common stock.
In the Pro Forma As Adjusted column below, we have further adjusted the actual
balance sheet data to give effect to receipt of the net proceeds from the sale
in the initial public offering and the concurrent private placement of shares of
common stock at an initial public offering price of $14.00 per share, after
deducting underwriting discounts and commissions and the estimated offering
expenses payable by us.

<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 21,640 $21,640 $92,840
Working capital............................................. 20,169 20,169 91,369
Total assets................................................ 26,961 26,961 98,161
Long-term obligations, less current portion................. 791 791 791
Redeemable convertible preferred stock...................... 49,843 -- --
Total stockholders' equity (deficit)........................ (25,744) 24,099 95,299
</TABLE>

Please see Note 2 to our financial statements for an explanation of the
method used to calculate net loss attributable to common stockholders, basic and
diluted net loss per share attributable to common stockholders and the number of
shares used in the computation of per share amounts.

7
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RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCURS, WE MAY NOT BE ABLE TO CONDUCT OUR BUSINESS AS
CURRENTLY PLANNED AND OUR FINANCIAL CONDITION AND OPERATING RESULTS COULD BE
SERIOUSLY HARMED. IN THAT CASE, THE MARKET PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS."

RISKS RELATED TO OUR BUSINESS

BECAUSE WE ARE IN THE EARLY STAGE OF COMMERCIALIZING OUR PRODUCTS AND SERVICES
AND HAVE A RELATIVELY SHORT OPERATING HISTORY, THERE IS A LIMITED AMOUNT OF
INFORMATION ABOUT US UPON WHICH YOU CAN EVALUATE OUR BUSINESS AND PROSPECTS FOR
FUTURE SUCCESS.

We are in the early stage of commercializing our products and services. We
have just begun to generate revenues from this commercialization, and have only
a relatively limited operating history upon which you can evaluate our business
and prospects for future success. Since our inception, we have devoted our
efforts primarily to financial planning, research and development of
pharmacogenomics technology, recruiting management and technical staff,
acquiring operating assets and raising capital. You must consider the risks and
uncertainties frequently encountered by companies in new and rapidly evolving
markets, such as the market for products and services derived from
pharmacogenomics. Some of these risks and uncertainties relate to our ability
to:

- anticipate and adapt to changes in the rapidly evolving pharmacogenomics
field;

- retain current customers and collaborators and attract new customers and
collaborators;

- implement and successfully execute our business strategy and sales and
marketing initiatives;

- attract, retain and motivate qualified personnel;

- respond effectively to competitive and technological developments through
the timely introduction of our NuCleave-TM- analysis platform,
Variagenic-Registered Trademark- Impact Program and our other
technologies, products and services; and

- effectively manage our anticipated growth.

If we fail to address these risks and uncertainties successfully, our
financial condition and opportunity for growth will suffer.

WE HAD AN ACCUMULATED DEFICIT OF $39.6 MILLION AS OF MARCH 31, 2000, EXPECT TO
CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES AND NEGATIVE CASH FLOW FOR
SEVERAL YEARS AND MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.

We have had substantial operating losses since our inception and we expect
our operating losses to continue at least through the end of 2001. We may never
be profitable. We experienced net losses of $4.7 million in the first quarter of
2000, $16.7 million in 1999, $8.1 million in 1998 and $4.8 million in 1997. As
of March 31, 2000, we had an accumulated deficit of $39.6 million. We expect
significant increases in expenses in connection with our internal research and
development and commercialization programs, including the development and
planned commercial introduction of our NuCleave-TM- technology,
Variagenic-Registered Trademark- Impact Program and our other technologies,
products and services. Our ability to achieve significant revenue or
profitability will depend upon successful completion of our product development
activities and obtaining collaborations and customers for our products and
services. Even if we do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis.

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IF WE DO NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS AND SERVICES AND EXPAND THE
RANGE OF APPLICATIONS FOR OUR CURRENT PRODUCTS AND SERVICES, WE MAY NOT GENERATE
SUFFICIENT REVENUES TO ACHIEVE OR MAINTAIN PROFITABILITY.

Our technologies are still in the early stages of development and we or our
customers or collaborators may not be able to use them successfully in
pharmaceutical or diagnostic product development. Our ability to successfully
develop our technologies into new products and services and expand the range of
applications of our current products and services is subject to a variety of
factors, including our ability to:

- obtain substantial additional capital to support the expenses of
developing our technologies and commercializing our products and services;

- develop markets for our products and services;

- transition successfully from a company with a research focus to a company
capable of supporting commercial activities; and

- attract and retain qualified management, sales, technical and scientific
staff.

To date, we have developed a limited number of products and services based
on our technologies, including NuCleave-TM- and our
Variagenic-Registered Trademark- Impact Program. These products and services
have not yet been commercially proven in the marketplace and we may not
successfully complete their development.

We have only limited experience in sales and marketing, and have only just
begun to develop a sales force capable of selling and marketing our products and
services. We intend to market our technologies and applications through
collaborations with pharmaceutical, biotechnology and diagnostic companies. If
we are unable to establish or maintain collaborative or distribution
arrangements to market our products and services, we may not generate sufficient
revenues to achieve or maintain profitability.

OUR BUSINESS MODEL IS BASED ON PHARMACOGENOMICS, WHICH IS COMMERCIALLY UNPROVEN,
AND IF THIS FIELD DOES NOT DEVELOP AS WE BELIEVE, WE WILL HAVE DIFFICULTY
IMPLEMENTING OUR BUSINESS STRATEGY.

The field of pharmacogenomics is relatively new and it has not been proven
to be commercially viable. Our business model is based on the assumption that
pharmacogenomics may help scientists better understand complex disease processes
and aid in drug development. Scientists generally have a limited understanding
of the role of genes in diseases, and few products based on pharmacogenomics
have been developed. If our assumption about the role of genes in the disease
process is wrong, our business model may not result in products or services and
the genetic data included in our SNP database and other products and services
may not be useful to our collaborators. In addition, if our customers do not
successfully develop or commercialize pharmaceutical or diagnostic products
using our technologies, we may not generate further revenues from those
customers.

The instrumentation, software and know-how that comprise our technologies
involve new uses that have not previously been used in commercial applications.
If the industry adopts these technologies, it is possible that previously
unrecognized defects or limitations will emerge. We may be unable to achieve the
improvements in the components of our technologies necessary for their
successful commercialization. Our technologies will also need to compete against
well-established techniques to discover new drugs, including chemical processes
and high volume screening of genes. If we are unable to compete successfully
against these existing techniques and instruments then we may not be able to
commercialize our products or achieve a competitive position in the market which
would adversely affect our ability to generate revenues.

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WE INTEND TO RELY ON OUR COMMERCIAL AND ACADEMIC COLLABORATORS AND LICENSING
AGREEMENTS TO IMPLEMENT OUR BUSINESS STRATEGY AND COMMERCIALIZE OUR PRODUCTS AND
SERVICES. IF WE ARE UNABLE TO ENTER INTO THESE ARRANGEMENTS, WE MAY NOT GENERATE
SUFFICIENT REVENUE TO ACHIEVE OR MAINTAIN PROFITABILITY.

Our strategy for developing and commercializing products and services based
on our technologies depends upon our ability to form collaborations and
licensing arrangements. We currently have collaborations with Waters
Technologies Corporation, Covance, Inc., Quintiles Transnational Corporation and
Bruker Daltonics, Inc. and will seek to enter into additional collaborations. As
a result, we may depend on our collaborators and licensees for product
development, regulatory approval, and the manufacturing and marketing of the
pharmaceutical, therapeutic and diagnostic products we develop. We cannot
control the amount and timing of resources our customers may devote to our
programs or potential products. As a result, we cannot be certain that our
customers will choose to develop and commercialize these products. If we are not
able to enter into these arrangements or implement our strategy to develop and
commercialize pharmaceutical, therapeutic and diagnostic products based upon our
technologies, we may not generate sufficient revenue to achieve or maintain
profitability.

We or our collaborators or licensees may terminate our agreements early. In
addition, our collaborators or licensees may negotiate provisions with us that
allow them to terminate our agreements prior to the expiration of the negotiated
term. If any third party collaborator or licensee were to terminate its
agreement with us or otherwise fail to conduct its obligations under our
collaboration or to complete them in a timely manner, we could lose significant
revenue.

In addition, we intend to establish new relationships with researchers,
consultants and scientific advisors in the pharmacogenomics field. Under a
typical arrangement, we can expect that they will dedicate only limited amounts
of their time to our activities. These individuals work for other employers and
have commitments to other entities that may limit their availability to us. We
cannot be certain that any of our existing relationships will be successful, and
we may not be able to negotiate acceptable collaborations in the future with
additional researchers, consultants, or scientific advisors at academic and
other institutions.

Our current and potential collaborators could develop competing products,
prevent us from entering into relationships with their competitors, fail to
obtain timely regulatory approvals, terminate their agreements with us
prematurely or fail to devote sufficient resources to the development and
commercialization of products. Potential collaborators with whom we may wish to
establish a relationship could develop products or technologies similar to our
own, reducing our pool of possible collaborative parties and increasing
competition. Any of these developments could harm our product development
efforts, which would seriously harm our business.

WE EXPECT TO DEPEND IN THE FORESEEABLE FUTURE ON A SMALL NUMBER OF CUSTOMERS AND
COLLABORATORS FOR A SUBSTANTIAL PORTION OF OUR REVENUE. THE LOSS OF ANY ONE OF
THESE CUSTOMERS OR COLLABORATORS COULD RESULT IN A SUBSTANTIAL DECLINE IN
REVENUE.

Our customers and collaborators have been, and will most likely be,
concentrated in a limited number of pharmaceutical, biotechnology and
diagnostics companies. As a result, our financial performance may depend on
large contracts from a limited number of customers and collaborators. Also, if
consolidation trends in the healthcare industry continue, the number of our
potential customers and collaborators could decrease, which could have an
adverse impact on our marketing efforts and revenues.

WE FACE INTENSE COMPETITION WHICH COULD RESULT IN REDUCED ACCEPTANCE AND DEMAND
FOR OUR PRODUCTS AND SERVICES.

We are subject to significant competition from pharmaceutical, biotechnology
and diagnostic companies, academic and research institutions and government or
other publicly-funded agencies that are pursuing products and services that are
substantially similar to our proposed products and services,

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or which otherwise address the needs of our customers and potential customers.
Many of the organizations competing with us have significantly greater
experience in financial, research and development, manufacturing, marketing,
sales distribution and technical regulatory matters than we do. In addition,
many current and potential competitors have greater name recognition and more
extensive collaborative relationships. In the pharmacogenomics field, we compete
with several companies offering alternative technologies, including chemical
processes, high volume screening of genes and proteins or other methods for
identifying and analyzing variations of genes. In addition, numerous
pharmaceutical companies are developing genomic research programs, either alone
or in partnership with our competitors. We believe our closest competitor is
Genaissance Pharmaceuticals, Inc., which offers a line of pharmacogenomics
products similar to ours. Genaissance has started to provide characterization of
relevant SNPs to drug action.

We believe our future success will depend, in large part, on our ability to
maintain a competitive position in the pharmacogenomics field. Pharmacogenomic
technologies have undergone and are expected to continue to undergo rapid and
significant change. We or our competitors may make rapid technological
developments which may result in products or technologies becoming obsolete,
before we recover the expenses incurred. The introduction of less expensive or
more effective drug discovery and development technologies, including
technologies that may be unrelated to genomics, may also make our products and
services obsolete. We may not be able to make the necessary enhancements to our
technology to compete successfully with newly emerging technologies.

IF OUR PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, OR IF THE APPLICABLE
COURTS OR PATENT OFFICES DETERMINE THAT OUR ISSUED PATENTS ARE UNENFORCEABLE OR
INVALID, OUR COMPETITORS MAY OBTAIN RIGHTS TO COMMERCIALIZE OUR DISCOVERIES,
WHICH WOULD HARM OUR COMPETITIVE POSITION.

We intend to continue to apply for patent protection for many aspects of our
business, including:

- our SNP discovery and characterization process;

- our NuCleave-TM- DNA analysis technology and related technologies; and

- our Variagenic-Registered Trademark- Targeting program for identifying new
drug targets.

As of June 16, 2000, we owned seven issued US patents and two foreign patents.
In addition, we have 75 pending patent applications. Our patent portfolio has
three areas of technology pertinent to the field of
pharmacogenomics--pharmacogenetics, variance detection, and
Variagenic-Registered Trademark- Targeting. Our patent strategy, with respect to
SNPs and other genetic variations, seeks broad coverage of the uses of SNPs and
other genetic variations in initial patent applications while continually
updating the filings as to specific SNPs and other genetic variations.

The patent positions of pharmaceutical, biotechnology and diagnostic
companies, including us, are frequently uncertain and involve complex legal and
factual questions. Our patent applications and issued patents may not result in
sufficient protection, if any, for our technologies, products or SNP discoveries
for any of a number of reasons, including any one or more of the following:

- some or all of our pending patent applications may not result in issued
patents;

- the US Patent and Trademark Office or the courts may not hold that our
claims seeking broad protection for the uses of SNPs and other genetic
variations or our claims seeking narrow protection as to specific SNPs and
other genetic variations are entitled to our earliest filing date that we
are claiming;

- we may develop additional proprietary technologies that are not patentable
or are not covered by claims of any patents we have obtained or will
obtain;

- our issued patents may not provide us with any competitive advantages or a
basis for commercially viable products; and

- third parties may seek to challenge or design around our issued patents.

Our competitors may seek patent protection for alternative methods of
genotyping samples and for identification of genetic variances. If third parties
obtain issued patents which claim methodologies

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identical or similar to our own, we or our collaborators may not be able to
commercialize our technologies, including NuCleave-TM-, for those purposes. It
is possible that others may obtain patents on methodologies that consumers
consider superior to the NuCleave-TM- approach to genotyping or identification
of genetic variances, which would reduce the demand for our NuCleave-TM-
technology, and harm our competitive position.

Even if we obtain patents for our products, the patents may not be valid or
enforceable, and may not provide us with any right to practice the patented
technology. The US Patent and Trademark Office or the courts may invalidate our
patents or interpret them narrowly. To protect or enforce our patent rights, we
may initiate patent litigation against third parties. In addition, third parties
may sue us for infringing on their intellectual property rights. Patent law
relating to claims in our industry is still evolving and, as a result, the
outcome of any lawsuit or level of damages awarded is generally uncertain.
Patent lawsuits can take significant time and could divert management's
attention from other business concerns. Even if we are successful, litigation
costs could adversely affect our business and results of operations.

If we do not prevail in any intellectual property litigation, in addition to
any damages we might have to pay, we could be required to stop infringing on, or
obtain a license to or design around, the intellectual property in question. If
third parties patent important SNPs or our patents for important SNPs do not
have a priority position, we will need to obtain rights to these SNPs to develop
and use them. If our licenses prove to be ineffective, we may not gain access to
the technologies or information that we need to develop our products. If we are
unable to obtain a required license on acceptable terms, or are unable to design
around any third party patent, we may be unable to sell some of our products and
services, which would reduce our revenues. If we are required to pay licensing
fees, our costs could increase.

During the course of patent suits, there may be public announcements of the
results of hearings, motions and other interim proceedings or developments in
the litigation. If securities analysts or investors regard these announcements
as negative, the market price of our stock could decline. General proclamations
or statements by key public figures may also have a negative impact on the
perceived value of our intellectual property.

IF THIRD PARTIES VIOLATE OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY NOT BE ABLE TO
COMPETE IN THE MARKET.

In addition to patents, we rely on a combination of trade secrets, copyright
and trademark laws, nondisclosure agreements and other contractual provisions
and technical measures to protect our intellectual property rights. While we
require most employees, academic collaborators, consultants and other third
parties to enter into confidentiality and/or non-disclosure agreements where
appropriate, any of the following could still occur:

- third parties may breach their agreements with us;

- we may have inadequate remedies for any breach;

- our competitors could disclose our proprietary information; or

- third parties may otherwise gain access to our trade secrets or disclose
such technologies.

We may not be able to maintain the confidentiality of our technologies and
other confidential information in connection with each academic collaboration or
advisory arrangement, and any unauthorized disclosure of our confidential
information could harm our business and results of operations. Further, any
collaborator, consultant or advisor may enter into an employment agreement or
consulting arrangement with any of our competitors. The measures that we take
may not provide protection for our trade secrets or other proprietary
information. If we are unable to protect our intellectual property, we may not
be able to execute our business strategy or compete in the market.

12
<PAGE>
WE USE HAZARDOUS MATERIALS, CHEMICALS AND PATIENT SAMPLES IN OUR BUSINESS AND
ANY DISPUTES RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.

Our research and development, production and service activities involve the
controlled use of hazardous or radioactive materials, chemicals, including
oxidizing and reducing reagents, and patient tissue and blood samples. We are
subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and certain waste products. We
could be liable for accidental contamination or discharge or any resultant
injury from hazardous materials, conveyance, processing, and storage of and data
on patient samples. If we fail to comply with applicable laws or regulations, we
could be required to pay penalties or be held liable for any damages that result
and this liability could exceed our financial resources. Further, future changes
to environmental health and safety laws could cause us to incur additional
expense or restrict our operations.

In addition, our collaborators may be working with these types of hazardous
materials, including viruses and hazardous chemicals, in connection with our
collaborations. In the event of a lawsuit or investigation, we could be held
responsible for any injury caused to persons or property by exposure to, or
release of, these patient samples that may contain viruses and hazardous
materials. The cost of this liability could exceed our resources.

OUR PRODUCTS AND SERVICES HAVE A LENGTHY AND EXPANSIVE SALES CYCLE THAT MAY NOT
RESULT IN ACTUAL SALES WHICH COULD INCREASE OUR EXPENSES WITHOUT A CORRESPONDING
INCREASE IN REVENUES.

Our ability to obtain customers for our products and services will depend in
significant part upon the perception that our products and services can help
accelerate or improve drug discovery and development efforts on human health.
Our average sales cycle is lengthy because:

- we must educate our customers about our products and services;

- we market our products and services to a variety of constituencies within
potential collaborators and customers, including research and development
personnel and key management; and

- the negotiations for each collaboration will typically involve multiple
agreements containing terms that may be unique to each customer or
collaborator.

We may expend substantial funds and management effort to sell our products.
If our efforts do not result in actual sales, we could experience an increase in
our expenses without a corresponding increase in revenues.

IF WE FAIL TO RETAIN OUR KEY PERSONNEL AND HIRE, TRAIN AND RETAIN QUALIFIED
EMPLOYEES, WE MAY NOT BE ABLE TO DEVELOP OUR PRODUCTS AND PROVIDE OUR SERVICES.

Our future success will depend on the continued services and on the
performance of our senior management including Taylor J. Crouch, our President
and Chief Executive Officer and Colin W. Dykes, Ph.D. our Vice President,
Research and Genomics. The loss of the services of any of these individuals
could seriously impair our ability to operate our business, compete in our
industry and improve our products and services. We must also hire, train,
motivate and retain key personnel and manage employees with skills related to
pharmacogenomics and rapidly changing technologies to serve our customers.
Individuals who have expertise and can research or develop our technologies are
scarce. We might not be able to hire enough experienced individuals or to train,
motivate, retain and manage the employees we do hire. This could hinder our
ability to complete existing projects or perform our obligations under our
agreements. In addition, because the competition for qualified employees in the
biotechnology industry is intense, hiring, training, motivating, retaining and
managing employees with the strategic and technical skills we need is both
time-consuming and expensive. While our key employees are subject to
non-competition agreements, these agreements may be difficult to enforce. If we
fail to attract, train and retain key personnel, we may experience delays in the
research, development and commercialization of our technologies, products and
services.

13
<PAGE>
THIRD PARTIES MAY FILE PRODUCTS LIABILITY LAWSUITS AGAINST US, AND, IF ANY SUIT
WAS SUCCESSFUL, WE COULD FACE SUBSTANTIAL LIABILITIES THAT MAY EXCEED OUR
RESOURCES.

We may be held liable if any product we develop, or any product which is
made using our technologies, causes injury or is found unsuitable during product
testing, manufacturing, marketing or sale. If our products and services do not
function properly, or if the results obtained by our customers are not conducive
for the selection of appropriate therapies, we may be sued. These risks are
inherent in the development of pharmacogenomics products and services. We
currently do not have product liability insurance. If we choose to obtain
products liability insurance but cannot obtain sufficient insurance coverage at
an acceptable cost or otherwise protect against potential products liability
claims, the commercialization of products that we or our strategic partners
develop may be prevented or inhibited. If we are sued for any injury caused by
our products, our liability could exceed our total assets.

RISKS RELATED TO THE PHARMACEUTICAL, BIOTECHNOLOGY AND DIAGNOSTICS INDUSTRIES

IF GOVERNMENT REGULATION OF OUR COLLABORATORS INCREASES, THEY MAY NOT GAIN
GOVERNMENTAL APPROVAL OF THEIR PRODUCTS, REDUCING THE LIKELIHOOD THAT THEY WILL
ENTER INTO COLLABORATIONS WITH US AND HARMING OUR BUSINESS.

The pharmaceutical, biotechnology and diagnostics industries are subject to
stringent regulation by the FDA and comparable agencies in other countries. The
regulation of new products is extensive, and the required process of preclinical
laboratory testing and human studies is lengthy and expensive. It typically
takes many years and substantial resources to satisfy regulatory requirements
depending on the types, complexity and novelty of the product. Our collaborators
may not be able to obtain FDA approvals for their drugs or other products in a
timely manner, or at all. They may encounter significant delays or excessive
costs in efforts to secure necessary approvals or licenses. Even if they obtain
FDA regulatory approvals, the FDA extensively regulates manufacturing, labeling,
distributing, marketing, promotion and advertising after product approval. Our
collaborators who use our technology in their clinical laboratories may also be
subject to the registration and certification requirements of the Clinical
Laboratory Improvement Act, which mandates specific standards in areas such as
proficiency testing, patient test management, quality control, quality assurance
and inspections. Our collaborators and future collaborators may fail to comply
with the Clinical Laboratory Improvement Act. Moreover, several areas in which
our collaborators may develop drugs or other products involve relatively new
technology that has not been the subject of extensive testing in humans. The
regulatory requirements governing these products and related clinical procedures
remain uncertain. In addition, these products may be subject to substantial
review by foreign regulatory authorities that could prevent or delay approval in
other countries. If our collaborators cannot obtain government approval of their
products, they are less likely to purchase our products or enter into
collaborations with us.

IF WE BECOME SUBJECT TO INCREASED GOVERNMENT REGULATION, OUR OPERATING COSTS
WILL INCREASE AND WE MAY LIMIT OR DELAY THE TESTING, MANUFACTURING AND
COMMERCIALIZATION OF OUR PRODUCTS AND SERVICES.

The FDA does not currently regulate our products and services, but the FDA
does regulate the products of many of the pharmaceutical, biotechnology and
diagnostics companies to which we market our products and services. The FDA or
other governmental agencies may become more interested in our products and
services as the number of pharmaceutical and other products developed using our
technologies increases. In addition, the FDA is placing increased scrutiny on
products and services in the genomics field. Regulatory requirements ultimately
imposed on our products and services could limit our ability to test,
manufacture and, ultimately, commercialize our products and thereby could
adversely affect our financial condition and results of operations.

14
<PAGE>
IF RESTRICTIONS ON REIMBURSEMENTS AND HEALTHCARE REFORM LIMIT OUR COLLABORATORS'
FINANCIAL RETURNS ON PRODUCTS BASED ON GENES THAT WE IDENTIFY AS PROMISING
CANDIDATES FOR DEVELOPMENT AS DRUGS OR DRUG TARGETS, OUR COLLABORATORS MAY
REDUCE OR TERMINATE THEIR COLLABORATIONS WITH US.

Our collaborators' ability to commercialize drugs and diagnostic products
may depend in part on the extent to which coverage and adequate payments for
these products will be available from government payors, such as Medicare and
Medicaid, private health insurers, including managed care organizations and
other third-party payors. These payors are increasingly challenging the price of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved pharmaceutical and diagnostics products,
and coverage and adequate payments may not be available for these products.

In recent years, officials have made numerous proposals to change the
healthcare system in the US. These proposals included measures to limit or
eliminate payments for some medical procedures and treatments or subject the
pricing of pharmaceuticals and other medical products to government control.
Government and other third-party payors increasingly attempt to contain
healthcare costs by limiting both coverage and the level of payments of newly
approved healthcare products. In some cases, they may also refuse to provide any
coverage of uses of approved products for disease indications other than those
for which the FDA has granted marketing approval. Governments may adopt future
legislative proposals and federal, state or private payors for healthcare goods
and services may take action to limit their payments for goods and services. Any
of these events could limit our ability to form collaborations or commercialize
our products successfully.

ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION MAY REDUCE
THE DEMAND FOR OUR PRODUCTS AND SERVICES.

Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on, or regulation of the use of, genetic testing
or prohibit testing for genetic predisposition to diseases, particularly for
those that have no known cure. Any of these scenarios could reduce the potential
markets for our products and services, which could materially and adversely
affect our business and financial condition.

RISKS ASSOCIATED WITH THIS OFFERING

OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD DISCOURAGE ACQUISITION
PROPOSALS, DELAY A CHANGE IN CONTROL OR PREVENT TRANSACTIONS THAT ARE IN YOUR
BEST INTERESTS.

Following this offering, provisions of our certificate of incorporation and
bylaws, as well as Section 203 of the Delaware General Corporation Law, may
discourage, delay or prevent a change in control of our company that you as a
stockholder may consider favorable and may be against your best interest. These
provisions include:

- authorizing the issuance of up to 5,000,000 shares of "blank check"
preferred stock that could be issued by our Board of Directors to increase
the number of outstanding shares and discourage a takeover attempt;

- a classified Board of Directors with staggered, three-year terms, which
may lengthen the time required to gain control of our Board of Directors;

- prohibiting cumulative voting in the election of directors, which will
allow a majority of stockholders to control the election of all directors;

- requiring super-majority voting to effect amendments to our certificate of
incorporation and bylaws;

- limitations on who may call special meetings of stockholders;

- prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of stockholders; and

15
<PAGE>
- establishing advance notice requirements for nominations of candidates for
election to the Board of Directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law and our
stock option plan may discourage, delay or prevent a change in control of our
company.

OUR STOCK PRICE MAY BE EXTREMELY VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.

We and the representatives of the underwriters will negotiate to determine
the initial public offering price. The initial public offering price may not be
related to the price at which the common stock will trade following this
offering. An active public market for our common stock may not develop or be
sustained after this offering, and the market price could fall below the initial
public offering price. As a result, you could lose all or part of your
investment.

Our results of operations have fluctuated significantly in the past and we
expect our revenue and results of operations to fluctuate significantly in the
future. A substantial portion of our operating expenses is related to personnel
costs, research and development, marketing programs and overhead, which cannot
be adjusted quickly and is therefore relatively fixed in the short term. Our
operating expense levels are based, in significant part, on our expectations of
future revenue. If actual revenue falls below our expectations, our business may
suffer and our stock price may decline.

In addition, the market prices of biotechnology and genomics-related
companies have been highly volatile and have reacted significantly to publicity
regarding policy, regulatory, safety, and business issues regarding the
industry. Future publicity about our industry, whether or not it relates
directly to us or our products, may adversely affect our stock price.

Shareholders have brought securities class action litigation against
biotechnology and pharmaceutical companies following periods of volatility in
the market price of their securities. We may be the target of similar litigation
in the future. Securities litigation could result in substantial costs and
divert management's attention and resources, which could have a material adverse
effect on our business and the market for our common stock.

OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS WILL HAVE
SUBSTANTIAL CONTROL OVER OUR AFFAIRS, AND MAY NOT MAKE DECISIONS THAT ALL
STOCKHOLDERS SUPPORT.

Our directors, executive officers and principal stockholders will
beneficially own, in the aggregate, approximately 72.6% of our common stock
following this offering. These stockholders acting together will have the
ability to exert substantial influence over all matters requiring approval by
our stockholders. These matters include the election and removal of directors
and any merger, consolidation or sale of all or substantially all of our assets.
In addition, they may dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination of which you might otherwise approve.

WE DO NOT HAVE AN EXACT PLAN FOR THE USE OF THE NET PROCEEDS OF THIS OFFERING
AND WILL THEREFORE HAVE BROAD DISCRETION AS TO THE USE OF THESE PROCEEDS, WHICH
WE MAY NOT USE EFFECTIVELY.

We have no exact plan with respect to the use of the net proceeds of this
offering and have not committed these proceeds to any particular purpose apart
from general corporate purposes, including research and development and possible
future acquisitions. Accordingly, our management will have broad discretion in
applying the net proceeds of this offering and may use the proceeds in ways with
which you and our other stockholders may disagree. We may not be able to invest
these funds effectively.

