GENE LOGIC INC, 424B4, 1997-11-24

GENE LOGIC INC
424B4, 1997-11-24
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

Previous: PINNACLE RESOURCES INC, 10QSB, 1997-11-24

Next: LETS TALK CELLULAR & WIRELESS INC, S-1/A, 1997-11-24

<PAGE>
[LOGO]

3,000,000 SHARES

COMMON STOCK

All of the 3,000,000 shares of Common Stock offered hereby are being sold by
GENE LOGIC INC. ("Gene Logic" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. See
"Underwriting" for information relating to the method of determining the initial
public offering price.

Japan Tobacco Inc. ("Japan Tobacco") is a party to a strategic alliance with
the Company. As part of the strategic alliance, Japan Tobacco has agreed to
purchase $3,000,000 of the Company's Common Stock in a private transaction
concurrent with this offering at a price per share equal to the price per share
at which Common Stock is sold in this offering. See "Business--Strategic
Alliances--Japan Tobacco Inc."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share.................................. $8.00 $0.56 $7.44
Total (2).................................. $24,000,000 $1,680,000 $22,320,000
</TABLE>

(1) Before deducting expenses payable by the Company estimated at $600,000.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $27,600,000, $1,932,000 and $25,668,000,
respectively.

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

The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about November 26, 1997.

BANCAMERICA ROBERTSON STEPHENS

HAMBRECHT & QUIST

UBS SECURITIES

The date of this Prospectus is November 21, 1997
<PAGE>
GENE LOGIC INC.
MOLECULAR TOPOGRAPHY-TM- OF GENE EXPRESSION
[GRAPHICAL DEPICTION OF MOLECULAR TOPOGRAPHY]

Above is a Molecular Topographic representing a quantitative snapshot of the
expression of essentially all of the genes in a human cell sample. The data were
generated using, Gene Logic's proprietary READS technology and are represented
using Gene Logic's Molecular Topography software tool. Gene Logic intends to use
these technologies to discover drug targets and drug leads and to develop
database products.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

UNTIL DECEMBER 16, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 7
Use of Proceeds................................................................................ 20
Dividend Policy................................................................................ 20
Capitalization................................................................................. 21
Dilution....................................................................................... 22
Selected Financial Data........................................................................ 23
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 24
Business....................................................................................... 28
Management..................................................................................... 48
Certain Transactions........................................................................... 57
Principal Stockholders......................................................................... 59
Description of Capital Stock................................................................... 61
Shares Eligible For Future Sale................................................................ 63
Underwriting................................................................................... 65
Legal Matters.................................................................................. 67
Experts........................................................................................ 67
Additional Information......................................................................... 67
Index to Financial Statements.................................................................. F-1
</TABLE>

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

READS-TM-, MuST-TM-, Flow-thru Chip-TM-, Molecular Topography-TM-, GENE
EXPRESS-TM-, ACCELERATED DRUG DISCOVERY-TM-, Pharmacology EXPRESS-TM-,
Toxicology EXPRESS-TM-, rEST-TM-, TAG-TM- and quEST-TM- are trademarks of the
Company. Tradenames and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.

The Company was incorporated in Delaware in 1994. The Company's executive
offices are located at 10150 Old Columbia Road, Columbia, Maryland 21046, and
its telephone number is (410) 309-3100.

3
<PAGE>
SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary system,
based on analysis of gene expression and gene regulation, designed to accelerate
the discovery of drug targets and drug leads. The Company's objective is to
provide its pharmaceutical company partners with novel drug targets, drug leads
and a suite of genomic database products to reduce the time, cost and risk
associated with drug discovery. The Company believes that by building its
portfolio of partnerships it will generate current revenues and establish a
long-term economic interest in the product pipelines of multiple partners
through milestone and royalty payments. Gene Logic has established major
strategic alliances with Procter & Gamble Pharmaceuticals, Inc. ("Procter &
Gamble") and Japan Tobacco Inc. ("Japan Tobacco").

The core of Gene Logic's ACCELERATED DRUG DISCOVERY system is its
proprietary READS (Restriction Enzyme Analysis of Differentially-expressed
Sequences) technology for analyzing patterns of gene expression. Gene Logic uses
READS in its drug target and drug lead discovery programs and to generate
genomic data for its database products.

DRUG TARGET DISCOVERY. Gene Logic identifies and analyzes
disease-associated genes and their functional pathways to determine which
genes might encode useful drug targets and prioritizes targets for drug
screening. Using READS, Gene Logic generates a gene expression profile, or
Molecular Topography, representing a quantitative snapshot of the levels of
expression of essentially all the genes expressed in a tissue sample. The
Company compares normal and diseased tissues through a series of Molecular
Topography snapshots, a "molecular movie," to identify the changes in gene
expression that occur as the disease develops and progresses and to
determine which genes are associated with the disease. In addition, using
its MuST (Multiplex Selection of Transcription Factors) technology, Gene
Logic characterizes the regions of the genes that regulate their expression.
This allows the Company to identify genes which share common regulatory
mechanisms with disease-associated genes and are therefore in the same
functional pathways. Gene Logic has received notices of allowance for patent
applications covering the key aspects of the READS and MuST technologies
from the United States Patent and Trademark Office.

DRUG LEAD DISCOVERY. Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru Chip will enable the
development of high-throughput screening assays to evaluate the effects of
compounds on the expression of disease-associated genes identified by READS.
For a given disease, the Company will design a customized Flow-thru Chip
incorporating probes specific for these genes and use the chip to test the
effects of compounds on cells. Compounds that have the desired effect on
expression of the relevant genes may be evaluated as drug leads. Gene Logic
believes this technology represents a new approach to drug discovery and has
the potential to accelerate substantially the identification of drug leads.

GENOMIC DATABASES. Gene Logic is developing a suite of genomic database
products to accelerate the process of target identification and
prioritization, the discovery of lead compounds and the preclinical and
clinical development of drugs. The Company plans to market its genomic
database products, either in a single package or as separate modules, to
multiple pharmaceutical company customers. The Company's database products
are: (i) the GENE EXPRESS NORMAL database, a reference set of gene
expression profiles in a wide variety of normal tissues; (ii) the rare EST
(rEST) database containing sequences for rarely-expressed genes that are not
available through public sources; (iii) The Annotated Genome (TAG) database
which assigns human genes to functional pathways based on their patterns of
expression and regulation; (iv) the Pharmacology EXPRESS database to predict
efficacy of lead compounds at the preclinical drug development stage; and
(v) the Toxicology EXPRESS database for screening of lead compounds for
common classes of toxicological effects.

4
<PAGE>
The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates. The system integrates
Gene Logic's genomic data content with other proprietary or public genomic
databases, protein databases and the chemical, screening and assay databases
used by the Company's strategic partners.

Gene Logic's business strategy is to (i) establish strategic alliances with
pharmaceutical companies for drug target and drug lead discovery programs in
specific disease areas, (ii) establish independent discovery programs and
license resulting drug targets and drug leads to pharmaceutical companies for
further development and commercialization, (iii) market its suite of genomic
database products under non-exclusive license to multiple pharmaceutical company
customers, and (iv) retain significant rights to new product opportunities,
including diagnostic products, therapeutic proteins, gene therapy products and
products in the fields of differential diagnosis, molecular staging of disease
and pharmacogenomic profiling. The Company expects to receive a diversified
stream of technology license fees, research funding, milestone payments and
royalty or profit-sharing income from its strategic alliance partners and
licensees.

Gene Logic has established discovery programs in the fields of heart
failure, renal disease, certain diseases of the central nervous system,
osteoporosis and prostate cancer. The Company has collaborations with academic
institutions and commercial organizations for access to relevant normal and
diseased human tissues and cell types and animal disease models in these areas.

To date, Gene Logic has partnered two of its discovery programs with
pharmaceutical companies. In May 1997, the Company entered into a 4 1/2-year
strategic alliance with Procter & Gamble for drug target discovery in heart
failure. In September 1997, the Company and Japan Tobacco entered into a
five-year strategic alliance for drug target and drug lead discovery in renal
disease. Through both alliances, Gene Logic will receive committed technology
access fees and research funding. In each case, the Company's partner has the
right to expand the alliance to include discovery programs in two additional
disease indications upon terms, including committed payments, identical to those
covering the initial program. Gene Logic will also be entitled to receive
additional payments for the achievement of specified target discovery, product
development and associated regulatory milestones and royalties on worldwide net
sales of all products that may result from each alliance. As part of its
alliance, Japan Tobacco has agreed to purchase $3.0 million of Common Stock in
the Company in a private placement concurrent with this offering at a price per
share equal to the price per share at which Common Stock is sold in this
offering. The Company also granted Japan Tobacco a non-exclusive license to the
GENE EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru Chip
technology for drug screening. Japan Tobacco is obligated to pay Gene Logic chip
design fees and screening fees for use of the Flow-thru Chip and an accelerated
schedule of milestone and royalty payments on any resulting products. The
Company has retained certain rights to diagnostic products and certain classes
of therapeutics under these alliances.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company............ 3,000,000 shares

Common Stock Outstanding after the Offering.... 13,540,039 shares (1)

Use of Proceeds................................ For research and development, capital
expenditures, working capital and general
corporate purposes, including possible
acquisitions of complementary
technologies, products or businesses. See
"Use of Proceeds."

Nasdaq National Market Symbol.................. GLGC
</TABLE>

5
<PAGE>
SUMMARY FINANCIAL DATA

(in thousands, except per share data)

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
1995 1996 1996 1997
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues......................................................... $ -- $ -- $ -- $ 774
Operating expenses:
Research and development...................................... 486 1,741 982 3,338
General and administrative.................................... 258 1,345 791 2,443
--------- --------- ----------- ---------
Total operating expenses........................................ 744 3,086 1,773 5,781
Interest income, net............................................ -- 221 111 355
Income tax expense.............................................. -- -- -- 100
--------- --------- ----------- ---------
Net loss........................................................ $ (744) $ (2,865) $ (1,662) $ (4,752)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Pro forma net loss per share (2)................................ $ (0.31) $ (0.46)
--------- ---------
--------- ---------
Shares used in computing pro forma
net loss per share (2)........................................ 9,198 10,269
</TABLE>

- ------------------------
(1) Based on shares outstanding as of September 30, 1997. Includes (i) the sale
of 375,000 shares of Common Stock to Japan Tobacco at a price equal to the
initial public offering price of $8.00 per share and (ii) 9,281,185 shares
of Preferred Stock which will convert to Common Stock concurrent with the
initial public offering. Excludes (i) 2,424,381 shares of Common Stock
issuable upon exercise of outstanding stock options as of September 30, 1997
at a weighted average exercise price of $1.05 per share, and (ii) 93,687
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.88 per share. Also excludes 56,000
shares of Common Stock issuable upon exercise of stock options granted after
September 30, 1997 with an exercise price of $3.50 per share. See
"Business--Strategic Alliances," "Management--Equity Incentive Plans" and
"Description of Capital Stock--Warrants."

(2) See Note 1 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED (1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............................................. $ 22,143 $ 47,083
Working capital........................................................... 18,776 43,716
Total assets.............................................................. 27,621 52,561
Total mandatorily redeemable convertible preferred stock.................. 30,508 --
Total stockholders' equity................................................ (9,614) 45,834
</TABLE>

- ----------------
(1) As adjusted to give effect to (i) the conversion of all outstanding shares
of Preferred Stock into 9,281,185 shares of Common Stock upon the closing of
this offering, (ii) the issuance of 55,389 shares upon the exercise of
certain warrants upon the closing of this offering and (iii) the sale by the
Company of 3,000,000 shares of Common Stock offered hereby at the initial
public offering price of $8.00 per share and 375,000 shares of Common Stock
to Japan Tobacco at a price equal to the initial public offering price per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Business--Strategic Alliances."

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

EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN
ADJUSTED TO GIVE EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK INTO COMMON STOCK UPON THE COMPLETION OF THIS OFFERING, (II) ASSUMES THE
ISSUANCE OF 55,389 SHARES OF COMMON STOCK UPON THE EXERCISE OF CERTAIN WARRANTS
UPON THE COMPLETION OF THIS OFFERING AND (III) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "CAPITALIZATION" AND "UNDERWRITING."

6
<PAGE>
RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the matters set forth in the following risk factors and elsewhere in
this Prospectus.

TECHNOLOGICAL UNCERTAINTY AND PRODUCT DEVELOPMENT RISK

The Company has developed and intends to continue to develop its ACCELERATED
DRUG DISCOVERY system, including its proprietary READS and MuST technologies,
bioinformatics system and Flow-thru Chip, for the identification of genes, drug
targets and drug leads useful for the discovery and development of therapeutic
and diagnostic products. These technologies are new and unproven approaches and
are based on the assumption that information about gene expression and gene
sequences may enable scientists better to understand complex disease processes.
Generally, there is limited understanding of the roles of genes in these
diseases, and relatively few therapeutic products based on gene discoveries have
been developed and commercialized. There can be no assurance that the Company's
technologies will enable it or its strategic partners to identify genes, drug
targets and drug leads useful for the discovery and development of therapeutic
and diagnostic products. Even if the Company is successful in identifying genes
and drug targets associated with specific diseases, there can be no assurance
that the Company or its strategic partners will be able to discover drug leads
or develop products based on such discoveries. To date, no drug targets or drug
leads have been identified based on the Company's technologies, and the Company
has not commercialized any therapeutic or diagnostic products either alone or in
conjunction with its strategic partners. Failure to identify genes, drug targets
and drug leads useful for the discovery and development of therapeutic and
diagnostic products will have a material adverse effect on the Company's
business, financial condition and results of operations.

The development of therapeutic and diagnostic products based on the
Company's discoveries will also be subject to other risks of failure inherent in
pharmaceutical development. These risks include, among others, the possibilities
that any such products will be found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory approvals; that any of the products, if
safe and effective, will prove difficult or impossible to manufacture on a large
scale or will be uneconomical to market; that the proprietary rights of third
parties will preclude the Company or its strategic partners from marketing any
products developed; and that third parties will market equivalent or superior
products. As a result, there can be no assurance that the activities of the
Company or its strategic partners will result in any commercially viable
products.

The Company has created a prototype of the Flow-thru Chip and plans to
commence in-house testing during 1998 but has not yet produced the Flow-thru
Chip on a commercial scale. The Company is in the process of developing its
suite of genomic database products, but, to date, only the GENE EXPRESS NORMAL
database is commercially available. Other than the option to require the Company
to develop Flow-thru Chip assays and the non-exclusive license to the GENE
EXPRESS NORMAL database granted to Japan Tobacco, the Company has not sold or
licensed rights to its Flow-thru Chip or any of its genomic database products.
There can be no assurance that the development or commercial scale-up of the
Flow-thru Chip or the genomic database products will be successful or that the
Company will be successful in marketing such products.

The success of the Company's genomic database products will depend on the
Company's ability to generate genomic data content and analyze such data using
software tools. Gene Logic's database products are complex and sophisticated and
could contain design defects or software errors that could be difficult to
detect and correct. There can be no assurance that, despite testing by the
Company and its strategic partners and customers, errors, bugs and viruses will
not be found in current and future products, if any.

7
<PAGE>
Failure to maintain and further develop the necessary bioinformatics platform to
support the drug discovery efforts of the Company and its partners could result
in the loss of or delay in revenues and market acceptance, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Because the Company's genomic database products contain
genomic information generated by the Company's technologies, the development and
commercialization of the Company's genomic database products will be materially
adversely affected in the event that its technologies fail to generate such
information. See "Business--Gene Logic's ACCELERATED DRUG DISCOVERY System" and
"--Gene Logic Programs and Products."

RELIANCE ON STRATEGIC PARTNERS

The Company's strategy for development and commercialization of therapeutic
and diagnostic products based on its discoveries depends, in large part, upon
the formation of multiple strategic alliances and licensing arrangements to
pursue drug targets and drug leads in different disease areas. The Company has
established strategic alliances with Procter & Gamble and Japan Tobacco in
certain disease fields. These strategic alliances have only been formed in
recent months. No drug targets have been identified pursuant to such alliances,
and there can be no assurance that the alliances will be successful. There can
also be no assurance that the Company will establish additional strategic
alliances or licensing arrangements that it deems necessary to develop and
commercialize products based upon its discovery programs, that any such
agreements will be made under terms acceptable to the Company or that any future
strategic alliances or licensing arrangements will ultimately be successful. The
Company has received a substantial portion of its revenues since inception from
alliances with its strategic partners and expects to continue to do so in the
near term. Failure of the Company to enter into additional strategic alliances
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's strategy includes entering into multiple, concurrent strategic
alliances. There can be no assurance that the Company will successfully manage
simultaneous collaborative programs. Failure by the Company to manage existing
and future strategic alliances, maintain confidentiality among strategic
partners or prevent the occurrence of conflicts among strategic partners could
lead to disputes that result in, among other things, a significant strain on
management resources, legal claims involving significant time, expense and loss
of reputation, loss of capital or a loss of revenues, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company intends to rely on strategic partners for preclinical studies,
clinical development, regulatory approval, manufacturing and marketing of
therapeutic and diagnostic products, if any, resulting from its discovery
programs. Agreements with strategic partners typically will allow such partners
significant discretion in electing whether to pursue any of these activities.
The Company cannot control the amount and timing of resources its strategic
partners may devote to the Company's programs or potential products, and there
can be no assurance that such partners will perform their obligations as
expected. A strategic partner's performance under its alliance agreement with
the Company could be materially adversely affected if such partner were involved
in certain third party transactions such as a business combination or in the
event that the partner had a significant strategic shift in its business focus.
If any strategic partner were to breach its agreement with the Company, or
otherwise fail to conduct its collaborative activities in a timely manner, such
conduct could have a material adverse effect on the Company's business,
financial condition and results of operations. Each of the Company's current
strategic alliances provides the strategic partner with certain rights to
terminate the alliance agreement without cause by giving Gene Logic six months
notice at any time after 12 months from the date of commencement of the research
program under such agreement. The early termination of any strategic alliance
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to continue to rely on
its strategic partners for significant funding in support of its research
operations. The Company would be required to devote additional internal
resources to such

8
<PAGE>
programs, or to scale back or terminate certain programs, if such funding were
not available or were reduced in amount.

Under its current strategic alliances, the Company has agreed not to conduct
certain research, independently or with other commercial third parties, that is
in the same field as the research conducted under the alliance agreement.
Consequently, such arrangements could have the effect of limiting the areas of
research the Company may pursue, either alone or with others. Should a strategic
partner fail to develop or commercialize a product to which it has rights, the
Company's business may be materially adversely affected. There can be no
assurance that a strategic partner will not develop, either alone or with
others, alternative technologies or products which are competitive with any that
might result from the Company's research program with the strategic partner.
Possible disagreements between the Company and its partners could lead to delays
in collaborative research, development or commercialization of certain products
or could require or result in litigation or arbitration, which would be time
consuming and expensive, and could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Gene Logic's Strategy" and "--Strategic Alliances."

EARLY STAGE OF DEVELOPMENT; LIMITED OPERATING HISTORY; PROFITABILITY UNCERTAIN

The Company is at an early stage of development. There is limited historical
information available upon which an investor can base an evaluation of an
investment in the Company. The Company was founded in September 1994, but did
not scale up operations until May 1996 following its first major financing.
Substantially all of the Company's resources have been, and for the foreseeable
future will continue to be, dedicated to the development of the Company's
ACCELERATED DRUG DISCOVERY system and its application to the identification of
genes, drug targets and drug leads with therapeutic and diagnostic potential.
All of the Company's programs and strategic alliances are at an early stage. The
development of the Company's technologies and their application to the discovery
of genes, drug targets and drug leads will require significant additional
research and development and investment, including testing to further validate
performance and demonstrate cost effectiveness. There can be no assurance that
the Company's technologies will continue to be successfully developed, or that
any therapeutic or diagnostic products discovered or developed through their
utilization will prove to be commercially useful, meet applicable regulatory
standards in a timely manner or at all, compete with other technologies and
products, avoid infringing the proprietary rights of others, be manufactured in
sufficient quantities or at reasonable costs or be marketed successfully. The
Company expects that it will be a number of years, if ever, before the Company
will recognize revenue from therapeutic or diagnostic product sales or
royalties.