16
<PAGE>
YOU WILL SUFFER SUBSTANTIAL DILUTION OF $9.52 PER SHARE IN THE NET TANGIBLE BOOK
VALUE OF THE COMMON STOCK YOU PURCHASE.

The initial public offering price of our common stock is substantially
higher than the book value per share of our common stock. Based on the initial
public offering price of $14.00 per share, if you purchase shares of common
stock in this offering, you will suffer immediate and substantial dilution of
$9.52 per share in the net tangible book value of the common stock. To the
extent we issue additional shares pursuant to outstanding options and warrants,
you will suffer further dilution.

IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK FOLLOWING THIS
OFFERING, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE.

Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. The number of shares of common stock available for sale in the
public market is limited by restrictions under federal securities law and under
lock-up agreements that substantially all of our stockholders have entered into
with the underwriters and with us. Those lock-up agreements restrict our
stockholders from selling, pledging our otherwise disposing of their shares for
a period of 180 days after the date of this prospectus without the prior written
consent of Credit Suisse First Boston Corporation. However, Credit Suisse First
Boston Corporation may, in its sole discretion, release all or any portion of
the common stock from the restrictions of the lock-up agreements. The following
table indicates approximately when the 16,682,332 shares of our common stock
that are not being sold in the offering but which were outstanding as of
June 22, 2000 will be eligible for sale into the public market:

<TABLE>
<CAPTION>
ELIGIBILITY OF
RESTRICTED SHARES FOR SALE
IN PUBLIC MARKET
--------------------------
<S> <C>
On the date of this prospectus.............................. 270,914
90 days after the date of this prospectus................... 57,564
At various times after 180 days from the date of this
prospectus................................................ 16,353,854
</TABLE>

17
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements may be found in
the material set forth under "Prospectus Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as in this prospectus generally. We generally use words such as "believe,"
"will," "intend," "expect," "anticipate," "plan," and similar expressions to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements. Our actual results could differ materially
from those anticipated in the forward-looking statements for many reasons,
including the risks described above and elsewhere in this prospectus.

Although we believe the expectations reflected in the forward-looking
statements are reasonable, they relate only to events as of the date on which
the statements are made, and we cannot assure you that our future results,
levels of activity, performance or achievements will meet these expectations.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. We are under no
duty to update any of the forward-looking statements after the date of this
prospectus to conform these statements to actual results or to changes in our
expectations.

TRADEMARKS

This prospectus contains references to our trademarks
Variagenics-Registered Trademark-, Variagenic-Registered Trademark-, SAGA-TM-,
NuCleave-TM-, ProSNP-TM-, Discover the Difference-TM-, and genes4life-TM-. All
other trademarks or trade names referred to in this prospectus are the property
of their respective owners.

18
<PAGE>
USE OF PROCEEDS

We estimate that our net proceeds from the sale of the 5,000,000 shares of
common stock we are offering at the initial public offering price of $14.00 per
share, will be $64.0 million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. We expect to use the
net proceeds for general corporate purposes, including research and development
and potential acquisitions.

In addition, we estimate that the net proceeds from our concurrent private
placement with an affiliate of Waters Technologies Corporation will be
$7.2 million.

The amount and timing of our actual expenditures will depend upon numerous
factors, including the status of our product development and commercialization
efforts, the amount of proceeds actually raised in this offering, the amount of
cash generated by our operations and sales and marketing activities. We may also
use a portion of the proceeds for research and development and for the
acquisition of, or investment in, companies, technologies or assets that
complement our business. However, we have no present understandings, commitments
or agreements to enter into any potential acquisitions or make any investments.
Further, we have not determined the amounts we plan to spend on any of the areas
listed above or the timing of these expenditures. As a result, our management
will have broad discretion to allocate the net proceeds from this offering.
Pending application of the net proceeds as described above, we intend to invest
the net proceeds of the offering in short-term, investment-grade,
interest-bearing securities.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We currently
anticipate retaining all of our future earnings, if any, to support operations
and to finance the growth and development of our business and do not anticipate
paying any cash dividends for the foreseeable future. The terms of future credit
agreements may prevent us from paying any dividend or making any distributions
or payment with respect to our capital stock.

19
<PAGE>
CAPITALIZATION

The following table presents the following information:

- our actual capitalization as of March 31, 2000;

- our pro forma capitalization reflecting the conversion of all outstanding
shares of redeemable convertible preferred stock, including
4,664,705 shares of Series F redeemable convertible preferred stock sold
in March 2000 for net proceeds of $19.9 million, into 14,931,289 shares
common stock upon the closing of this offering; and

- our pro forma as adjusted capitalization reflecting the pro forma
adjustments mentioned above, the sale of 5,000,000 shares of common stock
offered by us in a public offering, and 535,714 shares of common stock
offered by us in a concurrent private placement for $7.5 million at the
initial public offering price of $14.00 per share, less underwriting
discounts and commissions and the estimated offering expenses payable by
us.

This table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Obligations under capital leases and line of credit......... $ 1,452 $ 1,452 $ 1,452
Redeemable convertible preferred stock $.01 par value;
16,241,164 shares authorized; 14,931,289 shares issued and
outstanding, actual; no shares issued and outstanding, pro
forma and pro forma as adjusted........................... 49,843 -- --
Stockholders' deficit
Common stock, $.01 par value; 20,406,435 shares
authorized, 779,752 shares issued and outstanding,
actual; 20,406,435 shares authorized, 15,711,041 shares
issued and outstanding, pro forma; 70,000,000 shares
authorized, 21,246,755 shares issued and outstanding,
pro forma as adjusted................................... 8 157 212
Additional paid-in capital................................ 36,751 86,445 157,590
Deficit accumulated during the development stage.......... (39,625) (39,625) (39,625)
Deferred compensation..................................... (22,878) (22,878) (22,878)
-------- -------- --------
Total stockholders' equity (deficit)........................ (25,744) 24,099 95,299
-------- -------- --------
Total capitalization.................................. $ 25,551 $ 25,551 $ 96,751
======== ======== ========
</TABLE>

This table excludes the following shares:

- 2,548,775 shares of common stock that may be issued upon exercise of
options outstanding as of March 31, 2000 under our 1997 Employee, Director
and Consultant Stock Option Plan at a weighted average exercise price of
$0.90 per share; and

- 2,208,480 shares of common stock reserved for issuance upon the exercise
of warrants outstanding as of March 31, 2000 at a weighted average
exercise price of $2.93 per share.

20
<PAGE>
DILUTION

The pro forma net tangible book value of our common stock as of March 31,
2000, reflecting the conversion of all outstanding shares of redeemable
convertible preferred stock into 14,931,289 shares of common stock upon the
closing of this offering, was $24.0 million, or $1.53 per share. Pro forma net
tangible book value per share represents the amount of our total tangible
assets, including net proceeds from the sale of Series F redeemable convertible
preferred stock of $19.9 million, less total liabilities divided by the number
of pro forma shares of common stock outstanding as of March 31, 2000 and
including 4,664,705 shares of Series F redeemable convertible preferred stock
sold in March 2000. Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the net tangible book value per
share of our common stock immediately afterwards. After giving effect to our
sale of 5,000,000 shares of common stock offered by this prospectus at the
initial public offering price of $14.00 per share, and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us and the receipt of $7.2 million in net proceeds from our concurrent
private placement with an affiliate of Waters Technologies Corporation, our net
tangible book value as of March 31, 2000 would have been approximately
$95.2 million, or $4.48 per share. This represents an immediate decrease in net
tangible book value of $9.52 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this dilution on
a per share basis:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $14.00
Pro forma net tangible book value per share as of
March 31, 2000.......................................... $ 1.53
Increase per share attributable to new investors.......... 2.95
------
Pro forma net tangible book value per share after this
offering.................................................. 4.48
------
Dilution per share to new investors......................... $ 9.52
======
</TABLE>

If the underwriters' over-allotment option is exercised in full, our pro
forma as adjusted net tangible book value at March 31, 2000 would have been
approximately $4.77 per share, representing an immediate increase in net
tangible book value of $3.24 per share to existing stockholders and an immediate
dilution in net tangible book value of $9.23 per share to new investors.

The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares of common stock in this
offering and in the concurrent private placement at the initial public offering
price of $14.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 15,711,041 73.9% $ 59,676,166 43.5% $ 3.80
New investors.......................... 5,535,714 26.1% 77,500,000 56.5 14.00
---------- ----- ------------ -----
Total................................ 21,246,755 100.0% $137,176,166 100.0%
========== ===== ============ =====
</TABLE>

The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants at March 31, 2000. The exercise of all options and
warrants outstanding as of March 31, 2000 having an exercise price less than the
offering price would increase the dilutive effect to new investors to $10.00 per
share.

If the underwriters exercise their over-allotment option in full, the
following will occur:

- the number of shares of common stock held by existing stockholders will
decrease to approximately 71.4% of the total number of shares of our
common stock outstanding; and,

- the number of shares held by new investors will increase to 6,285,714
shares, or approximately 28.6% of the total number of our common stock
outstanding after this offering.

21
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The statements of operations data for the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 have
been derived from our audited financial statements included elsewhere in this
prospectus which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The statements of operations data for the years ended December 31,
1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997
have been derived from our audited financial statements not included in this
prospectus. The statements of operations data for the three months ended
March 31, 1999 and 2000, and the balance sheet data as of March 31, 2000, are
derived from our unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements have been prepared on the same
basis as our audited financial statements, and in our opinion, include all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair statement of our results of operations and financial
positions for these periods. These historical results are not necessarily
indicative of results to be expected for any future period. Our historical
results are not necessarily indicative of results to be expected for any future
period. The data present below should be read with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes, included elsewhere in this prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................. $ -- $ -- $ -- $ -- $ 399 $ 94 $ 127
Costs and expenses:
Research and development.......... 909 1,298 2,234 5,071 8,602 1,725 2,712
General and administrative........ 654 781 2,059 3,176 6,945 1,169 2,194
In-process research and
development..................... -- -- 674 -- -- --
------- ------- ------- ------- -------- -------- --------
Loss from operations............ (1,563) (2,079) (4,967) (8,247) (15,148) (2,800) (4,779)
Other income (expense):
Interest income................... 9 10 258 200 167 15 115
Interest expense.................. (79) (32) (80) (98) (1,497) (525) (66)
Loss on investment in affiliate... -- -- -- -- (250) (151) --
------- ------- ------- ------- -------- -------- --------
Net loss............................ $(1,633) $(2,101) $(4,789) $(8,145) $(16,728) $ (3,461) $ (4,730)
======= ======= ======= ======= ======== ======== ========
Dividend on redeemable convertible
preferred stock................... -- -- (153) -- (1,437) -- (20,749)
Net loss attributable to common
stockholders...................... $(1,633) $(2,101) $(4,942) $(8,145) $(18,165) $ (3,461) $(25,479)
======= ======= ======= ======= ======== ======== ========
Net loss attributable to common
stockholders per share (basic and
diluted).......................... $ (7.71) $ (8.22) $(13.48) $(16.13) $ (29.96) $ (6.43) $ (34.85)
Weighted average common shares
outstanding (basic and diluted)... 212 256 367 505 606 539 731
Unaudited pro forma net loss per
share (basic and diluted)......... $ (2.54) $ (0.38)
Shares used in computing unaudited
pro forma basic and diluted net
loss per share.................... 6,594 12,304
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- AS OF
1995 1996 1997 1998 1999 MARCH 31, 2000
-------- -------- -------- -------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments............ $ 365 $ 34 $ 6,994 $ 734 $ 4,328 $ 21,640
Working capital..................... 377 (804) 6,591 (3,771) 2,799 20,169
Total assets........................ 856 445 8,177 5,249 9,403 26,961
Long-term obligations, less current
portion........................... 150 84 -- 868 977 791
Redeemable convertible preferred
stock............................. -- -- 16,804 16,804 29,094 49,843
Total stockholders' equity
(deficit)......................... 492 (609) (9,285) (17,403) (22,390) (25,744)
</TABLE>

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ WITH "SELECTED
FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS APPLYING TO ALL RELATED
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK
FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE. SEE "RISK FACTORS" AND "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS."

OVERVIEW

We are a leader in developing technologies for the discovery and
commercialization of drugs and diagnostics based on understanding the genetic
differences among individuals. As a pharmacogenomics company offering a full
range of solutions to support key steps of the drug discovery and development
process, we discover genetic variations characterized by the most common form of
genetic variability, single nucleotide polymorphisms, or SNPs, and other genetic
differences and use this information to improve and enhance drugs in development
and develop new drug targets. We also intend to use our technology to bring
high-value diagnostic products to market. We have developed our NuCleave-TM-
proprietary method for testing genes using mass spectrometry, a tool used to
measure molecular weight, for use in clinical research, and we develop assays
which may be used as diagnostics. From inception in December 1992 through 1996,
the main focus of our research activities was directed toward developing a
pharmacogenomic approach to cancer therapy. In 1996 that focus was broadened to
include SNP discovery and development of pharmacogenomic technologies. Since our
inception in 1992, our operating activities have been primarily devoted to
research and development, recruiting personnel, raising capital, acquiring
assets and business development. In the second half of 1999, we recognized
revenue from our first commercial collaboration.

We have incurred losses since our inception and, as of March 31, 2000, we
had an accumulated stockholders' deficit of $39.6 million. We anticipate
incurring additional operating losses through at least the end of 2001, as we
expand the commercialization of our products and services to the clinical
research market and we fully implement our business strategy. This expansion is
expected to result in increases in research and development, marketing and
sales, and general and administrative expenses. Payments under contracts,
collaborations and licensing arrangements will be subject to significant
fluctuation in both timing and amount and, therefore, our results of operations
for any period may not be comparable to the results of operations for any other
period.

SOURCES OF REVENUE AND REVENUE RECOGNITION

Our revenue to date has been generated from collaborations and research
grants from a governmental agency. We recognize revenue from collaborations and
grants in the period in which our specific performance obligations under the
terms of the contracts are satisfied and related costs are incurred. Payments
received in advance under agreements are recorded as deferred revenue until
earned. As of March 31, 2000, we had approximately $0.1 million of deferred
revenue.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2000 AND 1999

REVENUES. Revenues totaled $0.1 million for each of the three month periods
ended March 31, 2000 and 1999. Revenues for the quarter ended March 31, 2000
were from collaborations and revenues

24
<PAGE>
for the quarter ended March 31, 1999 were from a Small Business Innovation and
Research grant from the National Institute of Health.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of salaries and related personnel costs, consumable laboratory
supplies, facilities and equipment expenses, license fees and fees paid to
scientific advisors, consultants and sponsored research providers. We expense
our research and development costs as they are incurred. Research and
development expenses increased to $2.7 million for the quarter ended March 31,
2000 from $1.7 million for the quarter ended March 31, 1999. The increase was
due primarily to increased stock-based compensation expense of approximately
$0.9 million from the quarter ended March 31, 1999 relating to option grants.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and related expenses for executive, business
development, finance and other administrative personnel, facility operations and
equipment costs, legal expenses for general legal activities and preparation of
intellectual property filings, recruiting and marketing. General and
administrative expenses increased to $2.2 million for the quarter ended
March 31, 2000 from $1.2 million for the comparable period of 1999. The increase
in general and administrative expense was primarily due to increased stock-based
compensation expense of approximately $1.2 million from the same quarter in
1999.

We recognized $2.2 million in the quarter ended March 31, 2000 and
$0.1 million in the quarter ended March 31, 1999, in equity-related charges
resulting from grants of options and stock to employees and options and
restricted stock to non-employees. These charges are included in research and
development or general and administrative expenses depending upon the nature of
the work performed by the individuals receiving the grants. We incurred expenses
of $1.3 million for the three month period March 31, 2000, related to the
issuance of stock options to employees. The options granted to employees
generally vest over four years, which will result in additional compensation
expense of $22.9 million for periods subsequent to March 31, 2000. In May and
June 2000, we issued 173,667 common stock options to employees and directors at
an exercise price of $3.78. We will record deferred compensation of
$1.4 million in the second quarter which will be amortized over the future
vesting period. Additionally, we issued 118,950 common stock options to a
consultant at an exercise price of $3.78. In conjunction with entering into a
license agreement with an academic institution in June 2000, we issued 35,865
shares of common stock. We will record an expense of $0.4 million in the second
quarter of 2000 related to this agreement.

We also incurred expenses of $0.9 million in the first quarter of 2000 and
$0.1 million in the first quarter of 1999, related to restricted stock and
options granted to non-employees. Non-employee equity grants are subject to
remeasurement over the vesting period and we cannot estimate the expense we will
recognize in future periods because the amount expensed will depend on a number
of variables, including our stock price.

INTEREST INCOME. Interest income increased to $115,000 for the first
quarter of 2000 from $15,000 for the comparable quarter in 1999 due to the
increase in cash from the sale of our Series F redeemable convertible preferred
stock in March 2000.

INTEREST EXPENSE. Interest expense decreased to $0.1 million for the first
quarter of 2000 from $0.5 million for the comparable quarter in 1999 due to
interest from convertible notes and warrants recorded in the 1999 quarter.

NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. The net loss
increased to $4.7 million for the first quarter of 2000 from $3.5 million for
the comparable quarter in 1999 primarily due to the increase in non-cash equity
related charges. In March 2000, we issued redeemable convertible preferred stock
at $4.29 per share for net proceeds of $19.9 million. The issuance of these
shares resulted in a beneficial conversion feature, which we recorded as a
dividend of $19.9 million to

25
<PAGE>
the preferred holders and which increased the loss attributable to common
stockholders to $25.5 million.

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUES. Revenues totaled $0.4 million for the year ended December 31,
1999, with no revenues recorded in 1998. We generated no revenues from our
inception in December 1992 through December 31, 1998. Revenues for the year
ended December 31, 1999 included $0.2 million from collaborations and
$0.2 million from two Small Business Innovation and Research grants from the
National Institute of Health.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $8.6 million for the year ended December 31, 1999 from
$5.1 million for the year ended December 31, 1998. The increase was due
primarily to increased salary and related personnel costs as we expanded our
research and technology development activities and stock-based compensation
expense of approximately $1.9 million relating primarily to option grants. We
expect research and development spending to increase significantly over the next
several years as we expand our research and technology development efforts.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $6.9 million for the year ended December 31, 1999 from
$3.2 million for the comparable period of 1998. General and administrative
expenses for 1999 includes a charge of $1.8 million recorded in connection with
the cancellation of our agreements with Nova Molecular, Inc. In consideration
for the cancellation of: 1) a funding commitment, 2) a license agreement and
3) a conversion agreement that contained anti-dilution provisions, we issued
380,640 shares of our Series D redeemable convertible preferred stock, valued at
$1.0 million, to the holders of Nova Molecular's Series A preferred stock, and
paid $0.8 million to Nova Molecular. General and administrative expenses in 1999
also include stock-based compensation expense of $1.1 million for stock and
stock option grants. The increase in general and administrative expense from
1998 to 1999 was primarily due to these charges as well as increased salary and
related costs due to an increase in general and administrative personnel and
increased recruiting costs.

We recognized $3.0 million in 1999 in equity-related charges resulting from
grants of options and stock to employees and options and restricted stock to
non-employees. These charges are included in research and development or general
and administrative expenses depending upon the nature of the work performed by
the individuals receiving the grants. We incurred expenses of $0.6 million in
1999 related to the issuance of stock options to employees. These employee
options generally vest over four years, which will result in additional
compensation expense of $6.3 million for periods ending subsequent to
December 31, 1999. We also incurred expenses of $1.7 million in 1999 related to
restricted stock and options granted to non-employees. Non-employee equity
grants are subject to remeasurement over the vesting period and we cannot
estimate the expense we will recognize in future periods because the expense
will depend on a number of variables, including our stock price.

INTEREST INCOME. Interest income, which is earned on cash equivalents and
short-term investments, decreased to approximately $167,000 for the year ended
December 31, 1999 from approximately $200,000 for the comparable period in 1998.
The decrease was due to a lower average balance of cash equivalents and
short-term investments in 1999 than in 1998 resulting from cash used in 1999 for
operating activities and for investments in leasehold improvements in connection
with our move to a larger facility in December 1998.

INTEREST EXPENSE. Interest expense increased to $1.5 million for the year
ended December 31, 1999 from $0.1 million for the comparable period in 1998. The
increase was primarily due to non-cash interest expense of $1.0 million recorded
in connection with warrants issued with convertible notes

26
<PAGE>
payable and to non-cash interest expense of $0.3 million on convertible notes
payable that converted into Series E-2 redeemable convertible preferred stock on
July 30, 1999.

NET LOSS. Due to the increases in expenses from 1998 to 1999 described
above, our net loss was $16.7 million for the year ended December 31, 1999
compared with a net loss of $8.1 million for the comparable period in 1998.

YEARS ENDED DECEMBER 31, 1998 AND 1997

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $5.1 million for the year ended December 31, 1998 from
$2.2 million for the year ended December 31, 1997. The increase was due
primarily to increased payroll and related costs, increased costs of consumable
laboratory supplies and increased facility and equipment costs, as we expanded
our research programs in SNP discovery and technology development.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.2 million for the year ended December 31, 1998 from
$2.1 million for the comparable period of 1997. The increase was primarily
attributable to increased general legal expenses, increased salary, travel and
marketing costs due to an increase in business development activities and
increased facility and office operations costs.

IN-PROCESS RESEARCH AND DEVELOPMENT. We recorded a charge of $0.7 million
for in-process research and development in the year ended December 31, 1997
resulting from our purchase of certain assets of Avitech Diagnostics, Inc. in
September 1997. The in-process research and development related to enzyme-based
processes used in discovering genetic variations. In 1999, we revised our
process for discovering genetic variations and no longer use an enzyme-based
approach. We recorded no comparable charge in 1998.

INTEREST INCOME. Interest income decreased to approximately $0.2 million
for the year ended December 31, 1998 from approximately $0.3 million for the
comparable period in 1997. The decrease was due to a lower average balance of
cash equivalents and short-term investments in 1998 than in 1997 resulting from
cash used for operating activities and for investments in leasehold improvements
and equipment.

INTEREST EXPENSE. Interest expense increased to approximately $98,000 for
the year ended December 31, 1998 from approximately $80,000 for the comparable
period in 1997 primarily due to an increase in equipment under lease.

NET LOSS. Due to the increases in research and development, general and
administrative expenses from 1997 to 1998 and the in-process research and
development charge described above, our net loss was $8.1 million for the year
ended December 31, 1998 compared with a net loss of $4.8 million for the
comparable period in 1997.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations from inception primarily through private
sales of preferred stock and equipment financing arrangements. As of March 31,
2000, we have received net proceeds of $55.0 million from issuances of
redeemable convertible preferred stock, including related convertible notes
payable that converted into redeemable convertible preferred stock. We have
financed equipment purchases through leases and loans totaling $2.2 million. As
of March 31, 2000, we had an equipment loan of $0.2 million and $1.3 million in
capitalized lease obligations. We lease our corporate facility under an
operating lease which expires in 2008. We also have contractual commitments to
sponsored research providers totaling $0.6 million at March 31, 2000, of which
$0.2 million is due within one year.

27
<PAGE>
Cash and cash equivalents increased by $19.8 million in the first quarter of
2000 to $21.6 million at March 31, 2000. We used $2.4 million for operations in
the first quarter, which consisted of the net loss of $4.7 million offset by
non-cash compensation expense of $2.2 million and depreciation and amortization
of $0.2 million. We used $0.1 million to purchase fixed assets and received
$19.8 million from our financing activities, which included $19.9 million in net
proceeds from our sale of Series F redeemable convertible preferred stock.

Cash and cash equivalents increased by $1.1 million in 1999 to $1.8 million
at December 31, 1999. Cash used for operating activities increased from 1998 to
1999 and from 1997 to 1998, primarily due to the increases in net loss. We used
$10.4 million for operations in 1999. This consisted of the net loss for the
year of $16.7 million offset in part by several non-cash charges, including
$3.0 million for compensation charges from stock awards and option grants,
$1.0 million relating to the issuance of Series D redeemable convertible
preferred stock to Nova Molecular stockholders, $0.3 million relating to our
share in the losses of Nova Molecular, $0.7 million of depreciation and
amortization and $1.1 million of non-cash interest expense. We used
$7.0 million for operating activities for the year ended December 31, 1998 and
$3.3 million for operating activities for the year ended December 31, 1997.

We used $3.1 million for investing activities in 1999, $2.5 million for the
purchase of short-term investments, $0.3 million for our equity investment in
Nova Molecular and $0.6 million for capital expenditures that were offset by
$0.3 million of reimbursement of leasehold improvements costs. In 1998, we
received $7.0 million from the maturity of short-term investments that was
offset by $2.1 million invested in leasehold improvements and equipment. In 1997
we used $8.0 million for investing activities, which included $7.0 million used
to purchase short-term investments, $0.6 million used for the acquisition of
assets of Avitech and $0.4 million for capital expenditures.

We received $14.6 million from our 1999 financing activities, which included
$10.6 million in net proceeds from our sale of Series E and E-2 redeemable
convertible preferred stock and related proceeds of $4.7 million from bridge
notes payable which were converted into Series E and E-2 redeemable convertible
preferred stock. We also drew down $0.4 million on a bank line of credit. These
financing proceeds were offset in part by repayments of the bank line of credit
and equipment loan totaling $0.8 million and repayments of capitalized lease
obligations totaling $0.3 million. In 1998, we received $3.3 million from
convertible notes payable, and $0.6 million from a line of credit, offset by a
$1.0 million payment as collateral for a letter of credit securing a facility
lease obligation. We generated $11.3 million from financing activities in 1997,
including $10.3 million in net proceeds from the sale of Series B redeemable
convertible preferred stock and $1.1 million from convertible notes payable.

As of March 31, 2000, we had $21.6 million of cash and cash equivalents as
compared with $4.3 million of cash, cash equivalents and short-term investments
at December 31, 1999. In May 2000, we received $2.4 million in proceeds from the
exercise of warrants. In June 2000, we entered into an alliance agreement with
Waters Technologies Corporation which provides for payments to us of up to
$7.0 million. We believe that our cash reserves, including the net proceeds of
$19.9 million from the sale of our Series F redeemable convertible preferred
stock in March 2000, our expected short-term revenue, the net proceeds of this
offering, and the proceeds from our concurrent private placement with an
affiliate of Waters Technologies Corporation will be sufficient to fund our
operations at least through the year 2002. During or after this period, if cash
generated by operations is insufficient to satisfy our liquidity requirements,
we may need to issue additional equity or debt securities or obtain additional
credit arrangements. Additional financing may not be available on terms
acceptable to us or at all. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders.

We cannot assure you that our business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. We
also cannot assure you that we will not

28
<PAGE>
require substantial additional funding before we can achieve profitable
operations. Our capital requirements depend on numerous factors, including the
following:

- our ability to enter into additional collaborative agreements;

- competing technological and market developments;

- changes in our existing collaborative relationships;

- the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights;

- the purchase of additional capital equipment;

- the expansion of our facilities;

- the progress of our existing and future milestone and royalty producing
activities; and

- the availability of additional funding, if necessary, and if at all, on
favorable terms.

IMPACT OF INFLATION

We do not believe inflation has had a material impact on our business or
operating results during the periods presented.

DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is principally confined to our cash equivalents
and investments, all of which have maturities of less than one year. We maintain
a non-trading investment portfolio of investment grade, liquid debt securities
that limits the amount of credit exposure to any one issue, issuer or type of
instrument. The fair value of these securities approximates their cost.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133, as amended, is effective for fiscal years
beginning on or after June 15, 2000 and is not anticipated to have an impact on
our financial position or results of operations.

In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of
Accounting Principles Board ("APB") Opinion 25". FIN 44 clarifies the
application of APB Opinion 25 and, among other issues, clarifies the following:
the definition of an employee for purposes of applying APB Opinion 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. We do not expect the application
of FIN 44 to have a material impact on our financial position or results of
operations.

29
<PAGE>
BUSINESS

OVERVIEW

We are a leader in the development and commercialization of technologies
related to pharmacogenomics. Pharmacogenomics is the study of the correlation
between an individual's genetic differences, or genetic variability and his or
her specific response to a drug. The most common form of this genetic
variability is a single nucleotide polymorphism, or SNP. We use our
pharmacogenomics technology, expertise and proprietary data to improve and
enhance the effects of drugs in development and develop new drug targets, and we
also intend to use our technology to bring high-value diagnostic products to
market. We are a pharmacogenomics company offering a full range of solutions to
support key steps of the drug discovery and development process, extending from
drug target identification through clinical trials to commercialization. We
intend to establish multiple sources of revenue, which will include
collaboration revenues, license fees, milestone payments and royalties on
products commercialized using our technology.

Since our inception in December 1992 through 1996, the main focus of our
research activities was directed toward developing a pharmacogenomics approach
to cancer therapy. In 1996, we significantly broadened our focus to include SNP
discovery and development of pharmacogenomics technologies, with applications
targeted to several therapeutic areas including cancer, central nervous system
disorders, cardiovascular disease and inflammatory disorders, among others.

BACKGROUND

The effect that a drug has on an individual is often a function of that
individual's unique genetic make-up. Genetic variation may also explain why some
individuals contract certain diseases and others do not, and may also determine
why some individuals respond differently to the same drug. Typically, drugs are
developed to interact with a single version of a given protein in the human
body. Accordingly, a drug may only be effective in individuals that carry the
specific protein for which the drug was designed. Individuals who have a
genetically-caused variation in these proteins, or the proteins involved in the
metabolism of the drug, may not respond to the drug or may experience adverse
side effects.

The methods used by the pharmaceutical industry to develop new drugs and to
improve existing drugs are expected to undergo a fundamental transformation to
take genetic variation into account. In fact, genetic variation can play a
significant role in all stages of drug discovery and development. Genetic
variation information can also be used to improve drugs already on the market by
providing information to select the best drug for a particular patient.

GENOMICS

The foundation for the collection of cells that make up the human body is
the genetic material known as deoxyribonucleic acid, or DNA. It is the DNA
contained in all cells that is responsible for determining the inherited
characteristics of living organisms. Each DNA molecule contains two
complementary strands comprised of chains of four different chemical bases
called nucleotides. The order in which nucleotides pair together is called the
DNA sequence. DNA is organized into functional regions known as genes. The exact
DNA sequence in all the genes of an individual, called a genome, is unique to
each individual and forms each individual's genetic make-up. The entire
collection of genes resides on the 23 pairs of chromosomes that compose the
human genome. Genomics, broadly defined, is the study of the genome and its
importance in human physiology and disease.

The field of genomics is proceeding through the following three interactive
phases:

- the identification, or sequencing, of each base pair of DNA;

- the definition of the functional role of genes within the human genome;
and

30
<PAGE>
- most recently, pharmacogenomics, the application of knowledge of how
genetic variation among individuals may be used to improve existing drug
development programs and to discover new drug targets.

The Human Genome Project, an international government and foundation-funded
effort to sequence human DNA, is on target to identify the definitive sequence
of every gene in the human genome by 2003. More recently, a private industry
effort has been launched to sequence the human genome with the hope of
completing the sequence as early as 2000.

The first phase of the genomics effort has resulted in a dramatic increase
in the volume of DNA sequence data, creating a critical mismatch between the
availability of vast amounts of sequence information and the ability to
understand and use that information. As a result, the genomics effort is now
becoming focused on understanding the functional relevance of individual genes
and genetic variation and applying this knowledge to drug discovery and
development. Significant progress on the last two phases is necessary for
genomics to change the practice of medicine from identifying disease by gross
symptomatic complaints to identifying potential or underlying disease at the
genetic level. The use of genomics could enable physicians to treat disease
prior to the development of clinical symptoms and, in particular, to tailor
treatments to the unique genetic make-up of an individual. For this to become a
reality, however, the enormous amount of genomics data currently being generated
must be sorted and interpreted in a cost-effective fashion and in a method
practical for use in clinical testing.

GENETIC VARIABILITY, SNPS, GENOTYPES AND HAPLOTYPES

A difference in one or more nucleotide base of a DNA sequence, referred to
as a genetic variation, can modify the way a gene functions. The most common
type of genetic variation is called a single nucleotide polymorphism, or SNP. It
is estimated that hundreds of thousands of SNPs contribute to the differences
between individuals and among groups of individuals. However, only a small
subset of those SNPs is likely to be related to disease susceptibility or to how
an individual responds to a drug. The challenge is to prioritize which subset of
SNPs can be effectively utilized within the costly clinical trial process.

After a SNP is discovered, a genetic test, or assay, must be developed to
allow for rapid and repetitive testing of the occurrence of that SNP in a
targeted population. The basic process to identify the presence of a SNP is
called genotyping. A patient's genotype contains the summary of all of the SNPs
identified for that patient for a particular evaluation. Generally, a genotyping
analysis will identify the presence of a small subset of the total SNPs in a
patient.

A more profound test in many cases is to identify the group of SNPs, or
haplotype, that collectively exerts an effect on drug action. Haplotypes should
have far greater predictive value than individual SNPs, and we believe
researchers will be increasingly turning to haplotypes as a better indicator of
the potential effects of drugs. We believe that haplotyping assays will reduce
the total number of possible explanations for SNP variations down to a number
that is practical to test in the size of clinical trials commonly conducted in a
drug development program.

PHARMACOGENOMICS

It has long been known that people respond differently to the same drug. The
field of pharmacogenomics studies these variations in drug response and their
relation to genetic differences. We believe that the emerging ability to
correlate drug response with SNPs should enable doctors to prescribe appropriate
drugs to patients with the goal of maximizing drug response and minimizing
negative side effects. Pharmacogenomics can be applied at each stage of drug
development from identification of a drug target through clinical trials to
commercialization.

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<PAGE>
DRUG TARGET IDENTIFICATION

The process of discovering and developing a new drug is long and complex,
taking an average of 12 to 15 years from initial discovery to FDA approval.
According to a 1999 study published by the Pharmaceutical Research and
Manufacturers of America, for every 5,000 to 10,000 chemically synthesized
molecules screened, only one becomes an approved drug. This statistic suggests
that a pharmacogenomic screening capability, introduced early in the drug target
development process, would save drug development sponsors significant time and
money. Pharmaceutical companies could use targeted pharmacogenomic screening to
eliminate non-promising compounds earlier. Furthermore, compounds that make it
through the screening process should have a higher overall chance of success.

CLINICAL TRIALS

Making the clinical trial process more efficient is critical to a
pharmaceutical company's ability to manage its costs. According to the Boston
Consulting Group, the pre-tax cost of the pharmaceutical research and
development process for drugs introduced in the early 1990s could be over
$500 million. The challenge is for drug developers to use meaningful
pharmacogenomics data to predict which patients are likely to benefit from a
drug or to identify those patients who will not experience negative side
effects. Pharmacogenomics information could be used to reduce the length of the
clinical trial by selecting patients who are likely to develop disease earlier
and/or respond to therapy faster. In addition, pharmacogenomics could be used to
reduce the number of patients in many clinical trials. According to the
Pharmaceutical Research and Manufacturers of America, today, the average new
drug application for a new prescription drug is based on almost 70 clinical
trials involving more than 4,000 patients. Pre-selecting patients for a clinical
trial who are likely to respond to the drug candidate could significantly reduce
the required sample size.

COMMERCIALIZATION

Pharmacogenomics data about an individual's potential response to a drug
creates opportunities to enhance the commercial value of pharmaceuticals. Given
the high cost of drug development, the ability to properly market a new drug to
its ideal target population is key to maximizing the drug's potential value. If
the appropriate set of pharmacogenomics data can be identified and the
appropriate diagnostic tests were developed for a given drug, patients could be
steered more quickly to appropriate therapies. This information may allow the
pharmaceutical industry to engage in highly-focused product positioning and
marketing campaigns. In addition, broad usage of a drug in patient segments
where the drug is not effective could jeopardize overall usage of the drug, even
to the point of recall.

DNA ANALYSIS PLATFORMS

A need is emerging within the pharmacogenomics market for platform
technology and assays suitable for the challenges of clinical research to enable
routine testing of genotypes and haplotypes. Key aspects of the ideal DNA
analysis platform in clinical research include:

- ultra-high accuracy to reduce the risk of mistakes that can jeopardize an
entire drug development program;

- accommodation of a constantly-changing mix of custom SNP tests in
relatively small patient populations; and

- appropriate economic efficiencies.

Also, it is critical that these platforms effectively handle both genotyping
and haplotyping analyses. We believe that the genotyping and other DNA analysis
platforms currently available in the market do not adequately address the
commercial requirements of the clinical trial setting.

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VARIAGENICS' SOLUTIONS

We are a leading pharmacogenomics company offering a broad range of
solutions for applying pharmacogenomics to the discovery and development of new
drugs and diagnostics, extending from drug target identification through
clinical testing to commercialization.

WE HAVE USED AN EXTENDED CANDIDATE GENE APPROACH TO DEVELOP A
HIGHLY-CHARACTERIZED PROPRIETARY SNP DATABASE.

We believe that our proprietary ProSNP-TM- database is the most
comprehensive collection of genetic variability data specific to
pharmacogenomics and relevant to major drugs in development, including drugs for
cancer and for cardiovascular, central nervous system and inflammatory
disorders. We have targeted our SNP discovery to extended candidate gene sets
considered most likely to affect drug activity. Moreover, our SNP detection is
performed on DNA samples derived from an ethnically and geographically diverse
panel of over 100 anonymous individuals. This provides a greater than 99%
probability of detecting SNPs with a frequency in the population of 10% or
greater. Our database of over 17,000 SNPs is highly-characterized. It includes
information on the percentage occurrence of selected SNPs in a target population
and information on our SNPs' potential significance to drug response. Our
database also contains critical information regarding important haplotype
groupings.

We will also perform custom SNP discovery for our collaborators, working
jointly to select an extended set of candidate genes. Alternatively, we can
screen for SNPs in the DNA from patients in a clinical trial with a specific
disease or drug response.

WE USE OUR TECHNOLOGIES TO SELECT AN OPTIMAL SET OF SNPS FOR CLINICAL
TESTING.

Our Variagenic-Registered Trademark- Impact Program's proprietary
technologies filter and focus the tremendous volume of SNP and other genetic
information into a usable amount of data suitable for clinical research testing.
The hundreds of thousands of individual SNP data points now entering the public
and private domain have little commercial utility without a process for reducing
this information to a manageable set of genetic markers. Our
Variagenic-Registered Trademark- Impact Program technology incorporates
proprietary bioinformatics software which allows researchers to compare genetic
sequence data with public and proprietary databases to quickly analyze the
common haplotypes in key genes. In addition, we utilize experimental methods to
identify haplotypes that are associated with drug action. We believe that the
future effectiveness of pharmacogenomics will largely depend on the ability to
experimentally detect haplotypes, and that we are well positioned to be a leader
in this new emerging technology.

WE WILL COMMERCIALIZE OUR NUCLEAVE-TM- DNA TESTING AND ANALYSIS TECHNOLOGY.

After we have reduced the number of potentially relevant genetic markers to
a subset appropriate for clinical testing, it is necessary to incorporate these
markers into assays or test kits. These assays will enable highly accurate and
reproducible testing to be performed on DNA samples from patients known to have
responded in a certain way to drug treatment.

The assays will be performed using our proprietary NuCleave-TM- DNA testing
and analysis technology which is based on the integration of new genotyping and
haplotyping methods, proprietary purification procedures, robotics and mass
spectrometry. This combination results in a high-volume automated SNP detection
system that combines the high accuracy and high throughput of mass spectrometry
with the low set up and test costs required in the clinical research
marketplace. We anticipate launching our NuCleave-TM- DNA testing and analysis
technology commercially in late 2000.

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WE WILL DEVELOP NEW DIAGNOSTIC PRODUCTS AND IMPROVED DRUGS BOTH INTERNALLY
AND WITH OUR COLLABORATORS.

Ultimately, our pharmacogenomics approach should enable the development of
improved, targeted therapeutic and diagnostic products. We anticipate that our
Variagenic-Registered Trademark- Impact Program will substantially impact the
drug development programs of our pharmaceutical collaborators.

We intend to fund the development of multiple diagnostics programs, as well
as establish research collaborations, to co-develop additional diagnostics
products. We have commenced clinical studies on a diagnostic test to determine
appropriate therapeutic applications for colon cancer. This is being studied in
a clinical trial at the Dana Farber Cancer Institute. We are also engaged in
clinical studies on a cardiovascular risk assessment diagnostics product.

AN EXAMPLE: PHARMACOGENOMICS IN COLON CANCER

The treatment of colon cancer is very challenging and pharmacogenomics
may provide promising solutions. Current therapies for colon cancer are
effective in less than 50% of patients and choosing a drug treatment with
modest or no efficacy may lead to further costly medical complications. In
addition, physicians do not always have clear guidelines as to when to start
treating colon cancer, and how long and/or aggressively to treat this
disease. If we assume that drug effectiveness is at least partially
associated with the genetic background of colon cancer patients, our
pharmacogenomics approach may offer the following solutions:

- genetic tests to identify which patient groups respond to available
drugs;

- tests to identify whether some patients are genetically predisposed to
tolerating a more aggressive dosage of a given drug, with a
corresponding faster treatment of the colon cancer; and

- tests to identify whether some patients have a genetic predisposition
to have recurring colon cancer and/or cancer spreading to other organs
which might be mitigated by remaining on maintenance doses of
appropriate therapy.

By using a combination of these above tests developed through
pharmacogenomics, we believe patients may realize the following benefits:

- patients who respond favorably to one of the available drugs will
receive the necessary medication;

- patients who would have received an inappropriate medication will avoid
the possible side effects of an inadequate treatment and may avoid the
risks of continuing to be untreated while on the ineffective
medication; and

- patients who have not responded to treatment with available drugs
should benefit by having their physicians focusing on alternative ways
to manage the disease.

We have developed a unique approach to cancer therapy called
Variagenic-Registered Trademark- Targeting, which is based on our understanding
of the deterioration of chromosomes in cancer cells, or loss of heterozygosity.
We have identified over 20 potential targets for new drugs and will continue to
identify new targets in this area.

BUSINESS STRATEGY

We have developed a focused business plan to commercialize our genomics
assets and position Variagenics as the leader in pharmacogenomics. Our strategy
focuses on the commercialization of therapeutics and diagnostics based on our
proprietary pharmacogenomic technologies, databases and

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expertise, while positioning Variagenics to be the leader in bringing new
pharmaceutical products and diagnostics to the market. The key elements of our
strategy are:

RAPIDLY COMMERCIALIZE OUR FULL RANGE OF PHARMACOGENOMICS CAPABILITIES

We provide a comprehensive product offering covering key stages of
pharmaceutical product development from discovery through development to
commercialization. Our highly characterized proprietary database of SNPs,
proprietary clinical research focused genotyping platform and expertise in the
development of therapeutics offers pharmaceutical and diagnostic companies a
complete solution that allows for more cost-effective and improved drug and
diagnostic test development.

ESTABLISH DIVERSE SOURCES OF REVENUE

We have targeted several complementary strategic business segments to
provide us with a diverse set of revenue sources. We will work with our
collaborators to provide pharmacogenomic solutions from drug development through
commercialization. Revenues are currently generated from collaboration funding
and government grants, and we expect to earn additional revenues from milestone
achievements and royalties on drugs, diagnostic products and technology
platforms as they are launched. We also plan to earn royalties from sales
relating to our NuCleave-TM- analysis technologies when they are launched,
including royalties on sales of instruments and reagents, which are chemical
compounds used in assays.

CAPITALIZE UPON OUR EXPERTISE TO BRING IMPROVED PHARMACEUTICAL AND DIAGNOSTIC
PRODUCTS TO MARKET

We expect to add significant value to our pharmaceutical collaborators'
drugs while also using our expertise to target future drug candidates. A
corresponding part of our strategy is to develop and commercialize the
diagnostic tests that will be linked to future drugs that have been improved
using pharmacogenomics for both treatment prognosis and selection of the most
appropriate drug regimen. This will be accomplished by combining our proprietary
database, our DNA analysis platforms and other technologies with collaborations
in the life sciences, reagents, reference laboratories and diagnostics
manufacturing fields.

MAINTAIN AND IMPROVE OUR PROPRIETARY TECHNOLOGY BASE

We expect to continue to be a leader in developing a technology base that is
focused on the commercial applications of pharmacogenomics. We have established
a proprietary SNP database clustered among genes important to common drug
mechanisms and pathways related to drug efficacy, side effects and metabolism.
We will continue to pursue innovation in the technology areas that we feel are
critical, including our establishment of the following:

- proprietary database and the right to use newly discovered SNPs and genes;

- proprietary positions for technologies used to detect genetic variances,
including genotyping and haplotyping; and

- proprietary rights to genetic pathway targets involved in drug response in
major disease categories.

USE MANAGEMENT'S INDUSTRY EXPERTISE IN OUR TARGET BUSINESS SEGMENTS

We have established a management team that has expertise across the
genomics, pharmaceutical, diagnostic, life sciences and clinical research
industries. We plan to use this diversity of industry expertise to target
pharmacogenomics opportunities in these industries. We expect to continue to
strengthen this team with key hires from these target business segments to
ensure that we maintain a practical solutions-oriented approach by understanding
the market dynamics within these segments.

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COMMERCIAL COLLABORATIONS

We have established, or intend to establish, commercial collaborations with
leading companies in each of our targeted market sectors, including
pharmaceuticals/biotechnology, diagnostics/laboratory services, life sciences
and clinical research organizations. In the clinical research organization
sector, both Covance, Inc. and Quintiles Transnational Corporation selected us
as their collaborator for complementary segments of the market.

Covance, a world-wide market leader in providing laboratory services for
clinical trials, selected us as their provider of genotyping assays. We have
targeted Covance to be a key user of our NuCleave-TM- DNA testing and analysis
technology. Our August 1999 alliance agreement with Covance provides funding to
us for assay development and royalties payable to us for laboratory tests
performed at Covance. As of March 31, 2000, we have received $336,727 in
sponsored research fees and no royalties under our agreement with Covance. Under
this agreement, Covance is the only contract research organization which can
directly license our technologies for providing pharmacogenomic lab services in
clinical trials. We delivered our first non-cash performance based production
target under the Covance agreement in February 2000, when we delivered to
Covance 17 assays relevant for standard pharmacogenomic testing. Our agreement
with Covance is for a five-year term, subject to adjustment, after two years.
After two years, if we have not achieved predetermined sales levels, Covance may
discontinue funding. In this event we may terminate the agreement. Covance may
terminate the agreement if (i) we fail to achieve assay production targets, or
(ii) we have a change in control, including if Taylor J. Crouch ceases to serve
as our Chief Executive Officer. Either party may terminate the agreement upon
material breach, misconduct or insolvency of the other party. After the
five-year term expires, the agreement may be automatically renewed for
additional one-year terms.

Our arrangement with Quintiles is a preferred provider co-marketing
arrangement under which Quintiles' worldwide business development group will
incorporate our SNP discovery and clinical design services into the Quintiles'
selling cycle. Our December 1998 agreement with Quintiles is for a two-year term
and may be renewed by mutual agreement. We will receive revenues from this
marketing agreement based on the types of pharmacogenomic services we perform
under the contract. To date, we have not received any revenues under our
arrangement with Quintiles. The agreement may be terminated by either party upon
a material breach of the agreement.

In the life sciences sector, we have formed collaborations with both Waters
Technologies Corporation and Bruker Daltonics, Inc.

We entered into a strategic alliance with Waters in June 2000 to combine our
proprietary NuCleave-TM- chemical cleavage genotyping and haplotyping
technologies with Waters' DNA sample purification technology to create a kit for
NuCleave-TM- mass spectrometry applications. Both Waters and Variagenics will
develop the market for the NuCleave-TM- technology and kits among pharmaceutical
companies and clinical laboratories. The alliance is subject to approval under
the Hart-Scott-Rodino Act. As part of the alliance, we may receive up to
$7 million in fees or upon the achievement of milestones, as well as royalties
on kit sales. In addition, we will issue to an affiliate of Waters $7.5 million
in common stock at the initial public offering price in a private placement to
close concurrently with our initial public offering. Also, we will issue a
warrant to the Waters affiliate to purchase 80,357 shares of common stock in the
concurrent private placement. The warrant has a five year term and an exercise
price per share equal to the initial public offering price. The alliance will
continue until the later of: (i) the expiration of our patent rights for the
technology that are the subject of the alliance, (ii) 15 years after the first
commercial sale of kits developed under the alliance or (iii) by mutual consent
of Waters and Variagenics to terminate the alliance. Waters may terminate the
alliance upon 120 days' notice after two years from the formation of the
alliance, subject to Waters' fulfillment of a supply commitment.

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The Waters affiliate has agreed in a standstill agreement with us to refrain
from taking certain actions, including acquiring additional shares of our stock,
soliciting proxies or participating in an election contest with respect to
Variagenics, or acting alone or with others to acquire Variagenics. The
standstill agreement will terminate upon the earlier to occur of: (i) the
termination of the alliance agreement, (ii) approval by our Board of Directors
of the merger of our company or the acquisition of more than 30% of our
securities by a third party, (iii) a publicly announced tender or exchange offer
for our securities, and (iv) the third anniversary of the standstill agreement.

In May 2000, we entered into a collaboration with Bruker Daltonics, Inc., a
leading provider of life sciences tools based on mass spectrometry, to
manufacture and develop mass spectrometers for our NuCleave-TM- DNA testing and
analysis system. We will use the resulting system and also market and sell the
system to our pharmaceutical and drug-development collaborators to identify
genetic variances including genotypes and haplotypes. The collaboration
agreement with Bruker Daltonics extends until December 31, 2001, or until
terminated by either party for any reason upon 90 days notice. The parties may
agree to renew the agreement for additional one-year terms.

We expect to place our NuCleave-TM- DNA testing and analysis system in
Covance's largest testing laboratory in Indianapolis, Indiana by the end of
2000.

In the pharmaceutical sector, we anticipate a significant demand for our
Variagenic-Registered Trademark- Impact Program capabilities and we are in
late-stage discussions with a number of pharmaceutical companies regarding
custom SNP discovery and assay development collaborations. We have begun work on
our first two funded Variagenic-Registered Trademark- Impact Program
collaborations.

In the diagnostics/laboratory sector, we market the ApoE genotype through a
July 1999 co-marketing agreement with Nova Molecular, Inc., a clinical
laboratory services company in which we have an equity interest. The ApoE
genotype is associated with Alzheimer's and certain cardiovascular diseases.
ApoE is the most widely cited pharmacogenomic marker in the industry. Under this
agreement, we will earn royalties on ApoE genotyping tests sold by us and
performed by Nova Molecular. We anticipate that our future revenues under this
agreement will be immaterial. Our agreement with Nova Molecular is for a
three-year term and may be automatically renewed for additional terms of one
year each, unless either party gives notice to the other of its intent not to
renew at least 90 days prior to the expiration of each term.

SPONSORED RESEARCH

We believe that maintaining and expanding our close collaborations with
academia will be important to our success. We have numerous academic
collaborations centered on several in-licensed genes with demonstrated
pharmacogenomic effects. These genes include MTHFR (cardiovascular and cancer
applications), TPMT (cancer, transplant and arthritis applications), DPD
(cancer), ICAM-1 (Crohn's disease and inflammation), and MGMT (chemosensitizing
agents). We have also established sponsored research arrangements with leading
academic institutions, as well as consulting agreements with scholars, to keep
pace with the rapid development within the pharmacogenomics field.

David Housman, Ph.D., Ludwig Professor of Biology at the Massachusetts
Institute of Technology and our founder, is chairman of our Board of Directors.
In addition, we are also funding research at the University of Reading, England,
in their Departments of Medical and Pharmaceutical Statistics and Applied
Statistics. This sponsored research program is aimed at developing new methods
for genetic analysis in clinical trials. We are also supporting clinical
collaborations at the Dana Farber Cancer Institute, University of Reading and
McGill University, as well as at several other institutions. These clinical
collaborations include clinical trials of our first diagnostic products in colon
cancer and in the cardiovascular area.

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TECHNOLOGY, RESEARCH AND DEVELOPMENT

We have developed and plan to continue to develop proprietary technologies
to execute the technical steps required to implement the key phases of
pharmacogenomic drug development through commercialization. We are also
developing other advanced drug development technologies to meet the needs of the
principal stakeholders in the pharmacogenomics field which includes
pharmaceutical, diagnostic/laboratory, life sciences and contract clinical
research companies. We spent approximately $2.2 million in 1997, $5.0 million in
1998 and $8.4 million in 1999 on company sponsored research and development.

The following areas represent our comprehensive pharmacogenomic platform
abilities:

1) identification of genes likely to be relevant to interpatient
variation in response to a drug, or candidate genes;

2) discovery and cataloging of SNPs in and around the candidate genes;

3) prioritization of the SNPs to be subsequently integrated into
clinical trial testing;

4) development of assays used to analyze the SNPs in clinical samples,
which may include both genotyping and haplotyping assays;

5) analysis of clinical trial data resulting in recommendations for
pharmacogenomic drug development;

6) development of diagnostic tests to support pharmacogenomic products;
and

7) development of pharmaceutical products based on our
Variagenic-Registered Trademark- Targeting approach.

1) IDENTIFICATION OF CANDIDATE GENES RELEVANT TO DRUG ACTION.

The selection of appropriate candidate genes is a key step in identifying
the association between genetic variation and drug response. In order to
maximize the likelihood of selecting the genes most relevant to drug response,
we evaluate a broad spectrum of candidate genes using two methods. The first
method draws on the extensive knowledge in biomedical literature regarding
molecular pharmacology. The second method makes no assumptions about the
biochemical processes relating to the action of drugs, but instead draws on
experimental observations of genes whose level of activity, or expression, is
disturbed by drug treatment.

METHOD 1: SELECTION OF GENES BASED ON KNOWLEDGE OF DRUG ACTION. The targets
for virtually all drugs currently in development have been identified in
biomedical literature. For many drugs there is also information regarding the
genes that are involved in changing or affecting the natural activity of the
target gene and that may be responsible for affecting the activity of a drug
aimed at a target. This is called the extended candidate gene set or pathway
analysis approach. Selection of the extended candidate gene set can be
undertaken jointly with our collaborators, who may have proprietary information
relating to the selection of candidate genes, and with additional input from our
scientific advisors who are experts in the relevant areas of biology,
pharmacology and medicine.

METHOD 2: IDENTIFICATION OF CANDIDATE GENES USING GENE EXPRESSION
PROFILING. We also employ gene expression profiling, a technique that
identifies the levels of proteins produced by a gene. Generally, this is done in
drug-treated cells to identify additional candidate genes that might not be
apparent from the known pharmacology of drug action. Drug-induced changes in
gene expression are detected by both commercially available arrays, as well as
custom arrays prepared by our own scientists. Any genes showing altered
expression on exposure to the test drug could conceivably be involved in
mediating drug action, and would be considered as potential candidate genes.
This technique can also be used to evaluate the functional effects of SNPs in
candidate genes.

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2) DISCOVERY AND CATALOGING OF SNPS IN CANDIDATE GENES.

We maintain a dedicated core laboratory responsible for discovering SNPs in
candidate genes using automated DNA sequencing. Our laboratory uses robotic
platforms to perform all steps of the sequencing process and uses custom
bioinformatics software to track and analyze the results. To ensure the accuracy
and consistency of the vast amounts of data generated, we have developed a bar
code-based tracking system for test preparation that eliminates the need for
human data entry. In addition, all process steps are governed by standard
operating procedures, and quality control tests are used to derive metrics for
the process. SNP detection is routinely performed on DNA samples derived from an
ethnically and geographically diverse panel of anonymous individuals. Typically,
we examine 32 to 64 DNA samples drawn from an available panel of over 100
different individuals representing all major human populations. This provides a
greater than 99% probability of detecting SNPs with a frequency in the
population of 10% or greater. Alternatively, DNA from patients with a specific
disease or drug response can be screened for SNPs. In all cases, the samples
screened can be customized to match the specific needs of collaborators.

3) PRIORITIZATION OF SNPS FOR CLINICAL TESTING.

It is a challenge to select an appropriate set of SNPs for clinical testing
initially and to design a data analysis strategy compatible with the SNPs
selected. Our Variagenic-Registered Trademark- Impact Program prioritizes SNPs
in several ways, including:

- computational prediction of the effects of SNPs;

- analysis of the genetic relationships between SNPs, including their
relative frequencies of occurrence, the degree to which particular SNPs
are inherited together and aspects of the evolutionary relationships
between SNPs; and

- experimental analyses of the functional effects of SNPs, such as
expression profiling.

ANALYTICAL METHOD 1: COMPUTATIONAL PREDICTION OF THE EFFECTS OF
SNPS. Computational methods for predicting the effects of SNPs have the
advantage of being fast and inexpensive, and can be performed automatically. Our
proprietary software suite predicts the effects of SNPs on protein activity and
levels. Our software automatically generates a three-dimensional model of the
region of the protein containing the genetically-expressed variance and uses a
set of criteria to measure the probability that the variance will affect protein
function. This approach can greatly reduce the number of SNPs which are
prioritized for further study.

ANALYTICAL METHOD 2: GENETIC ANALYSIS OF SNPS. Our process for measuring
groups of SNPs or haplotypes in candidate genes allows us both to analyze the
variants now existing across human populations, and to establish which genetic
variants co-exist on the same chromosome. These analyses increase the power of
SNP data to detect genetic effects on drug response. We believe that the future
effectiveness of pharamcogenomics will largely depend on the ability to
experimentally detect haplotypes, and that we are a well-positioned leader in
this newly emerging component of the market.