The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million and $4.8 million during the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and as of September 30, 1997, had an accumulated deficit of $9.9
million. The Company expects to incur additional losses for at least the next
several years and that such losses will increase as the Company expands its
research and development activities. The Company's losses to date have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. To date,
substantially all of the Company's revenues have been derived from payments from
strategic alliances and licensing arrangements, and the Company expects that
substantially all of its revenues for the foreseeable future will result from
payments from strategic alliances and licensing arrangements and interest
income. There can be no assurance that the Company will receive additional
revenues under existing strategic alliances or that the Company will be
successful in entering into any new strategic alliance that results in revenues.
The Company's ability to generate revenues and achieve profitability is
dependent in large part on the Company's ability to enter into additional
strategic alliances, and on the ability of the Company and its strategic
partners to discover genes and drug targets associated with particular diseases
and, thereafter, utilize such discoveries to identify drug leads, develop
therapeutic and diagnostic products, conduct preclinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture,
introduce and market such

9
<PAGE>
products. In addition, to the extent that the Company relies upon others for
these research, development and commercialization activities, the Company's
ability to achieve profitability will be dependent in part upon the success of
such outside parties. The time required to reach profitability is highly
uncertain and there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. Failure to achieve significant
revenues or profitability would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

DEPENDENCE UPON ACCESS TO CERTAIN MATERIALS AND INFORMATION AND LICENSED
TECHNOLOGIES

The Company obtains relevant normal and diseased human tissue samples,
related clinical and other biological information and animal disease models
through collaborations with academic institutions and commercial organizations.
Use of the Company's technologies to discover disease-related genes and drug
targets requires access to such materials and information and there is
substantial competition for such materials and information. There can be no
assurance that the Company will continue to be able to obtain access to such
materials and information upon terms acceptable to the Company, if at all, and
any material lack of availability of such materials and information would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Gene Logic Programs and Products."

Certain of the components of the ACCELERATED DRUG DISCOVERY system, such as
the technologies underlying READS, MuST and the Flow-thru Chip, have been
acquired or licensed from third parties. Changes in certain third party license
agreements and relationships, or termination thereof, could materially adversely
affect the Company's research and development activities. There can be no
assurance that the Company will be able to acquire from third parties or develop
new technologies, alone or with others. Failure to license necessary
technologies would have a material adverse effect on the Company's business,
financial condition and results of operations. There also can be no assurance
that there will not be disruptions in the Company's relationships with third
parties from whom the Company derives technology, or that any disruptions that
do arise will be resolved in a timely and cost-effective manner, if at all. Any
such disruptions could have a material adverse effect on the Company's business,
financial condition and results of operations.

FLUCTUATIONS IN OPERATING RESULTS

The Company's operating results may fluctuate significantly from quarter to
quarter as a result of a variety of factors, including changes in the demand for
the Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract revenues, the timing of new product introductions, if any, by the
Company, changes in the research and development budgets of the Company's
strategic partners and any potential partners, the introduction of new products
by the Company's competitors and other competitive factors, regulatory actions,
adoption of new technologies, manufacturing results, and the cost, quality and
availability of cell and tissue samples, reagents and related components. If
revenue in a particular period does not meet expectations, the Company may not
be able to adjust significantly its level of expenditures in such period, which
would have an adverse effect on the Company's operating results. The Company
believes that quarterly comparisons of its financial results will not
necessarily be a meaningful indication of future performance. Due to the
foregoing and other unforeseen factors, in some future quarter or quarters the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
could be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

10
<PAGE>
PATENTS AND PROPRIETARY RIGHTS; THIRD PARTY RIGHTS

Gene Logic seeks United States and international patent protection for major
components of its technology platform, including elements of its READS, MuST,
Flow-thru Chip and bioinformatics technologies; it relies upon trade secret
protection for certain of its confidential and proprietary information; and it
uses license agreements both to access external technologies and assets and to
transfer certain intellectual property rights to others. The Company's
commercial success will be dependent in part upon its ability to obtain
commercially valuable patent claims and to protect its intellectual property
portfolio.

As of October 20, 1997, the Company had exclusive rights to nine United
States patent applications, as well as corresponding international and foreign
patent applications, relating to its technologies. The Company has received
notices of allowance for two United States patent applications covering the key
aspects of the READS technology, and notice of allowance for one United States
patent application covering the key aspects of MuST technology. However, no
patents have issued to date.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Gene Logic, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the pending
patent applications to which the Company has exclusive rights will result in
issued patents, that the claims of any patents which are issued will provide
meaningful protection, that the Company will develop additional proprietary
technologies that are patentable, that any patents licensed or issued to the
Company or its strategic partners will provide a basis for commercially viable
products or will provide the Company with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology field in which the Company
operates is still evolving. The degree of future protection for the Company's
proprietary rights, therefore, is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
licensed or issued to the Company, design around the patented technologies
licensed to or developed by the Company. In addition, the Company could incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates such suits.

The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned by
third parties relating to the analysis of gene expression or the manufacture and
use of DNA chips. There can be no assurance that these or other technologies
will not provide third parties with competitive advantages over the Company and
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain third party patent
applications contain broad claims, and it is not possible to determine whether
or not such claims will be narrowed during prosecution and/or will be allowed
and issued as patents, even if such claims appear to cover the prior art or have
other defects. There can be no assurance that an owner or licensee of a patent
in the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
required licenses would be made available on commercially viable terms, if at
all. Failure to obtain any required license could prevent the Company from
utilizing or commercializing one or more of its technologies and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

In general, the Company intends to continue to apply for patent protection
for methods relating to gene expression and to apply for patent protection for
the individual disease genes and drug targets it discovers. Such patents may
include claims relating to novel genes and gene fragments and to novel uses for
known genes or gene fragments identified through its discovery programs. There
can be no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are

11
<PAGE>
issued, the scope of the coverage or protection afforded thereby is uncertain.
Failure to secure such meaningful patent protection could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or related expression patterns. Furthermore, others
may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar or identical to any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.

Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may adversely affect the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the extent that the
duration and level of the royalties it is entitled to receive from its strategic
partners are based on the existence of a valid patent covering the product
subject to the royalty obligation.

With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its ACCELERATED DRUG
DISCOVERY system involve proprietary know-how, technology or data which are not
covered by patents or patent applications. In addition, the Company has
developed a proprietary index of gene and gene fragment sequences which it
updates on an ongoing basis. Some of these data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. The Company has taken security measures to protect its proprietary
know-how and technologies and confidential data and continues to explore further
methods of protection. While Gene Logic requires all employees, consultants and
collaborators to enter into confidentiality agreements, there can be no
assurance that proprietary information will not be disclosed, that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade

12
<PAGE>
secrets, or that the Company can meaningfully protect its trade secrets. In the
case of a strategic partnership or other collaborative arrangement which
requires the sharing of data, the Company's policy is to make available to its
partner only such data as are relevant to the partnership or arrangement, under
controlled circumstances, and only during the contractual term of the strategic
partnership or collaborative arrangement, and subject to a duty of
confidentiality on the part of its partner or collaborator. There can be no
assurance, however, that such measures will adequately protect the Company's
data. Any material leak of confidential data into the public domain or to third
parties may have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company is a party to various license agreements which give it rights to
use certain technologies and biological materials in its research and
development processes. There can be no assurance that the Company will be able
to maintain such rights on commercially reasonable terms, if at all. Failure by
the Company to maintain such rights could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."

INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE

Competition among entities attempting to identify genes associated with
specific diseases and to develop products based on such discoveries is intense.
Gene Logic faces, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. The Company is aware that
certain entities are utilizing a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to identify
disease-related genes. In addition, numerous pharmaceutical companies are
developing genomic research programs, either alone or in partnership with the
Company's competitors. Competition among such entities is intense and is
expected to increase. In order to compete against existing and future
technologies, the Company will need to demonstrate to potential customers that
its technologies and capabilities are superior to competing technologies.

Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its strategic partners, or may obtain regulatory approvals of their
drugs more rapidly than the Company and its strategic partners, any of which
could have a material adverse effect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also faces competition from
these and other entities in gaining access to relevant samples used in its
discovery programs.

The Company will rely on its strategic partners for support of certain of
its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners is conducting multiple product development efforts within each area
which is the subject of its strategic alliance with Gene Logic. Generally, the
Company's strategic alliance agreements do not preclude the strategic partner
from pursuing development efforts utilizing approaches distinct from that which
is the subject of the alliance. Any product candidate of the Company, therefore,
may be subject to competition with a potential product under development by a
strategic partner. See "--Reliance on Strategic Partners."

13
<PAGE>
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, gene expression analysis, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies. See "Business--Competition."

FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ACCESS TO ADDITIONAL FUNDING

The Company has invested significant capital in its infrastructure and in
its scientific and business development activities and expects capital and
operating expenditures to increase over the next several years as it expands its
operations. The Company believes that the net proceeds from this offering and
the sale of shares to Japan Tobacco, existing cash and marketable securities and
anticipated cash flow from strategic alliances will be sufficient to support the
Company's operations for at least the next 24 months. However, this expectation
is based on the Company's current operating plan, which could change as a result
of many factors, and the Company could require additional funding sooner than
expected. In addition, the Company may choose to raise additional capital due to
market conditions or strategic considerations even if it has sufficient funds
for its operating plan. The Company's actual future capital requirements and the
adequacy of its available funds will depend on many factors, including progress
of its discovery programs, the number and breadth of these programs, the ability
of the Company to establish and maintain strategic alliance and licensing
arrangements and the progress of the development and commercialization efforts
of the Company's strategic partners. These factors also include the level of the
Company's activities relating to its independent discovery programs and to the
development and commercialization rights it retains in its strategic alliance
arrangements, competing technological and market developments, the costs
associated with obtaining access to tissue samples and related information and
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights.

The Company expects that it will require significant additional funding in
the future, which it may seek through public or private equity offerings, debt
financings or additional strategic alliance and licensing arrangements. No
assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed, or that, if available,
such financing will be obtained on terms favorable to the Company or its
stockholders. To the extent the Company raises additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If adequate funds are not available when needed, the Company may be
required to curtail operations significantly or to obtain funds by entering into
strategic alliances and licensing arrangements, in which case the Company may be
required to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to the
Company, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that
adequate funds are not available, the Company's business would be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

14
<PAGE>
ATTRACTION AND RETENTION OF KEY EMPLOYEES

The Company is highly dependent on the principal members of its management
and scientific staff. The loss of the services of any of these persons could
significantly impede the accomplishment of the Company's scientific and business
objectives. The Company's success is also dependent upon its ability to attract
and retain additional qualified scientific, technical and managerial personnel.
There is substantial competition among biotechnology, pharmaceutical and health
care companies, universities, government entities and non-profit organizations
for such personnel, and there can be no assurance that the Company will retain
its key scientific, technical and managerial employees or that it will be able
to attract, assimilate and retain such other highly qualified scientific,
technical and managerial personnel as may be required in the future. The
inability of the Company to retain its current scientific, technical and
managerial personnel and to attract and retain additional key employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Competition," "--Scientific Advisers"
and "--Employees."

GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL; HAZARDOUS MATERIALS

The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug developed
by the Company's strategic partners must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes preclinical studies and clinical trials, and may include
post-marketing surveillance of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in
United States Food and Drug Administration ("FDA") policies for drug approval
during the period of product development and FDA regulatory review of each
submitted new drug application ("NDA") in the case of new pharmaceutical agents,
or product license application ("PLA") or biologics license application ("BLA")
in the case of biological therapeutics. Similar delays may also be encountered
in the regulatory approval of any diagnostic product, where such approval is
required, and in obtaining regulatory approval in foreign countries. Delays in
obtaining regulatory approvals could adversely affect the marketing of any drugs
developed by the Company or its strategic partners, impose costly procedures
upon the Company's or its partners' activities, diminish any competitive
advantages that the Company or its partners may attain and adversely affect the
Company's receipt of royalties. There can be no assurance that regulatory
approval will be obtained for any drugs or diagnostic products developed by the
Company or its strategic partners. Furthermore, regulatory approval may entail
limitations on the indicated uses of a drug. Because certain of the products
likely to result from the Company's drug target and lead discovery programs
involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities and, as a result, regulatory
approvals may be obtained more slowly than for products based upon more
conventional technologies.

15
<PAGE>
product candidate resulting from the Company's discovery programs, and no
product candidate has been approved for commercialization in the United States
or elsewhere. The Company intends to rely on its strategic partners to file INDs
and generally direct the regulatory approval process. There can be no assurance
that the Company's strategic partners will be able to conduct clinical testing
or obtain necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use of
such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally. See "Business--Government
Regulation."

ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENE-BASED DIAGNOSTICS

The Company and its partners may seek to develop diagnostic products based
on genes it discovers. The prospect of broadly available gene-based diagnostic
tests raises issues regarding their appropriate utilization and the
confidentiality of the information provided by such testing. It is possible that
discrimination by third party payors, based on the results of such testing,
could lead to the increase of premiums by such payors to prohibitive levels,
outright cancellation of insurance or unwillingness to provide coverage to
individuals showing unfavorable gene expression profiles. Similarly, employers
could discriminate against employees with gene expression profiles indicative of
the potential for high disease-related costs and lost employment time. Finally,
government authorities could, for social or other purposes, limit or prohibit
the use of such tests under certain circumstances. There can be no assurance
that such ethical and social factors or concerns about genetic testing and
target identification will not have a material adverse effect on market
acceptance of the Company's technologies and products.

REIMBURSEMENT RISK

The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of governments and third party payors to
contain or reduce the costs of health care through various means including by
limiting prices paid for pharmaceuticals. In both the United States and
elsewhere, sale of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third party payors, such as
government insurance programs (Medicare and Medicaid) and private and corporate
health insurance plans. Third party payors are increasingly challenging the
prices charged for pharmaceuticals and, in some cases, refusing payment for
off-label use and other uses of pharmaceuticals they deem inappropriate.

EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH

The Company has recently experienced, and expects to continue to experience,
significant growth in the number of its employees and the scope of its
operations. The Company has significantly increased the scale of its operations
and number of employees to support its partnered and independent discovery

16
<PAGE>
programs and to manage its strategic alliances. The number of employees of the
Company increased from three on January 1, 1996 to 57 on September 30, 1997.
This growth has placed, and may continue to place, a significant strain on the
Company's management, operations and systems. The Company's ability to manage
such growth effectively will depend upon its broadening its management team and
attracting, hiring and retaining skilled employees. In addition, in order to
increase capacity to remain competitive and satisfy the needs of current and
future strategic partners, the Company will be required to acquire additional
capital equipment and resources. There can be no assurance that the Company will
be able to manage its growth, and the Company's inability to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees" and
"--Facilities."

LIMITED CLINICAL DEVELOPMENT, MANUFACTURING, MARKETING AND SALES EXPERIENCE

The Company has made no investment in therapeutic or diagnostic
manufacturing, marketing or product sales resources and does not generally
expect to engage directly in the manufacturing, marketing or sale of therapeutic
or diagnostic products. Instead, the Company currently intends to contract with
others to pursue the commercialization of therapeutic or diagnostic products
based upon or discovered using its technologies. There can be no assurance that
the Company will be able to enter into such arrangements on acceptable terms, if
at all. The Company will be dependent to a significant extent on partners,
licensees or other entities for development, manufacturing and commercialization
of such products. The Company's dependence upon third parties for the
manufacture, marketing and sales of therapeutic or diagnostic products may
materially adversely affect the Company's ability to develop and deliver such
products on a timely and competitive basis, if at all. To the extent the Company
directly engages in development, manufacturing and marketing of certain
therapeutic or diagnostic products, it will require substantial additional
funds, personnel and production facilities. See "--Reliance on Strategic
Partners."

PRODUCT LIABILITY EXPOSURE

Clinical trials, manufacturing, marketing and sale of any of the Company's
or its partners' potential therapeutic or diagnostic products may expose the
Company to liability claims from the use of such products. The Company currently
does not carry product liability insurance. There can be no assurance that the
Company or its partners will be able to obtain such insurance or, if obtained,
that sufficient coverage can be acquired at a reasonable cost. The inability to
obtain sufficient insurance coverage at an acceptable cost or to otherwise
protect against potential product liability claims could prevent or inhibit the
commercialization of pharmaceutical products developed by the Company or its
partners. A product liability claim or recall would have a material adverse
effect on the Company's business, financial condition and results of operations.

CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS

Upon completion of this offering, the Company's executive officers,
directors and affiliated individuals and entities together will beneficially own
approximately 30.2% of the outstanding shares of Common Stock (29.2% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, acting together, will be able to influence significantly and
possibly control most matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, mergers, a sale of all or substantially all of the assets of the
Company, going private transactions and other fundamental transactions. In
addition, the Company's Certificate of Incorporation, as it is proposed to be
amended and restated concurrently with the closing of this offering (the
"Restated Certificate"), does not provide for cumulative voting with respect to
the election of directors. Consequently, the present executive officers,
directors and affiliated individuals and entities will be able to control the
election of the members of the Board of Directors of the Company. Such a

17
<PAGE>
concentration of ownership could affect the liquidity of the Company's Common
Stock and have an adverse effect on the price of the Common Stock, and may have
the effect of delaying or preventing a change in control of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. See "Principal Stockholders"
and "Description of Capital Stock."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price will be determined by negotiations between the
Company and the Underwriters and is not necessarily indicative of the market
price at which the Common Stock of the Company will trade after this offering.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The market prices for securities of biotechnology
and pharmaceutical companies have been highly volatile, and the market has
experienced significant price and volume fluctuations that are often unrelated
to the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, disputes or other developments concerning proprietary rights,
including patents and litigation matters, developments concerning strategic
alliance agreements, publicity regarding actual or potential results with
respect to products or technology under development by the Company, its
strategic partners or its competitors, regulatory developments in both the
United States and foreign countries, public concern as to the efficacy of new
technologies, quarterly fluctuations in the Company's operating results, future
sales of substantial amounts of Common Stock by existing stockholders and
comments by securities analysts, as well as general market conditions and other
factors, may have a significant impact on the market price of the Common Stock.
In particular, the realization of any of the risks described in these "Risk
Factors" could have a material adverse impact on such market price.

ANTI-TAKEOVER PROVISIONS

The Restated Certificate provides for staggered terms for the members of the
Board of Directors. In addition, the Restated Certificate authorizes the Board
of Directors of the Company, without stockholder approval, to issue additional
shares of Common Stock and to fix the rights, preferences and privileges of and
issue additional shares of Preferred Stock with voting, conversion, dividend and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock,
rights to purchase Preferred Stock or additional shares of Common Stock may have
the effect of delaying or preventing a change in control of the Company. In
addition, the possible issuance of Preferred Stock or additional shares of
Common Stock could discourage a proxy contest, make more difficult the
acquisition of a substantial block of the Company's Common Stock or limit the
price that investors might be willing to pay for shares of the Company's Common
Stock. Further, the Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent. Special meetings of the stockholders of the Company may be
called only by the Chairman of the Board of Directors, the President of the
Company or by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. These and other provisions
contained in the Restated Certificate and the Company's By-laws, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving an actual or potential change in control of the
Company or its management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices)
and may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their best
interests and, therefore, could adversely affect the price of the Company's
Common Stock. See "Description of Capital Stock."

18
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE

Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Upon completion of
this offering, the Company will have 13,540,039 shares of Common Stock
outstanding, assuming no exercise of currently outstanding options or warrants.
Of these shares, the 3,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. The remaining 10,540,039 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 of the Securities Act (the "Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities Act.
As a result of contractual restrictions and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) approximately 5,732 Restricted Shares will be eligible for sale
90 days after the date of this Prospectus; (iii) approximately 5,609,475
Restricted Shares will be eligible for sale 180 days after the effective date of
this offering upon expiration of lock-up agreements and upon expiration of their
respective holding periods under Rule 144; and (iv) the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective holding periods under Rule 144. In addition,
1,192,918 shares issuable upon exercise of vested stock options will become
eligible for sale 180 days after the date of this Prospectus upon expiration of
lock-up agreements. The holders of 9,281,185 shares of Common Stock and the
holders of warrants to purchase 30,051 shares of Common Stock have the right in
certain circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning three months after the
effective date of this offering. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. In addition, the
Company expects to file a registration statement on Form S-8 registering a total
of approximately 6,134,268 shares of Common Stock subject to outstanding stock
options or reserved for issuance under the Company's equity incentive plans.
Such registration statement is expected to be filed and to become effective 180
days after the effective date of this offering. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above. See "Management--Equity Incentive Plans," "Description of
Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."

DILUTION; ABSENCE OF CASH DIVIDENDS

Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the initial public offering price. Additional dilution will
occur upon exercise of outstanding options and warrants. See "Dilution" and
"Shares Eligible for Future Sale." The Company has never paid any dividends and
does not anticipate paying dividends in the foreseeable future. See "Dividend
Policy."