We use methods based on determining all the common haplotypes in key
candidate genes, and then create a tree-like ordering of haplotypes based on
their inferred evolutionary relatedness. We have developed and currently use
custom bioinformatics software to complete most of these analyses.

ANALYTICAL METHOD 3: EXPERIMENTAL ANALYSIS OF FUNCTIONAL EFFECTS OF
SNPS. Identification of the levels of proteins produced by a gene is also
useful for selection of SNPs to analyze in clinical trials. One approach we are
using is to study gene expression levels in cell lines of known genotype. The
correlation between specific genotypes or haplotypes and levels of the
corresponding proteins can be measured and used to select SNPs of known
functional effect.

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4) ESTABLISHMENT OF ASSAYS TO ANALYZE SNPS IN CLINICAL SAMPLES.

Once we select a set of SNPs for analysis in a clinical trial we must
establish and validate assays for analysis of patient samples. The relevant
assays may include either genotyping or haplotyping assays, or both. We have
developed proprietary methods for both genotyping and haplotyping. We have also
established assays for analysis of genetic changes in cancer tissue, called loss
of heterozygosity, that may be useful in accounting for inter-patient
differences in response to anti-cancer drugs.

The NuCleave-TM- DNA analysis system is based on the integration of novel
genotyping and haplotyping assays, proprietary purification procedures,
robotics, bioinformatics and mass spectrometers resulting in a high-volume
automated SNP detection platform that we believe meets the accuracy and volume
requirements of the clinical research marketplace. NuCleave-TM- allows cleavage
of DNA at specified points to create fragments suitable for analytical
measurement. We believe there are many potential applications of our
NuCleave-TM- technology. Our first application we intend to commercialize
utilizes mononucleotide cleavage for genotyping and haplotyping to detect which
variant of any known SNP is present in a particular individual. This application
is being adapted for use with mass spectrometry.

The NuCleave-TM- DNA analysis system for genotyping and haplotyping utilizes
an automated four-step procedure. The first step is to produce multiple copies
of the DNA containing the SNP site, using polymerase chain reaction, or PCR, a
laboratory tool which amplifies a gene fragment in the presence of modified
nucleotides. In the second step, a proprietary chemical which assists with
cleavage of DNA is added to the same reaction tube and the amplified DNA is
cleaved into variable lengths depending upon the location of modified
nucleotides in the PCR product. The third step in the assay is a proprietary,
single-step purification to eliminate the salts that interfere with mass
spectrometer readings. The purification step has been adapted to a format that
is automated on robotic platforms. The fourth step is analysis by mass
spectrometry. A robot deposits the purified samples on a micro preparation plate
that facilitates automated sample loading into the mass spectrometer, and also
enhances the sensitivity of the mass spectrometry analysis. Our proprietary
bioinformatics software then reports and records the genotypes or haplotypes.
All steps of the NuCleave-TM- technology from set up, cleavage, purification and
sample deposition are automated. Primers and polymerases are not included in the
NuCleave-TM- analysis platform. Our customers and collaborators may need to
obtain licenses if they are using our NuCleave-TM- analysis platform to perform
clinical diagnostics or for other commercial purposes.

In addition to our NuCleave-TM- assay technologies, we have also developed
assays for analyzing the deterioration of chromosomes in cancer cells, or loss
of heterozygosity. These assays are developed by studying paired cancerous and
normal tissues at many different SNP locations throughout the genome. We have
developed a sensitive, quantitative method for testing loss of heterozygosity in
tumor cells. We have established a fully-equipped molecular pathology laboratory
for performing our work on loss of heterozygosity assays. We have also developed
a database detailing loss of heterozygosity for all major cancer types,
including data from published reports as well as internally generated data.

5) ANALYSIS OF CLINICAL TRIAL DATA AND RECOMMENDATIONS FOR PHARMACOGENOMIC
DRUG DEVELOPMENT.

Once the key SNP markers have been identified and assays have been created,
the clinical trial process can begin. In this process, it is critical to design
cost-effective, practical programs which can lead to a statistically significant
correlation between the markers and the drug effect being targeted. Those
markers that are confirmed to be valuable in a clinical trial can then be
developed into diagnostic tests for commercialization. We have devoted
considerable time and resources in establishing an efficient clinical trials
process, including securing key relationships with leading therapeutic experts
and Covance and Quintiles, the two largest global clinical research companies.

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6) DEVELOPMENT OF DIAGNOSTIC TESTS.

We are developing a process for developing our pharmacogenomic markers,
which are segments of DNA known to be linked with traits or diseases, into
diagnostic tests suitable for regulatory approval and commercialization. Each
assay developed for clinical research testing to evaluate the correlation of
drug effect and genetic variance will also be evaluated in parallel for its
potential use as a diagnostic product. We will utilize the clinical trial
processes that we develop with our clinical research organization collaborators
to ensure a streamlined and compatible approach for co-developing each potential
diagnostic product alongside with the corresponding drugs on which we work.

7) DEVELOPMENT OF PHARMACEUTICAL PRODUCTS BASED ON OUR VARIAGENIC-TM-
TARGETING APPROACH.

We have also developed a proprietary pharmacogenomic approach to cancer
therapy based upon our understanding of the deterioration of chromosomes in
cancer cells, or loss of heterozygosity. We have identified more than 20 targets
for discovery of new drugs to date and we believe that up to 600 additional
targets may be suitable for this approach. We have received a US patent
describing the application of loss of heterozygosity to cancer therapy and are
conducting pre-clinical studies utilizing our Variagenic-Registered Trademark-
Targeting approach.

INTELLECTUAL PROPERTY

We have structured our intellectual property portfolio in order to attempt
to develop and maintain a proprietary position in the identification and
application of genomic information to the development of current and future
drugs and diagnostic tests. We cannot be certain we will succeed in our
attempts. As of June 16, 2000, we owned seven issued US patents, had exclusive
licenses to four US patents and 42 US pending patent applications. In addition,
we have two issued foreign patents and have filed 33 pending foreign patent
applications. Our patent portfolio has three areas of technology pertinent to
the field of pharmacogenomics--pharmacogenetics, variance detection, and
Variagenic-Registered Trademark- Targeting.

We have described candidate genes with likely involvement in drug response
for the following disease categories: cancer, neurological, psychiatric,
inflammatory immune, metabolic, endocrine, cardiovascular and renal disease, as
well as the effect of genotype on the parameters of response to any drug,
including the levels and rates of movement of drugs within biological systems.
In addition to the patent applications describing the utility of proprietary
SNPs, we own rights to gene specific patents for the following two genes: MTHFR
(cardiovascular and cancer applications), and TPMT (cancer, transplant and
arthritis applications).

In the area of polymorphism detection technologies, our patent applications
describe a DNA analysis platform based on mass spectrometry. Our patent
applications in this field describe the use of NuCleave-TM-, a unique
mononucleotide chemical cleavage method, as well as additional chemistries and
strategies for the rapid resolution and identification of SNPs using mass
spectrometry.

In the area of targeting alleles, which are two or more different genes
which may occupy the same location on a specific chromosome, our patents and
patent applications describe Variagenic-Registered Trademark- Targeting, a
technology involving loss of heterozygosity, profiling and, in particular,
differences among alleles. An issued patent broadly describes allelic
differences as a result of loss of heterozygosity occurring in cancer. The
allele-specific differences observed in cancer can be applied further to other
disease indications.

Our strategy is to apply for patent protection on SNPs of known genes and
their uses and additional uses for previously identified SNPs discovered by
third parties. We have sought and intend to continue to seek patent protection
for additional uses for SNPs that may have initially been patented by third
parties. In these cases, we might need a license from the holders of the patent
with respect to the gene in order to make, use or sell products for this use.

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We also rely upon trade secrets, know-how and licensing opportunities to
protect our intellectual property. Complex legal and factual determinations and
evolving laws make patent protection uncertain. As a result, we cannot be sure
that patents will issue from any of our patent applications or from applications
licensed to us or that any issued patents will have sufficient breadth or terms
to offer meaningful protection of our technology. In addition, our issued
patents or patents we license may be successfully challenged, invalidated,
circumvented or rendered unenforceable so that our patent rights would not
create an effective competitive barrier. Moreover, the laws of some foreign
countries may not protect our proprietary rights to the same extent as do US and
Canadian laws. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Most
of our employees and consultants also sign agreements requiring that they assign
to us their interests in discoveries, inventions, patents and copyrights arising
from their work for us, maintain the confidentiality of our intellectual
property, and refrain from unfair competition with us during their employment
and for a period of time after their employment with us, which includes
solicitation of our employees and customers. We cannot be sure that these
agreements will not be breached or invalidated or even held valid by a court. In
addition, we cannot assure you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade secrets,
or other technologies. If our intellectual property is not protected from
disclosure to, or use by, third parties, our competitive market position will be
harmed.

Generally, US patents have a term of 17 years from the date of issue for
patents issued from applications filed with the US Patent Office prior to
June 8, 1995 and 20 years from the application filing date or earlier claimed
priority date in the case of patents issued from applications filed on or after
June 8, 1995. Under some circumstances, patent term extensions may be obtained,
or disclaimers of some part of the patent term may be required. Patents in most
other countries have a term of 20 years from the date of filing the patent
application.

Although we are not a party to any material legal proceedings, in the
future, third parties may file claims asserting that our technologies or
products infringe on their intellectual property. We cannot predict whether
third parties will assert such claims against us or against the licensors of
technologies licensed to us, or whether those claims will harm our business. If
we are forced to defend against such claims, whether they are with or without
any merit or whether they are resolved in favor of or against us or our
licensors, we may face costly litigation and diversion of management's attention
and resources. As a result of disputes, we may have to develop costly
non-infringing technologies, or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business and financial condition.

COMPETITION

Our business model may expose us to competition in many of the sectors in
which we operate. We expect the intensity of competition to increase. We are
subject to significant competition from pharmaceutical, biotechnology and
diagnostic companies, academic and research institutions and government or other
publicly-funded agencies that are pursuing products and services that are
substantially similar to our proposed products and services, or which otherwise
address the needs of our customers and potential customers. Some of our
competitors have greater financial, operational, sales and marketing resources,
and more experience in research and development than we have. These competitors
may have developed, or could develop in the future, technologies that compete
with our products or which could render our products obsolete. We anticipate
that our principal competitors will ultimately come from four areas. Genomics
companies, such as Human Genome Sciences, Inc. and Millennium
Pharmaceuticals, Inc., may develop parallel business models in order to bring
their discovery products into the development and commercialization stages.
Companies and entities focused on SNP discovery such as CuraGen Corporation,
Genset Pharmaceuticals, Inc., Celera Genomics Group, Incyte
Pharmaceuticals, Inc., and The SNP Consortium Ltd. may focus their discovery
efforts on providing further characterization of relevant SNPs to drug action
and thus begin to compete with

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our pharmacogenomics model. At least one company, Genaissance
Pharmaceuticals, Inc., has already moved in this direction. Tool companies such
as Affymetrix, Inc., Orchid Biosciences, Inc. and Sequenom, Inc. may supply
tools to meet the rapidly increasing workload of research experiments. Service
companies such as PPGX, a subsidiary of Axys Pharmaceuticals, Inc., may compete
by providing clinical trials genotyping capabilities. We cannot assure you that
we will be able to make the enhancements to our technologies necessary to
compete successfully with newly emerging techniques.

GOVERNMENT REGULATION

At the current time, the FDA does not regulate us or our products. However,
many of our customers and collaborators will be subject to regulation depending
on the type of products or services they provide. The FDA and comparable
regulatory agencies in foreign countries impose substantial requirements on the
clinical development, manufacture and marketing of biopharmaceuticals and in
vitro diagnostic products. These agencies regulate research and development
activities and the testing, manufacture, quality control, safety, effectiveness,
labeling, storage, record keeping, advertising and promotion of these products
and services. Different centers within the FDA are responsible for regulating
these products, depending on whether the product is considered a pharmaceutical,
biologic or medical device.

The process required by the FDA before a pharmaceutical or biologic product
may be marketed in the US generally requires substantial time, effort and
financial resources. Satisfaction of FDA requirements or similar requirements of
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially based upon the type, complexity and novelty of
the product or disease. Even if a product receives regulatory approval, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from the
market.

Because our testing services are currently used only for research purposes,
we are not registered under the Clinical Laboratory Improvement Act, or CLIA.
However, Covance, which uses our technology in clinical trials, is
CLIA-certified. CLIA is intended to ensure the quality and reliability of
clinical laboratories in the US by mandating specific standards in the areas of
personnel qualification, administration, participation in proficiency testing,
patient test management, quality control, quality assurance and inspections. We
cannot assure you that the CLIA regulations and future administrative
interpretations of CLIA will not have a materially adverse impact on our ability
to sell our technology to Covance or any future collaborators that want to use
our technology to provide reference laboratory services.

We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on our business and results of operations.

EMPLOYEES

As of June 19, 2000, we employed 51 persons and engaged one full-time
consultant, of whom 16 hold Ph.D. or M.D. degrees and 11 hold other advanced
degrees. Approximately 38 employees are engaged in research and development, and
13 employees are engaged in business development, intellectual property, finance
and other administrative functions. None of our employees are subject to a
collective bargaining arrangement and we consider our relations with our
employees to be good.

FACILITIES

We lease a 39,014 square foot facility in Cambridge, Massachusetts for our
headquarters and as the base for our marketing, research and development
activities. The lease expires in 2008 and is renewable for another five years.
We believe that suitable additional space will be available to us, when needed,
on commercially reasonable terms.

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

Our executive officers, directors and key employees and their respective
ages and position(s) as of June 22, 2000 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------------
<S> <C> <C>
Taylor J. Crouch*(1)................. 40 President, Chief Executive Officer and Director
Bruce L. Maloff, Ph.D.*.............. 46 Executive Vice President, Commercial Operations
Colin W. Dykes, Ph.D.*............... 46 Vice President, Research and Genomics
Anne L. Bailey*...................... 54 Vice President, Diagnostic and Process Development
Richard P. Shea*..................... 48 Chief Financial Officer and Treasurer
Vincent P. Stanton, Jr., M.D.*....... 44 Vice President and Principal Scientist
David Housman, Ph.D.................. 53 Chairman and Principal Scientific Advisor
R. Mark Adams, Ph.D.................. 33 Senior Director, Bioinformatics
Andrew M. Ferrie..................... 39 Senior Director, Variance Discovery
Alan C. Houston, M.D................. 48 Interim Medical Director
Edward E. Koval...................... 38 Senior Director, Business Development
Beverly A. Holley.................... 42 Senior Director, Investor Relations
Karyn C. Finamore.................... 36 General Counsel
Philippe O. Chambon, M.D., 41
Ph.D.(1)(2)........................ Director
Mark P. Carthy(3).................... 39 Director
Jean-Francois Formela, 43
M.D.(1)(2)(3)...................... Director
Martin A. Vogelbaum(1)(2)(3)......... 37 Director
David A. Shotland.................... 37 Director
William A. Scott, Ph.D............... 59 Director
Anthony H. Wild, Ph.D................ 53 Director
</TABLE>

------------------------

* Executive Officer

(1) Member of the Executive Committee

(2) Member of the Compensation Committee

(3) Member of the Audit Committee

TAYLOR J. CROUCH has served as our President, Chief Executive Officer and a
member of our Board of Directors since April 1999. From 1991 to April 1999,
Mr. Crouch was Senior Vice President, Worldwide Marketing and Strategic
Development for PAREXEL International Corporation, leading PAREXEL's global
sales, marketing and strategy functions, where he worked with client companies
to establish broad-based strategic partnering relationships in all major
pharmaceutical marketplaces. Prior to joining PAREXEL, Mr. Crouch spent ten
years in the pharmaceutical and device industries in new product development
marketing at Schering-Plough International, Pfizer International and Johnson &
Johnson's Critikon division. Within the pharmaceutical industry, he has worked
on the development and launch of many leading products in the cardiovascular,
anti-infectives, dermatology and allergy fields. Mr. Crouch received his B.S. in
chemical engineering, cum laude, from Princeton University and his M.B.A. in
international finance and marketing from the University of Chicago.

BRUCE L. MALOFF, PH.D. has served as our Executive Vice President,
Commercial Operations since February 2000. From 1998 until joining us,
Dr. Maloff served as Vice President, Business Development for Quintiles CNS
Therapeutics, a strategic business unit of Quintiles Transnational. From 1988 to

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1998, Dr. Maloff held a series of senior management positions in the clinical
research industry, including Vice President of Business Development at
ClinTrials Research. Prior to joining ClinTrials, Dr. Maloff was a research
pharmacologist at Dupont Pharmaceuticals. Dr. Maloff received his Ph.D. in
cellular physiology from the State University of New York, Albany, and his B.S.
with honors from Syracuse University.

COLIN W. DYKES, PH.D. has served as our Vice President, Research and
Genomics since July 1998. From 1997 until joining us, Dr. Dykes was director of
the United Kingdom Genetics Division of Glaxo Wellcome, where he also served as
a member of its Genetics Directorate, with responsibility for formulating
policies on patents, diagnostics, genetics applications in clinical trials, and
public policy. Dr. Dykes joined Glaxo in 1982, and in 1993 he established
Glaxo's genetics and genomics programs as the United Kingdom head of Glaxo's
Human Genetics Initiative. Dr. Dykes is trained in protein chemistry and
received his Ph.D. in Biochemistry from University College, Cardiff.

ANNE L. BAILEY has served as our Vice President, Diagnostic and Process
Development since April 1998. From 1990 until joining us, Ms. Bailey served as
Vice President of Operations of Avitech Diagnostics, Inc. Prior to joining
Avitech, from 1984 to 1990, Ms. Bailey served as Director, New Product
Development and Vice President, Manufacturing and Regulatory Affairs at Photest
Diagnostics, Inc. She has over 25 years of management experience in the medical
diagnostics reference laboratory and research products industries. Ms. Bailey
received her B.S. in Biology/Chemistry from Stanford University and an M.S. in
Biochemistry from Johns Hopkins University.

RICHARD P. SHEA joined us as our Vice President, Finance and Administration
in February 1999, and has served as our Chief Financial Officer and Treasurer
since March 2000. From April 1997 until joining us, Mr. Shea served as Vice
President, Finance of Genetics Institute. In that capacity he helped manage the
launch of BeneFIX and Neumega and assisted with the integration of Genetics
Institute into American Home Products Corporation. Mr. Shea joined Genetics
Institute in October 1992 as Controller, and was formerly Senior Manager at
PricewaterhouseCoopers LLP in Boston and Copenhagen, primarily serving clients
in the high technology and manufacturing sectors. Mr. Shea is a certified public
accountant and received his M.B.A. from Boston University and an A.B. from
Princeton University.

VINCENT P. STANTON, JR., M.D. was a founding employee of Variagenics in 1993
and served as our Vice President, Research from 1995 until 1998 and as our Vice
President, Discovery Research from 1998 until May 2000. In May 2000,
Dr. Stanton became Vice President and Principal Scientist. Prior to joining us,
Dr. Stanton was a Research Scientist at the Massachusetts Institute of
Technology, where his research focused on human and cancer genetics and the
development of techniques for polymorphism detection and genome mapping.
Previously, Dr. Stanton completed a residency in anatomical pathology at Brigham
and Women's Hospital in Boston and a post doctoral fellowship at the Dana-Farber
Cancer Institute where his research concerned oncogenes. Dr. Stanton received
his M.D. from the University of Pennsylvania School of Medicine.

DAVID HOUSMAN, PH.D. was a scientific founder of Variagenics and has served
as Chairman and Principal Scientific Advisor since 1993. Dr. Housman is the
Ludwig Professor of Biology at the Center for Cancer Research of the
Massachusetts Institute of Technology where he has been on the faculty since
1975. Dr. Housman's laboratory at M.I.T. has pioneered many of the techniques
and concepts which culminated in the human genome project. His laboratory
isolated the multidrug resistance gene, now the focus of cancer drug development
efforts at several pharmaceutical companies; the gene causing Wilm's tumor, a
pediatric kidney cancer; and the gene which causes myotonic dystrophy, the major
adult form of muscular dystrophy. He is a member of the National Academy of
Sciences and was a co-founder of Integrated Genetics, Genzyme Genetics and the
former Somatix Therapy Corp. Dr. Housman has served on Scientific or Medical
Advisory Boards for the National Center for Human Genome Research, the
Hereditary Disease Foundation, the National Neurofibromatosis Foundation,

45
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the National Cancer Institute and the Tourette's Syndrome Association.
Dr. Housman teaches undergraduate and graduate students at M.I.T. and medical
students in the M.I.T.--Harvard Medical School program, and is a frequent
consultant to the pharmaceutical and biotechnology industries. Dr. Housman
received his Ph.D. from Brandeis University.

R. MARK ADAMS, PH.D. has served as our Senior Director, Bioinformatics since
January 1998. From April 1996 until joining us, Dr. Adams was Director of
Bioinformatics at AlphaGene, Inc., where he designed and implemented a system
for the automated processing and analysis of full-length cDNA sequence
information. From August 1994 until April 1996, Dr. Adams was a post-doctoral
fellow at the Biomolecular Engineering Research Center at Boston University and
a consultant to Incytc Pharmaceuticals, Inc. His academic work is principally in
the area of computational analysis of multiple-domain proteins and the
prediction of protein domain structure and function. He is an author of several
bioinformatics programs including DashPat and MultiDom. Dr. Adams received his
Ph.D. in Cell Biology from Baylor College of Medicine.

ANDREW M. FERRIE has served as our Senior Director, Variance Discovery since
April 1998. From 1993 until joining us, Mr. Ferrie served as Gene Discovery
Manager and Group Leader at Human Genome Sciences. At Human Genome Sciences, he
was responsible for establishing and managing the gene sequencing facility, as
well as developing robotic platforms for high-throughput sample preparation and
sequencing. Prior to joining Human Genome Sciences, he was employed by Digene
Corporation from 1989 to 1993, and Cetus Corporation from 1984 to 1989, where he
was involved in the development of diagnostic products. Mr. Ferrie has a B.S. in
Microbiology from California Polytechnic State University, San Luis Obispo and a
M.S. in Biotechnology Management from the University of Maryland, College Park.

ALAN C. HOUSTON, M.D. joined us as Interim Medical Director in April 2000.
Upon receipt of his United States visa, Dr. Houston will become our Vice
President, Clinical Development and Chief Medical Officer and an executive
officer. From April 1997 until April 2000, Dr. Houston was the Vice President of
Quintiles' Worldwide Phase I Services Division, based in the United Kingdom.
From July 1995 to April 1997, Dr. Houston served as head of International
Clinical Pharmacology at Ciba-Geigy AG (now Novartis) in Basel, Switzerland.
Dr. Houston is a member of the Royal College of Physicians and earned his MB BS
(equivalent to an M.D. degree) from the University of London and has specialty
degrees in Internal and Pharmaceutical Medicine.

EDWARD E. KOVAL has served as our Senior Director, Business Development
since February 2000. Most recently, Mr. Koval was an independent business
development consultant providing services to, among others, Chiron Corporation
and Pharmacopeia Inc. From January 1996 to January 1998, Mr. Koval served as
Director of Corporate Development at Chiron Corporation, where he was
instrumental in creating and executing strategies related to partnering,
acquisition and joint venture plans. From June 1992 to December 1995, Mr. Koval
held a series of positions at Merck & Co., including Director of Corporate
Planning and Development. Mr. Koval received a B.S. from Polytechnic University,
an M.B.A. from the M.I.T. Sloan School of Management and an M.S. from the
Rensselaer Polytechnic Institute.

BEVERLY A. HOLLEY has served as our Senior Director, Investor Relations
since March 2000. From March 1999 until joining us, Ms. Holley was a partner in
the strategic investor relations practice of Devine and Holley. From
September 1997 to March 1999 Ms. Holley was director of corporate communications
at Tranksaryotic Therapies, Inc. Prior to that she was director of investor and
public relations at Millennium Pharmaceuticals, Inc. from July 1996 to
July 1997. From October 1985 to July 1996 Ms. Holley served in a variety of
positions at Matrix Pharmaceutical, Inc., most recently as director of corporate
communications and investor relations from January 1992 until July 1996.
Ms. Holley received a B.S. from Western Washington State University.

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KARYN C. FINAMORE has served as our General Counsel since April 2000. From
June 1992 until joining us, Ms. Finamore served as Corporate Counsel at PAREXEL
International Corporation, a multinational contract research organization.
Before joining PAREXEL, Ms. Finamore practiced corporate and securities law in
private practice. Ms. Finamore received a B.A. in Economics from Cornell
University and a J.D. from Boston University School of Law.

PHILIPPE O. CHAMBON, M.D., PH.D. has served as a member of our Board of
Directors since July 1999. Since January 1997, Dr. Chambon has been a General
Partner of the Sprout Group. He joined the Sprout Group in May 1995. From
May 1993 to April 1995, Dr. Chambon served as Manager in the Healthcare Practice
of The Boston Consulting Group, a leading management consulting firm. From
September 1987 to April 1993, he was an executive with Sandoz Pharmaceutical
(Novartis), where he had late-stage product development and pre-marketing
responsibilities. Dr. Chambon currently serves as a member of the board of
directors of CombiChem, Inc. and several privately-funded biotechnology
companies. Dr. Chambon holds an M.D. and a Ph.D. from the University of Paris
and an M.B.A. from Columbia University.

MARK P. CARTHY has served as a member of our Board of Directors since
October 1998. Since September 1998, Mr. Carthy has been the biotechnology
portfolio manager for Morningside Ventures which advises Kummell Investments
Limited on its venture capital portfolio. From April 1997 to October 1998,
Mr. Carthy was Chief Business Officer at Cubist Pharmaceuticals Inc., a
biotechnology company. From January 1992 to April 1997, Mr. Carthy held various
positions at Vertex Pharmaceuticals, Inc., most recently as Senior Director of
Business Development. Mr. Carthy currently serves as a member of the board of
directors of Dendreon Corporation and several privately-funded biotechnology
companies. Mr. Carthy received a B.E. in Chemical Engineering from the
University College Dublin, an M.Sc. in Chemical Engineering from the University
of Missouri and an M.B.A. from Harvard Business School.

JEAN-FRANCOIS FORMELA, M.D. has served as a member of our Board of Directors
since June 1997. Dr. Formela was a partner of Atlas Venture from 1993 to 1995,
and has been a general partner of Atlas since 1995. From 1989 to 1993,
Dr. Formela served at Schering-Plough, most recently as Senior Director, Medical
Marketing and Scientific Affairs, where he had biotechnology licensing and
marketing responsibilities. Dr. Formela serves on the board of directors of
BioChem Pharma, Inc., Exelixis, Inc. and several private companies. Dr. Formela
holds an M.D. from Paris University School of Medicine and an M.B.A. from
Columbia Business School.

MARTIN A. VOGELBAUM has served as a member of our Board of Directors since
June 1997. Mr. Vogelbaum was a General Partner of Oxford Bioscience Partners
until June 2000. Prior to joining Oxford in 1993, he held senior executive
positions at the public and investor relations firms of Burns McClellan and
Hill & Knowlton, where he implemented marketing and investor initiatives for
biotechnology and pharmaceutical companies. Previously, he was a Research
Associate in the Bone Marrow Transplant Unit at Memorial Sloan-Kettering Cancer
Center. Mr. Vogelbaum received his A.B. in biology and history from Columbia
University.

DAVID A. SHOTLAND has served as a member of our Board of Directors since
March 2000. Since November 1999, Mr. Shotland has been a Managing Director of
CIBC Capital Partners, a merchant banking division of CIBC World Markets Corp.,
an indirect subsidiary of Canadian Imperial Bank of Commerce, the successor to
Oppenheimer & Co., Inc. where he was employed since 1993. Prior to joining CIBC
Capital Partners, Mr. Shotland was a Managing Director in investment banking at
CIBC World Markets Corp., responsible for private equity transactions.
Mr. Shotland received his B.A. from Boston University and a M.B.A. from Columbia
Business School.

WILLIAM A. SCOTT, PH.D. has served as a member of our Board of Directors
since May 2000. Dr. Scott is currently an Adjunct Professor at The Rockefeller
University, where he has been affiliated since 1969. During his tenure at The
Rockefeller University, Dr. Scott has held a variety of academic

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appointments, including Associate Dean from 1979 to 1982. From March 1997 until
August 1999 he served as the Chief Executive Officer and a member of the board
of directors of Physiome Sciences, a private biotechnology company. From March
1991 to December 1996, Dr. Scott served as Senior Vice President, Exploratory
and Drug Discovery Research at the Bristol-Myers Squibb Pharmaceutical Research
Institute, where he had previously served as Senior Vice President, Drug
Discovery from March 1990 to March 1991 and co-chair of the committee
responsible for integration of research programs during the merger of
Bristol-Myers and Squibb. From September 1983 to February 1990, Dr. Scott held a
series of positions at The Squibb Institute for Medical Research, including
Senior Vice President, Molecular and Cellular Biology. Dr. Scott is a member of
the board of directors of Atherogenics Inc., a biotechnology company. Dr. Scott
holds a B.S. in Chemistry from the University of Illinois, and a Ph.D. in
Biochemistry from the California Institute of Technology. He was a National
Institute of Health Postdoctoral Fellow at The Rockefeller University from 1967
to 1969.

ANTHONY H. WILD, PH.D. has served as a member of our Board of Directors
since May 2000. Dr. Wild is a founder, partner and Chief Executive Officer of
MedPointe Capital Partners, Inc. Dr. Wild has almost three decades of
pharmaceutical experience at senior executive management levels. Dr. Wild served
as the President of Warner Lambert's Global Pharmaceuticals Sector from
May 1996 until June 2000. From February 1995 to May 1996, Dr. Wild served as
President of Parke-Davis North America, a division of Warner Lambert. Prior to
joining Warner Lambert, Dr. Wild served in various management, marketing and
operating positions at Schering-Plough from 1973 to 1995, where he served as
President of Schering-Plough KK in Osaka, Japan, the largest division of
Schering Plough outside of the U.S. He serves on the Board of Directors for
Bioglan Pharma plc. Dr. Wild holds a B.A. in Chemistry from the University of
York, England and a Ph.D. in Physical Chemistry from University of Cambridge,
England.

COMPOSITION OF THE BOARD OF DIRECTORS

Following this offering, our Board of Directors will be divided into three
staggered classes, each of whose members will serve for a three-year term as
follows:

- our Class I directors will be Messrs. Shotland and Carthy and
Dr. Housman;

- our Class II directors will be Drs. Chambon and Formela and
Mr. Vogelbaum; and

- our Class III directors will be Mr. Crouch and Drs. Scott and Wild.

At each annual meeting of stockholders, a class of directors will be elected
for a three-year term to succeed the directors of the same class whose terms are
then expiring. The terms of the directors will expire upon the election and
qualification of successor directors at the Annual Meeting of Stockholders to be
held during calendar years 2001 for Class I directors, 2002 for Class II
directors and 2003 for Class III directors.

Each officer serves at the discretion of the Board of Directors and holds
office until his successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.

COMMITTEES OF THE BOARD OF DIRECTORS

Our Board of Directors has standing audit, compensation and executive
committees. The audit committee consists of Dr. Formela, Mr. Vogelbaum and
Mr. Carthy and will meet at least two times a year. The audit committee oversees
the engagement of our independent public accountants, reviews the annual
financial statements and the scope of the annual audits and considers matters
relating to accounting policy and internal controls. The compensation committee
consists of Dr. Chambon, Dr. Formela and Mr. Vogelbaum. The compensation
committee reviews, approves and makes recommendations to our Board of Directors
concerning our compensation practices, policies and procedures for our executive
officers, including the Chief Executive Officer. The compensation

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<PAGE>
committee's duties include the administration of our 1997 Employee, Director and
Consultant Stock Option Plan. The executive committee consists of Mr. Crouch,
Dr. Chambon, Dr. Formela and Mr. Vogelbaum. The executive committee reviews and
approves strategic matters, including major investments, potential acquisition
transactions and business strategies, and reviews and approves the structure of,
and additions to, senior management.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Dr. Chambon, Dr. Formela and Mr. Vogelbaum, each of whom are a non-employee
director, constitute our compensation committee. None of our executive officers
serve as a member of the Board of Directors or compensation committee of any
entity that has one or more executive officers serving as a member of our Board
of Directors or compensation committee.

SCIENTIFIC ADVISORS

Our scientific advisors have demonstrated expertise in various fields and
advise us concerning long-term scientific planning, research and development.
Our principal scientific advisors own shares and/or options to acquire shares of
our common stock, some of which shares are subject to vesting. These advisors
also evaluate our research program, recommend personnel to us and advise us on
technology matters. In addition to David Housman, Ph.D., the following
individuals serve as our principal scientific advisors:

FRED D. LEDLEY, M.D. is a co-founder and Chief Scientific Officer of
Framingham Genomic Medicine. Dr. Ledley served as our President and Chief
Scientific Officer from April 1999 to July 1999, as our President and Chief
Executive Officer from June 1997 until April 1999, as our President and Chief
Operating Officer from June 1996 to June 1997 and as a member of our Board of
Directors from 1996 to July 1999. Prior to joining us in 1996, he was Scientific
Founder and Vice President, Research and Development of GeneMedicine, Inc. At
GeneMedicine, Dr. Ledley had a leading role in developing GeneMedicine's
business plan, private and public financings, technical programs and corporate
alliances. Prior to joining GeneMedicine, Dr. Ledley was an Assistant
Investigator of the Howard Hughes Medical Institute and tenured Associate
Professor at the Baylor College of Medicine in the Departments of Cell Biology
and Pediatrics. Dr. Ledley has authored more than 150 publications on the
molecular biology of inherited disease and clinical applications of molecular
genetics including product design, clinical trials, bioethics, and government
regulation. Dr. Ledley received a B.S. in Physical Science from the University
of Maryland, College Park and an M.D. from Georgetown University. He is on the
Board of Directors of the Massachusetts Biotechnology Council.

GREG VERDINE, PH.D. is Professor of Chemistry and Chemical Biology at
Harvard University and Founding Faculty Member of Harvard's Institute of
Chemistry and Cell Biology. He joined the Harvard University Department of
Chemistry in 1988, was named Thomas D. Cabot Associate Professor in 1992, and
became Full Professor in 1994. Professor Verdine's research focuses on
mechanisms for DNA repair and regulated gene expression as well as the discovery
of small molecules that can directly affect these processes. He is the recipient
of the 1996 Lilly Award in Biological Chemistry from the American Chemical
Society. He received an ACS Arthur C. Cope Scholar Award and the Zeneca
Pharmaceuticals Group Excellence in Chemistry Award in 1994. He has also been
named a National Science Foundation Presidential Young Investigator, a Fellow of
the Alfred P. Sloan Foundation, a Dreyfus Teacher-Scholar, a Lilly Grantee in
Chemistry, a Dreyfus Distinguished New Faculty Awardee, a DuPont Young Faculty
Fellow, and a Searle Scholar. Dr. Verdine received a B.S. from St. Joseph's
University and a Ph.D. from Columbia University.

Each of Drs. Housman and Verdine have entered into a consulting agreement
with us covering the terms of such person's position as a consultant to us. All
of our scientific advisors are employed by employers other than us and may have
other commitments to, or consulting or advisory contracts with, other entities
that may conflict or compete with their obligations to us. Generally, scientific
advisors are not expected to devote a substantial portion of their time to our
matters.

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1997 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN

Our 1997 Employee, Director and Consultant Stock Option Plan was approved by
our Board of Directors and stockholders in 1997. The plan authorizes for the
issuance of stock options to our employees, directors and consultants. An
increase in the aggregate number shares of common stock reserved for issuance
under the plan from 2,497,950 to 4,758,000 shares was approved by our Board of
Directors in March 2000, and by our stockholders in July 2000.

SHARE RESERVE. A total of 4,758,000 shares of our common stock have been
reserved for issuance under the plan. As of June 22, 2000, options to purchase
2,750,280 shares were outstanding under the Plan.

ADMINISTRATION. Our Board of Directors has the authority to adopt, amend
and repeal the administrative rules, guidelines and practices relating to the
plan and to interpret its provisions and may delegate authority under the plan
to a committee of the Board of Directors. The compensation committee of our
Board of Directors administers the plan. The compensation committee has the
authority to determine the following:

- the persons to whom options will be granted;

- the number of shares to be covered by each option; and

- the terms and conditions upon which an option or options may be granted.

Options awarded under the plan will be subject to such terms and conditions
as the compensation committee deems to be appropriate and in our best interest.
These terms may include conditions relating to our right to reacquire the shares
subject to a granted option, including the time and events upon which such
rights shall accrue and the purchase price of the shares.

ELIGIBILITY. Options granted under the plan may be either options intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended, or non-qualified stock options. Incentive
stock options may be granted to our employees. The compensation committee may
also grant options at an exercise price less than, equal to or greater than the
fair market value of the common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common stock
on the date of grant or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of our voting
power. The plan permits the Board of Directors to determine how optionees may
pay the exercise price of their options, including by cash, check or in
connection with a "cashless exercise" through a broker, by surrender of shares
of common stock, by delivery of a promissory note, or by any combination of the
permitted forms of payment.

GENERAL PROVISIONS. The aggregate fair market value, determined on the date
of grant, of shares issuable pursuant to incentive stock options that become
exercisable in any calendar year under any of our existing or future potential
incentive stock plans may not exceed $100,000. Incentive stock options granted
under the plan may not be granted at a price less than the fair market value of
our common stock on the date of grant, or 110% of fair market value in the case
of employees holding 10% or more of our voting stock. Non-qualified stock
options granted under our plan may not be granted at an exercise price less than
the par value per share of our common stock on the date of the grant. Incentive
stock options granted under the plan expire not more than ten years from the
date of grant, or not more than five years from the date of grant in the case of
incentive stock options granted to an employee or officer holding 10% or more of
our voting stock. An option granted under the plan is not transferable by the
optionholder except by will or by the laws of descent and distribution or as
otherwise determined by the compensation committee and set forth in the
applicable option agreement.

EFFECT OF TERMINATION OF EMPLOYMENT. An incentive stock option granted
under the plan may be exercised after the termination of the optionholder's
employment with us, other than by reason of

50
<PAGE>
death, disability or termination for "cause" as defined in the plan, to the
extent exercisable on the date of termination, at any time prior to the earlier
of the option's specified expiration date or 90 days after such termination. The
compensation committee may specify the termination or cancellation provisions
applicable to a non-qualified stock option. In the event of the optionholder's
death or disability, both incentive stock options and non-qualified stock
options generally may be exercised, to the extent exercisable on the date of
death or disability, by the optionholder or the optionholder's survivors at any
time prior to the earlier of the option's specified expiration date or one year
from the date of death or disability. Generally, in the event of the
optionholder's termination for cause, all outstanding and unexercised options
are forfeited.

EFFECT OF ACQUISITION. If we are to be consolidated with or acquired by
another entity in a merger, sale of all or substantially all of our assets or
otherwise, the compensation committee or the board of directors of any entity
assuming our obligations under the plan shall, as to outstanding options under
the plan, either (i) make appropriate provision for the continuation of such
options by substituting, on an equitable basis, for the shares then subject to
such options, the consideration payable with respect to the outstanding shares
of common stock in connection with such an acquisition or securities of the
successor or acquiring entity; or (ii) upon written notice to the optionholders,
provide that all options must be exercised (either to the extent then
exercisable or, at the discretion of the compensation committee, all options
being made fully exercisable for purposes of the transaction) within a specified
number of days of the date of such notice, at the end of which period the
options shall terminate; or (iii) terminate all options in exchange for a cash
payment equal to the excess of the fair market value of the shares subject to
each such option (either to the extent then exercisable or, at the discretion of
the compensation committee, all options being made fully exercisable for
purposes of the transaction) over the exercise price thereof.

AMENDMENT. The plan may be amended by our stockholders, by our Board of
Directors or by our compensation committee, provided that any amendment which
the compensation committee determines is of a scope that requires stockholder
approval shall be subject to obtaining such stockholder approval.

2000 EMPLOYEE STOCK PURCHASE PLAN

Our 2000 Employee Stock Purchase Plan was approved by our Board of Directors
in May 2000 and by our stockholders in July 2000. Under this plan, we may issue
up to a total of 475,800 shares of our common stock to participating employees.
Employees, including officers, who have been continuously employed for three
months as of the first business day of each offering period of the plan,
generally six months, is eligible to participate. However, an employee who would
immediately after the grant own 5% or more of the total combined voting power or
value of our stock or permits his or her rights to purchase stock to accrue at a
rate which exceeds $25,000 of the fair market value of this stock (determined at
the time option is granted) for each calendar year in which this option is
outstanding at any time are not eligible to participate. There is a maximum
number of shares that each employee may purchase in any one offering period.

During each offering period, each eligible employee may deduct a percentage
of their base pay to purchase our common stock under the plan. The purchase
price will be the lower of 85% of the fair market value of a share of our common
stock on the first business day of the offering period or 85% of the fair market
value of a share of our common stock on the exercise date.

In the event we are acquired, each option under the plan may be assumed or
substituted with an equivalent option by the successor corporation. In lieu of
assumption or substitution, our Board of Directors in its discretion may shorten
the offering period in progress.

DIRECTOR COMPENSATION

All of the directors are reimbursed for expenses incurred to attend meetings
of our Board of Directors and any committees of the Board of Directors. Pursuant
to the terms of our 1997 Employee,

51
<PAGE>
Director and Consultant Stock Option Plan, our Board of Directors has the
discretion to grant options to non-employee directors.

Upon their appointment to our Board of Directors in May 2000, we awarded
each of Drs. Scott and Wild options to purchase 23,790 shares of our common
stock at a purchase price of $3.78 per share. Upon each anniversary of their
service on our Board of Directors, we will award them additional options to
purchase 5,948 shares of our common stock at a purchase price per share equal to
the fair market value of the common stock on the date of grant, subject to
compliance with our requirements for attendance at meetings of the Board of
Directors.

EXECUTIVE COMPENSATION

The following table sets forth the total compensation paid to or earned for
the fiscal year ended December 31, 1999 by our chief executive officer and by
all of our executive officers whose salary and bonus exceed $100,000. We refer
to these persons as named executive officers:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION SECURITIES
------------------- ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS/STOCK AWARDS
--------------------------- -------- -------- ------------ --------------------
<S> <C> <C> <C> <C>
Taylor J. Crouch(1)........................ $225,135 $37,500 -- 465,541(2)
President and Chief Executive Officer
Fred D. Ledley, M.D.(3).................... 156,731 -- $105,767(4) 20,810(5)
Scientific Advisor, Former President and
Chief Executive Officer
Colin W. Dykes, Ph.D....................... 200,000 40,000 -- 83,265
Vice President, Research and Genomics
Anne L. Bailey............................. 150,800 15,000 60,000(6) 61,854
Vice President, Diagnostic and Process
Development
Richard P. Shea(7)......................... 135,577 30,000 -- 95,160
Chief Financial Officer and Treasurer
Vincent P. Stanton Jr., M.D................ 130,150 27,000 -- 72,019
Vice President and Principal Scientist
</TABLE>

------------------------

(1) Mr. Crouch joined us in April 1999.

(2) Consists of 376,328 options to purchase our common stock and an award of
89,213 shares of restricted stock.

(3) Dr. Ledley served as our President and Chief Executive Officer through
April 1999. He currently serves as one of our Scientific Advisors.

(4) Constitutes severance payments made upon Dr. Ledley's departure from us.

(5) Consists of 14,274 shares of our common stock granted as a performance bonus
to Dr. Ledley and 6,536 shares of common stock granted upon Dr. Ledley's
departure from us.

(6) Constitutes a retention payment to Ms. Bailey paid by us on behalf of
Avitech Diagnostics, Inc., which we acquired in September 1997.

(7) Mr. Shea joined us in February 1999.

52
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1999

The following table sets forth information regarding options granted by us
to our named executive officers during the fiscal year ended December 31, 1999.
We have never granted any stock appreciation rights. The potential realizable
value is calculated based on the term of the option at its time of grant. It is
calculated assuming that the fair market value of common stock on the date of
grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. Actual gains, if any, on
stock option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the table
may not necessarily be achieved. The percentage of total options granted to
employees in the last fiscal year is based on options to purchase an aggregate
of 1,141,826 shares of common stock granted under our option plans. There was no
public market for our common stock as of December 31, 1999. Accordingly, the
fair market value on December 31, 1999 is based on the initial public offering
price of $14.00 per share.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------
GRANTED 1999 SHARE DATE 5% 10%
---------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Taylor J. Crouch.......... 376,328 33.0 $.54 2009 $8,378,764 $13,462,154
Fred D. Ledley, M.D....... -- -- -- -- -- --
Colin W. Dykes, Ph.D...... 83,265 7.3 $.54 2009 $1,853,856 $ 2,978,588
Anne L. Bailey............ 61,854 5.4 $.54 2009 $1,377,150 $ 2,212,666
Richard P. Shea........... 95,160 8.3 $.54 2009 $2,118,692 $ 3,404,101
Vincent P. Stanton, Jr.,
M.D..................... 72,019 6.3 $.54 2009 $1,603,469 $ 2,576,292
</TABLE>

AGGREGATE STOCK OPTION EXERCISES IN FISCAL YEAR 1999 AND
FISCAL YEAR-END OPTION VALUES

The following table sets forth certain information concerning the number of
unexercised options held by each of our named executive officers on
December 31, 1999 and the value realized by named executive officers. None of
our executive officers exercised stock options in the fiscal year ended
December 31, 1999. There was no public market for our common stock as of
December 31, 1999. Accordingly, the fair market value on December 31, 1999 is
based on the initial public offering price of $14.00 per share.

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Taylor J. Crouch.............................. 88,136 288,192 $1,186,311 $3,879,064
Fred D. Ledley, M.D........................... -- -- -- --
Colin W. Dykes, Ph.D.......................... 26,024 140,506 $ 350,283 $1,891,211
Anne L. Bailey................................ 3,868 57,986 $ 52,063 $ 780,492
Richard P. Shea............................... -- 95,160 -- $1,280,854
Vincent P. Stanton, Jr., M.D.................. 6,792 71,175 $ 91,420 $ 958,016
</TABLE>

53
<PAGE>
401(K) PLAN

We sponsor a 401(k) plan covering all of our employees who meet certain
defined requirements. Under the terms of our 401(k) plan, participants may elect
to make contributions on a pre-tax and after-tax basis, subject to certain
limitations under the Internal Revenue Code. We do not match employee
contributions to the 401(k) plan.

EMPLOYMENT AGREEMENTS

On March 19, 1999, we entered into an employment agreement with Taylor J.
Crouch to serve as our President and Chief Business Officer at a base salary of
$250,000 a year with annual performance-based bonuses at the discretion of the
Board of Directors and the Compensation Committee. The target levels for those
bonuses are 30% of salary and 59,475 options. Mr. Crouch also received options
to purchase 376,328 shares of common stock at $0.54 per share and 89,213 shares
of restricted stock at $.01 per share. The aggregate number of options and
shares of restricted stock is 3.25% of the fully diluted shares of Variagenics
upon completion of the first round of financing after the date of the agreement.
The restricted stock vested in full six months from the date Mr. Crouch joined
us. The options will vest over four years with 73,726 vesting six months from
the date of hire and the remainder vesting over a period of three and a half
years in 42 equal monthly installments. All options vest in the event we are
acquired or if we are merged into a larger entity. If Mr. Crouch terminates the
agreement with Good Reason, as defined in the agreement, or if we terminate
Mr. Crouch without Cause, as defined in the agreement, we are required to pay
Mr. Crouch his full salary for a period of nine months from the date of such
termination.

On January 27, 2000, we entered into an employment agreement with Bruce
L. Maloff, Ph.D., to serve as our Executive Vice President, Commercial
Operations at a base salary of $210,000 a year with annual performance-based
bonuses at the discretion of the Board of Directors and the Compensation
Committee. The target for the bonuses is 25% of Dr. Maloff's base salary.
Dr. Maloff received options to purchase 118,950 shares of common stock at $1.05
per share. The options vest over four years with 25% vesting after one year and
the remainder vesting over a period of three years in 36 equal monthly
installments. In addition, we paid a signing bonus of $15,000 to Dr. Maloff and
we will reimburse Dr. Maloff for his reasonable moving expenses. The employment
agreement is at will. If we terminate the agreement without Cause, as defined in
the agreement, we will pay Dr. Maloff's full salary for six months from the date
we notify him that we intend to terminate his agreement.

On July 3, 1998, we entered into an employment agreement with Colin W.
Dykes, Ph.D. to serve as our Vice President, Research and Genomics at a base
salary of $200,000 a year with annual performance-based bonuses at the
discretion of the Board of Directors and the Compensation Committee. Dr. Dykes
received options to purchase 83,265 shares of common stock at $.54 per share.
The options vest over five years with 20% vesting one year from the date of hire
and the remainder vesting over a period of four years in 48 equal monthly
installments. In addition, we paid Dr. Dykes a signing bonus of $25,000 and
reimbursed him for $25,000 of moving expenses. If Dr. Dykes terminates the
agreement with Good Reason, as defined in the agreement, or if we terminate
Dr. Dykes without Cause, as defined in the agreement, we are required to pay
Dr. Dykes his full salary for a period of six months from the date of such
termination.

On February 5, 1998, we entered into an employment agreement with Anne L.
Bailey to serve as our Vice President, Diagnostic and Process Development at a
base salary of $145,000 a year with an annual bonus of up to $14,500 for
achieving certain milestones. In addition, we will reimburse Ms. Bailey for her
reasonable relocation and moving expenses. Ms. Bailey also was awarded 38,064
shares of restricted stock for a purchase price of $.54 per share, subject to a
right of repurchase by us at a purchase price of $.54 per share, which
repurchase right lapses in 60 equal monthly installments from the date of
original purchase. If Ms. Bailey terminates the agreement with Good Reason, as

54
<PAGE>
defined in the agreement, or if we terminate Ms. Bailey without Cause, as
defined in the agreement, we are required to pay Ms. Bailey her full salary for
a period of six months from the date of such termination.

On December 23, 1998, we entered into an employment agreement with Richard
P. Shea to serve as our Vice President, Finance and Administration at a base
salary of $150,000 a year with an annual bonus of up to $30,000 for achieving
certain milestones. Mr. Shea received options to purchase 47,580 shares of
common stock at $0.54 per share. The options vest over four years with 25%
vesting one year from the date of hire and the remainder vesting over a period
of three years in 36 equal monthly installments. Mr. Shea may be eligible to
receive additional bonuses or options based on his performance.

On May 17, 1993, our predecessor, K.O. Technology, Inc., entered into an
employment agreement with Vincent P. Stanton, Jr., M.D., to serve as Senior
Scientist at a base salary of $85,000. Dr. Stanton received restricted stock
equal to 4% of K.O. Technology, Inc.'s equity after its first round of financing
on a five year vesting schedule.

On April 17, 2000, we entered into a consulting agreement with Dr. Alan C.
Houston to serve as our consultant in the field of clinical development and
medical affairs. Upon receipt of his United States visa, we will name
Dr. Houston as Vice President, Clinical Development and Chief Medical Officer.
His compensation will include a base salary of $210,000 per year, a sign-on
bonus of $20,000, a bonus of up to $25,000 a year for achieving defined
milestones, and reimbursement for reasonable moving expenses. Dr. Houston
received non-qualified stock options entitling him to purchase up to
118,950 shares of our common stock at a price of $3.78 per share. The options
vest over four years with 25% vesting one year from the date of hire and the
remainder vesting over a period of three years in 36 equal monthly installments.
Either party may terminate the employment agreement at any time and for any
reason, provided that if the agreement is terminated without cause by either
party, the terminating party must give six months prior notice of termination.

All of the employment agreements are at will, contain an anti-piracy clause,
an invention and non-disclosure clause, and a non-competition/non-solicitation
clause.

55
<PAGE>
TRANSACTIONS WITH EXECUTIVE OFFICERS,
DIRECTORS AND FIVE PERCENT STOCKHOLDERS

Since January 1997, there has not been nor is there currently proposed, any
transaction or series of similar transactions to which we were or are to be a
party in which the amount involved exceeded or exceeds $60,000 and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest other than the transactions described
below.

The following executive officers, directors or holders of more than five
percent of our voting securities purchased securities in the amounts as of the
dates shown below. Each share of preferred stock is convertible into one share
of our common stock upon the closing of this offering.

<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
COMMON COMMON SERIES E -------------------------------------------------------
STOCK WARRANTS(3) WARRANTS(4) SERIES B(5) SERIES E-2(6) SERIES E(6) SERIES F(7)
-------- ----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICERS
Taylor J. Crouch........ 89,213(1) -- -- -- -- -- --
Anne L. Bailey.......... 38,064(2) -- -- -- -- -- --
Mark P. Carthy.......... -- -- -- -- -- -- 23,324
5% OR MORE STOCKHOLDERS
The Sprout Group........ -- -- 878,401 -- -- 2,928,001 741,905
Atlas Venture........... -- 275,068 110,068 553,255 916,895 366,895 341,975
Oxford Bioscience
Partners.............. -- 211,470 112,660 368,835 704,905 375,533 341,974
CIBC.................... -- -- -- -- -- -- 2,099,118
Forward Ventures........ -- 207,583 -- 553,255 691,943 -- 242,701
Kummell Investments..... -- 28,668 44,048 396,295 95,560 146,828 --
</TABLE>

------------------------

(1) Acquired September 1999 for a purchase price of $.0084 per share.

(2) Acquired March 1998 for a purchase price of $.54 per share, subject to a
right of repurchase by us at a purchase price of $.54 per share, which
repurchase right lapses in 60 equal monthly installments from the date of
original purchase.

(3) Issued in July 1999 in exchange for cancellation of debt we incurred in
bridge financings with these investors. Warrants are exercisable at a price
of $2.73 per share and expire in July 2004. As of June 22, 2000, a total of
204,513 shares of common stock have been issued to these investors upon
exercise of the warrants.

(4) Issued in July 1999 in connection with the purchase of Series E redeemable
convertible preferred stock. Warrants are exercisable at a price of $2.73
per share and expire in July 2004. As of June 22, 2000, a total of 462,849
shares of Series E redeemable convertible preferred stock have been issued
to these investors upon exercise of the warrants.

(5) Acquired June 1997 for a purchase price of $5.42 per share.

(6) Acquired July 1999 for a purchase price of $2.73 per share.

(7) Acquired March 2000 for a purchase price of $4.29 per share.

CONSULTING AGREEMENT AND STOCK OPTION AWARDS. We have a consulting
agreement with Dr. David Housman, a member of our Board of Directors and one of
our scientific advisors, under which he provides us with scientific consulting
services and is paid $6,000 per month. We awarded Dr. Housman options to
purchase 59,475 shares of common stock at a price of $.54 per share in January
1998, and options to purchase 59,475 shares of common stock at a price of $1.05
per share in March 2000.

In March 2000, we awarded Mr. Martin Vogelbaum, a member of our Board of
Directors, options to purchase 29,738 shares of common stock at a price of $1.05
per share. In May 2000, we awarded each of Drs. Scott and Wild, members of our
Board of Directors, options to purchase 23,790 shares of common stock at a price
of $3.78 per share.

In connection with the preferred stock financings and issuance of common
stock, we granted registration rights. Upon exercise of these registration
rights, these stockholders can require us to file registration statements
covering the sale of shares held by them and may include the sale of their
shares in registration statements covering our sale of shares to the public.

56
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to us regarding the
beneficial ownership of our common stock as of June 22, 2000 and as adjusted to
reflect the sale of the shares of our common stock in this offering and in the
concurrent private placement, for:

- each person known by us to beneficially own more than 5% of our common
stock;

- each of our directors;

- each of our executive officers named in the summary compensation table;
and

- all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock that could be issued upon the exercise of outstanding
options and warrants held by that person that are currently exercisable or
exercisable within 60 days of June 22, 2000 are considered outstanding. These
shares, however, are not considered outstanding when computing the percentage
ownership of each other person.

Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting and
investment power for the shares shown as beneficially owned by them. Percentage
of ownership is based on 16,682,332 shares of common stock outstanding on
June 22, 2000 and 22,218,046 shares of common stock outstanding after completion
of this offering and the concurrent private placement. This table assumes no
exercise of the underwriters' over-allotment option.