19
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby and the sale of 375,000 shares of
Common Stock to Japan Tobacco are estimated to be approximately $24,720,000
($28,068,000 if the Underwriters' over-allotment option is exercised in full),
at the initial public offering price of $8.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company.

The Company intends to use the net proceeds from this offering and the sale
of shares to Japan Tobacco as follows: approximately $2,000,000 to fund tenant
improvements; approximately $10,000,000 to fund capital expenditures; and the
remainder to fund its research and development activities, including scale-up of
its laboratory, database and business development operations, and for working
capital and general corporate purposes. The Company's management will retain
broad discretion in the allocation of such net proceeds. The Company may also
use a portion of the net proceeds to fund acquisitions of complementary
technologies, products or businesses, although the Company has no current
agreements or commitments for any such acquisitions. Pending such uses, the
Company intends to invest the net proceeds of this offering and the sale of
shares to Japan Tobacco in short-term, interest bearing, investment-grade
securities.

The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including progress of the Company's programs,
the number and breadth of these programs, future revenue growth, if any,
achievement of milestones under strategic alliances and licensing arrangements,
the ability of the Company to establish and maintain strategic alliances and
other arrangements, the progress of the development efforts of the Company's
strategic partners and the amount of cash, if any, generated by the Company's
operations. Such factors also include the pace and amount of any acquisitions or
investments, competing technological and market developments that make the
Company's technologies and database products relatively less attractive to
strategic partners and the costs involved in enforcing patent claims and other
intellectual property rights.

The Company believes that its existing capital resources, together with the
net proceeds from this offering and the sale of shares to Japan Tobacco,
interest income and future payments due under its existing strategic alliances,
will be sufficient to satisfy its current and projected funding requirements for
at least the next 24 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

DIVIDEND POLICY

The Company has never declared or paid dividends on its Common Stock and
does not anticipate paying any dividends on its Common Stock in the forseeable
future. The Company currently intends to retain any future earnings to fund the
development of its business.

20
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the conversion of all outstanding
shares of Preferred Stock into 9,281,185 shares of Common Stock upon the closing
of this offering, the issuance of 55,389 shares of Common Stock upon the
exercise of certain warrants upon the closing of this offering and the sale of
3,000,000 shares of Common Stock offered hereby at the initial public offering
price of $8.00 per share and the sale of 375,000 shares of Common Stock to Japan
Tobacco at a price equal to the initial public offering price per share and the
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
<S> <C> <C>
ACTUAL (1) AS ADJUSTED (2)
----------- -----------------

<CAPTION>
(in thousands)
<S> <C> <C>
Current portion of long-term debt and capital lease obligations........ $ 358 $ 358
----------- -------
----------- -------
Noncurrent portion of long-term debt and capital lease obligations..... $ 998 $ 998
Series A, A-1, B and C convertible preferred stock, $0.01 par value;
9,550,000 shares authorized; 9,281,185 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted (2)............ 30,508 --
Stockholders' equity:
Preferred Stock, $.01 par value; no shares authorized, actual;
10,000,000 shares authorized, as adjusted; no shares issued or
outstanding, actual and as adjusted................................ -- --
----------- -------
Common Stock, $.01 par value; 17,000,000 shares authorized, actual;
60,000,000 shares authorized, as adjusted; 828,465 shares issued
and outstanding, actual; 13,540,039 shares issued and outstanding,
as adjusted........................................................ 8 135
Additional paid-in capital........................................... 6,765 62,086
Deferred compensation, net........................................... (6,530) (6,530)
Unrealized loss on marketable securities............................. (1) (1)
Accumulated deficit.................................................. (9,856) (9,856)
----------- -------
Total stockholders' equity......................................... (9,614) 45,834
----------- -------
Total capitalization............................................. $ 21,892 $ 46,832
----------- -------
----------- -------
</TABLE>

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

(1) Excludes: (i) 2,424,381 shares of Common Stock issuable upon exercise of
outstanding stock options as of September 30, 1997 at a weighted average
exercise price of $1.05 per share; and (ii) 93,687 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $1.88 per share. Also excludes 56,000 shares of Common
Stock issuable upon exercise of stock options granted after September 30,
1997 with an exercise price of $3.50 per share. See "Management--Equity
Incentive Plans," "Description of Capital Stock--Warrants" and Note 13 of
Notes to Financial Statements.

(2) See the Financial Statements and Note 9 of Notes to the Financial Statements
for descriptions of the authorized, issued and outstanding shares,
liquidation preferences and conversion features of the individual Series of
Preferred Stock.

21
<PAGE>
DILUTION

The pro forma net tangible book value of the Company as of September 30,
1997 was $20,709,747 or $2.04 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock and assuming the issuance of 55,389 shares of
Common Stock upon the exercise of certain warrants upon the closing of this
offering.

Pro forma net tangible book value dilution 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 the Common
Stock immediately after completion of this offering. After giving effect to the
sale by the Company of 3,000,000 shares of Common Stock offered hereby at the
initial public offering price of $8.00 per share and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and the sale of 375,000 shares of Common Stock to Japan Tobacco
at a price equal to the initial public offering price per share and assuming no
other changes in the net tangible book value after September 30, 1997, the
Company's pro forma net tangible book value as of September 30, 1997 would have
been $45,429,747 or $3.36 per share. This represents an immediate increase in
pro forma net tangible book value of $1.32 per share to existing stockholders
and an immediate dilution in pro forma net tangible book value of $4.64 per
share to new purchasers of Common Stock in this offering and in the sale of
shares of Common Stock to Japan Tobacco, as illustrated by the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share.................... $ 8.00
Pro forma net tangible book value per share as of
September 30, 1997..................................... $ 2.04
Increase attributable to new investors................... 1.32
---------
Pro forma net tangible book value per share after the
offering................................................. 3.36
---------
Dilution to new investors.................................. $ 4.64
---------
---------
</TABLE>

The following table sets forth on a pro forma basis, as of September 30,
1997, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing holders of Common Stock and by the new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......................... 10,165,039 75.1% $ 30,419,910 53.0% $ 2.99
New investors...................................... 3,375,000 24.9 27,000,000 47.0 8.00
------------ ----- ------------- -----
Total............................................ 13,540,039 100.0% $ 57,419,910 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>

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

(1) Gives effect to the conversion of all outstanding shares of Preferred Stock
into 9,281,185 shares of Common Stock upon the closing of this offering.

The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options and warrants. As of September 30,
1997, 2,518,068 shares of Common Stock were subject to outstanding options and
warrants at a weighted average exercise price of $1.08 per share. To the extent
additional shares are purchased pursuant to the exercise of outstanding options
and warrants, there will be further dilution to new investors. See
"Management--Equity Incentive Plans," "Description of Capital Stock--Warrants"
and Note 13 of Notes to Financial Statements.

22
<PAGE>
SELECTED FINANCIAL DATA

The selected financial data presented below for the period from September
22, 1994 (inception) through December 31, 1994, the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 and at December 31,
1994, 1995 and 1996 and September 30, 1997 are derived from the Company's
financial statements audited by Arthur Andersen LLP, independent auditors, which
are included elsewhere in this Prospectus. The statement of operations data for
the nine months ended September 30, 1996 and the balance sheet data at September
30, 1996 have been derived from unaudited financial statements; however,
management believes such financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1997. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) DECEMBER 31, SEPTEMBER 30,
THROUGH -------------------- ----------------------
DECEMBER 31, 1994 1995 1996 1996 1997
--------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ -- $ -- $ -- $ -- $ 774
Operating expenses:
Research and development..................... 44 486 1,741 982 3,338
General and administrative................... 46 258 1,345 791 2,443
--- --------- --------- ----------- ---------
Total operating expenses......................... 90 744 3,086 1,773 5,781
Interest income, net............................. -- -- 221 111 355
Income tax expense............................... -- -- -- -- 100
--- --------- --------- ----------- ---------
Net loss......................................... $ (90) $ (744) $ (2,865) $ (1,662) $ (4,752)
--- --------- --------- ----------- ---------
--- --------- --------- ----------- ---------
Pro forma net loss per share (1)................. $ (0.31) $ (0.46)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per
share (1)...................................... 9,198 10,269
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------

<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............................. $ 298 $ 348 $ 5,671 $ 5,930 $ 22,143
Working capital............................................ 311 246 4,581 5,832 18,776
Total assets............................................... 311 424 7,819 7,126 27,621
Total long-term debt and capital lease obligations......... -- -- 446 471 1,356
Total mandatorily redeemable convertible
preferred stock.......................................... 400 1,153 10,471 9,301 30,508
Total stockholders' equity................................. (89) (833) (4,187) (2,810) (9,614)
</TABLE>

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

(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net loss per share.

23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements which
involve risk and uncertainties. Actual events and results may differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including the matters set forth under the caption "Risk
Factors" and elsewhere in this Prospectus.

OVERVIEW

The Company was incorporated in September 1994, and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics systems and database products used to identify the
expression of genes, drug targets and drug leads. The Company has incurred
losses since inception and, as of September 30, 1997, had an accumulated deficit
of $9.9 million.

The Company entered into a strategic alliance with Procter & Gamble in the
field of heart failure in May 1997 and with Japan Tobacco in the field of renal
disease in September 1997. These agreements provide the Company with various
combinations of technology and database access fees and research funding and may
provide certain additional payments upon the attainment of research and
regulatory milestones and royalty payments based on sales of any products
resulting from the strategic alliances. Revenue recognized under the alliances
with Procter & Gamble and Japan Tobacco through September 30, 1997 totalled
approximately $774,000. Each strategic partner has the option to expand the
alliance to cover two additional disease indications. In addition, Japan Tobacco
is also obligated to purchase $3.0 million of the Company's Common Stock in a
private placement to close simultaneously with this offering.

The Company's future profitability will depend in part on the successful
development and marketing of the ACCELERATED DRUG DISCOVERY system, the genomic
database products and the Flow-thru Chip and the establishment of strategic
alliances. Payments from strategic alliance partners and interest income are
expected to be the only sources of revenue for the foreseeable future. These
payments will include committed technology access fees and milestone payments
for the discovery of drug targets and leads. Such revenue is dependent in large
part on the discovery of genes, drug targets and drug leads using the Company's
technologies. Royalties or other revenue from commercial sales of products
developed from any therapeutic or diagnostic product identified using the
Company's technologies are not expected for at least several years, if at all.
Payments under strategic alliances will be subject to significant fluctuation in
both timing and amount, and, therefore, the Company's results of operations for
any period may not be comparable to the results of operations for any other
period. Furthermore, the generation of significant revenues and profitability
will depend upon the Company entering into additional alliances. There can be no
assurance that the Company will enter into additional alliances on acceptable
terms, if at all, or that such current or future alliances will be successful.

The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million and $4.8 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and at September 30, 1997, the Company had an accumulated deficit
of approximately $9.9 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which to date have been
generated principally from strategic alliances. The Company expects to incur
substantial additional operating losses over the next few years as a result of
increases in its expenses for research and development capabilities.

The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including changes in the demand for the
Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract

24
<PAGE>
revenues, and the timing of new product introductions, if any, by the Company.
The Company's quarterly operating results may also fluctuate significantly
depending on changes in the research and development budgets of the Company's
strategic partners and any potential partners, the introduction of new products
by the Company's competitors and other competitive factors, regulatory actions,
adoption of new technologies, manufacturing results, and the cost, quality and
availability of cell and tissue samples, reagents and related components.

Compensation expense of approximately $48,000 will be recorded as a result
of the accelerated vesting of Common Stock options upon completion of this
offering. The conversion of Preferred Stock that will occur upon completion of
this offering will have no impact on the Company's income statement.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996

Revenue under strategic alliance agreements was $774,000 for the nine months
ended September 30, 1997. There was no revenue for the nine months ended
September 30, 1996. The 1997 revenue resulted from the Company's strategic
alliance agreements with Procter & Gamble and Japan Tobacco. Under the terms of
the strategic alliance agreements, payments for technology access fees and
research and development support are recognized as revenue ratably over the
period for which the payments are made. Payments related to the achievement of
certain milestones are recognized as revenue when the milestones are achieved.

Research and development expenses increased to $3,338,000 for the nine
months ended September 30, 1997 from $982,000 for the comparable period in 1996.
This increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional research and development personnel,
increased purchases of laboratory supplies and increased equipment depreciation
as a result of capital expenditures. The Company expects research and
development expenses to continue to increase as personnel and research and
development facilities are expanded to accommodate new and existing strategic
alliances.

General and administrative expenses increased to $2,443,000 for the nine
months ended September 30, 1997 from $791,000 for the comparable period in 1996.
This increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional management and administrative personnel
and professional fees in connection with the overall scale-up of the Company's
operations and business development efforts. The Company expects that general
and administrative expenses will continue to increase as the Company continues
to expand its operations.

Net interest income increased to $355,000 for the nine months ended
September 30, 1997 from $111,000 for the comparable period in 1996. This
increase was primarily due to larger cash and investment balances on hand during
1997 as a result of private placements of equity securities.

As of September 30, 1997, the Company had accumulated losses of $9.9 million
since inception and, therefore, has not paid any federal income taxes.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances in
amounts equal to the deferred tax assets have been established to reflect these
uncertainties. See Note 7 of Notes to Financial Statements.

YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995

Research and development expenses increased to $1,741,000 in 1996 from
$486,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as the Company hired additional research and development
personnel, increased purchases of laboratory supplies and increased contracted
services.

25
<PAGE>
General and administrative expenses increased to $1,345,000 in 1996 from
$258,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as the Company hired additional management and
administrative personnel and professional fees in connection with the expansion
of the Company's operations and business development efforts.

The Company had net interest income of $221,000 in 1996 resulting from
interest earned on cash and marketable securities derived from private
placements of equity securities. The Company did not earn interest income in
1995.

YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM SEPTEMBER 22, 1994 (INCEPTION)
THROUGH
DECEMBER 31, 1994

Research and development expenses increased to $486,000 in 1995 from $44,000
in the 1994 period. This increase was primarily due to the inclusion of a full
year of operations in 1995 and expenditures for certain contracted research
activities.

General and administrative expenses increased to $258,000 in 1995 from
$46,000 in the 1994 period. This increase was primarily due to the inclusion of
a full year of operations in 1995 as well as increased contracted services.

LIQUIDITY AND CAPITAL RESOURCES

From inception through September 30, 1997, the Company financed its
operations through private placements of equity securities, payment from a
strategic alliance partner, a capital lease and an equipment loan. The private
placement of equity securities has provided the Company with aggregate gross
proceeds of approximately $30,160,000 as of September 30, 1997. The Company also
has obtained $3,000,000 under its strategic alliance with Procter & Gamble, as
of September 30, 1997, comprised of an initial research and technology access
payment of $1,000,000 and a $2,000,000 note which will be forgiven over the
initial 18 months of the agreement upon the Company's performance of research
obligations. The Company has also obtained $471,000 of capital lease financing
and $1,084,000 under an equipment loan. As of September 30, 1997, the Company
had approximately $22,143,000 in cash and marketable securities.

During the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997, the Company had expenditures relating to intangible and
other assets of approximately $63,000, $126,000 and $275,000, respectively.
These expenditures were primarily for patent costs and license fees. The Company
will amortize capitalized patent costs to research and development expense once
the patents issue. These expenditures are necessary to protect the Company's
intellectual property and to secure rights to current technology and are
expected to continue to increase.

Amounts financed for equipment under a capital lease for the year ended
December 31, 1996 were approximately $471,000. The Company also had purchases of
equipment of approximately $12,000, $1,339,000 and $1,785,000 during the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively. Although the Company had no material commitments for capital
expenditures as of September 30, 1997, the Company expects capital expenditures
to increase over the next several years as it expands its facilities and
acquires scientific and computer equipment to support the planned expansion of
its research and development efforts.

As of September 30, 1997, the Company had net operating loss carryforwards
of approximately $7,726,000 to offset federal and state income taxes. The
Company's research and development tax credit carryforwards were estimated to be
approximately $56,000 as of December 31, 1996 for federal income tax purposes.
If not utilized, the federal and state net operating loss carryforwards will
expire through 2011. See Note 7 to Notes to Financial Statements.

To date, all revenue received by the Company has been from its strategic
alliances. The Company expects that substantially all revenue for the
foreseeable future will come from strategic alliance partners

26
<PAGE>
and interest income. Furthermore, the Company's ability to achieve profitability
will be dependent upon the ability of the Company to enter into additional
strategic alliances. There can be no assurance that the Company will be able to
negotiate additional strategic alliances in the future on acceptable terms, if
at all, or that current or future strategic alliances will be successful and
provide the Company with expected benefits.

The Company believes that the net proceeds from this offering and the sale
of shares to Japan Tobacco, existing cash and marketable securities and
anticipated cash flow from its current strategic alliances will be sufficient to
support the Company's operations for at least the next 24 months. The Company's
actual future capital requirements and the adequacy of its available funds,
however, will depend on many factors, including progress of its discovery
programs, the number and breadth of these programs, the ability of the Company
to establish and maintain additional strategic alliance and licensing
arrangements and the progress of the development and commercialization efforts
of the Company's strategic partners. These factors also include the level of the
Company's activities relating to its independent discovery programs and to the
development and commercialization rights it retains in its strategic alliance
arrangements, competing technological and market developments, the costs
associated with obtaining access to tissue samples and related information and
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights. The Company expects that
it will require significant additional financings in the future, which it may
seek to raise through public or private equity offerings, debt financing or
additional strategic alliance and licensing arrangements. No assurance can be
given that additional financing or strategic alliance and licensing arrangements
will be available when needed, if at all, or that, if available, such financing
will be obtained on terms favorable to the Company or its stockholders. To the
extent the Company raises additional capital by issuing equity or convertible
debt securities, ownership dilution to stockholders will result. If adequate
financing is not available when needed, the Company may be required to curtail
significantly one or more of its research and development programs or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to the
Company, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that
adequate funds are not available, the Company's business would be adversely
affected.

27
<PAGE>
BUSINESS

The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary system,
based on analysis of gene expression and gene regulation, to discover drug
targets and drug leads. Gene Logic uses READS in its drug target and drug lead
discovery programs and to generate genomic data for its database products. The
Company's objective is to provide its pharmaceutical company partners with novel
drug targets, drug leads and a suite of genomic database products to reduce the
time, cost and risk associated with drug discovery. The Company believes that by
building its portfolio of partnerships it will generate current revenues and
establish a long-term economic interest in the product pipelines of multiple
partners through milestone and royalty payments. Gene Logic has established
major strategic alliances with Procter & Gamble and Japan Tobacco.

INDUSTRY BACKGROUND

DRUG DISCOVERY AND DEVELOPMENT

Diseases are the result of disturbances of, or abnormalities in, the
physiological pathways that regulate the functioning of cells in the human body.
The main components of these pathways are proteins, such as enzymes, receptors
or ion channels, encoded by genes expressed within the cells affected by the
disease. Drugs generally exert their therapeutic effects by interacting with
certain of these proteins, referred to as drug targets, in such a way as to
restore the normal functioning of the disease-affected pathways or otherwise to
compensate for the abnormalities. The process of drug discovery involves the
screening of collections of compounds against a drug target to identify those
compounds which interact with the target to produce the desired effect.

In response to increasing competitive pressures to discover and develop new
drugs in a more rapid and cost-effective manner, pharmaceutical and
biotechnology companies have recently made significant advances in combinatorial
chemistry and high-throughput screening technologies which enable the rapid
generation and screening of large and diverse compound libraries against many
potential targets. However, the current drug discovery process remains
time-consuming and costly, in part because of the difficulty and complexity of
identifying novel drug targets using traditional methodologies. In general,
pharmaceutical companies rely upon their own basic research and academic
discoveries to identify drug targets. The Company believes this approach
provides an insufficient number of targets to fill the industry's increasing
annual screening objectives. Recent developments in genomics have permitted the
partial sequencing of tens of thousands of new genes and the identification of
the classes of proteins they encode. These developments have not enabled the
rapid identification of drug targets, because the gene sequence data by itself
provides limited information, if any, about a gene's relationship to a specific
disease. There remains a significant need for a rapid and cost-effective method
to correlate genes with specific diseases to discover drug targets.

GENES, GENE EXPRESSION AND DISEASE

The genetic content of humans, the human genome, is maintained in
chromosomes, which contain deoxyribonucleic acid ("DNA"). DNA is composed of two
strands of four constituent molecules known as bases or nucleotides: adenine
(A), thymine (T), guanine (G) and cytosine (C). The specific order, or sequence,
of these bases encodes genetic information within units defined as genes, which
are the

28
<PAGE>
hereditary units that control the structure, health and function of all
organisms. The beginning sequence of any gene is called 5 prime (5') and its end
is called 3 prime (3'). The human genome is estimated to comprise approximately
three billion base pairs encoding 100,000 to 150,000 genes. While all of these
genes are present in every human cell, certain of these genes are switched "on"
only in specific tissues or only at certain developmental stages and are
otherwise inactive. On average, in any single cell type, 10,000 to 20,000
different genes are expressed out of the possible 100,000 to 150,000. The cell's
pattern of gene expression defines the function of that cell.

Genes consist of coding and non-coding regions which ultimately direct and
regulate the production of the various proteins that maintain normal cellular
function. The coding regions, which account for less than five percent of the
human genome, direct the production of proteins, and the order of the bases in
these regions determine the order of amino acids in a given protein. An enzyme
reads these genes and makes a strand of RNA (a molecule similar to DNA) that
consists of a string of bases complementary to that of the DNA of the gene. This
process is known as transcription and results in the production of messenger RNA
("mRNA"). Messenger RNA directs the assembly of amino acids in a sequence that
corresponds to the order of the bases of the mRNA defining the sequence of a
protein. The amount of mRNA in a cell provides a direct indication of the level
of activity of the corresponding gene.

Some of the non-coding DNA sequences, referred to as promoter regions,
regulate genes in the different tissues. A series of regulatory proteins, called
transcription factors, bind to specific promoter regions, either singularly or
in unique, multi-component complexes, and act as switches controlling the
activity of the genes. The synthesis of regulatory proteins is, in turn,
directed by genes coding for transcription factors and their accessory proteins.
Together these control elements regulate the pattern of gene expression in
specific cells.

When a mutation occurs in a gene, the resulting protein may be abnormal in
function, resulting in disease. A number of relatively rare diseases, such as
cystic fibrosis and sickle cell anemia, result from such single gene mutations,
and the genes responsible for many of these monogenic diseases have been
identified over the last decade. Detailed knowledge of gene sequences that
encode defective proteins may facilitate development of novel therapeutic
products and diagnostic tests for these conditions. However, almost all major
common diseases, including heart failure, renal disease, diseases of the central
nervous system, osteoporosis and cancer, are believed to involve multiple genes
and, often, complex interactions of genetic and environmental factors. These
conditions evolve over time as a result of successive changes in the patterns of
gene expression in the cells involved in the disease.

THE NEED FOR NOVEL DRUG TARGETS

A critical step for drug development is the identification of suitable drug
targets for screening. The major pharmaceutical companies are facing increasing
pressures to introduce new drugs more rapidly than in the past. Because most
drug candidates fail during the development process, these companies need to
identify a large number of potential drug candidates by screening compound
libraries against large numbers of targets to improve their chances of
identifying commercially viable drugs. Recent estimates suggest that major
pharmaceutical companies may have to screen hundreds of new targets each year in
order to meet their drug discovery objectives. This figure compares with a
published 1995 industry source estimate that approximately 300 targets in total
were then in active screening by the pharmaceutical industry.

The majority of drug targets are proteins that are encoded by genes
expressed within tissues affected by a disease. The importance of certain
protein classes, such as enzymes, receptors or ion channels, as targets is
illustrated by the world's top selling prescription drugs. Of the 100 most
prescribed drugs, approximately 80% interact with one of four classes of
proteins: 33 drugs inhibit 13 different enzymes; 22 bind to ten different
G-protein-coupled receptors; 13 interact with six different ion channels; and 15
bind to four different nuclear hormone receptors. It is estimated that there are
approximately 10,000 different

29
<PAGE>
enzymes, 1,000 different G-protein-coupled receptors, 200 different ion channels
and 100 different nuclear hormone receptors encoded in the human genome. These
proteins are key components of the pathways involved in disease and, therefore,
are likely to be a rich source of new drug targets.

Proven drug targets share certain other characteristics which can only be
identified by understanding their expression levels in cells and cannot be
determined by their gene sequence alone. Drug targets are (i) often expressed
primarily in specific tissues, allowing for selectivity of pharmacological
action and reducing the potential for adverse side effects and (ii) generally
expressed at low abundance in the cells of the relevant organ. An effective
target discovery system would therefore enable the detection of genes that
encode for proteins expressed in specific tissues at low abundance, thereby
permitting the rapid identification of proteins which are likely to be targets
for therapeutic and diagnostic development.

LIMITATIONS OF TRADITIONAL GENOMICS TECHNOLOGIES

Although traditional genomics technologies have yielded sequence information
for many genes and have succeeded in identifying genes that predispose
individuals to certain diseases, the rate at which novel drug targets can be
identified from this information is limited. Traditional genomics efforts are
generally classified in two categories: gene sequencing and positional cloning.

Most gene sequencing approaches use high-throughput methods to capture
partial sequences (known as expressed sequence tags or "ESTs") for many genes on
an essentially random basis. These ESTs are stored in public and proprietary
databases which, to date, contain an estimated three million ESTs, representing
partial and fragmentary sequence data for 50 to 60 percent of human genes.
Despite the widespread availability of a significant amount of sequence data,
these data have limited use in identifying targets for therapeutic or diagnostic
product development. This is because the gene sequence data by itself provides
limited information, if any, about a gene's relationship to a specific disease.
Also, the EST sequencing approach tends to capture multiple times those genes
which are abundantly expressed, while missing the low-abundance, tissue-specific
genes which may code for useful drug targets.

Positional cloning is a method of identifying individual genes that, when
defective, cause or predispose individuals to particular diseases. The process
consists of genetic mapping, physical mapping and sequencing, and typically
requires an extensive collection of DNA samples from families affected by the
disease. Scientists test the DNA of both affected and non-affected members of
these families and, through statistical analysis, attempt to identify the region
or regions of the genome likely to contain a gene related to the disease.
Positional cloning requires large numbers of samples from the affected families
to demonstrate statistical significance and becomes much more complicated when
multiple genes are involved in the disease. The accumulation of such samples is
costly and time consuming. Although researchers are attempting to use other
methodologies, including animal models of disease, to speed the process of gene
discovery, the overall process may take several years.

THE GENE LOGIC SOLUTION

Gene Logic believes that its proprietary technologies for analysis of the
overall patterns of gene expression and regulation in specific diseases will
enable the Company to identify multiple, novel drug targets more rapidly than
competing technologies. Gene Logic's ACCELERATED DRUG DISCOVERY system allows
the Company to display the changes in gene expression patterns as a disease
develops and progresses. The Company uses this information, in conjunction with
its proprietary suite of genomics databases and bioinformatics tools, to
identify genes and their associated pathways implicated in disease and to
discover and prioritize individual drug targets. Pursuant to strategic alliances
with corporate partners and in independent programs, the Company is using its
system to identify drug targets for major common diseases, including heart
failure, renal disease, diseases of the central nervous system, osteoporosis and
prostate cancer. In addition, Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru

30
<PAGE>
Chip will enable the development of high-throughput screening assays to evaluate
the effects of compounds on the expression of disease-associated genes
identified by READS. This technology represents a new approach to drug discovery
and has the potential to accelerate substantially the identification of drug
leads. By utilizing and further developing the portfolio of technologies,
genomics databases and bioinformatics tools in its ACCELERATED DRUG DISCOVERY
system, Gene Logic believes it can significantly enhance many critical steps in
the drug development process and accelerate the development of novel
pharmaceuticals for the Company and its partners.

GENE LOGIC'S STRATEGY

Gene Logic's objective is to provide to its pharmaceutical company partners
novel drug targets, drug leads and a suite of genomic database products in order
to reduce the time, cost and risk associated with drug discovery. The Company
believes that by building its portfolio of partnerships it will generate current
revenues and establish a long-term economic interest in the product pipelines of
multiple partners through milestone and royalty payments. The Company believes
that this portfolio approach will maximize the likelihood of drugs being
discovered and developed using its system. The Company's strategy for building
commercial value is to:

- PROVIDE AN INTEGRATED DRUG DISCOVERY PLATFORM. The Company has established
and intends to continue to build a broad technology platform, the
ACCELERATED DRUG DISCOVERY system, based on the analysis of gene
expression and gene regulation for the rapid discovery of multiple,
screenable drug targets and drug leads. The ACCELERATED DRUG DISCOVERY
system is designed to be integrated easily into the current drug discovery
processes of multiple partners.

- ESTABLISH DISEASE-SPECIFIC DRUG TARGET AND LEAD DISCOVERY ALLIANCES. Gene
Logic intends to continue to establish strategic alliances in specific
disease areas with pharmaceutical companies for drug target and drug lead
discovery programs. Such strategic alliances would generally provide the
Company technology license fees, research funding, milestone payments and
royalty or profit-sharing income from commercialization of products
resulting from the alliances. To date, Gene Logic has entered into a
target discovery alliance with Procter & Gamble in the field of heart
failure and a target and lead discovery alliance with Japan Tobacco in the
field of renal disease.

- ESTABLISH INDEPENDENT DRUG TARGET AND LEAD DISCOVERY PROGRAMS. Gene Logic
has established and intends to expand independent drug discovery programs
based on its proprietary technologies, including the Flow-thru Chip. The
Company plans to license drug leads discovered through its independent
programs to pharmaceutical companies for clinical development and
commercialization and expects to receive license fees, development
milestone payments and royalty or profit-sharing income from such
licensees.

- MARKET GENOMIC DATABASE PRODUCTS UNDER NON-EXCLUSIVE LICENSE. The Company
plans to market its suite of genomic database products, including its GENE
EXPRESS NORMAL and rare EST (rEST) databases, either in a single package
or as separate modules, to multiple pharmaceutical company partners. The
Company intends to grant non-exclusive licenses independent of, or in
conjunction with, strategic alliances. Such licenses would generally
provide the Company annual subscription fees, milestone payments and
royalties. To date, Gene Logic has granted Japan Tobacco a non-exclusive
license to its GENE EXPRESS NORMAL database.

- RETAIN SIGNIFICANT RIGHTS TO NEW PRODUCT OPPORTUNITIES. Under its
strategic alliances, Gene Logic retains certain rights to diagnostic,
therapeutic protein and gene therapy applications. In addition, the
Company intends to use its databases and technological capabilities to
develop products for the evolving fields of differential diagnosis,
molecular staging of disease and pharmacogenomic profiling. The Company
may pursue these applications independently or in alliances with
additional partners.

31
<PAGE>
GENE LOGIC'S ACCELERATED DRUG DISCOVERY SYSTEM

Gene Logic is employing its proprietary technologies and bioinformatics
system for the discovery of drug targets and drug leads and to accelerate the
development of drugs. The elements of Gene Logic's ACCELERATED DRUG DISCOVERY
system include:

ANALYSIS OF GENE EXPRESSION AND REGULATION

READS TECHNOLOGY

The Company has developed a proprietary, automated technology, known as
READS (Restriction Enzyme Analysis of Differentially-expressed Sequences), for
capturing and analyzing the overall gene expression profile of a given cell or
tissue type to identify drug targets. The Company has an exclusive license from
Yale University to patent applications covering the READS technology. The
Company has received notices of allowance for two patent applications, covering
the key aspects of the READS technology, from the United States Patent and
Trademark Office (the "USPTO"). Using READS, Gene Logic rapidly generates a gene
expression profile, or Molecular Topography, representing a quantitative
snapshot of the levels of expression of essentially all the genes in a tissue
sample. The Company compares normal and diseased tissues through a series of
Molecular Topography snapshots, a "molecular movie," to identify the changes in
gene expression patterns that occur as the disease develops and progresses and
to determine which genes are associated with the disease. The READS technology
is accurate and highly sensitive, capable of detecting essentially all mRNA
transcripts including rarely expressed genes, at the level of approximately one
mRNA copy per cell. By employing its READS technology in conjunction with its
proprietary bioinformatics system, the Company can then prioritize the proteins
encoded by these disease-associated genes as potential drug targets.

The READS process begins with the procurement of a relevant cell or tissue
sample, extraction of its total RNA content and preparation of complementary DNA
("cDNA") using standard techniques. By applying proprietary tagging and enzyme
cleavage procedures to the cDNA pool, the Company generates a unique set of
identifiable signature fragments (3' ESTs) for each mRNA species present in the
cell. The fragments are separated by size using gel-based, automated separation
techniques and quantified using proprietary image analysis software. The
quantity of each signature fragment correlates directly with the expression
levels of the corresponding gene. The Company uses its bioinformatics system to
compile these data into a Molecular Topography snapshot which represents the
levels of expression of genes active in the sample. This process typically takes
two days and is tracked by the Company's laboratory information management
system, which captures both process and quality control data.

The READS technology has been highly automated through the use of
commercially available robotic liquid handling stations, thermocyclers and
fragment separation instruments. A single production unit may be utilized for
two shifts per day and is capable of generating approximately 1,000 Molecular
Topography snapshots per year. Gene Logic has installed its first production
unit and has scaled up operations to two shifts per day. The Company expects to
install a second production unit during 1998. There can be no assurance,
however, that the Company will be able to increase its capacity as expected or
to realize the cost efficiencies of scale it anticipates.

MUST TECHNOLOGY

Gene Logic's proprietary MuST (Multiplex Selection of Transcription Factors)
technology enables the Company to identify the nucleotide sequences of the
transcription factor binding sites through which the expression of genes is
regulated. The Company believes that the information generated by MuST, in
combination with the information on gene expression levels generated by its
READS technology, will enable the Company to assign genes to functional pathways
based on the observation that genes in such pathways share common regulatory
mechanisms and are coordinately expressed. The Company has an exclusive license
from Yale University to patent applications covering the MuST technology and has

32
<PAGE>
received a notice of allowance for the original patent application, covering the
key aspects of the MuST technology, from the USPTO.

The MuST process starts with the extraction of nuclear proteins in the cell
or tissue sample. Proteins within this extract which exhibit sequence-specific
DNA binding properties are bound to a set of DNA probes and separated from all
unbound probes using electrophoretic separation techniques. After purification
and amplification, the binding sites are sequenced and entered into a database.
The result is a library of sequences which represent the binding sites for the
gene regulatory proteins contained in the original nuclear extract. The entire
process is tracked by the Company's laboratory information management system,
which captures both process and quality control data.

The Company has established the technical resources to construct a library
of transcription factor binding sequences for any given cell type in a period of
four weeks and has begun to process samples in order to expand the database.
Over 50% of the transcription factor binding sequences Gene Logic has identified
to date in a variety of different human cell types are not included in public
domain databases.

GENE LOGIC'S BIOINFORMATICS SYSTEM

The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates and to interface with
its databases, its partners' databases and databases in the public domain. This
system enables the functional integration of Gene Logic's genomic data content
with other proprietary or public genomic databases, protein databases and
strategic partners' chemical, screening and assay databases. Gene Logic's
bioinformatics system provides the analytical tools necessary to enable the
Company to discover and prioritize targets for drug discovery. Moreover, the
provision of Gene Logic's proprietary genomic data in conjunction with its
integrated bioinformatics system may enable the Company to introduce that system
into strategic partners' drug discovery process in a customized, expandable
format that is compatible with partners' current database architectures.

DATABASE INTEGRATION TOOLS

The Company's bioinformatics system was developed using scientific data
management tools based on the Object Protocol Model ("OPM"). These tools provide
support for the rapid development of relational databases, the integration of
relational and flat file databases and for cross-database queries. The Company's
bioinformatics system works through customized and configurable Web interfaces,
regardless of the structure of the underlying databases and without having to
redevelop each database. The Company's bioinformatics system enables the
integration of Gene Logic's information content into the data management systems
of its strategic partners, and the Company believes that the system will also
enhance the value of such partners' existing databases by establishing
interconnectivity of heterogeneous data sources.

GENOMIC DATA ANALYTICAL TOOLS

The Company's bioinformatics system includes tools for the analysis of data
generated by READS and MuST for both normal and diseased cell and tissue types.
Gene expression data are analyzed using the Company's proprietary Molecular
Topography data tool. The tool allows intuitive "point and click" navigation
among the expressed genes and is also an analytical tool. The system can
identify genes as known (represented in the Company's databases of indexed 3'
ESTs and full-length sequences) or unknown, and provides a wide variety of
statistical analyses of expression levels and correlations both within and
across cell, tissue and disease types.

Underlying the Molecular Topography tool is the quEST software developed by
the Company. quEST includes a reference set of indexed, human 3' ESTs,
representing the Company's universe of known genes. The Company processes these
ESTs to eliminate artifacts and redundancies which are commonly found in the
public data. The quEST tool also includes a searching and matching algorithm
which allows 3' EST

33
<PAGE>
signature fragments from READS to be correlated with known genes. The Company
routinely sequences signature fragments which are not in its databases as they
are identified by READS and is capable of sequencing over 1,000 such fragments
per week. Once the sequence of a gene is captured in the Company's database, a
fragment derived from that gene can thereafter be identified in a Molecular
Topography without the need for further sequencing.

Gene Logic has also developed proprietary methods to prioritize the
disease-associated genes it discovers as potential drug targets. This
prioritization depends upon a number of factors including: (i) a gene's temporal
association with the disease process; (ii) the tissue distribution of its
expression; (iii) any homology it may have with known target classes, such as
membrane receptors, enzymes or signaling proteins; (iv) its involvement in known
metabolic or signal transduction pathways; and (v) the feasibility of developing
a screening assay.

THE FLOW-THRU CHIP

Gene Logic is developing its proprietary, reusable Flow-thru Chip for
high-throughput analysis of changes in the expression of known genes. The
Company believes that the Flow-thru Chip will enable the development of
high-throughput screening assays to evaluate the effects of compounds on the
expression of disease associated genes identified by READS. This technology
represents a new approach to drug discovery and has the potential to accelerate
substantially the identification of drug leads. The Company has exclusive
licenses to the technology underlying the Flow-thru Chip from the United States
Department of Energy and the inventor of the technology.

In its drug discovery process, Gene Logic will use its READS technology to
identify which genes are associated with the disease. Once these genes are
known, the Company will design a customized Flow-thru Chip incorporating probes
specific to these genes and use the chip to test the effects of compounds in
cellular assays. Compounds that have the desired effect on expression of the
relevant genes, such as restoring the expression pattern to normal or mimicking
the effect of a known therapeutic, may be evaluated as drug leads.

The substrate of the Flow-thru Chip is a silicon or glass wafer traversed by
a grid of micro-channels. The current version of the chip is laid out in a
format which is compatible with current high-throughput cellular assay systems.
Each well is configured to contain an array of approximately 400 genes
identified using the Company's READS technology; the number of genes included in
each well is expected to be increased to approximately 1,000 in the second
version of the Flow-thru Chip. The Company expects to commence in-house testing
during 1998.

Based on disease-associated genes identified by READS, Gene Logic designs
and synthesizes custom oligonucleotide probes and binds them, using a
proprietary covalent attachment chemistry, within the micro-channels covering a
specific area of the chip. The function of each probe is to bind to its
complementary DNA or RNA in the sample being analyzed. The nucleic acid is
isolated from such a sample and fluorescently labeled by one of several standard
biochemical methods. The test sample is then flowed through the substrate of the
Flow-thru Chip where each attached probe captures, or hybridizes to, any labeled
nucleic acid present in the sample which is complementary to that probe. When
imaged using the Company's signal detection system, the hybridized test sample
generates a fluorescent signal which can be correlated with the expression in
the original sample of the gene captured by the probe because the sequence and
position of each complementary DNA probe on the Flow-thru Chip is known. The
level of signal is readily quantifiable and reflects the degree to which the
gene is expressed in the sample.

34
<PAGE>
FLOW-THRU CHIP-TM-

[graphical depiction of cross-sections of Flow-thru Chip]

Cut-away of a micro-channel containing covalently-linked oligonucleotide
probes.

Area of chip containing probes for a single gene.

Portion of one cm2 chip with 400 sites each containing probes for individual
genes.

Each high-throughput screening assay comprises 96 wells, each containing the
full 400 gene set.

The Company believes that several features make the Flow-thru Chip well
suited for monitoring the expression of known genes in high-throughput cellular
assays:

- SENSITIVITY. Because of the greater surface area available for attachment
of the oligonucleotide probes, the Company believes the Flow-thru Chip
will be sensitive enough to monitor changes in expression of low-abundance
transcripts.