57
<PAGE>

<TABLE>
<CAPTION>
SHARES ISSUABLE PERCENTAGE OF
PURSUANT TO OPTIONS COMMON STOCK
AND WARRANTS BENEFICIALLY OWNED
EXECISABLE WITHIN -------------------
SHARES BENEFICIALLY 60 DAYS OF PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED JUNE 22, 2000 OFFERING OFFERING
--------------------------------------- ------------------- ------------------- -------- --------
<S> <C> <C> <C> <C>
STOCKHOLDERS OWNING APPROXIMATELY 5% OR MORE
The Sprout Group(2)........................... 4,548,307 439,203 26.6% 20.1%
3000 Sand Hill Road, Building 3, Suite 170
Menlo Park, CA 94025

Atlas Venture(3).............................. 2,564,158 192,569 15.2% 11.4%
222 Berkeley Street, Suite 1950
Boston, MA 02116

Oxford Bioscience Partners(4)................. 2,115,381 162,068 12.6% 9.5%
31 St. James Avenue, Suite 350
Boston, MA 02116

CIBC(5)....................................... 2,099,118 -- 12.6% 9.4%
425 Lexington Avenue
New York, NY 10017

Forward Ventures(6)........................... 1,242,329 207,583 7.4% 5.5%
9255 Towne Center Drive, Suite 300
San Diego, CA 92121

Kummell Investments(7)........................ 1,340,272 92,027 8.0% 6.0%
Suite 835A, Europort
Gibraltar

DIRECTORS AND EXECUTIVE OFFICERS
Taylor J. Crouch.............................. 290,788 201,575 1.7% 1.3%
Fred D. Ledley, M.D........................... 199,777 -- 1.2% *
Bruce L. Maloff, Ph.D......................... -- -- * *
Colin W. Dykes, Ph.D.......................... 65,876 65,876 * *
Anne L. Bailey................................ 65,029 25,333 * *
Richard P. Shea............................... 43,122 43,122 * *
Vincent P. Stanton Jr., M.D................... 68,560 26,278 * *
David Housman, Ph.D........................... 221,912 38,914 1.3% 1.0%
Philippe O. Chambon, M.D., Ph.D.(8)........... 4,548,307 439,203 26.6% 20.1%
Mark P. Carthy(7)............................. 23,324 -- * *
Jean-Francois Formela(9)...................... 2,564,158 192,569 15.2% 11.4%
Martin A. Vogelbaum........................... 17,967 17,967 * *
David A. Shotland(5).......................... 2,099,118 -- 12.6% 9.4%
William A. Scott, Ph.D........................ -- 1,322 * *
Anthony H. Wild, Ph.D......................... -- 1,322 * *
All directors and executive officers as a
group
(15 persons)................................ 10,207,936 1,050,838 57.6% 43.9%
</TABLE>

------------------------

* Represents beneficial ownership of less than one percent of our common
stock.

(1) Unless otherwise indicated, the address of each shareholder is c/o
Variagenics, Inc., 60 Hampshire Street, Cambridge, Massachusetts 02139.

(2) Includes 3,572,034 shares and warrants to purchase 381,796 shares held by
Sprout Capital VIII, L.P., 214,322 shares and warrants to purchase 22,909
shares held by Sprout Venture Capital, L.P., 11,915 shares and warrants to
purchase 1,274 shares held by DLJ Capital Corp. and 310,833 shares and
warrants to purchase 33,224 shares held by DLJ ESC II, L.P. Philippe
Chambon, M.D., Ph.D., is a General Partner of the Sprout Group.

58
<PAGE>
(3) Includes 2,332,895 shares and warrants to purchase 188,470 shares held by
Atlas Venture Fund III, L.P. and 38,693 shares and warrants to purchase
4,099 shares held by Atlas Venture Entrepreneurs' Fund III L.P.
Jean-Francois Formela, M.D., is a General Partner of Atlas Venture.

(4) Includes 478,928 shares and warrants to purchase 62,469 shares held by
Oxford Bioscience Partners II, L.P., 501,116 shares and warrants to purchase
46,816 shares held by Oxford Bioscience Partners (Bermuda) II, L.P., 161,134
shares and warrants to purchase 16,207 shares held by Oxford Bioscience
Partners (Adjunct) II, L.P., and 280,408 shares and warrants to purchase
36,576 shares held by Oxford Bioscience Partners (GS-Adjunct) II, L.P.

(5) Includes 1,574,338 shares held by CIBC WMV Inc., an investment vehicle of
CIBC and 524,780 shares held by CIBC Employee Private Equity Partners, a
vehicle owned by partnerships established for the benefit of employees of
CIBC to which CIBC serves as an advisor. Mr. Shotland is a Managing Director
of CIBC Capital Partners, a merchant banking division of CIBC World Markets
Corp., and disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest in such shares. Mr. Shotland is an indirect
limited partner of CIBC Employee Private Equity Partners and disclaims
beneficial ownership of such shares, except to the extent of his pecuniary
interest in the shares.

(6) Includes 216,158 shares and warrants to purchase 43,364 shares held by
Forward Ventures III, L.P. and 818,588 shares and warrants to purchase
164,219 shares held by Forward Ventures III Institutional Partners, L.P.

(7) Mark P. Carthy is the biotechnology portfolio manager for Morningside
Ventures, which advises Kummell Investments Limited on its venture capital
portfolio. Mr. Carthy disclaims beneficial ownership of the shares and
warrants held by Kummell Investments, except to the extent of his pecuniary
interest in the shares and warrants.

(8) Includes 4,109,104 shares and 439,203 warrants held by the Sprout Group.
Dr. Chambon is a General Partner of the Sprout Group and disclaims
beneficial ownership of such shares and warrants, except to the extent of
his pecuniary interest in the shares and warrants.

(9) Includes 2,371,588 shares and 192,569 warrants held by Atlas Venture.
Dr. Formela is a General Partner of Atlas Venture and disclaims beneficial
ownership of such shares and warrants, except to the extent of his pecuniary
interest in the shares and warrants.

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DESCRIPTION OF CAPITAL STOCK

After this offering, our authorized capital stock will consist of
70,000,000 shares of common stock, $.01 par value per share, and 5,000,000
shares of preferred stock, $.01 par value per share.

After the closing of this offering and the concurrent private placement,
there will be:

- 22,218,046 shares of common stock outstanding;

- 2,750,280 options to purchase shares of common stock outstanding as of
June 22, 2000 of which 601,624 will be exercisable upon the closing of the
offering;

- 1,402,823 warrants to purchase shares of common stock outstanding, all of
which will be exercisable upon the closing of this offering; and

- no shares of preferred stock outstanding.

COMMON STOCK

Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of common stock are entitled to receive
proportionately any such dividends declared by the Board of Directors, out of
legally available funds for the dividends subject to the rights of the holders
of our preferred stock and any preferences that may be applicable to any other
then outstanding preferred stock. Upon our liquidation, dissolution or winding
up, the holders of our common stock are entitled to receive ratably our net
assets available after the payment of all debts and other liabilities and
subject to the liquidation preferences of any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights and are not subject to future calls or assessments by us. No
sinking fund provisions apply to our common stock. The outstanding shares of
common stock are, and the shares offered by us in this offering will be, when
issued and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of our common stock are subject to the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future. Some holders of common stock have the right to require us
to register their shares of common stock under the Securities Act in specified
circumstances. See "Shares Eligible for Future Sale."

PREFERRED STOCK

Upon the closing of this offering, all of our outstanding shares of
Series A redeemable convertible preferred stock, Series B redeemable convertible
preferred stock, Series C redeemable convertible preferred stock, Series D
redeemable convertible preferred stock, Series E redeemable convertible
preferred stock, Series E-2 redeemable convertible preferred stock and Series F
redeemable convertible preferred stock will be converted into 14,931,289 shares
of common stock.

Under the terms of our certificate of incorporation, our Board of Directors
will be authorized to issue up to 5,000,000 shares of preferred stock in one or
more series without stockholder approval. Our Board of Directors also has
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock.

The purpose of authorizing our Board of Directors to issue preferred stock
in one or more series and determine the number of shares in the series and its
rights and preferences is to eliminate delays associated with a stockholder vote
on specific issuances. Examples of rights and preferences that the Board of
Directors may fix are (1) dividend rights, (2) dividend rates, (3) conversion
rights, (4) voting rights, (5) terms of redemption, including sinking price or
prices, and (6) liquidation preferences. The

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issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could make it more
difficult for a third party to acquire, or could discourage a third party from
acquiring, a majority of our outstanding voting stock. The rights of holders of
our common stock described above will be subject to, and may be adversely
affected by, the rights of any preferred stock that we may designated and issue
in the future.

WARRANTS

As of June 22, 2000, 12 investors held outstanding warrants to purchase
1,322,466 shares of common stock. These warrants have expiration dates ranging
from June 30, 2000 to July 30, 2004, and have a weighted average exercise price
of $3.06 per share. In addition, we are obligated to issue warrants to an
affiliate of Waters Technologies Corporation to purchase 80,357 shares of our
common stock in the concurrent private placement, based on the initial public
offering price of $14.00 per share. These warrants have a five year term and an
exercise price equal to the initial public offering price. The number of shares
for which the warrants are exercisable is subject to adjustment for stock
splits, combinations or dividends and reclassifications, exchanges or
substitutions.

REGISTRATION RIGHTS

The holders of approximately 16,460,884 shares of common stock are entitled
to registration rights with respect to the registration of those shares under
the Securities Act of 1933. An affiliate of Waters Technologies Corporation is
also entitled to registration rights with respect to the shares purchased in the
private placement to close concurrently with the offering, and the shares to be
issued upon exercise of the warrants held by the affiliate. If we propose to
register our securities under the Securities Act, either for our own account or
for the account of other security holders, the holders of these shares will be
entitled to notice of the registration and will be entitled to include, at our
expense, their shares of common stock. In addition, other than the Waters
affiliate, the holders of these shares may require us, at our expense and on not
more than two occasions at any time beginning approximately six months from the
date of the closing of this offering, to file a registration statement covering
their shares of common stock and we will be required to use our best efforts to
have the registration statement declared effective. The Waters affiliate may
elect to include their shares in any such demand registration. Further, the
holders may require us to register their shares on Form S-3 at our expense when
this form becomes available. These rights shall terminate five years after the
effective date of this offering. Attached to these registration rights are
conditions and limitations including the right of the underwriters to limit the
number of shares included in the registration statement. These registration
rights in connection with this offering have been waived.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

We are subject to the provisions of Section 203 of the Delaware General
Corporation Law statute. Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes an interested
stockholder, unless the business combination is approved in a prescribed manner.
A business combination includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an interested stockholder is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock.

Our by-laws divide the Board of Directors into three classes with staggered
three-year terms. See "Management." Under the by-laws, any vacancy on our Board
of Directors, including a vacancy resulting from an enlargement of our Board of
Directors, may only be filled by vote of a majority of the directors then in
office. The classification of the Board of Directors and the limitation on
filling of

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vacancies could make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of our company.

Our by-laws also provide that after this offering, stockholders can only
take action at an annual meeting or special meeting, and not by written action
in lieu of a meeting. Our by-laws further provide that only stockholders holding
a majority of outstanding shares, our Chairman of the Board, President or our
Board of Directors may call a special meeting of stockholders.

Our stockholders must comply with advance notice and information disclosure
requirements in order for any matter to be considered "properly brought" before
a meeting. Stockholders must deliver written notice to us between 60 and
90 days prior to the meeting. If we give less than 70 days' notice or prior
public disclosure of the meeting date, stockholders must deliver written notice
to us within ten days following the date upon which the notice of the meeting
was mailed or such public disclosure was made, whichever occurs first. If the
matter relates to the election of directors, the notice must set forth specific
information regarding each nominee and the nominating stockholder. For any other
matter, the notice must set forth a brief description of the proposed matter and
certain information regarding the proponent stockholder. These provisions could
delay until the next stockholders' meeting proposed actions which are favored by
the holders of a majority of our outstanding voting securities. These provisions
could also discourage a third party from making a tender offer for our common
stock, because even if it acquired a majority of the outstanding voting
securities, the third party would be able to take action as a stockholder only
at a duly called stockholders' meeting, and not by written consent.

The Delaware General Corporation Law statute provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Our by-laws require the affirmative vote of
holders of at least 75% of the votes which all the stockholders would be
entitled to cast in any annual election of directors or class of directors to
amend or repeal any of the provisions described in the prior two paragraphs.

Our certificate of incorporation contains certain provisions permitted under
the Delaware General Corporation Law statute relating to the limitation of
liability of directors. These provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the certificate of incorporation contains provisions to indemnify
our directors and officers to the fullest extent permitted by the Delaware
General Corporation Law statute. We believe these provisions will assist us in
attracting and retaining qualified individuals to serve as our directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is EquiServe, L.P.

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SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there has been no public market for our securities.
After completion of this offering there will be 22,218,046 shares of common
stock outstanding based upon the number of shares outstanding as of June 22,
2000. Of these shares, the 5,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act of
1933, except that any shares purchased by our "affiliates," as that term is
defined in Rule 144 under the Securities Act, may generally only be sold in
compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SHARES

All of the shares offered under this prospectus will be freely tradable in
the open market. The remaining 16,682,332 shares of common stock that will be
outstanding after this offering, as well as the shares of common stock to be
issued to an affiliate of Waters Technologies Corporation in the private
placement to occur contemporaneously with the closing of the offering, will be
considered "restricted securities" under Rule 144 of the Securities Act.
Generally, restricted securities that have been owned for a period of at least
two years may be sold immediately after the completion of this offering, and
restricted securities that have been owned for at least one year may be sold
90 days after the completion of this offering. Certain of the restricted
securities are subject to lock-up agreements with the underwriters. Persons
subject to lock-up agreements have agreed not to sell shares of our common stock
without the prior permission of Credit Suisse First Boston Corporation for a
period of 180 days after the completion of this offering. Credit Suisse First
Boston Corporation has indicated that it does not intend to release anyone from
the lock-up agreement. The table below sets forth information regarding
potential sales of restricted securities.

- 270,914 shares may be sold immediately after completion of this offering;

- 57,564 shares may be sold 90 days after the date of this prospectus; and

- 16,353,854 additional shares may be sold upon the expiration of the
lock-up agreements.

OPTIONS

Shares of common stock may also be issued and sold upon the exercise of
options. After this offering, we intend to register substantially all of the
common stock which may be issued under our 1997 Employee, Director and
Consultant Stock Option Plan, 2000 Employee Stock Purchase Plan, and other stock
options not issued under a plan. Shares issued upon the exercise of stock
options after the effective date of the registration statements on Form S-8 will
be eligible for resale in the public market without restriction, subject to
Rule 144 limitations applicable to affiliates and the lock-up agreements noted
above, if applicable.

WARRANTS

Shares of common stock may also be issued pursuant to outstanding warrants.
As of June 22, 2000 there are outstanding warrants to purchase 1,322,466 shares
of our common stock, all of which are currently exercisable. In addition, we are
obligated to issue warrants to an affiliate of Waters Technologies Corporation
to purchase 80,357 shares of our common stock in the concurrent private
placement.

REGISTRATION RIGHTS

The holders of approximately 16,460,884 shares of common stock are entitled
to rights with respect to the registration of those shares under the Securities
Act of 1933. An affiliate of Waters Technologies Corporation is also entitled to
registration rights with respect to the shares purchased in the private
placement to close concurrently with the offering, and the shares to be issued
upon exercise of the

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warrants held by an affiliate. If we propose to register our securities under
the Securities Act, either for our own account or for the account of other
security holders, the holders of these shares will be entitled to notice of the
registration and will be entitled to include, at our expense, their shares of
common stock. In addition, other than the Waters affiliate, the holders of these
shares may require us, at our expense and on not more than two occasions at any
time beginning approximately six months from the date of the closing of this
offering, to file a registration statement covering their shares of common stock
and we will be required to use our best efforts to have the registration
statement declared effective. The Waters affiliate may elect to include their
shares in any such demand registration. Further, the holders may require us to
register their shares on Form S-3 at our expense when this form becomes
available. These rights shall terminate five years after the effective date of
this offering. Attached to these registration rights are conditions and
limitations including the right of the underwriters to limit the number of
shares included in the registration statement. These registration rights in
connection with this offering have been waived.

EFFECT OF SALES OF SHARES

Prior to this offering, there has been no public market for our common
stock, and we cannot advise you as to the effect, if any, that sales in the
public market of shares of our common stock, or the availability of shares for
sale, will have on the market price of our common stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of our common stock
in the public market could adversely affect the market price of our common stock
and could impair our ability to raise capital.

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U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS

The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a non-U.S. holder. As used in this prospectus, a non-U.S. holder is
defined as a holder that for United States federal income tax purposes is an
individual or entity other than:

- a citizen or individual resident of the United States;

- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision thereof, other than a
partnership treated as foreign under U.S. Treasury regulations;

- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or

- a trust if a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust.

An individual may, subject to a number of exceptions, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year, counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year. Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens.

This discussion does not address all aspects of United States federal income
and estate taxes that may be relevant to non-U.S. holders in light of their
personal circumstances, including the fact that in the case of a non-U.S. holder
that is a partnership, the U.S. tax consequences of holding and disposing of
shares of common stock may be affected by determinations made at the partner
level, or that may be relevant to non-U.S. holders which may be subject to
special treatment under United States federal income tax laws such as insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities and holders of securities held as part of a "straddle," "hedge" or
"conversion transaction." This discussion also does not address U.S. state or
local or foreign tax consequences. Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, existing and proposed
regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are subject
to change, possibly with retroactive effect. The following summary is included
herein for general information. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISERS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF COMMON STOCK.

DIVIDENDS

We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In the event, however, that dividends are paid on shares of
our common stock, dividends paid to a non-U.S. holder of common stock generally
will be subject to withholding of United States federal income tax at a 30%
rate, or such lower rate as may be provided by an applicable income tax treaty.
Non-U.S. holders should consult their tax advisers regarding their entitlement
to benefits under a relevant income tax treaty.

Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States through which the
non-U.S. holder carries on business, are generally subject to U.S. federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to

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the 30% withholding tax if the non-U.S. holder complies with applicable
certification and disclosure requirements. Any such U.S. trade or business
income received by a non-U.S. holder that is a corporation may also be subject
to an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.

Under currently applicable U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed, absent actual knowledge to the
contrary, to be paid to a resident of such country for purposes of the
withholding discussed above and for purposes of determining the applicability of
a tax treaty rate. Under U.S. Treasury regulations generally effective for
payments made after December 31, 2000, however, a non-U.S. holder of our common
stock who wishes to claim the benefit of an applicable treaty rate generally
will be required to satisfy applicable certification and other requirements. In
addition, under these regulations, in the case of our common stock held by a
foreign partnership, the certification requirement will generally be applied to
the partners of the partnership and the partnership will be required to provide
specified information, including a United States taxpayer identification number.
The regulations generally effective for payments made after December 31, 2000
also provide look-through rules for tiered partnerships. Further, the Internal
Revenue Service may issue regulations under which a foreign trustee or foreign
executor of a U.S. or foreign trust or estate, depending on the circumstances,
will be required to furnish the appropriate withholding certificate on behalf of
the beneficiaries, grantor trust or estate, as the case may be.

A non-U.S. holder of our common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.

The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 also provide special rules for dividend payments made to
foreign intermediaries, U.S. or foreign wholly owned entities that are
disregarded for U.S. federal income tax purposes and entities that are treated
as fiscally transparent in the United States, the applicable income tax treaty
jurisdiction, or both. In addition, in specified circumstances, income tax
benefits may be denied to non-U.S. holders receiving income derived through a
partnership, or otherwise fiscally transparent entity.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of our common stock unless:

- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder;

- the non-U.S. holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the United States for 183 or more days in the taxable
year of the sale or other disposition and meets certain other
requirements;

- the non-U.S. holder is subject to tax under the provisions of the U.S. tax
law applicable to some United States expatriates; or

- we are or have been a "U.S. real property holding corporation" for federal
income tax purposes at any time during the shorter of the five-year period
preceding such disposition or the period that the non-U.S. holder held our
common stock.

Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that we have not been, are not currently, and do not anticipate becoming, a
"U.S. real property

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holding corporation" for U.S. federal income tax purposes. The tax with respect
to stock in a "U.S. real property holding corporation" does not apply to a
non-U.S. holder whose holdings, direct and indirect, at all times during the
applicable period, constituted 5% or less of our common stock, provided that our
common stock was regularly traded on an established securities market.

If a non-U.S. holder who is an individual is subject to tax on gain which is
U.S. trade or business income, such individual generally will be taxed on the
net gain derived from a sale of common stock under regular graduated United
States federal income tax rates. If an individual non-U.S. holder is subject to
tax because such individual holds our common stock as a capital asset, is
present in the United States for 183 or more days in the taxable year of the
sale or other disposition and meets certain other requirements, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by United States capital losses, notwithstanding the fact
that such individual is not considered a resident alien of the United States.
Thus, individual non-U.S. holders who have spent, or expect to spend, more than
a DE MINIMIS period of time in the United States in the taxable year in which
they contemplate a sale of common stock are urged to consult their tax advisers
prior to the sale concerning the U.S. tax consequences of such sale.

If a non-U.S. holder that is a foreign corporation is subject to tax on gain
which is U.S. trade or business income, it generally will be taxed on its net
gain under regular graduated United States federal income tax rates and, in
addition, will be subject to the branch profits tax equal to 30% of its
"effectively connected earnings and profits," within the meaning of the Internal
Revenue Code for the taxable year, as adjusted for specific items, unless it
qualifies for a lower rate under an applicable tax treaty.

FEDERAL ESTATE TAX

Common stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident, as defined for United States
federal estate tax purposes, at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax or other treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Under U.S. Treasury regulations, we must report annually to the Internal
Revenue Service and to each non-U.S. holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder is
a resident under the provisions of an applicable income tax treaty or agreement.

Currently, United States backup withholding, which generally is a
withholding tax imposed at the rate of 31% on payments to persons that fail to
furnish specified information under the United States information reporting
requirements, generally will not apply:

- to dividends paid to non-U.S holders that are subject to the 30%
withholding discussed above, or that are not so subject because a tax
treaty applies that reduces or eliminates such 30% withholding; or

- before January 1, 2001, to dividends paid to a non-U.S. holder at an
address outside of the United States unless the payor has actual knowledge
that the payee is a U.S. holder.

Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of our common
stock to beneficial owners that are not "exempt recipients" and that fail to
provide identifying information in the manner required.

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The payment of the proceeds of the disposition of our common stock by a
holder to or through the U.S. office of a broker or through a non-U.S. branch of
a U.S. broker generally will be subject to information reporting and backup
withholding at a rate of 31% unless the holder either certifies its status as a
non-U.S. holder under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a non-U.S. holder
of common stock to or through a non-U.S. office of a non-U.S. broker will not be
subject to backup withholding or information reporting unless the non-U.S.
broker has particular types of U.S. relationships. In the case of the payment of
proceeds from the disposition of our common stock effected by a foreign office
of a broker that is a U.S. person or a U.S. related person, existing regulations
require information reporting on the payment unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files as to the
non-U.S. holder's foreign status and the broker has no actual knowledge to the
contrary. For this purpose, a U.S. related person is defined as:

- a "controlled foreign corporation" for U.S. federal income tax purposes;
or

- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceeding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business.

The U.S. Treasury regulations generally effective for payments made after
December 31, 2000 alter the foregoing rules. Among other things, such
regulations provide presumptions under which a non-U.S. holder is subject to
backup withholding at the rate of 31% and information reporting unless we
receive certification from the holder of non-U.S. status. Depending on the
circumstances, this certification will need to be provided:

- directly by the non-U.S. holder;

- in the case of a non-U.S. holder that is treated as a partnership or other
fiscally transparent entity, by the partners, stockholders or other
beneficiaries of such entity; or

- by qualified financial institutions or other qualified entities on behalf
of the non-U.S. holder.

Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.

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UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated July 20, 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Chase Securities Inc.
and SG Cowen Securities Corporation are acting as representatives, the following
respective numbers of shares of our common stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation...................... 2,087,500
Chase Securities Inc........................................ 1,043,750
SG Cowen Securities Corporation............................. 1,043,750
Donaldson, Lufkin & Jenrette Securities Corporation......... 75,000
A.G. Edwards & Sons, Inc.................................... 75,000
E*Offering Corp............................................. 75,000
FleetBoston Robertson Stephens Inc.......................... 75,000
Gruntal & Co., L.L.C........................................ 75,000
ING Barings LLC............................................. 75,000
Invemed Associates LLC...................................... 75,000
Leerink, Swann, Garrity, Sollami, Yaffe & Wynn, Inc......... 75,000
Lehman Brothers Inc......................................... 75,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 75,000
Prudential Securities Incorporated.......................... 75,000
----------
Total............................................... 5,000,000
==========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 750,000 additional shares of our common stock from us at the
initial public offering price less the underwriting discounts and commissions.
The option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.58 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us................ $ 0.98 $ 0.98 $4,900,000 $5,635,000
Expenses payable by us.................. $ 0.22 $ 0.19 $1,100,000 $1,100,000
</TABLE>

The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the common stock being offered.

69
<PAGE>
We have an agreement with Credit Suisse First Boston Corporation under which
they provide financial advisory and investment banking services to us. In
connection with the closing of the private placement of common stock to an
affiliate of Waters Technologies Corporation, Credit Suisse First Boston
Corporation will receive a cash fee of $250,000. Credit Suisse First Boston
Corporation does not have any other material relationship with us or any of our
officers, directors, or controlling persons, except with respect to its
contractual relationship with us under the underwriting agreement entered into
in connection with this offering.

We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any shares of our common stock or securities convertible into or exchangeable
or exercisable for any shares of our common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus.

All of our officers and directors and substantially all of our stockholders
have agreed that they will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of our
common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock, whether
any of these types of transactions is to be settled by delivery of our common
stock or other securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to enter into any
of these types of transaction, swap, hedge or other arrangement, without, in
each case, the prior written consent of Credit Suisse First Boston Corporation
for a period of 180 days after the date of this prospectus.

The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of the common stock for our employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in the offering. The number of shares available for sale
to the general public in the offering will be reduced to the extent these
persons purchase these reserved shares. Any reserved shares not so purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.

We have agreed to indemnify the underwriters against liabilities under the
Securities Act or contribute to payments which the underwriters may be required
to make in that respect.

Our common stock has been approved for quotation on The Nasdaq Stock
Market's National Market under the symbol "VGNX."

Prior to this offering, there has been no public market for our common
stock. The initial public offering price was determined by negotiation between
us and the underwriters. The principal factors considered in determining the
public offering price were:

- the information presented in this prospectus and otherwise available to
the underwriters;

- the history and the prospects for the industry in which we will compete;

- the ability of our management;

- our prospects for our future earnings;

- the present state of our development and our current financial condition;

- the general condition of the securities markets at the time of this
offering; and

- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.

70
<PAGE>
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will develop
and continue after this offering.

In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Over-allotment transactions involve sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to purchase,
which creates a syndicate short position. The short position may be either
a covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option--a naked short position--that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors who
purchase in the offering.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of the common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

A prospectus in electronic format may be made available on the Web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations.

71
<PAGE>
NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under these securities laws, (2) where
required by law, that the purchaser is purchasing as principal and not as agent,
and (3) the purchaser has reviewed the text above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recission or rights of action under the civil liability provisions of
the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

72
<PAGE>
LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts. Members of that firm own 32,244 shares of our common stock.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Piper Marbury Rudnick & Wolfe LLP, Baltimore, Maryland.

EXPERTS

The financial statements of Variagenics, Inc. as of December 31, 1998 and
1999 and for each of the three years in the period ended December 31, 1999 and
for the period from inception (December 7, 1992) through December 31, 1999,
included in this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on their authority as
experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 (including its exhibits
and schedules) with the Securities and Exchange Commission under the Securities
Act with respect to our common stock to be sold in this offering. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any contract, agreement or
other document of ours, such references are not necessarily complete and you
should refer to the exhibits attached to the registration statement for copies
of the actual contract, agreement or other document. You may review a copy of
the registration statement, including exhibits, at the Securities and Exchange
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC
located at Seven World Trade Center, 13th Floor, New York, New York 10048 or at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Please call 1-800-SEC-0330 for further information about the operation of the
public reference rooms.

After we have filed this registration statement, we will file annual,
quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Securities and Exchange Commission.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.

The registration statement and our other Securities and Exchange Commission
filings can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at HTTP://WWW.SEC.GOV, which contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.