- SPEED. The existence of the micro-channels accelerates the hybridization
reaction, reducing the time required for each assay. In addition, because
the walls of the micro-channels focus the fluorescent signal, the Company
expects to be able to use a commercially available digital signal
detection system to provide an immediate read-out.

- COST. As a result of the proprietary covalent chemistry through which the
oligonucleotide probes are attached within the micro-channels, each
Flow-thru Chip can be used multiple times. Following each assay the chip
is washed to remove the hybridized material and is then ready for reuse.
The Company believes the reusability of the Flow-thru Chip will make it
suitable for use in high- throughput screening applications.

In addition to its use as part of the Company's drug lead discovery
programs, the Flow-thru Chip will also serve as a platform for the screening of
lead compounds against the data in the Toxicology EXPRESS and Pharmacology
EXPRESS databases being developed by the Company. Gene Logic will design
Flow-thru Chips using oligonucleotide probes representative of the genes that
comprise patterns of gene expression which typify known classes of toxic or
pharmacological effects identified using READS. The Company may sell Flow-thru
Chips to its strategic partners in conjunction with subscriptions to the
Toxicology EXPRESS or Pharmacology EXPRESS databases or provide screening
services in conjunction with an alliance.

35
<PAGE>
The Company has established relationships with several third parties for
manufacture of the chip substrates and oligonucleotide probes which constitute
its Flow-thru Chip arrays and for the robotic and signal detection systems
associated with running high-throughput screening assays using the chips. There
can be no assurance, however, that the Company will be able to maintain such
relationships on terms acceptable to the Company.

There can be no assurance that further development and scale-up of the
Flow-thru Chip will be successful or that the Company will be successful in
marketing the Flow-thru Chip to strategic partners or others.

GENE LOGIC PROGRAMS AND PRODUCTS

DRUG TARGET AND LEAD DISCOVERY PROGRAMS

The ACCELERATED DRUG DISCOVERY system is applicable to a broad range of
diseases. As part of its business strategy, Gene Logic focuses on large medical
markets that are poorly served by current drug treatments and intends to
establish strategic alliances in specific disease areas with pharmaceutical
companies for drug target and drug lead discovery programs. To date, the Company
has established two strategic alliances in the fields of heart failure and renal
disease. Gene Logic has established independent discovery programs to identify
drug targets for certain diseases of the central nervous system, osteoporosis
and prostate cancer. Gene Logic also intends to obtain access to compound
libraries from combinatorial chemistry and pharmaceutical companies for
screening using its Flow-thru Chip.

Gene Logic has collaborations with academic institutions and commercial
organizations for access to relevant normal and diseased human tissues and cell
types and animal disease models. The Company uses these tissues for analysis of
gene expression and gene regulation and to build its genomic databases. Under
the terms of these agreements, the Company generally retains all commercial
rights to gene discoveries made through the use of cells and tissues provided by
its collaborators.

HEART FAILURE

An estimated 4.8 million Americans suffer from heart failure. Heart failure
refers to a progressive reduction in the ability of the ventricles of the heart
to pump an adequate volume of blood. Although many causes for heart failure have
been identified, common to all is loss of the normal ability of the cells
comprising heart muscle to respond to stress. Normally, muscle becomes stronger
with exercise; in heart failure, increasing load on the heart muscle weakens
rather than strengthens the muscle. Better knowledge of altered patterns of gene
expression in the heart muscle cells as the disease progresses may offer insight
into the disease mechanism.

In May 1997, Gene Logic entered into a 4 1/2-year strategic alliance with
Procter & Gamble for the discovery of drug targets for heart failure. In
connection with this alliance, the Company has obtained access to muscle tissue
from normal and failing human hearts through several heart transplant programs.
Pursuant to the alliance research program, Gene Logic is using READS to identify
changes in the expression of genes which underlie the pathological process to
prioritize targets for the development of innovative drugs and prognostic
indicators. The Company has processed samples and generated Molecular Topography
snapshots for samples received to date from Procter & Gamble and is providing
Procter & Gamble with on-line access to such results. See "--Strategic
Alliances--Procter & Gamble Pharmaceuticals, Inc."

RENAL DISEASE

Approximately 200,000 Americans suffer from end-stage renal disease. The
management of chronic renal failure consumes a significant portion of the health
care budget in the United States. The major causes of renal failure are
glomerulonephritis, diabetes mellitus and hypertension.

In September 1997, the Company entered into a five-year strategic alliance
with Japan Tobacco for the discovery of drug targets and drug leads for renal
disease. As part of the alliance, the Company granted

36
<PAGE>
Japan Tobacco a non-exclusive license to the GENE EXPRESS NORMAL database and
Gene Logic may also use its Flow-thru Chip technology for screening for drug
leads in renal disease. Pursuant to the alliance, Gene Logic is establishing
collaborations for access to a broad range of human tissues and animal disease
models relevant to renal disease. The Company is using its ACCELERATED DRUG
DISCOVERY system to identify drug targets and leads for the development of novel
therapeutics and diagnostic and molecular staging products for renal disease.
See "--Strategic Alliances--Japan Tobacco Inc."

DISEASES OF THE CENTRAL NERVOUS SYSTEM

Gene Logic is employing its ACCELERATED DRUG DISCOVERY system to identify
drug targets for schizophrenia, affective disorders and Alzheimer's disease.

SCHIZOPHRENIA. Schizophrenia is a severe mental disorder affecting
approximately one percent of the worldwide population. Current treatments for
schizophrenia are inadequate because a significant percentage of schizophrenics
are resistant to all treatments and others respond only partially to drug
therapy and remain too affected to work or lead normal lives. The underlying
chemical alterations in the brain which cause schizophrenia are not well
understood.

Gene Logic is analyzing the patterns of gene expression in brain cells from
schizophrenics and animal treatment models to identify novel drug targets. Gene
Logic has entered into a collaboration with Johns Hopkins University School of
Medicine for access to POST MORTEM tissue samples from brains of schizophrenics.
These samples were obtained from both drug-treated and untreated individuals
shortly after death. The Company has also begun evaluating the effects of
established and experimental anti-
psychotic drugs on gene expression in the brain in animal models.

AFFECTIVE DISORDERS. There are two broad categories of affective disorders:
unipolar affective disorder, or depression, which affects an estimated 15
million Americans, and bipolar affective disorder, also known as
manic-depression, which affects an estimated two million people in the United
States. Although drug therapies exist for these disorders, pharmaceutical
companies are attempting to develop new products having a more rapid onset of
action and efficacy in a higher percentage of patients.

The Company is using READS to discover new antidepressant drug targets based
on changes in the patterns of gene expression in brain cells from patients with
affective disorders. The Company has entered into a collaboration with Johns
Hopkins University School of Medicine for access to POST MORTEM samples from
specific regions of the brains of both drug-treated and untreated
manic-depressives.

ALZHEIMER'S DISEASE. Between three and four million Americans suffer from
disabling age-related dementia, or Alzheimer's disease. The primary therapeutic
goal is postponement of the onset of disease in predisposed individuals and
slowing of disease progression.

Gene Logic has entered into a collaboration with Molecular Geriatrics
Corporation for access to micro-dissected samples of relevant regions of human
brain from patients with Alzheimer's disease ranging from early stage through
advanced degeneration. The samples have been characterized using proprietary
monoclonal antibodies to reveal cells affected at the onset of the disease. The
Company has exclusive rights to any genes useful in the development of
therapeutic products which are identified through the collaboration. The Company
may pursue such rights independently or in alliance with a strategic partner.
Molecular Geriatrics Corporation retains rights to develop diagnostic products.

OSTEOPOROSIS

Osteoporosis is a condition characterised by low bone mass and
susceptibility to fracture. Osteoporosis affects over 20 million American women,
a number which continues to grow as the average age of the population increases.
Loss of bone mass in postmenopausal women can be substantially retarded or
prevented by hormone replacement therapy. However, there is no available
treatment that significantly restores bone mass that has already been lost.
Because effective prevention requires early diagnosis, there is also a large and
immediate market for more sensitive diagnostics.

37
<PAGE>
Gene Logic has commenced its discovery program in osteoporosis with the
Center for Clinical and Basic Research and Johns Hopkins University School of
Medicine providing normal and osteoporotic bone samples. The Company intends to
develop drug targets identified through these programs independently or in
alliance with a strategic partner.

PROSTATE CANCER

Prostate cancer is the most commonly diagnosed cancer in American men with
317,000 new cases reported in 1996 and is the second leading cause of all male
cancer deaths in the United States.

Gene Logic has established a collaboration for access to staged and
characterized prostate cancer tissue samples, together with related clinical
treatment and outcomes data, with Baylor College of Medicine. In this program,
the Company is focusing on the identification of targets for the development of
novel therapeutics and diagnostic products. Gene Logic may develop these
independently or in alliance with strategic partners.

GENOMIC DATABASE PRODUCTS

Complementary to its disease-specific target discovery programs, the Company
is developing a suite of genomic database products designed to accelerate the
process of target identification and prioritization, the discovery of lead
compounds and the preclinical and clinical development of drugs. Gene Logic
intends to market its suite of genomic database products, in a single package or
as separate modules, to multiple partners on a non-exclusive basis both
independent of and in conjunction with drug target and drug lead discovery
alliances. The Company expects to receive annual database access subscription
fees, milestone payments based on utilization of the data in licensees' drug and
diagnostic discovery programs and royalties on net sales of resulting products.

GENE EXPRESS NORMAL DATABASE

The GENE EXPRESS NORMAL database is a reference set of gene expression
profiles for a wide variety of normal human tissues, which enables the Company
and its partners to determine rapidly the expression level of genes in normal
tissues. The database will also contain gene expression profiles for normal
tissues in rat and mouse, the experimental animals most commonly used by the
pharmaceutical industry. This information facilitates the prioritization of drug
targets. The database uses the Company's bioinformatics system to correlate
specific gene sequences to their expression levels and to interface with other
public or private sequence databases to which the licensee may have access. The
Company has granted the first non-exclusive license to the GENE EXPRESS NORMAL
database to Japan Tobacco.

RARE EST (REST) DATABASE

Approximately 80% of all human genes are rarely expressed (at the level of
fewer than five mRNA copies per cell), and fewer than an estimated 50% of such
genes are available in existing human EST databases. However, these
low-abundance, tissue-specific gene transcripts are those that the Company
believes will be most promising as drug targets. Gene Logic uses its READS
technology on tissue samples to identify rarely expressed genes. Unlike
traditional EST sequencing methods, Gene Logic's process is directed
(non-random) and has a low level of redundancy. The Company is developing a
database of rare ESTs, with the potential to provide promising drug targets not
available through other sources of sequence data. The Company anticipates that
the rEST database will be commercially available in 1998, but there can be no
assurance that it will be available by such date, or at all.

THE ANNOTATED GENOME (TAG) DATABASE

The Human Genome Project is forecast to complete the sequencing of the
entire genome by the year 2005. Using expression data derived from the GENE
EXPRESS NORMAL database and the transcription factor binding site sequence
information generated by the Company's MuST technology, Gene Logic intends to
create a database, the TAG database, of human genomic sequence information
derived from the

38
<PAGE>
Human Genome Project annotated with expression levels, tissue distribution of
expression and gene regulatory mechanisms. The Company believes the analysis of
this database will enable genes to be placed in their functional pathways based
upon coordinate expression and shared transcriptional control elements, thereby
allowing the selection and prioritization of appropriate drug targets at
multiple points along disease-associated pathways. The development of the TAG
database is at an early stage and Gene Logic expects that it will accelerate as
more human genomic sequence data becomes available.

PHARMACOLOGY EXPRESS DATABASE

The Company is using its READS technology to build a database of profiles of
gene expression that characterize the pharmacological effects in relevant target
organs of compounds of known therapeutic benefit. These patterns can be used as
references for the screening of new lead compounds in order to predict
therapeutic efficacy at the preclinical development stage. The Company believes
that this technology may substantially reduce the risks associated with clinical
development of new drugs and provide a rapid filter for the selection and
prioritization of lead compounds. In conjunction with its Pharmacology EXPRESS
database, Gene Logic plans to use its Flow-thru Chip for the screening of lead
compounds against the database. The construction of the Pharmacology EXPRESS
database is at an early stage. The Company anticipates that such database will
be commercially available in 1998, but there can be no assurance that it will be
available by such date, or at all.

TOXICOLOGY EXPRESS DATABASE

Gene Logic intends to use its READS technology to build a database of the
changes in gene expression that typify known toxicological effects of compounds
in the target organs subject to such effects. Patterns may be identified by
comparing gene expression in normal tissues to gene expression in similar
tissues exposed to known toxic substances. These patterns can be used as
references for the screening of new lead compounds for common classes of
toxicological effects in order to minimize the use of traditional animal
toxicology screening, which is both time-consuming and expensive. In conjunction
with the Toxicology EXPRESS database, Gene Logic plans to use its Flow-thru Chip
for the screening of lead compounds against the database. The Company believes
that screening against the Toxicology EXPRESS database will provide a filter for
the prioritization of lead compounds and will accelerate the selection of those
to be taken forward through full toxicological studies in animals and those to
be abandoned. The construction of the Toxicology EXPRESS database is at an early
stage. The Company anticipates that such database will be commercially available
in 1998, but there can be no assurance that it will be available by such date,
or at all.

The statements made in this Prospectus regarding anticipated dates for
commercial availability of certain of its products are forward-looking
statements, and the actual dates of commercialization could differ materially
from those projected as a result of a variety of factors, including progress of
the Company's technologies, changes in the Company's business priorities and
other factors discussed in "Risk Factors." There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development and commercialization of products or that the Company's
products will address the requirements of the market or achieve market
acceptance.

NEW PRODUCT OPPORTUNITIES

Gene Logic intends to pursue commercial opportunities for diagnostic
applications of its discoveries, including molecular staging of disease,
differential diagnosis and pharmacogenomic profiling. The Company believes that
management of common diseases in the future will include gene expression-based
diagnostics to monitor the molecular evolution of the disease. Gene expression
analysis may enable differentiation among diseases which share clinical symptoms
but which differ at the level of molecular mechanism. Gene Logic believes that
pharmacogenomic profiling, using gene expression-based assays to predict an
individual's response to specific drugs, may be especially valuable in new drug
development and in modifying drug therapies of known efficacy but which have
toxic side effects in certain groups of patients.

39
<PAGE>
STRATEGIC ALLIANCES

As part of its business strategy, Gene Logic intends to continue to
establish strategic alliances for drug target and lead discovery programs in
specific disease areas with pharmaceutical companies. Gene Logic may also enter
into strategic alliances or joint ventures with additional partners to develop
certain diagnostics, therapeutic proteins and gene therapy products for which it
has retained rights. The Company's strategic alliances would generally provide
for the Company to receive technology license fees, research funding, milestone
payments and royalty or profit-sharing income. To date, Gene Logic has entered
into a target discovery alliance with Procter & Gamble in the field of heart
failure and a target and lead discovery alliance with Japan Tobacco in the field
of renal disease.

Gene Logic's objective is to structure its alliances in a flexible manner.
Subject to a commitment by a strategic partner, the Company is able to allocate
a variable portion of its production capacity to any individual program. An
alliance might embrace a field as restricted as one specific project within a
single disease indication or as broad as an entire category of disease involving
several indications.

PROCTER & GAMBLE PHARMACEUTICALS, INC.

In May 1997, the Company and Procter & Gamble entered into a 4 1/2-year
strategic alliance for drug target discovery in heart failure. Payments by
Procter & Gamble to the Company in the form of committed technology access fees
and research funding will total a minimum of $10.1 million if the research
program continues for its full term and the Company performs its research
obligations under the agreement. The parties may agree to extend the research
program for additional one-year periods. At any time during the first 18 months
of the alliance, Procter & Gamble has the right to expand the alliance to
include drug target discovery programs in two additional disease indications
upon terms, including committed research funding, identical to those covering
the initial program in heart failure. Procter & Gamble will be obligated to make
additional payments to the Company for the achievement of specified target
discovery, product development and associated regulatory milestones. Procter &
Gamble will also pay the Company royalties on worldwide net sales of all
products that may result from the alliance. Payments for technology access fees
and research and development support will be recognized as revenue ratably over
the period for which the payments are made. Payments related to the achievement
of milestones will be recognized as revenue when the milestones are achieved.

The agreement provides Procter & Gamble with exclusive, worldwide,
royalty-bearing rights to develop and commercialize small molecule therapeutics,
therapeutic proteins and diagnostics based on the Company's discoveries in the
field of heart failure. Gene Logic has retained all rights to develop and
commercialize products discovered pursuant to the alliance outside of the
alliance field. Procter & Gamble has agreed to assign to Gene Logic any and all
interest it may have in inventions related to the Company's core technologies
and to products developed pursuant to the alliance to the extent necessary for
Gene Logic to exercise its retained commercial rights.

Procter & Gamble has the right to terminate the research program with
respect to heart failure by giving Gene Logic six months notice at any time
after 12 months from the date of commencement of the research program under the
agreement and has comparable rights to terminate the research program in the
options fields. Accordingly, the minimum duration of any research program is 18
months. If Procter & Gamble terminates the agreement, it may elect to recommence
the research program for up to two additional years. Each party also has the
right to terminate the agreement upon certain change of control events with
respect to the other party. Unless earlier terminated in accordance with its
terms, the agreement will remain in effect until the expiration of the
last-to-expire obligations of Procter & Gamble to pay royalties under the
agreement.

There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets related to heart
failure or to either of the two option disease fields or that Procter & Gamble
will be successful in developing or commercializing any products based upon such
discoveries made by the Company. As a result, there can be no assurance that
Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement.

40
<PAGE>
JAPAN TOBACCO INC.

In September 1997, the Company and Japan Tobacco entered into a five-year
strategic alliance for drug target and drug lead discovery in renal disease.
Payments by Japan Tobacco to the Company in the form of committed technology
access fees and research funding total a minimum of $15.0 million if the
research program continues for its full term and the Company performs its
research obligations under the Agreement. Japan Tobacco may extend the research
program for one additional year. At any time during the first two years of the
alliance, Japan Tobacco has the right to expand the alliance to include drug
target and drug lead discovery programs in two additional disease indications
upon terms, including committed research funding, identical to those covering
the initial program in renal disease. Japan Tobacco will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development and associated regulatory milestones.
Pursuant to the terms of the agreement, Japan Tobacco would pay a minimum of
$12.5 million for each therapeutic product if all milestones are achieved. Japan
Tobacco will also pay the Company royalties on worldwide net sales of all
products that may result from targets discovered pursuant to the alliance.
Payments for technology access fees and research and development support will be
recognized as revenue ratably over the period for which the payments are made.
Payments related to the achievement of milestones will be recognized as revenue
when the milestones are achieved.

As part of the alliance and during the research term of the alliance
agreement, the Company granted Japan Tobacco a non-exclusive license to the GENE
EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru Chip
technology for screening for drug leads in renal disease or, if Japan Tobacco
has exercised its options to additional disease indications, such other disease
indications. In consideration for such license and access, Japan Tobacco has
agreed to purchase $3.0 million of Common Stock in a private transaction
concurrent with this offering at a price per share equal to the price per share
at which Common Stock is sold in this offering. Under the terms of the option,
Japan Tobacco will pay Gene Logic chip design fees, screening fees and a minimum
of $17.5 million for each therapeutic product based on a lead compound
identified through such assays if all milestones are achieved. The agreement
also entitles the Company to royalties on net sales of therapeutic products
based on lead compounds identified through such assays.

The agreement provides Japan Tobacco with exclusive, worldwide,
royalty-bearing rights to develop and commercialize small molecule therapeutics
and therapeutic antibodies and proteins based on the Company's discoveries in
the course of the alliance. Gene Logic has retained all rights to develop and
commercialize gene therapy and antisense drugs and diagnostic products
discovered pursuant to the alliance. Japan Tobacco has agreed to assign to Gene
Logic any and all interest it may have in inventions related to the Company's
core technologies and to products developed pursuant to the alliance to the
extent necessary for Gene Logic to exercise its retained commercial rights.

Japan Tobacco has the right to terminate the research program with respect
to renal disease by giving Gene Logic six months notice at any time after 12
months from the date of commencement of the research program under the agreement
and has comparable rights to terminate the research program in the option
fields. Accordingly, the minimum duration of any research program is 18 months.
Unless earlier terminated in accordance with its terms, the agreement will
remain in effect until the expiration of the last-to-expire obligations of Japan
Tobacco to pay royalties under the agreement.

There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets or drug leads related
to renal disease or to either of the two option disease fields or that Japan
Tobacco will be successful in developing or commercializing any products based
upon such discoveries made by the Company. As a result, there can be no
assurance that Gene Logic will receive any milestone payments, royalties or
other payments contemplated by the agreement.

41
<PAGE>
INTELLECTUAL PROPERTY

Gene Logic seeks United States and international patent protection for major
components of its technology platform, including elements of its READS, MuST,
Flow-thru Chip and bioinformatics technologies; it relies upon trade secret
protection for certain of its confidential and proprietary information; and it
uses license agreements both to access external technologies and assets and to
convey certain intellectual property rights to others. The Company's commercial
success will be dependent in part upon its ability to obtain commercially
valuable patent claims and to protect its intellectual property portfolio.

As of October 20, 1997, the Company had exclusive rights to nine United
States patent applications, as well as corresponding international and foreign
patent applications, relating to its technologies. The Company has received
notices of allowance for two United States patent applications covering the key
aspects of the READS technology, and notice of allowance for one United States
patent application covering the key aspects of the MuST technology. However, no
patents have issued to date.

In general, the Company intends to apply for patent protection for methods
relating to gene expression and to apply for patent protection for the
individual disease genes and targets it discovers. Such patents may include
claims relating to novel genes and gene fragments and to novel uses for known
genes or gene fragments identified through its discovery programs. There can be
no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are issued, the scope

42
<PAGE>
of the coverage or protection afforded thereby is uncertain. Failure to secure
such meaningful patent protection could have a material adverse effect on the
Company's business, financial condition and results of operations.

Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or to the related expression patterns. Furthermore,
others may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar, or identical to, any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.

43
<PAGE>
secrets, or that the Company can meaningfully protect its trade secrets. In the
case of a strategic partnership or other collaborative arrangement which
requires the sharing of data, the Company's policy is to make available to its
partner only such data as are relevant to the partnership or arrangement, under
controlled circumstances, and only during the contractual term of the strategic
partnership or collaborative arrangement, and subject to a duty of
confidentiality on the part of its partner or collaborator. There can be no
assurance, however, that such measures will adequately protect the Company's
data. Any material leak of confidential data into the public domain or to third
parties may have a material adverse effect on the Company's business, financial
condition and results of operations.

COMPETITION

Competition among entities attempting to identify the genes associated with
specific diseases and to develop products based on such discoveries is intense.
Gene Logic faces, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. The Company is aware that
certain entities are utilizing a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to identify
disease-related genes. In addition, numerous pharmaceutical companies are
developing genomic research programs, either alone or in partnership with the
Company's competitors. Competition among such entities is intense and is
expected to increase. In order to compete against existing and future
technologies, the Company will need to demonstrate to potential customers that
its technologies and capabilities are superior to competing technologies.

Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its strategic partners, or may obtain regulatory approvals of their
drugs more rapidly than the Company and its strategic partners, any of which
could have a material adverse affect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also faces competition from
these and other entities in gaining access to cells, tissues and nucleic acid
samples used in its discovery programs.

The Company will rely on its strategic partners for support of certain of
its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners is conducting multiple product development efforts within each disease
area which is the subject of its strategic alliance with Gene Logic. Generally,
the Company's strategic alliance agreements do not preclude the strategic
partner from pursuing development efforts utilizing approaches distinct from
that which is the subject of the alliance. Any product candidate of the Company,
therefore, may be subject to competition with a potential product under
development by a strategic partner.

44
<PAGE>
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.

GOVERNMENT REGULATION

The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug developed
by the Company's strategic partners must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes preclinical studies and clinical trials, and may include
post-marketing surveillance of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in FDA
policies for drug approval during the period of product development and FDA
regulatory review of each submitted NDA in the case of new pharmaceutical
agents, or PLA or BLA in the case of biological therapeutics. Similar delays may
also be encountered in the regulatory approval of any diagnostic product, where
such approval is required, and in obtaining regulatory approval in foreign
countries. Delays in obtaining regulatory approvals could adversely affect the
marketing of any drugs developed by the Company or its strategic partners,
impose costly procedures upon the Company's and its partners' activities,
diminish any competitive advantages that the Company or its partners may attain
and adversely affect the Company's receipt of royalties. There can be no
assurance that regulatory approval will be obtained for any drugs or diagnostic
products developed by the Company or its strategic partners. Furthermore,
regulatory approval may entail limitations on the indicated uses of a drug.
Because certain of the products likely to result from the Company's disease
research programs involve the application of new technologies and may be based
upon a new therapeutic approach, such products may be subject to substantial
additional review by various government regulatory authorities and, as a result,
regulatory approvals may be obtained more slowly than for products based upon
more conventional technologies.

Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market,
and could have adverse effects on the Company's business, financial conditions
and results of operations. Violations of regulatory requirements at any stage
during the regulatory process, including preclinical studies and clinical
trials, the approval process, post-approval or in good manufacturing practices
manufacturing requirements, may result in various adverse consequences to the
Company, including the FDA's delay in approval or refusal to approve a product,
withdrawal of an approved product from the market or the imposition of criminal
penalties against the manufacturer and NDA, PLA or BLA holder. No IND has been
submitted for any product candidate resulting from the Company's discovery
programs, and no product candidate has been approved for commercialization in
the United States or elsewhere. The Company intends to rely on its strategic
partners to file INDs and generally direct the regulatory approval process.
There can be no assurance that the Company's strategic partners will be able to
conduct clinical testing or obtain necessary approvals from the FDA or other

45
<PAGE>
regulatory authorities for any products. Failure to obtain required governmental
approvals will delay or preclude the Company's strategic partners from marketing
drugs or diagnostic products developed through the Company's research or limit
the commercial use of such products and could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally.

SCIENTIFIC ADVISERS

The Company has established a select group of scientists and physicians to
advise it on scientific and technical matters in areas of the Company's
business. The scientific advisers are compensated by retainer and on a time and
expenses basis, and certain of them have received shares of Common Stock of the
Company. The Company has entered into consulting agreements with a number of the
scientific advisers.

None of the scientific advisers is employed by the Company, and they may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a limited
portion of their time to the Company. The Company's scientific advisers include:

KENNETH L. BEATTIE, PH.D., Senior Research Staff Member, Oak Ridge National
Laboratory. Dr. Beattie, the inventor of the Flow-thru Chip, is an exclusive
consultant to the Company in its program for the development of analytical
microsystems for gene expression profiling. He is an inventor of several key
patents in the area of DNA probe and sequencing technologies and genome mapping.
Dr. Beattie holds a Ph.D. from the University of Tennessee.

RONALD FALK, M.D., Professor of Medicine and Chief, Division of Nephrology,
University of North Carolina. Dr. Falk consults with the Company in the field of
kidney disease. He is co-director of the Glomerular Disease Collaboration
Network. Dr. Falk holds a M.D. from the University of North Carolina.

J. CHARLES JENNETTE, M.D., Professor of Medicine, Pathology and Laboratory
Medicine, University of North Carolina. Dr. Jennette consults with the Company
in the field of kidney disease. He is Director of the Nephropathology Laboratory
at the University of North Carolina, Jennette holds a M.D. from the University
of North Carolina.

AARON KLUG, PH.D., Director, MRC Laboratory of Molecular Biology, University
of Cambridge, England and Fellow of Peterhouse College. Professor Klug, a
scientific founder of the Company, has been widely recognized for his
contributions to modern molecular biology. He was elected a fellow of the Royal
Society in 1969, received the Nobel Prize for Chemistry in 1982 and the Copley
Medal of the Royal Society in 1985 and was knighted in 1988.

RONALD A. MORTON, JR., M.D., Assistant Professor in Urology, Baylor College
of Medicine. Dr. Morton is Director of Laboratories at the Baylor Prostate
Center, one of three National Cancer Institute prostate cancer SPORE
(Specialized Programs of Research Excellence) centers, and is responsible for
developing and expanding its extensive library of normal and malignant human
prostate tissues. He is an exclusive

46
<PAGE>
consultant to Gene Logic in the field of gene discovery in prostate cancer. Dr.
Morton holds a M.D. from Johns Hopkins University School of Medicine. He is an
American Foundation for Urologic Disease Research Scholar.

JAY R. SHAPIRO, M.D., Professor, Division of Geriatric Medicine, Johns
Hopkins University School of Medicine. Dr. Shapiro is an expert in human bone
diseases and an exclusive consultant to the Company in the field of
osteoporosis. He holds a M.D. from Boston University School of Medicine.

SHERMAN M. WEISSMAN, M.D., Sterling Professor of Genetics and Medicine, Yale
University School of Medicine. Dr. Weissman, the inventor of the READS and MuST
technologies, is a scientific founder of and a key adviser to the Company. Dr.
Weissman graduated with advanced degrees in mathematics from the University of
Chicago and a M.D. from Harvard Medical School. He is a member of the National
Academy of Sciences, a fellow of the American Association for the Advancement of
Science and sits on the editorial board of the PROCEEDINGS OF THE NATIONAL
ACADEMY OF SCIENCES and other eminent journals.

ROBERT H. YOLKEN, M.D., Professor of Pediatrics and Director, The Stanley
Laboratory for the Study of Schizophrenia and Bipolar Disorder, Johns Hopkins
University School of Medicine. Dr. Yolken consults with the Company in the
fields of gene target discovery in schizophrenia and affective disorders. Dr.
Yolken holds a M.D. from Harvard University.

EMPLOYEES

As of September 30, 1997, the Company had a total of 57 employees, 18 of
whom hold M.D., Ph.D or D.Sc. degrees and ten of whom hold other advanced
degrees, and one part-time employee. Of these, 46 were engaged in research and
development and 11 were engaged in business development, finance and general
administration. The Company's future success depends in significant part upon
the continued service of its key scientific, technical and senior management
personnel and its continuing ability to attract and retain highly qualified
technical and managerial personnel. None of the Company's employees is
represented by a labor union or covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.

FACILITIES

The Company's facilities are located in Columbia, Maryland. The Company
leases approximately 21,000 square feet of laboratory and office space. These
facilities are leased through February 28, 1998. The Company recently entered
into a ten-year lease for approximately 50,000 square feet of laboratory and
office space in Gaithersburg, Maryland and plans to relocate its operations to
such facility in January 1998. The Company believes that, upon such relocation,
the Company's facilities will be adequate for its current and projected needs
and that additional space will be available as needed. The Company has leased
approximately 5,000 square feet of office space in Berkeley, California.

LEGAL PROCEEDINGS

Gene Logic is not a party to any material legal proceedings.

47
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of September 30, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>

Alan G. Walton, Ph.D., D.Sc. (1)..................... 61 Chairman of the Board of Directors

Michael J. Brennan, M.D., Ph.D. ..................... 40 President, Chief Executive Officer and Director

Keith O. Elliston, Ph.D. ............................ 36 Senior Vice President and Chief Scientific Officer

Mark D. Gessler...................................... 36 Senior Vice President, Corporate Development and
Chief Financial Officer

Eric M. Eastman, Ph.D. .............................. 45 Vice President, Technology Management

Gregory G. Lennon, Ph.D. ............................ 40 Vice President, Genomics Research

Victor M. Markowitz, D.Sc. .......................... 44 Vice President, Bioinformatics Systems

Daniel R. Passeri, J.D. ............................. 36 Vice President, Business Development and Intellectual
Property

Jules Blake, Ph.D. (1)(2)............................ 73 Director

Charles L. Dimmler III (1)(2)........................ 55 Director

G. Anthony Gorry, Ph.D. ............................. 56 Director

Jeffrey D. Sollender................................. 37 Director
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

ALAN G. WALTON, PH.D., D.SC. has served as Chairman of the Board of
Directors of the Company since its inception in September 1994. He has been a
General Partner of Oxford Bioscience Partners, a private equity investment firm,
since 1991 and a member of the Board of Directors of Collaborative Clinical
Research since 1994. In 1981, Dr. Walton co-founded University Genetics Co., a
public corporation specializing in technology transfer from academic
institutions to industry and in the seed financing of high-technology start-ups,
and served as President and Chief Executive Officer until 1987. He has lectured
extensively at various universities, including Harvard Medical School, Indiana
University and Case Western Reserve University where he was Professor of
Macromolecular Science and Director of the Laboratory for Biological
Macromolecules. Dr. Walton received a Ph.D. in chemistry and a D.Sc. in
biological chemistry from Nottingham University, England.

MICHAEL J. BRENNAN, M.D., PH.D. has served as President, Chief Executive
Officer and a director of the Company since December 1995. From October 1993 to
November 1995, he was Vice President, Business Development for Corange
International Limited's worldwide therapeutics business, Boehringer Mannheim
Therapeutics. From June 1990 to October 1993, Dr. Brennan was a director and the
general manager of Boehringer Mannheim South Africa. Dr. Brennan received a
Ph.D. in neurobiology and a M.D. from the University of the Witwatersrand,
Johannesburg, South Africa. In 1985, he completed his residency in neurology at
Boston City Hospital.

KEITH O. ELLISTON, PH.D. has served as Senior Vice President and Chief
Scientific Officer of the Company since February 1997. From July 1996 to
February 1997, Dr. Elliston was Head of Genome Sciences at Bayer Corporation, a
pharmaceutical company, and also responsible for establishing and

48
<PAGE>
directing its bioinformatics effort worldwide. From 1986 to July 1996, Dr.
Elliston was involved in a wide range of genomics and drug discovery programs at
Merck & Co., Inc. ("Merck"), a pharmaceutical company. In 1993, he founded the
Department of Bioinformatics at Merck. He also co-founded and was the scientific
director of the Merck Gene Index project, involving the coordinated efforts of
Merck, Washington University, Lawrence Livermore National Laboratory, the
University of Pennsylvania and the National Center for Biotechnology
Information. Dr. Elliston received his M.S. degree in genetics from the
University of Minnesota and a Ph.D. in molecular genetics from Rutgers
University. He is an advisory board member of the National Center for
Biotechnology Information, National Institutes of Health, and the National
Center for Genome Resources, and an Adjunct Professor at Rutgers University.

MARK D. GESSLER has served as Senior Vice President, Corporate Development
and Chief Financial Officer of the Company since June 1996. From February 1993
to June 1996, Mr. Gessler was with GeneMedicine, Inc., a gene therapy company,
most recently as Vice President, Corporate Development. From 1988 until January
1993, he was Director of Business Development at BCM Technologies, Inc., the
venture and technology subsidiary of Baylor College of Medicine. While in that
position, Mr. Gessler co-founded three biotechnology companies and a software
company. Mr. Gessler holds a MBA from the University of Tennessee and was an
Adjunct Professor of Business Administration at Rice University from 1991 to
1996.

ERIC M. EASTMAN, PH.D. has served as Vice President, Technology Management
of the Company since August 1997. He served as Vice President, Scientific
Operations of the Company from September 1996 to August 1997. From June 1993 to
September 1996, Dr. Eastman was Director of Gene Expression and Process Research
& Development at GeneMedicine, Inc. He was a founder and served as Vice
President and Chief Scientific Officer of Lark Sequencing Technologies, Inc., a
molecular biology services company, from 1989 to June 1993. Dr. Eastman holds a
M.S. from the University of Connecticut and received a M.Phil. degree and a
Ph.D. in human genetics and development from Columbia University College of
Physicians and Surgeons.

GREGORY G. LENNON, PH.D. has served as Vice President, Genomics Research
since September 1997. Prior to joining Gene Logic, Dr. Lennon was a senior
scientist of the Human Genome Center at Lawrence Livermore National Laboratory
from October 1991 to August 1997 and manager of the functional genomics research
portfolio for the Department of Energy's Joint Genome Institute from January
1997 to August 1997. Dr. Lennon is a founder and the director of the I.M.A.G.E.
(Integrated Molecular Analysis of Gene Expression) Consortium funded by the
Department of Energy. He was a participant in both the Merck Gene Index project
and the National Cancer Institute's Cancer Genome Anatomy Project. Dr. Lennon
holds a Ph.D. in genetics from the University of Pennsylvania. He is an adviser
to the National Cancer Institute of the National Institutes of Health.

VICTOR M. MARKOWITZ, D.SC. has served as Vice President, Bioinformatics
Systems since September 1997. Prior to joining Gene Logic, Dr. Markowitz was a
staff scientist at Lawrence Berkeley National Laboratory from 1987 to August
1997, serving most recently as project leader in the Data Management Research
and Development Group. He is the principal architect of the Object Protocol
Model (OPM) software. Dr. Markowitz received his M.Sc. and D.Sc. in computer
science from Technion, the Israel Institute of Technology.

DANIEL R. PASSERI, J.D. has served as Vice President, Business Development
and Intellectual Property of the Company since March 1997. From March 1995 to
March 1997, he was Director of Technology Management for the Boehringer Mannheim
Group, responsible for the assessment and acquisition or licensing of new
biomedical technologies. From January 1992 to February 1995 he was Acting Chief,
Cellular Growth and Regulation Branch of the Office of Technology Transfer of
the National Institutes of Health and its Senior Licensing Specialist. He served
as a Patent Examiner in the biotechnology section of the USPTO. Mr. Passeri
holds a M.Sc. in biotechnology from the Imperial College of Science, Technology
and Medicine, University of London. He holds a J.D. from George Washington
University. He is registered

49
<PAGE>
to practice before the USPTO and in the State of Maryland and has been an
adjunct professor at George Washington University since 1995.

JULES BLAKE, PH.D. has served as a director of the Company since its
inception. From 1973 until his retirement in 1989, Dr. Blake served as Vice
President of Research and Development and Vice President, Corporate Scientific
Affairs, for Colgate-Palmolive, Inc., a consumer products company. Dr. Blake was
appointed as an Industrial Research Institute Fellow at the United States Office
of Science and Technology Policy, Executive Office of the President, where he
served until 1991. Dr. Blake serves on the boards of directors of the public
companies Martek Biosciences Corporation and ProCyte Corporation. Dr. Blake
holds a Ph.D in organic chemistry from the University of Pennsylvania.

CHARLES L. DIMMLER III has served as a director of the Company since May
1996. Since 1988, Mr. Dimmler has been a General Partner of Hambro International
Equity Partners, an equity investment firm, and is currently also the principal
investment officer of Cross Atlantic Partners Funds, an equity investment firm,
and an operating officer of Hambro Health International, Inc., an affiliate of
Hambros Bank Limited, a global merchant bank based in London. Mr. Dimmler serves
as a director of SunPharm, Inc., a public company, and various private
companies. He holds an honors degree from the University of California at Davis.

G. ANTHONY GORRY, PH.D. has served as a director of the Company since
January 1997. Since April 1992, Dr. Gorry has been Vice President for
Information Technology and Professor of Computer Science at Rice University. He
is the Chairman and a founder of The Forefront Group, Inc., a public information
technology company. From 1975 to April 1992, he served as Vice President for
Information Technology and Professor of Medical Informatics and Neuroscience at
Baylor College of Medicine, as well as Director of the W. M. Keck Center for
Computational Biology and Adjunct Professor of Computer Science at Rice
University. Dr. Gorry holds a M.S. in chemical engineering from the University
of California at Berkeley and a Ph.D. in computer science from Massachusetts
Institute of Technology. He is a fellow of the American College of Medical
Informatics and a member of the Institute of Medicine and of the National
Academy of Sciences.

JEFFREY D. SOLLENDER has served as a director of the Company since July
1997. Mr. Sollender is a founder of and adviser to Biotechvest L.P., a venture
capital investment firm formed in 1993. From 1994 through December 1995, Mr.
Sollender served as an adviser to Forward Ventures, a venture capital investment
firm. Mr. Sollender became a venture partner of Forward Ventures in 1996 and a
general partner in September 1997. Mr. Sollender co-founded Triangle
Pharmaceuticals, Inc., a biopharmaceutical company, in 1995, CombiChem Inc., a
combinatorial chemistry company, in 1994 and GenQuest, Inc., a functional
genomics company, in 1995. He served as Vice President of Operations and
Business Development for CombiChem Inc. and GenQuest, Inc. until January 1995
and February 1996, respectively. Mr. Sollender co-founded AriZeke
Pharmaceuticals, an oral drug delivery company, in 1997 and continues to serve
as Chairman and Chief Executive Officer of the company. Mr. Sollender received
his MBA from the University of Chicago Graduate School of Business.

COMMITTEES OF THE BOARD OF DIRECTORS

The Compensation Committee consists of Dr. Walton, Dr. Blake and Mr.
Dimmler. The Compensation Committee makes recommendations regarding the
Company's 1997 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan
and Employee Stock Purchase Plan and determines salaries for the executive
officers and incentive compensation for employees and consultants of the
Company.