73
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... F-2

Balance Sheets as of December 31, 1998 and 1999 and March
31, 2000 (unaudited)...................................... F-3

Statements of Operations for each of the Years Ended
December 31, 1997, 1998 and 1999 and for the period from
inception (December 7, 1992) through December 31, 1999,
and the three months ended March 31, 1999 and 2000
(unaudited)............................................... F-4

Statements of Stockholders' Equity (Deficit) for the period
from inception (December 7, 1992) through December 31,
1999, and the three months ended March 31, 2000
(unaudited)............................................... F-5

Statements of Cash Flows for each of the Years Ended
December 31, 1997, 1998 and 1999 and for the period from
inception (December 7, 1992) through December 31, 1999,
and the three months ended March 31, 1999 and 2000
(unaudited)............................................... F-6

Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Variagenics, Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Variagenics, Inc. (a
development stage enterprise) at December 31, 1998 and 1999 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 and for the period from inception (December 7, 1992)
through December 31, 1999 in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit 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 the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 28, 2000, except as to
the stock split described in
Note 15 for which the date
is June 26, 2000

F-2
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, MARCH 31, EQUITY AT
--------------------------- 2000 MARCH 31,
1998 1999 ACTUAL 2000
------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 733,979 $ 1,827,519 $ 21,639,750
Short-term investments.................................. -- 2,500,000 --
Prepaid expenses and other current assets............... 474,718 194,195 599,672
------------ ------------ ------------
Total current assets.................................. 1,208,697 4,521,714 22,239,422
Restricted cash........................................... 1,000,000 1,000,000 1,000,000
Property and equipment, net............................... 2,835,306 3,753,586 3,605,282
Other assets.............................................. 204,679 127,850 116,600
------------ ------------ ------------
$ 5,248,682 $ 9,403,150 $ 26,961,304
============ ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 1,120,506 $ 314,984 $ 478,363
Accrued expenses and other liabilities.................. 303,632 740,332 877,777
Deferred revenue........................................ -- 42,000 53,493
Current portion of capital lease obligations............ 166,298 515,831 551,894
Convertible notes payable to stockholders............... 3,314,425 -- --
Line of credit, current portion......................... 75,000 109,091 109,091
------------ ------------ ------------
Total current liabilities............................. 4,979,861 1,722,238 2,070,618
Capital lease obligations................................. 342,938 877,463 718,540
Line of credit............................................ 525,000 100,000 72,727

Commitments and contingencies (Note 11)
Redeemable convertible preferred stock, $.01 par value;
2,978,255, 11,576,461 and 16,241,164 shares authorized
and 2,839,736, 10,266,584 and 14,931,289 shares issued
and outstanding at December 31, 1998 and 1999 and March
31, 2000, respectively, 0 shares outstanding on a pro
forma basis, redemption value of $49,093,686 at
March 31, 2000 (Note 8)................................. 16,803,883 29,093,692 49,842,946 $ --

STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $.01 par value; 92,209
shares authorized, issued and outstanding at
December 31, 1998 and 0 shares authorized, issued or
outstanding at December 31, 1999, March 31, 2000, and
on a pro forma basis.................................. 922 -- -- --
Common stock, $.01 par value; 5,590,650, 14,324,316 and
20,406,435 shares authorized, 617,813, 750,105 and
779,752 shares issued and outstanding at December 31,
1998 and 1999 and March 31, 2000, respectively
15,711,041 shares outstanding on a pro forma basis.... 6,178 7,501 7,798 157,110
Additional paid-in capital.............................. 756,869 18,822,467 36,751,214 86,444,848
Deficit accumulated during the development stage........ (18,166,969) (34,894,856) (39,624,890) (39,624,890)
Deferred compensation................................... -- (6,325,355) (22,877,649) (22,877,649)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit).................. (17,403,000) (22,390,243) (25,743,527) $ 24,099,419
------------ ------------ ------------ ------------
Total liabilities, redeemable convertible preferred
stock and
stockholders' equity (deficit)...................... $ 5,248,682 $ 9,403,150 $ 26,961,304
============ ============ ============
</TABLE>

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

F-3
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(DECEMBER 7, THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1992) THROUGH MARCH 31,
----------------------------------------- DECEMBER 31, ---------------------------
1997 1998 1999 1999 1999 2000
------------ ----------- ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue................................. $ -- $ -- $ 398,588 $ 398,588 $ 94,381 $ 126,574
Costs and expenses:
Research and development.............. 2,234,495 5,071,290 8,602,357 19,291,408 1,724,828 2,711,536
General and administrative............ 2,059,110 3,176,232 6,944,901 13,949,280 1,169,276 2,194,058
In-process research and development... 674,340 -- -- 674,340 -- --
------------ ----------- ------------ ------------ ------------ ------------
Loss from operations................ (4,967,945) (8,247,522) (15,148,670) (33,516,440) (2,799,723) (4,779,020)
Other income (expense):
Interest income....................... 258,216 200,118 167,523 678,029 15,010 115,248
Interest expense...................... (79,646) (98,024) (1,496,740) (1,805,933) (525,212) (66,262)
Equity in loss of affiliate........... -- -- (250,000) (250,000) (150,692) --
------------ ----------- ------------ ------------ ------------ ------------
Net loss............................ $ (4,789,375) $(8,145,428) $(16,727,887) $(34,894,344) $ (3,460,617) $ (4,730,034)
============ =========== ============ ============ ============ ============
Dividend on redeemable convertible
preferred stock....................... (153,193) -- (1,437,180) (1,590,373) -- (20,749,254)
------------ ----------- ------------ ------------ ------------ ------------
Net loss attributable to common
stockholders.......................... $ (4,942,568) $(8,145,428) $(18,165,067) $(36,484,717) $ (3,460,617) $(25,479,288)
============ =========== ============ ============ ============ ============

Net loss attributable to common
stockholders per share (basic and
diluted).............................. $ (13.48) $ (16.13) $ (29.96) $ (63.71) $ (6.43) $ (34.85)

Weighted average common shares
outstanding (basic and diluted)....... 366,643 505,049 606,267 572,686 538,602 731,180

Unaudited pro forma net loss per share
(basic and diluted)................... $ (2.54) $ (.38)

Shares used in computing unaudited pro
forma basic and diluted net loss per
share................................. 6,594,312 12,303,881
</TABLE>

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

F-4
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (DECEMBER 7, 1992) THROUGH DECEMBER 31, 1999
AND THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
-------------------- -------------------- PAID-IN DEVELOPMENT DEFERRED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL STAGE COMPENSATION
-------- --------- -------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock........... -- $ -- 237,900 $2,379 $ -- $ (379) $ --
Net loss for the period from
inception (December 7, 1992)
through December 31, 1992........ -- -- -- -- -- (8,455) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1992....... -- -- 237,900 2,379 -- (8,834) --
Issuance of common stock........... -- -- 43,750 437 -- (69) --
Issuance of Series A convertible
preferred stock, net of issuance
costs of $22,262................. 186,785 1,868 -- -- 1,426,809 -- --
Net loss for the year ended
December 31, 1993................ -- -- -- -- -- (339,176) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1993....... 186,785 1,868 281,650 2,816 1,426,809 (348,079) --
Issuance of common stock........... -- -- 39,638 397 -- (64) --
Issuance of Series A convertible
preferred stock.................. 10,717 107 -- -- 83,145 -- --
Net loss for the year ended
December 31, 1994................ -- -- -- -- -- (1,149,299) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1994....... 197,502 1,975 321,288 3,213 1,509,954 (1,497,442) --
Issuance of Series A convertible
preferred stock, net of issuance
costs of $12,551................. 273,018 2,730 -- -- 2,105,532 -- --
Purchase of common stock........... -- -- (45,201) (452) 72 -- --
Net loss for the year ended
December 31, 1995................ -- -- -- -- -- (1,633,433) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1995....... 470,520 4,705 276,087 2,761 3,615,558 (3,130,875) --
Issuance of Series A convertible
preferred stock.................. 128,735 1,288 -- -- 998,721 -- --
Net loss for the year ended
December 31, 1996................ -- -- -- -- -- (2,101,291) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1996....... 599,255 5,993 276,087 2,761 4,614,279 (5,232,166) --
Issuance of common stock........... -- -- 311,850 3,119 60,591 -- --
Purchase of common stock from
founder (Note 9)................. -- -- (36,069) (361) 323,807 -- --
Reclassification of Series A
preferred stock to redeemable
preferred stock.................. (599,255) (5,993) -- -- (4,614,207) -- --
Issuance of Series C convertible
preferred stock.................. 92,209 922 -- -- 499,078 -- --
Accretion of issuance costs for
redeemable preferred stock....... -- -- -- -- (153,193) -- --
Net loss for the year ended
December 31, 1997................ -- -- -- -- -- (4,789,375) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1997....... 92,209 922 551,868 5,519 730,355 (10,021,541) --
Issuance of common stock........... -- -- 65,946 659 26,514 -- --
Net loss for the year ended
December 31, 1998................ -- -- -- -- -- (8,145,428) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1998....... 92,209 922 617,814 6,178 756,869 (18,166,969) --
Issuance of common stock........... -- -- 132,291 1,323 783,466 -- --
Adjustment to redeemable
convertible preferred as a result
of change in redemption value.... -- -- -- -- 9,045,041 -- --
Reclassification of Series C
preferred stock to redeemable
convertible preferred stock...... (92,209) (922) -- -- (251,015) -- --
Issuance of warrants............... -- -- -- -- 1,418,000 -- --
Accretion of issuance costs for
redeemable preferred stock....... -- -- -- -- (394,267) -- --
Dividend on redeemable preferred
stock............................ (1,042,913)
Deferred compensation resulting
from the grant of options........ -- -- -- -- 8,507,286 -- (8,507,286)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 2,181,931
Net loss for the year ended
December 31, 1999................ -- -- -- -- -- (16,727,887) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at December 31, 1999....... -- -- 750,105 7,501 18,822,467 (34,894,856) (6,325,355)
Issuance of common stock........... -- -- 29,647 297 36,934 -- --
Accretion of issuance costs for
redeemable preferred stock....... -- -- -- -- (94,574) -- --
Dividend on redeemable preferred
stock............................ -- -- -- -- (749,257) -- --
Proceeds from redeemable preferred
stock allocated to beneficial
conversion feature............... -- -- -- -- 19,905,423 -- --
Dividend on redeemable preferred
stock attributable to beneficial
conversion feature............... -- -- -- -- (19,905,423) -- --
Deferred compensation resulting
from the grant of options........ -- -- -- -- 18,735,644 -- (18,735,644)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 2,183,350
Net loss for the quarter ended
March 31, 2000................... -- -- -- -- -- (4,730,034) --
-------- ------- ------- ------ ----------- ------------ ------------
Balance at March 31, 2000
(unaudited) -- $ -- 779,752 $7,798 $36,751,214 $(39,624,890) $(22,877,649)
======== ======= ======= ====== =========== ============ ============

TOTAL
------------
<S> <C>
Issuance of common stock........... $ 2,000
Net loss for the period from
inception (December 7, 1992)
through December 31, 1992........ (8,455)
------------
Balance at December 31, 1992....... (6,455)
Issuance of common stock........... 368
Issuance of Series A convertible
preferred stock, net of issuance
costs of $22,262................. 1,428,677
Net loss for the year ended
December 31, 1993................ (339,176)
------------
Balance at December 31, 1993....... 1,083,414
Issuance of common stock........... 333
Issuance of Series A convertible
preferred stock.................. 83,252
Net loss for the year ended
December 31, 1994................ (1,149,299)
------------
Balance at December 31, 1994....... 17,700
Issuance of Series A convertible
preferred stock, net of issuance
costs of $12,551................. 2,108,262
Purchase of common stock........... (380)
Net loss for the year ended
December 31, 1995................ (1,633,433)
------------
Balance at December 31, 1995....... 492,149
Issuance of Series A convertible
preferred stock.................. 1,000,009
Net loss for the year ended
December 31, 1996................ (2,101,291)
------------
Balance at December 31, 1996....... (609,133)
Issuance of common stock........... 63,710
Purchase of common stock from
founder (Note 9)................. 323,446
Reclassification of Series A
preferred stock to redeemable
preferred stock.................. (4,620,200)
Issuance of Series C convertible
preferred stock.................. 500,000
Accretion of issuance costs for
redeemable preferred stock....... (153,193)
Net loss for the year ended
December 31, 1997................ (4,789,375)
------------
Balance at December 31, 1997....... (9,284,745)
Issuance of common stock........... 27,173
Net loss for the year ended
December 31, 1998................ (8,145,428)
------------
Balance at December 31, 1998....... (17,403,000)
Issuance of common stock........... 784,789
Adjustment to redeemable
convertible preferred as a result
of change in redemption value.... 9,045,041
Reclassification of Series C
preferred stock to redeemable
convertible preferred stock...... (251,937)
Issuance of warrants............... 1,418,000
Accretion of issuance costs for
redeemable preferred stock....... (394,267)
Dividend on redeemable preferred
stock............................ (1,042,913)
Deferred compensation resulting
from the grant of options........ --
Amortization of deferred
compensation..................... 2,181,931
Net loss for the year ended
December 31, 1999................ (16,727,887)
------------
Balance at December 31, 1999....... (22,390,243)
Issuance of common stock........... 37,231
Accretion of issuance costs for
redeemable preferred stock....... (94,574)
Dividend on redeemable preferred
stock............................ (749,257)
Proceeds from redeemable preferred
stock allocated to beneficial
conversion feature............... 19,905,423
Dividend on redeemable preferred
stock attributable to beneficial
conversion feature............... (19,905,423)
Deferred compensation resulting
from the grant of options........ --
Amortization of deferred
compensation..................... 2,183,350
Net loss for the quarter ended
March 31, 2000................... (4,730,034)
------------
Balance at March 31, 2000
(unaudited) $(25,743,527)
============
</TABLE>

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

F-5
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(DECEMBER 7, THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1992) THROUGH MARCH 31,
---------------------------------------- DECEMBER 31, -------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................. $(4,789,375) $(8,145,428) $(16,727,887) $(34,894,344) $(3,460,617) $(4,730,034)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization.......... 173,154 412,163 670,091 1,431,272 164,597 211,922
Write-off of acquired in-process
research and development............. 674,340 -- -- 674,340 -- --
Loss on sale of short-term
investments.......................... -- -- -- 20,630 -- --
Loss on disposal of assets............. -- -- 15,142 15,142 -- --
Accrued interest on convertible notes
payable converted to redeemable
convertible preferred stock.......... 69,550 29,426 296,967 436,736 93,169 --
Non-cash compensation expense.......... 385,800 -- 2,966,552 3,334,352 118,169 2,204,630
Equity in loss of affiliate............ -- -- 250,000 250,000 150,692 --
Non-cash charge for preferred stock
issued to cancel agreements with
affiliate and affiliate's
investors............................ -- -- 1,040,000 1,040,000 -- --
Warrants issued for interest expense... -- -- 1,072,533 1,090,533 399,000 22,000
Changes in assets and liabilities:
Prepaid expenses and other current
assets............................. (124,485) (219,008) 324,523 (150,195) 247,455 (427,477)
Other assets......................... 13,054 27,667 20,579 (4,100) 417 --
Accounts payable..................... 154,934 851,047 (805,522) 314,984 205,093 163,379
Accrued expenses..................... 98,183 (1,088) 436,700 723,629 94,294 137,445
Deferred revenue..................... -- -- 42,000 42,000 -- 11,493
----------- ----------- ------------ ------------ ----------- -----------
Net cash used for operating
activities......................... (3,344,845) (7,045,221) (10,398,322) (25,675,021) (1,987,731) (2,406,642)
----------- ----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments....... (6,974,474) -- (2,500,000) (10,379,013) -- --
Maturity of short-term investments....... -- 6,974,474 -- 7,858,383 -- 2,500,000
Acquisition of property and equipment.... (377,001) (2,089,289) (620,361) (3,476,121) (405,335) (52,368)
Proceeds from sale/leaseback
transaction............................ -- 135,300 -- 406,148 246,327 --
Reimbursement from lessor................ -- -- 273,098 273,098 -- --
Cash paid for acquisitions and equity
investments............................ (615,637) -- (250,000) (865,637) (243,253) --
----------- ----------- ------------ ------------ ----------- -----------
Net cash (used for) provided by
investing activities............... (7,967,112) 5,020,485 (3,097,263) (6,183,142) (402,261) 2,447,632
----------- ----------- ------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations... (65,544) (172,749) (315,942) (675,581) (37,780) (122,860)
Payment as collateral for letter of
credit................................. -- (1,000,000) -- (1,000,000) -- --
Proceeds from line of credit............. -- 600,000 400,000 1,000,000 -- --
Repayment of line of credit.............. -- -- (790,909) (790,909) (9,091) (27,273)
Proceeds from issuance of notes payable
to stockholders........................ 1,076,250 3,284,999 4,665,000 10,906,249 2,914,601 --
Proceeds from issuance of preferred
stock, net of issuance costs........... 10,284,689 -- 10,630,808 24,214,905 -- 19,905,423
Proceeds from issuance of common stock... 1,356 27,173 168 31,018 268 15,951
----------- ----------- ------------ ------------ ----------- -----------
Net cash provided by financing
activities......................... 11,296,751 2,739,423 14,589,125 33,685,682 2,867,998 19,771,241
----------- ----------- ------------ ------------ ----------- -----------
Net (decrease) increase in cash and cash
equivalents.............................. (15,206) 714,687 1,093,540 1,827,519 478,006 19,812,231
Cash and cash equivalents at beginning of
period................................... 34,498 19,292 733,979 -- 733,979 1,827,519
----------- ----------- ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period................................... $ 19,292 $ 733,979 $ 1,827,519 $ 1,827,519 $ 1,211,985 $21,639,750
=========== =========== ============ ============ =========== ===========
</TABLE>

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

F-6
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION

Variagenics, Inc. (the "Company") was incorporated in Delaware on
December 7, 1992. The Company was originally formed to develop a pharmacogenomic
approach to cancer therapy. The Company has broadened that focus to discover
genetic variations characterized by SNPs and other genetic differences. The
Company will use this information to optimize drugs in development, develop new
drug targets and bring diagnostic products to market. Since inception, the
Company has devoted its efforts primarily to financial planning, research and
development, recruiting management and technical staff, acquiring operating
assets and raising capital. Accordingly, the Company is considered to be in the
development stage and the accompanying financial statements represent those of a
development stage enterprise as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7.

The accompanying financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has generated minimal
revenues and has an accumulated deficit of $39,624,890 at March 31, 2000. The
future viability of the Company is dependent on its ability to obtain necessary
additional financing, to complete development and commercialize its products and
to commence generating cash from operations. Management believes the Company has
the ability to do so.

The Company is subject to risks common to companies in the industry
including, but not limited to, uncertainty of product development and
commercialization, lack of marketing and sales history, dependence on key
personnel, market acceptance of products, product liability, protection of
proprietary technology, ability to raise additional financing, and compliance
with FDA and other governmental regulations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and 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.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The Company
maintains all of its cash, cash equivalents and short-term investments with one
high quality financial institution. Investment securities with original
maturities of greater than three months but less than one year are considered to
be short-term investments. Short-term investments are classified as held to
maturity in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 1999, short-term investments are
carried at cost and consist of a certificate of deposit which matured in
January 2000.

F-7
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS

Fixed assets are recorded at cost and depreciated using the straight-line
method over their estimated useful lives. Leasehold improvements are amortized
using the straight-line method over the shorter of the life of the improvement
or the remaining term of the lease.

Purchased software is capitalized at cost and amortized over the estimated
useful life, generally three years. Internally developed software is accounted
for in accordance with Statement of Position ("SOP") 98-1. Under the provisions
of SOP 98-1, Variagenics capitalizes costs of internally developed software
after the preliminary project stage has been completed. Costs eligible for
capitalization have not been significant. Therefore, the Company has not
capitalized any internal development costs.

LONG-LIVED ASSETS

The Company reviews long-lived assets for impairment by comparing the
cumulative undiscounted cash flows for groups of assets for which there are
identifiable cash flows independent of the cash flows of other groups of assets
with their carrying amount. Impairment is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Quoted market
prices, if available, are used as the basis for the measurement. If quoted
market prices are not available, the estimate of fair value is based on the best
information available in the circumstances. Any writedowns are treated as
permanent reductions in the carrying amount of the assets. Management's policy
regarding long-lived assets is to evaluate the recoverability of its assets when
the facts and circumstances suggest that these assets may be impaired. This
analysis relies on a number of factors, including operating results, business
plans, budgets, economic projections and changes in management's strategic
direction or market emphasis.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to its employees using the
intrinsic value based method as prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company has adopted the provisions of SFAS No. 123,
"Accounting for Stock-based Compensation," for disclosure only (Note 9). All
stock-based awards to nonemployees are accounted for in accordance with SFAS
No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18 "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."

REVENUE RECOGNITION

Revenue to date has been generated from collaborations and research grants
from a governmental agency. Revenue from collaborations and grants is recognized
in the period in which specific performance obligations under the terms of the
contracts are satisfied and related costs are incurred, provided that the
amounts received are not refundable if the research is not successful. Revenue
recognized under collaboration agreements, principally received under our
agreement with Covance,

F-8
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inc., was $225,155 for the year ended December 31, 1999 and $126,574 for the
three months ended March 31, 2000. Revenue recognized under two governmental
grants for research in 1999 was $173,433. Payments received in advance of work
being performed under agreements are recorded as deferred revenue until earned
in accordance with SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements."

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations as incurred.

INCOME TAXES

The Company accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.

COMPREHENSIVE INCOME (LOSS)

Comprehensive loss is equal to net loss for all years presented.

BUSINESS SEGMENTS

The Company operates as a single business segment as defined in SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."

NET LOSS PER SHARE

Net loss per share is computed under SFAS No. 128 "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding, excluding unvested restricted stock. Diluted net
loss per share does not differ from basic net loss per share since potential
common shares are antidilutive for all periods presented and, therefore, are
excluded from the calculation of diluted net loss per share.

F-9
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following potentially dilutive common shares were excluded because their
effect was antidilutive:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
AS OF DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible notes payable............. -- 3,314,425 -- 6,322,195 --
Redeemable convertible preferred
stock............................... 2,839,736 2,839,736 10,226,584 2,839,736 14,931,289
Convertible preferred stock........... 92,209 92,209 -- 77,519 --
Stock options......................... 109,518 601,822 1,572,690 617,136 2,548,775
Warrants.............................. 196,963 243,382 2,240,665 243,382 2,208,480
Unvested restricted stock............. 130,651 103,651 30,317 60,322 27,299
</TABLE>

Subsequent to March 31, 2000, warrants for the purchase of 886,015 shares of
the Company's common and preferred stock were exercised (see Note 15).

PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)

In March 2000, the Board of Directors authorized management of the Company
to file a Registration Statement with the Securities and Exchange Commission for
the Company to sell shares of its common stock in an initial public offering. If
the initial public offering contemplated by this Registration Statement is
consummated under the terms presently anticipated, all outstanding shares of
convertible preferred stock at March 31, 2000 will convert into 14,931,289
shares of common stock. The unaudited pro forma presentation of Stockholders'
Equity has been prepared assuming all preferred stock was converted into common
stock at March 31, 2000.

PRO FORMA NET LOSS PER SHARE (UNAUDITED)

The pro forma basic and diluted net loss per share and shares used in
computing pro forma basic and diluted net loss per share have been presented
reflecting the automatic conversion into shares of common stock of the
redeemable convertible preferred stock outstanding at December 31, 1999 and
March 31, 2000 upon completion of the offering contemplated herein, using the if
converted method from their respective dates of issuance.

NEW ACCOUNTING PRONOUNCEMENT

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge

F-10
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting criteria are met. Adoption of this standard is not expected to have a
material impact on the financial position or results of operations of the
Company.

In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting
for Certain Transactions Involving Stock Compensation--an interpretation of
Accounting Principles Board ("APB") Opinion 25". FIN 44 clarifies the
application of APB Opinion 25 and among other issues clarifies the following:
the definition of an employee for purposes of applying APB Opinion 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.

INTERIM FINANCIAL INFORMATION

The financial statements of the Company as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 are unaudited. All adjustments
(consisting only of normal recurring adjustments) have been made, which in the
opinion of management, are necessary for a fair statement of our interim
results. Results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000 or for any other future period.

3. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(DECEMBER 7,
YEAR ENDED DECEMBER 31, 1992) THROUGH
---------------------------------- DECEMBER 31,
1997 1998 1999 1999
---------- -------- ---------- -------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
NONCASH INVESTING AND FINANCING ACTIVITIES:

Cash paid for interest................................. $ 18,377 $ 68,024 $ 129,637 $ 296,547

Conversion of notes payable to stockholder into
redeemable preferred stock........................... $1,676,250 $ -- $8,276,392 $11,232,642

Acquisition of property and equipment under capital
lease agreements..................................... $ -- $462,727 $1,200,000 $ 1,662,727

Reclassification of preferred stock for redemption
features............................................. $4,615,163 $ -- $8,793,879 $13,409,042
</TABLE>

F-11
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

4. ACQUISITION

AVITECH DIAGNOSTICS, INC.

On September 10, 1997, the Company purchased certain assets and assumed
certain liabilities of Avitech Diagnostics, Inc. ("Avitech") for total
consideration and transaction costs of $1,116,000. Avitech had been engaged in
the business of developing and manufacturing clinical diagnostics for
genetically determined diseases and disorders. The acquisition was funded by the
issuance of 92,209 shares of Series C convertible preferred stock valued at
$500,000 (Note 8) and approximately $616,000 in cash.

The Avitech acquisition was accounted for under the purchase method of
accounting. In accordance with the provisions of APB No. 16, "Business
Combinations," the purchase price was allocated to the assets acquired and
liabilities assumed based upon their fair values at the date of acquisition.
Approximately $217,000 was allocated to the fair value of net tangible assets.
The Company also determined that $225,000 of the purchase price was attributable
to intangible assets consisting of the workforce-in-place which is included in
other assets and is being amortized over a five year period. Approximately
$674,000 of the purchase price was assigned to the value of Avitech's in-process
research and development. Because the technological feasibility of Avitech's
enzyme-based processes for detecting genetic variations required further
development, and the in-process research and development had no alternative use,
this amount was immediately charged to operations during the year ended
December 31, 1997. In 1999, the Company revised its process for discovering
genetic variations and no longer uses an enzyme-based approach.

5. INVESTMENT IN NOVA MOLECULAR, INC.

In January 1999, the Company entered into the following agreements with Nova
Molecular, Inc. ("NMI"), a company engaged in performing genetic research and
providing pharmacogenomic services: (i) a subscription agreement whereby the
Company acquired 37% of the outstanding shares of NMI in exchange for
approximately $250,000 in cash; (ii) a research and development agreement
whereby the Company agreed to fund $2.0 million of NMI's research and
development over a three year period, (iii) license agreements in which
proprietary rights were licensed to each other in exchange for future royalties;
and (iv) a conversion agreement in which the Company granted NMI shareholders
the right, under certain circumstances, to exchange shares of NMI preferred
stock for the Company's convertible preferred stock and common stock subject to
antidilution provisions. Through this alliance, the Company expected to expand
its pharmacogenomic technologies and services.

In the first quarter of 1999, the Company recorded an investment in
affiliate of $250,000 which was reduced to $99,308 at March 31, 1999 by the
recognition under the equity method of accounting of the Company's shares of
NMI's losses, included in equity in loss of affiliate. Prior to the
restructuring of the Company's alliance with NMI in July 1999, the investment
was reduced to zero by subsequent equity losses. Funding provided to NMI under
the research and development agreement was recorded as research and development
expense of $135,000.

In July 1999, the Company restructured its alliance with NMI. The Company
sought to terminate the conversion agreement in order to satisfy the
requirements for completion of the sale of its Series E

F-12
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

5. INVESTMENT IN NOVA MOLECULAR, INC. (CONTINUED)
redeemable convertible preferred stock. NMI's Series A preferred shareholders
sought to become shareholders of the Company, and the other NMI shareholders
sought to separately pursue financing options for NMI. Consequently, in
July 1999, pursuant to a cancellation agreement between the Company and NMI, the
Company issued 380,640 shares of the Company's Series D redeemable convertible
preferred stock to the NMI Series A preferred stockholders and agreed to pay
$0.8 million to NMI in exchange for the following: (i) all of the outstanding
NMI Series A preferred shares were acquired by Variagenics and redistributed to
the remaining NMI preferred shareholders; and (ii) the research and development
funding commitment, the license agreement and the conversion agreement were
canceled. After the purchase and redistribution of the NMI Series A shares, the
Company continued to hold 37% of the outstanding shares of NMI.

The value attributed to the Series D redeemable convertible preferred stock
of $1.0 million and the cash payment of $0.8 million were recorded as general
and administrative expense in consideration of the cancellations of the funding
commitment, the license agreement, and the conversion agreement.

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------
(YEARS) 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Machinery and equipment.................................... 3-5 $ 559,980 $ 932,077
Furniture and fixtures..................................... 5 476,167 523,711
Machinery and equipment under capital leases............... 3-5 598,027 1,798,027
Leasehold improvements..................................... lease life 1,910,594 1,782,322
-------- ---------- ----------
3,544,768 5,036,137
Less--accumulated depreciation and amortization............ (709,462) (1,282,551)
---------- ----------
$2,835,306 $3,753,586
========== ==========
</TABLE>

Depreciation and amortization expense was $173,154, $367,163 and $613,841
for the years ended December 31, 1997, 1998 and 1999, respectively and $200,672
for the three months ended March 31, 2000. Accumulated amortization of property
and equipment under capital leases totaled $104,670 and $304,012 at
December 31, 1998 and 1999, respectively.