The Audit Committee consists of Dr. Blake and Mr. Dimmler. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.

50
<PAGE>
DIRECTOR COMPENSATION

The Company's non-employee directors who are not affiliated with
stockholders of the Company currently receive $6,000 per year for their
attendance at Board meetings and all directors are reimbursed for certain
expenses in connection with attendance at Board and committee meetings.
Non-employee directors receive automatic grants of options under the Company's
Non-employee Directors' Stock Option Plan as described below. See "--Equity
Incentive Plans."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No executive officer of the Company serves 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 the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.

EXECUTIVE COMPENSATION

The following table sets forth summary information concerning compensation
paid by, or accrued for services rendered to, the Company during the fiscal year
ended December 31, 1996 to the Company's Chief Executive Officer and the two
other most highly compensated executive officers who earned in excess of
$100,000 in salary and bonus during the fiscal year ended December 31, 1996 (the
"Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------ SECURITIES ALL OTHER
SALARY UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS ($) OPTIONS(#) ($)
- -------------------------------------------------- --------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D. Ph.D. ................... 1996 $ 200,000 $ 30,000(2) 245,000 --
President, Chief Executive Officer and
Director
Mark D. Gessler................................... 1996 95,363 40,000 25,000 --
Senior Vice President, Corporate
Development and Chief Financial
Officer
Richard E. Kouri, Ph.D. (3)....................... 1996 106,875 30,000 -- 90,000(4)
Senior Vice President and Chief
Technical Officer
</TABLE>

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

(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company, and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.

(2) Includes an amount that was assigned to a corporation of which Dr. Brennan
is the sole stockholder.

(3) Dr. Kouri resigned from the Company effective on October 15, 1996.

(4) Represents a $90,000 severance payment to Dr. Kouri in connection with his
resignation from the Company.

51
<PAGE>
STOCK OPTION GRANTS

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth, for the fiscal year ended December 31, 1996,
certain information regarding options granted to each of the Named Executive
Officers:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES IN EXERCISE PRICE FOR OPTION TERM ($)(3)
GRANTED FISCAL PER SHARE EXPIRATION --------------------------
NAME (#) YEAR (%)(1) ($)(2) DATE 5% 10%
- ------------------------------------- ----------- --------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D....... 100,000 20.5% $ 0.01 2/28/06 $ 1,302,116 $ 2,073,994
145,000 29.8 0.15 12/19/06 1,867,768 2,986,991
Mark D. Gessler...................... 25,000 5.1 0.15 12/19/06 322,029 514,998
Richard E. Kouri, Ph.D............... -- -- -- -- -- --
</TABLE>

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

(1) Based on options to purchase 487,000 shares granted to employees in fiscal
1996, including the Named Executive Officers. The options were granted under
the Company's 1997 Equity Incentive Plan. Options granted under such plan
generally vest monthly over four years. The foregoing options accelerate
upon achievement of certain performance-based goals, including vesting of
80% of such options upon completion of this offering and the remaining 20%
180 days thereafter.

(2) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.

(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and the initial public offering price of
$8.00. It is calculated assuming that the stock price 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 amounts represent certain
assumed rates of appreciation only, in accordance with the rules of the
Commission, and do not reflect the Company's estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of the Company's Common Stock.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES

The following table sets forth, with respect to each of the Named Executive
Officers, information regarding the number and value of securities underlying
unexercised options held by the Named Executive Officers as of December 31,
1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
SHARES ACQUIRED VALUE ---------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D....... 100,000 $ 14,000 3,021 141,979 $ 23,715 $ 1,114,535
Mark D. Gessler...................... -- -- 521 24,479 4,090 192,160
Richard E. Kouri, Ph.D............... -- -- -- -- -- --
</TABLE>

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

(1) Based on the initial public offering price of $8.00 per share, less the
exercise price.

EMPLOYMENT AGREEMENTS

On December 1, 1995, Michael J. Brennan, the President, Chief Executive
Officer and a director and stockholder of the Company, entered into an
employment agreement with the Company. Dr. Brennan will be paid $200,000 in
salary for 1997 under such agreement. The employment agreement has a five-year
term and provides, among other things, for the payment to Dr. Brennan of annual
bonuses and the acceleration of certain unvested options upon achievement of
certain performance-based goals, including

52
<PAGE>
vesting of 80% of such options upon completion of this offering and the
remaining 20% 180 days thereafter. Of Dr. Brennan's total outstanding options to
purchase 538,962 shares, options to purchase 131,000 shares will be exercisable
upon completion of this offering. The employment agreement also provides that
Dr. Brennan will be offered the opportunity to participate in any future equity
financings on a pro rata basis, provided that such right terminates upon the
closing of this offering. Dr. Brennan and the Company have also entered into an
Equity Adjustment Agreement whereby the Company agreed to pay Dr. Brennan a cash
bonus upon the occurrence of a change in control of the Company. The Equity
Adjustment Agreement terminates upon the closing of this offering.

On May 16, 1996, Mark D. Gessler, the Senior Vice President, Corporate
Development and Chief Financial Officer of the Company and a stockholder of the
Company, entered into an employment agreement with the Company. The employment
agreement has a four-year term and provides, among other things, for the payment
to Mr. Gessler of annual bonuses and the acceleration of certain unvested
options upon achievement of certain performance-based goals, including vesting
of 80% of such options upon completion of this offering and the remaining 20%
180 days thereafter. Of Mr. Gessler's total outstanding options to purchase
346,981 shares, options to purchase 140,000 shares will be exercisable upon
completion of this offering. Mr. Gessler will be paid $185,000 in salary for
1997 under such agreement.

EQUITY INCENTIVE PLANS

1997 EQUITY INCENTIVE PLAN

The Company adopted its 1996 Stock Plan in January 1996 and amended and
restated the 1996 Stock Plan in September 1997 as the 1997 Equity Incentive Plan
(the "Stock Plan"). An aggregate of 6,100,000 shares of the Company's Common
Stock have been reserved for issuance pursuant to the exercise of stock awards
granted to employees, directors and consultants under the Stock Plan. The Stock
Plan will terminate in September 2007, unless sooner terminated by the Board.

The Stock Plan permits the granting of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors), and options that do not
so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock
Options, the "Options") to employees (including officers and employee directors)
and consultants (including non-employee directors). In addition, the Stock Plan
permits the granting of stock appreciation rights (SARs) appurtenant to or
independently of Options, as well as stock bonuses and rights to purchase
restricted stock (Options, SARs, stock bonuses and rights to purchase restricted
stock are hereinafter referred to as "Stock Awards"). No person is eligible to
be granted Options and SARs covering more than 700,000 shares of the Company's
Common Stock in any 12-month period.

The Stock Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the Stock Plan, the Board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each Stock Award, to determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to
establish vesting schedules, to specify the Option exercise price and the type
of consideration to be paid to the Company upon exercise and, subject to certain
restrictions, to specify other terms of Stock Awards.

The maximum term of Options granted under the Stock Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an optionee during any calendar year (under all such plans of
the Company and its affiliates) may not exceed $100,000. Options granted under
the Stock Plan generally are non-transferable and expire three months after the
termination of an optionee's service to the Company. In general, if an optionee
is permanently disabled or dies during his or her service to the

53
<PAGE>
Company, such person's Option may be exercised up to 12 months following such
disability and up to 18 months following such death.

The exercise price of Options granted under the Stock Plan is determined by
the Board of Directors in accordance with the guidelines set forth in the Stock
Plan. The exercise price of an Incentive Stock Option cannot be less than 100%
of the fair market value of the Common Stock on the date of the grant. The
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Common Stock on the date of grant. Options granted
under the Stock Plan vest at the rate specified in the option agreement. The
exercise price of Incentive Stock Options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.

Any stock bonuses or restricted stock purchase awards granted under the
Stock Plan will be in such form and will contain terms and conditions as the
Board deems appropriate. The purchase price under any restricted stock purchase
agreement will not be less than 85% of the fair market value of the Company's
Common Stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the Stock Plan are generally non-transferable.

Pursuant to the Stock Plan, shares subject to Stock Awards that have expired
or otherwise terminated without having been exercised in full again become
available for the grant, but shares subject to exercised stock appreciation
rights will not again become available for the grant. The Board of Directors has
the authority to reprice outstanding Options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.

Upon certain changes in control of the Company, all outstanding Stock Awards
under the Stock Plan must either be assumed or substituted by the surviving
entity. In the event the surviving entity determines not to assume or substitute
such Stock Awards, with respect to persons then performing services as
employees, directors or consultants, the time during which such Stock Awards may
be exercised will be accelerated and such Stock Awards terminated if not
exercised prior to such change in control. In the event that any person who was
providing services as an employee, director or consultant immediately prior to
the consummation of a change of control is terminated other than for cause
within 12 months following such change of control, any stock awards held by such
persons shall immediately become vested and exercisable or free from repurchase
rights.

As of September 30, 1997, the Company had issued 100,000 shares of Common
Stock pursuant to the exercise of purchase rights granted under the Stock Plan,
and had granted Incentive and Nonstatutory Stock Options to purchase an
aggregate of 2,716,881 shares of Common Stock. As of September 30, 1997,
3,334,887 shares of Common Stock remained available for future grants under the
Stock Plan.

NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

In September 1997, the Company adopted a Non-employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of disinterested directors.

The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 125,000. Pursuant to the terms of
the Directors' Plan: (i) each person who after the effective date of this
offering for the first time becomes a Non-employee Director automatically will
be granted, upon the date of his or her initial appointment or election to be a
Non-employee Director, a one-time option to purchase 30,000 shares of Common
Stock (the "Initial Options"); and (ii) on the date of each annual meeting of
the stockholders of the Company after the effective date of this offering (other

54
<PAGE>
than any such annual meeting held in 1997), each person who is a Non-employee
Director following such annual meeting (other than a person who receives a grant
in accordance with (i) above on or during the three-month period preceding such
date) automatically will be granted an option to purchase 7,500 shares of Common
Stock (the "Annual Options").

No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The Initial Options
granted under the Directors' Plan vest on an annual basis over four years. The
Annual Options vest on the anniversary of the date of grant. The exercise price
of options under the Directors' Plan will equal 100% of the fair market value of
the Common Stock on the date of grant. Options granted under the Directors' Plan
are generally non-transferable. Unless otherwise terminated by the Board of
Directors, the Directors' Plan automatically terminates in September 2007. As of
September 30, 1997, no options to purchase shares of Common Stock had been
granted under the Directors' Plan.

EMPLOYEE STOCK PURCHASE PLAN

In September 1997, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan will commence on the date of this Prospectus and
terminate on January 31, 2000.

Unless otherwise determined by the Board, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in this offering at any time during this offering period, and
participation ends automatically on termination of employment with the Company.

In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten this offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase Common
Stock.

401(K) PLAN

The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). The 401(k) Plan provides that each participant may
contribute between 2% and 15% of his or her pre-tax gross compensation (up to a
statutorily prescribed annual limit of $9,500 in 1997). Employees must be
twenty-one years old to participate and are eligible on the first day of the
quarter following six months as an employee of the Company. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.

55
<PAGE>
LIMITATIONS OF DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION

The Company's Restated Certificate of Incorporation provides that directors
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for any breach of fiduciary duty as a director, except to
the extent that such exemption from liability or limitation thereof is not
permitted by the Delaware General Corporation Law as currently in effect or as
the same is subsequently amended. Such limitation of liability does not apply to
liabilities arising under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or rescission.

The Company's Amended and Restated By-laws provide that the Company will
indemnify its directors and executive officers and may indemnify its other
officers, employees and agents to the fullest extent permitted by Delaware law.
The Company is also empowered under its Amended and Restated By-laws to enter
into indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.

56
<PAGE>
CERTAIN TRANSACTIONS

Between November 1994 and July 1997, the Company completed several equity
financings. During 1994, the Company sold 266,666 shares of Series A Convertible
Preferred Stock ("Series A") for $400,000. During 1995, the Company sold 66,667
shares of Series A for $100,000, 412,500 shares of Series A-1 Convertible
Preferred Stock ("Series A-1") for $660,000 and issued warrants to purchase an
additional 50,000 shares of Series A-1. During 1996, the Company sold 4,090,909
shares of Series B Convertible Preferred Stock ("Series B") for $9.0 million.
During 1997, the Company sold 4,444,443 shares of Series C Convertible Preferred
Stock ("Series C") for net proceeds of approximately $19.1 million and issued
warrants to purchase an additional 48,889 shares of Series C.

Each series of the Preferred Stock has certain conversion rights and
protection against certain dilutive issuances of securities by the Company. The
Preferred Stock is redeemable at the election of the holders of a majority of
outstanding Preferred Stock for the original purchase price plus any declared,
accrued or unpaid dividends of Series A and Series A-1 and any accrued or unpaid
dividends of Series B and Series C, whether declared or undeclared. Each holder
of Preferred Stock is entitled to one vote for each share held. Holders of
Preferred Stock are also entitled to certain preferences over holders of Common
Stock with respect to dividends and in certain liquidation events.

All Preferred Stock will automatically convert into Common Stock upon the
closing of this offering. The holdings of such Common Stock (to be issued upon
conversion of the Preferred Stock) by affiliates of the Company's Directors are
described below.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PURCHASER COMMON STOCK
- ------------------------------------------------------------------------- -------------------
<S> <C>
Biotechvest L.P. (1)..................................................... 333,334
Fruit of the Loom Senior Executive Officer Deferred
Compensation Trust (1)................................................. 333,333
Cross Atlantic Partners K/S (2).......................................... 880,233
Cross Atlantic Partners II K/S (2)....................................... 498,832
Cross Atlantic Partners III K/S (2)...................................... 173,334
Oxford Bioscience Partners (Adjunct) L.P. (3)............................ 138,952
Oxford Bioscience Partners (Bermuda) Limited Partnership (3)............. 276,119
Oxford Bioscience Partners L.P. (3)...................................... 995,282
Oxford Bioscience Management Partners (3)................................ 100,000
</TABLE>

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

(1) Affiliated with Jeffrey D. Sollender, a Director.

(2) Affiliated with Charles L. Dimmler III, a Director.

(3) Affiliated with Alan G. Walton, a Director.

In February 1996, Dr. Kouri, formerly the Senior Vice President and Chief
Technical Officer of the Company, received 55,000 shares of Common Stock (the
"Shares") pursuant to his Employment Agreement. Pursuant to the terms of a Stock
Pledge Agreement, Dr. Kouri pledged the Shares as security for the Promissory
Note. Following Dr. Kouri's resignation from the Company on October 15, 1996,
the Promissory Note was canceled and the Company canceled the Shares effective
January 1, 1997.

To assist Mr. Gessler, the Company's Senior Vice President, Corporate
Development and Chief Financial Officer, with his relocation, the Company loaned
Mr. Gessler $50,000 in July 1996 pursuant to a Promissory Note. Pursuant to the
terms of a Stock Pledge Agreement, the Promissory Note is secured by certain
shares of Common Stock of the Company owned by Mr. Gessler. The Promissory Note
provides that the loan balance will be forgiven upon the completion of this
offering.

In March 1997, the Company loaned Dr. Eastman, the Company's Vice President,
Technology Management, $20,000, of which $11,000 remains outstanding. Such loan
is non-interest bearing and becomes due at the end of 1997.

57
<PAGE>
The Company has entered employment agreements with each of its executive
officers. See "Management--Employment Agreements" for a description of the
employment agreements with Dr. Brennan and Mr. Gessler. The agreements with Dr.
Brennan, Mr. Gessler, Dr. Elliston, Dr. Eastman and Mr. Passeri provide, among
other things, for the acceleration of certain unvested options upon achievement
of certain performance-based goals (including 80% vesting upon completion of
this offering and the remaining 20% 180 days thereafter).

The Company has granted options to certain of its directors and executive
officers. The Company has also entered into an Indemnification Agreement with
each of its directors and executive officers.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors, and will continue to be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.

58
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1997, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby and
the sale of 375,000 shares of Common Stock to Japan Tobacco, by (i) each of the
Company's Named Executive Officers, (ii) each of the Company's directors, (iii)
each holder of more than 5% of the Company's Common Stock and (iv) all current
directors and executive officers as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED (1) OFFERING OFFERING
- ----------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Alan G. Walton, Ph.D., D.Sc. (2)............................................. 1,565,353 15.3% 11.5%
Oxford Bioscience Partners
315 Post Road West
Westport, CT 06880

Oxford Bioscience Partners (3)............................................... 1,560,353 15.3 11.5
c/o Alan G. Walton, Ph.D., D.Sc.
315 Post Road West
Westport, CT 06880

Charles L. Dimmler III (4)................................................... 1,557,399 15.3 11.5
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022

Cross Atlantic Partners K/S (5).............................................. 1,552,399 15.3 11.5
c/o Charles L. Dimmler III
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022

New York Life Insurance Company.............................................. 676,767 6.7 5.0
c/o Mr. Dominique O. Semon
51 Madison Avenue
New York, NY 10010

Altamira Management Ltd. (6)................................................. 652,020 6.4 4.8
c/o Mr. Ian Ainsworth
250 Bloor Street West
Suite 300
Toronto M4W1E6
Canada

GIMV Investment Corporation.................................................. 526,465 5.2 3.9
Karel Oomsstraat 37, 2018
Antwerpen
Belgium
</TABLE>

59
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED (1) OFFERING OFFERING
- ----------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D. (7).......................................... 486,000 4.7 3.6
Gene Logic Inc.
10150 Columbia Road
Columbia, MD 21046

Mark D. Gessler (8).......................................................... 240,000 2.3 1.8

Jules Blake, Ph.D. (9)....................................................... 14,500 * *

G. Anthony Gorry, Ph.D. (10)................................................. 5,000 * *

Jeffrey D. Sollender (11).................................................... 2,500 * *

All directors and executive officers as a group (12 persons) (12)............ 4,312,554 39.5 30.2
</TABLE>

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

* Represents beneficial ownership of less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 10,165,039 shares of Common Stock outstanding as of September 30,
1997 (including 55,389 shares of Common Stock to be issued upon the exercise
of certain warrants upon completion of this offering) and 13,540,039 shares
of Common Stock outstanding after completion of this offering.

(2) Includes an aggregate of 1,510,353 shares and warrants to purchase up to
50,000 shares held of record by Oxford Bioscience Partners, of which Dr.
Walton is a general partner, and by entities related thereto. Also includes
5,000 shares subject to options held by Dr. Walton exercisable within 60
days of September 30, 1997.

(3) Includes 100,000 shares held of record by Oxford Bioscience Management
Partners, 276,119 shares and warrants to purchase 10,859 shares held of
record by Oxford Bioscience Partners (Bermuda) Limited Partnership, 138,952
shares held of record by Oxford Bioscience Partners (Adjunct) L.P. and
warrants to purchase 39,141 shares held of record by Oxford Bioscience
Partners, L.P..

(4) Includes 880,233 shares held of record by Cross Atlantic Partners K/S,
498,832 shares held of record by Cross Atlantic Partners II K/S and 173,334
shares held of record by Cross Atlantic Partners III K/S. Also includes
5,000 shares subject to options held by Mr. Dimmler exercisable within 60
days of September 30, 1997. Mr. Dimmler is the Chief Investment Officer of
Cross Atlantic Partners.

(5) Includes 498,832 shares held of record by Cross Atlantic Partners II K/S and
173,334 shares held of record by Cross Atlantic Partners III K/S.

(6) Includes 90,909 shares held of record by Altamira Science & Technology Fund,
136,364 shares held of record by Altamira Pooled U.S. Equity Fund and
113,636 shares held of record by Altamira Special Growth Fund.

(7) Includes 100,000 shares held of record by the Brennan Family Limited
Partnership and 131,000 shares subject to options exercisable upon
completion of this offering.

(8) Includes 30,000 shares held of record by the Gessler Family Limited
Partnership and 140,000 shares subject to options exercisable upon
completion of this offering.

(9) Includes 14,500 shares subject to options exercisable within 60 days of
September 30, 1997.

(10) Includes 5,000 shares subject to options exercisable within 60 days of
September 30, 1997.

(11) Includes 2,500 shares subject to options held by Mr. Sollender exercisable
within 60 days of September 30, 1997.

(12) See footnotes (2), (4) and (7) through (11) above.

60
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, $.01 par value, and 10,000,000 shares of Preferred Stock, $.01 par
value.