F-13
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

7. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities at December 31, 1998 and 1999 consist
of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued payroll related................................. $146,822 $482,383
Professional fees....................................... 27,267 95,410
Sponsored research and development...................... 71,254 89,951
Other................................................... 58,289 72,588
-------- --------
$303,632 $740,332
======== ========
</TABLE>

F-14
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK

Mandatorily redeemable convertible preferred stock is carried at redemption
value plus accrued dividends. Issuance costs relating to redeemable convertible
preferred stock are accreted to the value of the stock immediately upon
issuance. Series A, B, C, D, E-2 and E have a par value of $.01 per share and
liquidation value of $2.73 per share. Series F have a par value share of $.01
per share and liquidation value of $4.29 per share. Mandatorily redeemable
convertible preferred stock consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred stock:
Series A, 599,255 shares authorized, issued and
outstanding at December 31, 1998 and 1999 and
March 31, 2000.................................... $ 4,654,992 $ 1,698,182 $ 1,734,682
Series B, 2,379,000, 2,240,482 and 2,240,482 shares
authorized at December 31, 1998 and 1999 and
March 31, 2000, respectively; 2,240,482 shares
issued and outstanding at December 31, 1998 and
1999 and March 31, 2000........................... 12,148,891 6,349,130 6,485,731
Series C, 92,209 shares authorized, issued and
outstanding at December 31, 1999 and March 31,
2000; prior to 1999 non-redeemable................ -- 261,304 266,904
Series D, 380,640 shares authorized, issued and
outstanding, at December 31, 1999 and March 31,
2000; prior to 1999 non-redeemable................ -- 1,078,667 1,101,867
Series E-2, 0, 2,734,142 and 2,734,142 shares
authorized, issued and outstanding at December 31,
1998 and 1999 and March 31, 2000, respectively.... -- 7,748,078 7,914,678
Series E, 0, 5,529,735 and 5,529,735 shares
authorized at December 31, 1998 and 1999 and March
31, 2000, respectively; 0, 4,219,857 and 4,219,857
issued and outstanding at December 31, 1998 and
1999 and March 31, 2000, respectively............. -- 11,958,331 12,215,531
Series F, 0, 0, and 4,664,705 shares authorized,
issued and outstanding at December 31, 1998 and
1999 and March 31, 2000, respectively............. -- -- 20,123,553
----------- ----------- -----------
$16,803,883 $29,093,692 $49,842,946
=========== =========== ===========
</TABLE>

In 1997, the previously non-redeemable Series A convertible preferred stock
were redefined as redeemable. At December 31, 1998, the redemption values of the
Series A and Series B redeemable convertible preferred stock were $7.77 and
$5.42 per share, respectively. During 1999, the redemption

F-15
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
preferences of all of the redeemable convertible preferred stock were adjusted
to $2.73 per share. The Company recorded an adjustment to redeemable convertible
preferred stock and to equity to reflect this decrease in redemption value and
redefinition.

In July 1999, the Company's Board of Directors and stockholders approved the
following: the number of authorized shares of Series B redeemable convertible
preferred stock was reduced from 2,379,000 to 2,240,482, the number of
authorized shares of Series D redeemable convertible preferred stock was
increased from 264,747 to 380,640, and 5,529,735 shares of Series E and
2,734,142 shares of Series E-2 redeemable convertible preferred stock were
authorized and designated.

In addition, the characteristics of the Series A, B, C and D redeemable
convertible preferred stock were redefined including the addition of redemption
privileges to the previously unredeemable Series C and D convertible preferred
stock. Effective July 30, 1999, the Series A, B, C, D, E and E-2 redeemable
convertible preferred stock (collectively, the "preferred stock") have the
following characteristics:

CONVERSION RIGHTS

Each share of redeemable preferred stock is convertible at any time at the
option of the holder into one share of common stock, subject to certain
anti-dilution adjustments. All shares of outstanding preferred stock
automatically convert into common stock upon the closing of a public offering of
the Company's common stock involving gross proceeds to the Company of at least
$15 million and a per share price of not less than $8.41 or (ii) the affirmative
vote of not less than a majority of the then-outstanding preferred stockholders
voting as a single class.

REDEMPTION RIGHTS

At any time on or after July 30, 2004, at the request of a majority of the
holders of the then-outstanding shares of the redeemable preferred stock, the
Company shall redeem 100% of those shares at a price of $2.73 per share, plus an
additional $0.24 per share for each full year between July 30, 1999 and the
redemption date, plus any declared but unpaid dividends, subject to certain
antidilution adjustments.

DIVIDEND RIGHTS

Holders of the Series E and E-2 preferred stock are entitled to receive
noncumulative dividends when and if declared by the Company's Board of Directors
at an annual rate of $0.24 per share prior to any distribution to the Series A,
B, C, D or the common stockholders. Holders of the Series A and B preferred
stock are entitled to receive dividends when and if declared by the Company's
Board of Directors prior to any distribution to the Series C, D or the common
stockholders. Holders of the Series C and D preferred stock are entitled to
receive dividends when and if declared by the Board of Directors sharing ratably
with the holders of the common stock on an as converted basis. Any dividends
declared by the Board of Directors on the common stock must be shared ratably by
the

F-16
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
preferred stockholders and common stockholders, with the preferred stockholders
receiving preference in distribution of such dividends.

VOTING RIGHTS

Each holder of the preferred stock is entitled to the number of votes equal
to the number of shares of the Company's common stock into which such holder's
shares are convertible at the record date for such vote, except for certain
preferential voting rights granted to the redeemable preferred stockholders
relative to the election of members of the Board of Directors and for certain
preferential voting rights granted to the Series E and E-2 preferred
stockholders, voting as a class, relative to the execution of certain equity and
corporate transactions.

LIQUIDATION PREFERENCES

In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Series E preferred stock shall be entitled to receive, in
preference to the holders of the Series A, B, C, D, E-2 or common stock, an
amount equal to $2.73, subject to certain antidilution adjustments, plus any
declared but unpaid dividends. Any assets remaining following the preferential
distribution to the holders of the Series E preferred stock shall be available
for distribution ratably among the redeemable preferred stockholders and the
common stockholders.

In March 2000, the Company authorized 4,664,705 shares of Series F
redeemable convertible preferred stock. The Series F redeemable convertible
preferred stock ranks senior to all other outstanding preferred stock with
respect to dividends, liquidation and redemption. The preferred shares are
convertible on a one for one basis to common stock and are entitled to the
number of votes equal to the number of common shares into which they are
convertible. Holders of the Series F preferred stock are entitled to receive
noncumulative dividends when and if declared by the Company's Board of Directors
at an annual rate of $0.39 per share. Redemption of Series F redeemable
convertible preferred stock shall be at a price of $4.29 per share, plus an
additional $0.39 per share for each full year between March 6, 2000 and the
redemption date, plus any declared but unpaid dividends. In connection with the
authorization of the Series F redeemable convertible preferred stock, the
Company amended the following characteristics of all of the Company's
outstanding redeemable convertible preferred stock.

CONVERSION RIGHTS

The automatic conversion features of the redeemable convertible preferred
stock were amended so that all shares of outstanding redeemable convertible
preferred stock automatically convert into one share of common stock, subject to
certain anti-dilution adjustments, upon the closing of a public offering of the
Company's common stock involving gross proceeds to the Company of at least
$20 million and a per share price of not less than $8.58.

F-17
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
REDEMPTION RIGHTS

Optional redemption of the Company's preferred stock were amended so that at
any time, on or after the earlier to occur March 6, 2005 or such date as any
other series of preferred stock is eligible for redemption or upon election of
the holders of at least 66.67% of the shares of the total outstanding preferred
stock then outstanding, the Company shall be required to redeem all of the
outstanding series of redeemable convertible preferred stock at the redemption
price in three equal annual installments commencing on the redemption date.

In March 2000, the Company issued 4,664,705 shares of Series F redeemable
convertible preferred stock to new investors at $4.29 per share for net proceeds
of $19.9 million. The issuance of these shares resulted in a beneficial
conversion feature equal to the total proceeds from the offering. Because the
redeemable convertible preferred stock is immediately convertible, the Company
recorded a dividend of $19.9 million to preferred holders in the first quarter
of 2000.

PREFERRED STOCK WARRANTS

In conjunction with issuance of notes payable and Series A preferred stock
in 1995, the Company had outstanding, fully vested warrants to purchase 138,389
shares of Series A preferred stock at a price of $7.77 per share. In connection
with the sale of Series B preferred stock in 1997, these warrants were converted
into warrants to purchase an equal amount of shares of Series B preferred stock
at a price of $5.42. The value ascribed to the warrants at the time of issuance
and amendment was deemed to be immaterial. In connection with the Series E and
E-2 preferred stock financing in 1999, these warrants were cancelled.

In connection with amending a line of credit in 1999, the Company issued a
warrant to purchase 43,920 shares of Series E preferred stock at an exercise
price of $2.73 (Note 11).

In connection with the issuance of Series E preferred stock in 1999, the
Company issued warrants for the purchase of 1,908,287 shares of Series E
preferred stock at an exercise price of $2.73 per share.

9. COMMON STOCK

STOCK OPTIONS

Prior to 1997, the Company did not maintain a formal stock option plan. All
options issued by the Company from inception (December 7, 1992) through
December 31, 1996 were non-qualified stock options issued to employees and
advisors of the Company. In January 1997, the Company adopted the 1997 Employee,
Director and Consultant Stock Option Plan, which provides for the granting of
incentive and non-qualified stock options to employees, directors and
consultants of the Company. The number of options available for grant was
increased from 237,900 to 832,650 in 1998 and to 1,903,200 in 1999. Options
granted by the Company generally vest ratably over four- to five-year periods
and have a term of ten years.

F-18
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

9. COMMON STOCK (CONTINUED)
In accordance with APB No. 25, no compensation cost has been recognized for
options granted to employees by the Company with exercise prices equal to or
greater than fair value of the underlying common stock at grant date. In 1999,
the Company recorded compensation expense of $567,576 relating to options
granted to employees with exercise prices less than the fair value of the
underlying common stock at grant date (the compensation expense represents the
difference between the exercise price of each option and the fair value of the
common stock on the date of grant). Had compensation cost been determined based
on the fair value at the date of grant consistent with the method prescribed by
SFAS No. 123, the Company's net loss and net loss attributable to common
stockholders per share for the years ended December 31, 1997, 1998 and 1999
would have been as follows:

<TABLE>
<CAPTION>
NET LOSS
ATTRIBUTABLE
TO COMMON
STOCKHOLDERS
PER SHARE --
NET LOSS BASIC AND DILUTED
------------ -----------------
<S> <C> <C>
As reported:
1997.......................................... $ (4,789,375) $(13.48)
1998.......................................... (8,145,428) (16.13)
1999.......................................... (16,727,887) (29.96)

Pro forma:
1997.......................................... $ (4,791,540) $(13.49)
1998.......................................... (8,156,292) (16.15)
1999.......................................... (16,751,560) (30.00)
</TABLE>

Because options vest over several years, additional option grants are
expected to be made in the future and the determination of fair value of option
grants made after the Company's initial public offering will include a
volatility factor, the pro forma effects of applying the fair value method are
not representative of future pro forma results.

For the purposes of pro forma disclosure, the fair value of each employee
option grant is estimated on the date of grant using the minimum valued method
with the following assumptions for grants in 1997, 1998 and 1999: no dividend
yield; risk-free interest rates of 6% for 1997 and 1999 grants and 5% for 1998
grants; and an expected life of five years for all options granted. The weighted
average fair value of options granted to employees during 1997, 1998 and 1999,
was $0.05, $0.12 and $5.48, respectively. For financial reporting purposes, all
options granted in 1999 were deemed to be granted at less than fair value.

The Company has granted options to non-employees which vest in future
periods. The Company applies EITF No. 96-18 to account for these non-employee
grants. Under EITF 96-18, the expense that will ultimately be recognized for
these options will be the fair value at the vesting dates of the underlying
options. As these options vest over periods up to five years, the Company will
be required to remeasure the fair value of these options at each reporting
period prior to vesting and then finally at

F-19
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

9. COMMON STOCK (CONTINUED)
the vesting date of the option. The Company recorded compensation expense of
$1,596,355 in 1999 relating to these options.

During the three months ended March 31, 2000, the Company increased the
number of options available for grant to 4,758,000 and granted stock options to
employees to purchase 959,710 shares of common stock at a weighted average
exercise price of $1.19 per share. The Company recorded deferred compensation
relating to these options totaling $17,828,555, representing the aggregate
difference between the estimated fair market value of Variagenics common stock
on the date of grant and the exercise price of each option. This deferred
compensation is being amortized on a straight line basis over the four year
vesting period. Compensation expense for the three months ended March 31, 2000
for these options was $862,259. The Company also granted options to purchase
130,845 shares of common stock to non-employees at a weighted average exercise
price of $1.10 and recorded compensation expense of $386,813 for the three
months ended March 31, 2000. At March 31, 2000, the Company also recorded
compensation expense of $414,002 and $520,276 for options previously granted to
employees and non-employees, respectively. At March 31, 2000 the Company has
$22,877,649 of deferred compensation relating to employee grants.

Option activity for the years ended December 31, 1997, 1998 and 1999 was as
follows:

<TABLE>
<CAPTION>
1997 1998 1999
---------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 15,107 $0.03 109,518 $0.31 601,821 $0.50
Granted............................... 128,763 0.23 523,380 0.54 1,157,290 0.54
Exercised............................. (14,617) 0.01 (15,987) 0.25 (11,557) 0.38
Canceled.............................. (19,735) 0.03 (15,090) 0.54 (174,864) 0.46
---------- ----- -------- ----- --------- -----
Outstanding at end of year.............. 109,518 $0.31 601,821 $0.50 1,572,690 $0.53
Options exercisable at year end......... 31,574 $0.09 78,902 $0.46 379,968 $0.49
========== ===== ======== ===== ========= =====
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
SHARES CONTRACTUAL LIFE SHARES
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISABLE
--------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.01.......... 31,858 6.03 25,120
$0.54.......... 1,540,832 7.92 354,848
--------- -------
1,572,690 379,968
========= =======
</TABLE>

F-20
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

9. COMMON STOCK (CONTINUED)
COMMON STOCK WARRANTS

In connection with a leasing agreement entered into by the Company in 1994
and the issuance of notes payable to a stockholder in 1995, the Company has
outstanding warrants for the purchase of 49,243 shares of the Company's common
stock at an exercise price of $9.24 per share. These warrants are fully vested,
exercisable at the option of the holders, in whole or in part, and expire in
2000. The value ascribed to these warrants upon issuance was not significant.

In connection with the issuance of the line and letter of credit in 1998,
the Company issued warrants to purchase 46,419 shares of common stock at a price
of $8.62 (Note 11). Additionally, in connection with a lease line, the Company
is obligated to issue warrants to purchase 5,551 shares of common stock at a
price of $8.62 (Note 11).

In connection with convertible notes payable to stockholders, the Company
issued warrants for the purchase of 820,242 shares of common stock at an
exercise price of $2.73 per share. The value of the warrants of $1,330,000 was
attributed to additional interest expense to be amortized over the stated term
of the convertible notes payable. The Company amortized $1,028,533 of the value
to interest expense during 1999, in the period prior to conversion. At the date
of conversion the unamortized balance of $301,467 was deducted from the value of
the Series E-2 redeemable preferred stock as issuance costs.

STOCK RESTRICTION AGREEMENTS

The Company has executed stock restriction agreements with certain of its
common stockholders. Each agreement gives the Company the right to repurchase,
at prices from $0.01 to $0.54 per share, a certain number of shares held by each
individual if the respective stockholder ceases to be a director, employee or
consultant, as appropriate, of the Company. The purchase option rights lapse at
various dates through March 2003. At December 31, 1999 and March 31, 2000, an
aggregate of 30,317 and 27,299 shares, respectively, of the Company's
outstanding common stock were subject to these repurchase options. In connection
with restricted stock issued to non-employees, the Company has recorded
compensation expense of $93,051 in 1999 and $21,280 for the three months ended
March 31, 2000.

STOCK ISSUANCE

Pursuant to the terms of his employment agreement, the Company sold 114,430
shares of its common stock to an officer at a price of $0.01 per share during
1997. Compensation expense recorded relating to this transaction totaled
$61,000.

In June 1997, the Company settled a lawsuit filed by a former officer. Under
the terms of the settlement agreement, the Company was required to make
severance payments totaling $26,000 during 1997. In addition, a significant
stockholder of the Company repurchased 36,069 shares of the Company's common
stock held by the former officer on behalf of the Company for $324,000 in cash.
Compensation expense recorded relating to this settlement totaled $350,000.

F-21
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

9. COMMON STOCK (CONTINUED)
Pursuant to the terms of two employment agreements, the Company issued
103,487 shares of common stock during 1999. Compensation expense recorded
relating to these agreements was $680,160. Additionally, in conjunction with a
license agreement, the Company issued 8,327 shares of common stock. The Company
recorded expense of $11,410 related to this issuance.

10. INCOME TAXES

At December 31, 1998 and 1999, the significant components of the Company's
deferred tax assets and liabilties consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Investment in affiliate......................... $ -- $ 846,650
Compensation expense............................ -- 679,821
Acquired intangible assets...................... 242,165 483,967
Net operating loss carryforwards................ 7,103,376 10,908,299
Research and development credit carryforwards... 620,656 918,332
Other........................................... 75,108 70,584
----------- ------------
Total gross deferred tax assets................... 8,041,305 13,907,653
Valuation allowance............................... (7,938,479) (13,788,500)
----------- ------------
Total deferred tax assets......................... 102,826 119,153
----------- ------------

Deferred tax liabilities:

Depreciation and amortization................... (63,687) (85,309)
Other........................................... (39,139) (33,844)
----------- ------------
(102,826) (119,153)
----------- ------------

Net deferred tax assets/liabilities............... $ -- $ --
=========== ============
</TABLE>

The Company has provided a valuation allowance for the full amount of its
net deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards cannot
be sufficiently assured at December 31, 1999.

At December 31, 1999, the Company has federal net operating loss
carryforwards of approximately $26,000,000 available to reduce future taxable
income which expire at various dates between 2007 and 2019. The Company also has
federal and state research and development tax credit carryforwards of
approximately $600,000 and $500,000, respectively, available to reduce future
tax liabilities which expire at various dates between 2008 and 2019.

F-22
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

10. INCOME TAXES (CONTINUED)
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may limit the amount of net operating loss
and tax credit carryforwards which could be utilized annually to offset future
taxable income and taxes payable. The amount of the annual limitation is
determined based upon the Company's value prior to the ownership change.
Subsequent significant ownership changes could further affect the limitation in
future years.

11. COMMITMENTS AND CONTINGENCIES

LEASE LINES OF CREDIT

The Company has various equipment leases with repayment terms of 36 months.
In connection with one lease agreement entered into in 1997, the Company is
obligated to issue warrants to purchase 5,551 shares of common stock at a price
of $8.62 per share based on the amount of borrowings under the lease. The value
ascribed to these warrants was not significant.

LEASE FOR FACILITY

In June 1998, the Company entered into a ten-year noncancelable operating
lease, renewable for an additional five years, related to its facility. Rent
expense under this lease will be approximately $975,000 per year, plus
applicable taxes and operating costs. Pursuant to the terms of the lease, the
Company agreed to expend a total of at least $1.5 million over the lease term
related to facility improvements, subject to reimbursements from the landlord of
$273,098 which was received in 1999 and recorded as an offset to leasehold
improvements.

Commitments under the Company's leases obligations (net of noncancelable
sublease income) as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
2000................................................. $ 750,350 $ 638,803
2001................................................. 862,850 575,513
2002................................................. 975,350 380,791
2003................................................. 975,350 --
2004................................................. 975,350 --
Thereafter........................................... 3,332,445 --
---------- ----------
Total minimum lease payments......................... $7,871,695 $1,595,107
==========
Less amount representing interest.................... 201,813
----------
Present value of capital lease obligations........... $1,393,294
==========
</TABLE>

Total rent expense (net of sublease income of $225,000 in 1999) under
operating leases in effect was $322,000, $1,317,334 and $1,320,970 for the years
ended December 31, 1997, 1998 and 1999, respectively and $295,150 for the three
months ended March 31, 2000.

F-23
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LINE OF CREDIT, LETTER OF CREDIT AND RESTRICTED CASH

In July 1998, the Company obtained a $1.2 million line of credit, available
through March 1999, from a bank. Drawdowns may be in the form of equipment loans
or bridge loans and interest is variable. As of December 31, 1998, the Company
had drawn down approximately $600,000 of this line of which $300,000 was under
the equipment line and $300,000 was in the form of a bridge loan. This line of
credit was amended in June 1999 so that all future borrowings are in the form of
bridge loans and repayment of all bridge loans are extended to June 2000. The
payment terms of the $300,000 equipment loan outstanding at December 31, 1998
were not modified and are payable in 33 monthly installments commencing
March 1999. As of December 31, 1999 interest accrues on the outstanding
equipment loan at 9%. During 1999, the balance outstanding under the bridge
loans was repaid. In order to secure the facility lease, the Company also
obtained a $2 million letter of credit from this same bank which is
automatically renewable on an annual basis through June 2009. These obligations
are being secured by $1 million of restricted cash, subject to certain
reductions after the second year of the lease, and substantially all of the
Company's assets excluding intellectual property.

In connection with the original obligations entered into during 1998, the
Company issued a fully vested five-year warrant to the bank to purchase 46,419
shares of its common stock at a price of $8.62 per share. The value ascribed to
this warrant was not significant. In connection with the 1999 amendment, the
Company issued a fully vested, five-year warrant for the purchase of 43,920
shares of Series E redeemable convertible preferred stock at an exercise price
of $2.73. The value ascribed to this warrant of $88,000 is being recorded as
additional interest expense over the period of the extension.

NOTES PAYABLE

During 1998 and 1999, the Company received cash proceeds totaling $3,284,999
and $4,665,000, respectively, pursuant to the issuance of unsecured convertible
notes payable to stockholders primarily at an interest rate of 8.25%. All
principal and accrued interest of $326,403 under these notes were converted to
Series E and Series E-2 redeemable convertible preferred stock in 1999.

OTHER AGREEMENTS

The Company has entered into various license agreements and research and
development funding agreements to support its research and development
activities. Certain of these license agreements contain provisions for future
royalties to be paid on sales of products developed under these agreements. In
conjunction with entering into one license agreement in 1999, the Company issued
8,327 shares of common stock (Note 9) and fully vested options to purchase
15,464 shares of common stock for which the Company recorded expense of $18,000.
Additionally, the Company has co-marketing agreements with various parties under
which revenues may be earned by either party.

Funding commitments under research and development agreements with two
universities are approximately $600,000 over the next three to five years.

F-24
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company entered into separation agreements with certain employees and
one officer. In connection with these agreements, the Company paid severance of
$193,665 in 1999 and had an accrued balance of $81,291 at December 31, 1999.

12. EMPLOYEE SAVINGS PLAN

In December 1995, the Company adopted an employee savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k) Plan
covers substantially all employees of the Company and allows them to defer a
portion of their annual compensation on a pre-tax basis. Company contributions
under the 401(k) Plan are made at the discretion of the Board of Directors in
amounts determined by the Board. No contributions were made to the 401(k) Plan
by the Company during the years ended December 31, 1997, 1998 and 1999.

13. RELATED PARTY TRANSACTIONS

Upon the closing of the Series B redeemable convertible preferred stock sale
in 1997, the Company paid $250,000 in cash to an officer as compensation for
arranging the financing.

The Company maintains annually renewable consulting agreements under which
scientific advisory services are provided to the Company by several individual
stockholders. Cash expenses under these contracts totaled $64,000, $198,000 and
$210,000 in each of the years ended December 31, 1997, 1998 and 1999,
respectively. The Company also grants options to these scientific advisors
(Note 9).

14. COMMERCIAL COLLABORATIONS

Covance, a contract research organization, selected the Company as their
provider of genotyping assays. The Company targeted Covance to be a user of its
NuCleave-TM- DNA testing and analysis technology. The Company's August 1999
alliance agreement with Covance provides funding to the Company for assay
development and royalties payable to the Company for laboratory tests performed
at Covance. As of March 31, 2000, the Company has received $336,727 in sponsored
research fees and no royalties under its agreement with Covance. Under this
agreement, Covance is the only contract research organization which can directly
license the Company's technologies for providing pharmacogenomic lab services in
clinical trials. The Company achieved its first non-cash performance based
production target under the Covance agreement in February 2000, when it
delivered to Covance 17 assays relevant for standard pharmacogenomic testing.
The Company's agreement with Covance is for a five-year term, subject to
adjustment, after two years. After two years, if the Company has not achieved
predetermined sales levels, Covance may discontinue funding. In this event the
Company may terminate the agreement. Covance may terminate the agreement if
(i) the Company fails to achieve assay production targets, or (ii) the Company
has a change in control, including if Taylor J. Crouch ceases to serve as the
Company's Chief Executive Officer. Either party may terminate the agreement upon
material breach, misconduct or insolvency of the other party. After the
five-year term expires, the agreement may be automatically renewed for
additional one-year terms.

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<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

14. COMMERCIAL COLLABORATIONS (CONTINUED)
Our arrangement with Quintiles Transactional Corporation is a preferred
provider co-marketing arrangement under which Quintiles' worldwide business
development group will incorporate our SNP discovery and clinical design
services into the Quintiles selling cycle. The Company's December 1998 agreement
with Quintiles is for a two-year term and may be renewed by mutual agreement.
The Company will receive revenues from this marketing agreement based on the
types of pharmacogenomic services performed under the contract. For the periods
presented, the Company has not received any revenues under its arrangement with
Quintiles. The agreement may be terminated by either party upon a material
breach of the agreement.

In the diagnostics/laboratory sector, the Company markets the ApoE genotype
through a July 1999 co-marketing agreement with Nova Molecular, Inc., a clinical
laboratory services company in which the Company has an equity interest. The
ApoE genotype is associated with Alzheimer's and certain cardiovascular
diseases. Under this agreement, the Company will earn royalties on ApoE
genotyping tests sold by the Company and performed by Nova Molecular. The
Company's agreement with Nova Molecular is for a three-year term and may be
automatically renewed for additional terms of one year each, unless either party
gives notice to the other of its intent not to renew at least 90 days prior to
the expiration of each term.

15. SUBSEQUENT EVENTS

EXERCISE OF WARRANTS

In May 2000, warrant holders exercised warrants to purchase 610,949 shares
of the Company's Series E preferred stock and 275,066 shares of common stock
warrants, both at exercise prices of $2.73 per share. Net cash proceeds to the
Company aggregated $2.4 million.

EMPLOYEE STOCK PURCHASE PLAN

On May 15, 2000, the Board of Directors approved the Variagenics, Inc. 2000
Employee Stock Purchase Plan, subject to stockholder approval. This plan allows
employees of the Company to purchase common stock through payroll deductions for
85% of fair market value. The Board of Directors authorized reserving
475,800 shares of common stock for issuance under this plan.

STOCK AND OPTIONS ISSUED

In conjunction with entering into a license agreement with an academic
institution in June 2000, the Company issued 35,685 shares of common stock. The
Company will record an expense of $0.4 million in the second quarter of 2000
related to this agreement. Also in May and June 2000, the Company issued 173,667
common stock options to employees and directors at an exercise price of $3.78.
As the exercise price is lower than the fair value of the underlying stock on
the grant date the Company will record deferred compensation of $1.4 million in
the second quarter to be amortized over the future vesting period. Additionally,
the Company issued 118,950 common stock options to a consultant at an exercise
price of $3.78. As these options vest over four years, the Company will be

F-26
<PAGE>
VARIAGENICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF MARCH 31, 2000
AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)

15. SUBSEQUENT EVENTS (CONTINUED)
required to remeasure the fair value of these options at each reporting period
prior to vesting and then finally at the vesting date.

STOCK SPLIT

On June 15, 2000, the Board of Directors of the Company authorized a 1.1895
to 1 stock split. All share and per share information have been retroactively
restated to reflect the stock split.

COLLABORATION AGREEMENT

In May 2000, the Company entered into a collaboration with Bruker Daltonics,
Inc. to manufacture and develop mass spectrometers for its NuCleave-TM- DNA
testing and analysis system. The Company will use the resulting system and also
market and sell the system to its pharmaceutical and drug-development
collaborators to identify genetic variances including genotypes and haplotypes.
The collaboration agreement with Bruker Daltonics extends until December 31,
2001, or until terminated by either party for any reason upon 90 days notice.
The parties may agree to renew the agreement for additional one-year terms.

ALLIANCE AGREEMENT

In June 2000, the Company entered into an alliance agreement with Waters
Technologies Corporation ("Waters"), a life science company, whereby Waters will
manufacture, distribute and sell consumable reagent kits for use in the
Company's NuCleave DNA analysis system. Under the terms of a related stock
purchase agreement, an affiliate of Waters will make a direct investment of
$7.5 million in the Company at the time of the Company's initial public offering
("IPO") at the offering price per share. In addition, the agreement provides for
payments of up to $7.0 million and royalties to the Company on sales of the
kits. At the Company's IPO, the Company will issue to Waters common stock
warrants equal to 15% of the shares purchased by Waters in the direct
investment. The value of the warrants at issuance will be recorded as a
reduction of the revenue recognized by the Company.

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