COMMON STOCK

As of September 30, 1997, there were 10,165,039 shares of Common Stock
outstanding, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 9,281,185 shares of Common Stock and assuming the issuance
of 55,389 shares of Common Stock upon the exercise of certain warrants upon the
completion of this offering.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Preferred Stock
will be converted into 9,281,185 shares of Common Stock. See Note 9 of Notes to
Financial Statements for a description of the currently outstanding Preferred
Stock. Following the conversion, the Company's Restated Certificate of
Incorporation will be amended and restated to delete all references to such
shares of Preferred Stock. Under the Certificate of Incorporation, as amended
and restated upon the closing of this offering (the "Restated Certificate"), the
Board has the authority, without further action by stockholders, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges, qualifications and restrictions granted to or
imposed upon such Preferred Stock, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preference and
sinking fund terms, any or all of which may be greater than the rights of the
Common Stock. The issuance of Preferred Stock could adversely affect the voting
power of holders of Common Stock and reduce the likelihood that such holders
will receive dividend payments and payments upon liquidation. Such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock could have the effect of delaying, deterring or
preventing a change in control of the Company. The Company has no present plans
to issue any additional shares of Preferred Stock.

WARRANTS

As of September 30, 1997, there were warrants outstanding to purchase an
aggregate of 93,687 shares of the Company's Common Stock at a weighted average
exercise price of $1.88 per share, assuming the exercise of warrants to purchase
55,389 shares of Common Stock upon completion of this offering. In August 1995,
the Company issued warrants to purchase an aggregate of 50,000 shares of Common
Stock in connection with an equity financing. Such warrants are exercisable for
$1.60 per share and expire August 31, 2005. In March 1997, the Company issued a
warrant to purchase 25,758 shares of Common Stock at an exercise price of $2.20
per share with an expiration date of December 31, 2002 in connection with an
equipment loan agreement. Such loan agreement provides for the grant of
additional warrants in the event the Company draws down on the loan. Pursuant to
such provision, in September 1997 the Company issued an additional warrant to
purchase 4,293 shares of Common Stock at an exercise price of $2.20 per share

61
<PAGE>
with an expiration date of December 31, 2002. In April 1997, in connection with
the establishment of capital lease facilities, the Company issued a warrant to
purchase 13,636 shares of Common Stock at an exercise price of $2.20 per share.
Such warrant expires November 2002. In August 1997, in connection with Company's
facilities lease, the Company issued a warrant to purchase 20,000 shares of
Common Stock at an exercise price of $5.40. Such warrant will expire upon the
completion of this offering. The holder of such warrant has indicated that it
intends to fully exercise such warrant pursuant to a net exercise provision
contingent upon the closing of this offering. The Company issued a warrant to
purchase 48,889 shares of its Common Stock at an exercise price of $4.50 per
share to Hambrecht & Quist LLC for services related to the Company's most recent
preferred stock financing which closed on July 15, 1997. Such warrant expires
upon completion of this offering. Hambrecht & Quist LLC has indicated that it
intends to exercise such warrant contingent upon the closing of this offering.

REGISTRATION RIGHTS

After this offering, the holders of 9,281,185 shares of Common Stock
(received upon conversion of the Company's Preferred Stock upon completion of
this offering) and the holder of warrants to purchase 30,051 shares of Common
Stock (issued in conjunction with an equipment loan agreement) will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act, pursuant to an Amended and Restated Investor Rights Agreement
dated July 15, 1997 (the "Investor Rights Agreement"). Under the terms of the
Investor Rights Agreement, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled, subject to certain
limitations, to include shares therein. Commencing with the date that is three
months after this offering, the holders may also require the Company to file a
registration statement under the Securities Act with respect to their shares on
two occasions, and the Company is required to use its best efforts to effect
such registration. Furthermore, the holders may require the Company to register
their shares on Form S-3 when such form becomes available to the Company.
Generally, the Company is required to bear all registration expenses incurred in
connection with any such registrations, but not including any underwriting
discounts and selling commissions. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. 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. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Common Stock.

The Company's Restated Certificate provides for a Board of Directors that is
divided into three Classes. The Directors in Class I hold office until the first
annual meeting of stockholders following this offering, the Directors in Class
II hold office until the second annual meeting of stockholders following this
offering and the Directors in Class III hold office until the third annual
meeting of stockholders following this offering, (or, in each case, until their
successors are duly elected and qualified or until their earlier resignation,
removal from office or death), and, after each such election, the Directors in
each such class will then serve in succeeding terms of three years and until
their successors are duly elected and qualified.

62
<PAGE>
The classification system of electing Directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board of Directors, as the
classification of the Board of Directors generally increases the difficulty of
replacing a majority of the directors.

The Company's Restated Certificate provides further that any action required
or permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of stockholders and may not be effected by
any consent in writing. The Company's Restated Certificate also specifies that
the authorized number of directors may be changed only by resolution of the
Board of Directors. In addition, the Company's Amended and Restated By-laws
provide that special meetings of the stockholders of the Company may be called
only by the Chairman of the Board, the President of the Company or by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors. These and other provisions contained in the Restated
Certificate and the Company's Amended and Restated By-laws could delay or make
more difficult certain types of transactions involving an actual or potential
change in control of the Company or its management (including transactions in
which stockholders might otherwise receive a premium for their shares over then
current prices) and may limit the ability of stockholders to remove current
management of the Company or approve transactions that stockholders may deem to
be in their best interests and, therefore, could adversely affect the price of
the Company's Common Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is Chase
Mellon Shareholder Services.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
the offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.

Upon completion of the offering, the Company will have 13,540,039 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options.
Of these shares, the 3,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act, unless they
are held by "affiliates" of the Company as that term is used under the
Securities Act and the regulations promulgated thereunder ("Affiliates"). The
remaining 10,540,039 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act. As a result of contractual
restrictions and the provisions of Rules 144 and 701, additional shares will be
available for sale in the public market as follows: (i) no Restricted Shares
will be eligible for immediate sale on the date of this Prospectus; (ii)
approximately 5,732 Restricted Shares will be eligible for sale 90 days after
the date of this Prospectus; (iii) approximately 5,609,475 Restricted Shares
will be eligible for sale 180 days after the effective date of this offering
upon expiration of lock-up agreements and upon expiration of their respective
holding periods under Rule 144; and (iv) the remainder of the Restricted Shares
will be eligible for sale from time to time thereafter upon expiration of their
respective holding periods under Rule 144. In addition, 1,192,918 shares
issuable upon exercise of vested stock options will become eligible for sale 180
days after the effective date of this offering upon expiration of lock-up
agreements. The holders of

63
<PAGE>
9,281,185 shares of Common Stock and the holders of warrants to purchase 30,051
shares of Common Stock have the right in certain circumstances to require the
Company to register their shares under the Securities Act for resale to the
public beginning three months after the effective date of this offering. If such
holders, by exercising their demand registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have an
adverse effect on the market price for the Company's Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, the Company expects to file a registration statement on
Form S-8 registering a total of approximately 6,134,268 shares of Common Stock
subject to outstanding stock options or reserved for issuance under the
Company's equity incentive plans. Such registration statement is expected to be
filed and to become effective 180 days following the effective date of this
offering. Shares registered under such registration statement will, subject to
Rule 144 volume limitations applicable to Affiliates, be available for sale in
the open market, unless such shares are subject to vesting restrictions with the
Company or the lock-up agreements described above.

In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the offering, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares (as defined under Rule 144) for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of the Company's
Common Stock or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to the
manner of sale, notice, and the availability of current public information about
the Company. A person (or persons whose shares are aggregated) who was not an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned restricted shares for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.

An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.

64
<PAGE>
UNDERWRITING

The Underwriters named below (the "Underwriters"), acting through their
representatives,
BancAmerica Robertson Stephens, Hambrecht & Quist LLC and UBS Securities LLC
(the "Representatives"), have severally agreed with the Company, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all such shares if
any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
BancAmerica Robertson Stephens.................................................. 950,000
Hambrecht & Quist LLC........................................................... 712,500
UBS Securities LLC.............................................................. 712,500
Furman Selz LLC................................................................. 125,000
Genesis Merchant Group Securities............................................... 125,000
Pacific Growth Equities, Inc.................................................... 125,000
Punk, Ziegel & Company, L.P..................................................... 125,000
Vector Securities International, Inc............................................ 125,000
------------
Total....................................................................... 3,000,000
------------
------------
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession not in excess of $0.32 per share, of
which $0.10 may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold. The Company will be obligated, pursuant to the option, to
sell shares to the extent the option is exercised. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
shares of Common Stock offered hereby.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.

Each officer and director of the Company and certain stockholders together
holding approximately 10,484,307 shares of Common Stock (including Japan
Tobacco) have agreed in writing with the Representatives (the "Lock-Up
Agreements") that, until 180 days after the Registration Statement is declared
effective by the Commission, subject to certain limited exceptions, they will
not, directly or indirectly, sell, offer, contract to sell, pledge, grant any
option to purchase or otherwise dispose of any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for, or any other rights to purchase or
acquire, Common Stock owned directly by them or acquired by them after the date
of the Lock-Up Agreements, or which may be deemed to be beneficially

65
<PAGE>
owned by them, without the prior written consent of BancAmerica Robertson
Stephens. Approximately 5,609,475 of such shares will be eligible for immediate
public sale following expiration of the lock-up period pursuant to Rule 144.
BancAmerica Robertson Stephens may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
Lock-Up Agreements. In addition, the Company has agreed that, until 180 days
after the Registration Statement is declared effective by the Commission, the
Company will not, without the prior written consent of BancAmerica Robertson
Stephens, subject to certain limited exceptions, sell, offer, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock, or
any securities convertible into or exchangeable for, or any other rights to
purchase or acquire, shares of Common Stock, other than the Company's sale of
shares in this offering and the sale of shares to Japan Tobacco, the issuance of
Common Stock upon the exercise of the outstanding warrants or options, or the
Company's grant of options and issuance of stock under existing employee stock
option or stock purchase plans. See "Shares Eligible for Future Sale."

The Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby was determined through negotiations among the Company and
the Representatives. Among the factors considered in such negotiations included
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present stage of the Company's development and other factors
deemed relevant.

The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock. A "syndicate covering transaction"
is the bid for or the purchase of the Common Stock on behalf of the Underwriters
to reduce a short position incurred by the Underwriters in connection with the
offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.

H&Q Gene Logic Investors, LP, a California limited partnership and a related
party to Hambrecht & Quist LLC, one of the Representatives, owns 111,111 shares
of the Company's Series C Preferred Stock, $.01 par value per share, which will
automatically convert into 111,111 shares of the Company's Common Stock upon the
closing of this offering. H&Q Gene Logic Investors, LP has agreed not to sell,
transfer, assign, pledge or hypothecate such shares for a period of one year
following the effective date of this offering. Approximately 22.5% of the
economic interests held in H&Q Gene Logic Investors, LP are held by persons
unaffiliated with Hambrecht & Quist LLC. In addition, Hambrecht & Quist LLC owns
a warrant which is exercisable for the purchase of 48,889 shares of the
Company's Series C Preferred Stock at an exercise price of $4.50 per share.
Hambrecht & Quist LLC received the warrant from the Company, in addition to a
cash payment, as compensation for Hambrecht & Quist LLC's services as placement
agent in connection with the Company's Series C Preferred Stock financing, which
closed on July 15, 1997. The warrant will expire upon the closing of this
offering. Hambrecht & Quist LLC has indicated that it intends to exercise such
warrant contingent upon the closing of this offering. Hambrecht & Quist LLC has
agreed

66
<PAGE>
not to sell, transfer, assign, pledge or hypothecate the shares to be issued
upon exercise of the warrant for a period of one year following the effective
date of this offering.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz & Thibeault,
LLP, Boston, Massachusetts.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996 and
September 30, 1997 and for the period from September 22, 1994 (inception)
through December 31, 1994, the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997 included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is a part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's web site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.

67
<PAGE>
GENE LOGIC INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----

<S> <C>
Report of Independent Public Accountants................................................................... F-2

Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997..................................... F-3

Statements of Operations for the period from September 22, 1994 (inception) through December 31, 1994, the
years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and
1997..................................................................................................... F-4

Statements of Stockholders' Equity for the period from September 22, 1994 (inception) through December 31,
1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............ F-5

Statements of Cash Flows for the period from September 22, 1994 (inception) through December 31, 1994, the
years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and
1997..................................................................................................... F-6

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

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Gene Logic Inc.:

We have audited the accompanying balance sheets of Gene Logic Inc. (a
Delaware corporation) as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, stockholders' equity and cash flows
for the period from September 22, 1994 (inception) through December 31, 1994,
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene Logic Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the period from September 22, 1994 (inception)
through December 31, 1994, the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP

Baltimore, Maryland
October 17, 1997

F-2
<PAGE>
GENE LOGIC INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 348,478 $ 1,137,130 $21,993,266
Marketable securities available for sale........... -- 4,534,353 149,582
Due from strategic partner......................... -- -- 945,833
Prepaid expenses................................... -- 37,424 590,265
Other current assets............................... 1,100 67,078 299,702
------------- ------------- -------------
Total Current Assets............................. 349,578 5,775,985 23,978,648
Property and Equipment, net.......................... 11,666 1,757,240 3,161,690
Notes Receivable from Employees...................... -- 102,896 65,215
Intangibles and Other Assets, net.................... 62,444 182,931 415,333
------------- ------------- -------------
Total Assets..................................... $ 423,688 $ 7,819,052 $27,620,886
------------- ------------- -------------
------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable................................... $ 17,294 $ 91,074 $ 395,200
Accrued expenses................................... 86,249 997,710 1,510,757
Current portion of capital lease obligation........ -- 106,195 112,736
Current portion of long-term debt.................. -- -- 244,764
Deferred revenue................................... -- -- 2,938,889
------------- ------------- -------------
Total Current Liabilities........................ 103,543 1,194,979 5,202,346
Deferred Revenue..................................... -- -- 333,332
Capital Lease Obligation............................. -- 339,699 254,310
Long-Term Debt....................................... -- -- 743,917
Other Noncurrent Liabilities......................... -- -- 193,326
------------- ------------- -------------
Total Liabilities................................ 103,543 1,534,678 6,727,231
------------- ------------- -------------

Commitments and Contingencies

Series A Convertible Preferred Stock, $.01 par value;
333,333 shares authorized; 333,333 shares issued
and outstanding as of December 31, 1995 and 1996
and September 30, 1997, liquidation preference of
$1.50 per share.................................... 500,000 500,000 500,000 --
Series A-1 Convertible Preferred Stock, $.01 par
value; 462,500 shares authorized; 412,500 shares
issued and outstanding as of December 31, 1995 and
1996 and September 30, 1997, liquidation preference
of $1.60 per share................................. 652,825 653,722 654,395 --
Series B Convertible Preferred Stock, $.01 par value;
4,154,167 shares authorized; 4,090,909 shares
issued and outstanding as of December 31, 1996 and
September 30, 1997, liquidation preference of $2.20
per share.......................................... -- 9,317,611 9,872,539 --
Series C Convertible Preferred Stock, $.01 par value;
4,600,000 shares authorized, 4,444,443 shares
issued and outstanding as of September 30, 1997,
liquidation preference of $4.50 per share.......... -- -- 19,480,942 --

Stockholders' Equity:
Common stock, $.01 par value; 17,000,000 shares
authorized; 280,000, 692,733 and 828,465 shares
issued and outstanding as of December 31, 1995
and 1996 and September 30, 1997, respectively.... 2,800 6,927 8,284 101,096
Additional paid-in capital......................... -- 13,450 6,764,236 37,179,300
Deferred compensation on stock options, net........ -- -- (6,529,934) (6,529,934)
Unrealized losses on marketable securities......... -- (13,215) (1,303) (1,303)
Accumulated deficit................................ (835,480) (4,194,121) (9,855,504) (9,855,504)
------------- ------------- ------------- -------------
Total Stockholders' Equity....................... (832,680) (4,186,959) (9,614,221) 20,893,655
------------- ------------- ------------- -------------
Total Liabilities and Stockholders' Equity....... $ 423,688 $ 7,819,052 $27,620,886
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-3
<PAGE>
GENE LOGIC INC.

STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.

F-4
<PAGE>
GENE LOGIC INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------
PREFERRED COMMON
STOCK STOCK UNREALIZED
----------------------- -------------------- ADDITIONAL LOSSES ON
NUMBER NUMBER PAR PAID-IN DEFERRED MARKETABLE
OF SHARES AMOUNT OF SHARES VALUE CAPITAL COMPENSATION SECURITIES
---------- ----------- --------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception (September 22,
1994)....................... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock.... -- -- 100,000 1,000 -- -- --
Issuance of Series A
Convertible Preferred
Stock..................... 266,666 400,000 -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1994........................ 266,666 400,000 100,000 1,000 -- -- --
Issuance of common stock.... -- -- 180,000 1,800 -- -- --
Issuance of Series A
Convertible Preferred
Stock..................... 66,667 100,000 -- -- -- -- --
Issuance of Series A-1
Convertible Preferred
Stock, net of issuance
costs..................... 412,500 651,928 -- -- -- -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 897 -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1995........................ 745,833 1,152,825 280,000 2,800 -- -- --
Issuance of common stock.... -- -- 412,733 4,127 13,450 -- --
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs..................... 4,090,909 8,824,995 -- -- -- -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 493,513 -- -- -- -- --
Net change in unrealized
losses from marketable
securities................ -- -- -- -- -- -- (13,215)
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1996........................ 4,836,742 10,471,333 692,733 6,927 13,450 -- (13,215)
Issuance of Series C
Convertible Preferred
Stock, net of issuance
costs..................... 4,444,443 19,127,148 -- -- -- -- --
Cancellation of common
stock..................... -- -- (55,000) (550) (7,700) -- --
Stock issued in connection
with exercise of stock
options................... -- -- 140,732 1,407 19,695 -- --
Issuance of common stock.... -- -- 50,000 500 7,000 -- --
Issuance of warrants........ -- -- -- -- 42,563 -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 909,395 -- -- -- -- --
Net change in unrealized
losses from marketable
securities................ -- -- -- -- -- -- 11,912
Deferred compensation from
stock options............. -- -- -- -- 6,689,228 (6,689,228) --
Amortization of deferred
compensation.............. -- -- -- -- -- 159,294 --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at September 30,
1997........................ 9,281,185 30,507,876 828,465 8,284 6,764,236 (6,529,934) (1,303)
Pro forma conversion of
Preferred Stock to Common
Stock (unaudited)........... (9,281,185) (30,507,876) 9,281,185 92,812 30,415,064 -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Pro forma balance at
September 30, 1997
(unaudited)................. -- $ -- 10,109,650 $ 101,096 $37,179,300 $(6,529,934) $ (1,303)
---------- ----------- --------- --------- ---------- ------------- --------------
---------- ----------- --------- --------- ---------- ------------- --------------

ACCUMULATED
DEFICIT
------------
<S> <C>
Inception (September 22,
1994)....................... $ --
Issuance of common stock.... --
Issuance of Series A
Convertible Preferred
Stock..................... --
Net Loss.................... (90,404)
------------
Balance at December 31,
1994........................ (90,404)
Issuance of common stock.... --
Issuance of Series A
Convertible Preferred
Stock..................... --
Issuance of Series A-1
Convertible Preferred
Stock, net of issuance
costs..................... --
Accretion of mandatory
redemption value of
preferred stock........... (897)
Net Loss.................... (744,179)
------------
Balance at December 31,
1995........................ (835,480)
Issuance of common stock.... --
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs..................... --
Accretion of mandatory
redemption value of
preferred stock........... (493,513)
Net change in unrealized
losses from marketable
securities................ --
Net Loss.................... (2,865,128)
------------
Balance at December 31,
1996........................ (4,194,121)
Issuance of Series C
Convertible Preferred
Stock, net of issuance
costs..................... --
Cancellation of common
stock..................... --
Stock issued in connection
with exercise of stock
options................... --
Issuance of common stock.... --
Issuance of warrants........ --
Accretion of mandatory
redemption value of
preferred stock........... (909,395)
Net change in unrealized
losses from marketable
securities................ --
Deferred compensation from
stock options............. --
Amortization of deferred
compensation.............. --
Net Loss.................... (4,751,988)
------------
Balance at September 30,
1997........................ (9,855,504)
Pro forma conversion of
Preferred Stock to Common
Stock (unaudited)........... --
------------
Pro forma balance at
September 30, 1997
(unaudited)................. $(9,855,504)
------------
------------
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>
GENE LOGIC INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994
(INCEPTION)
THROUGH YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------ --------------------- ------------------------
1994 1995 1996 1996 1997
------------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash Flows From Operating Activities:
Net loss................................. $ (90,404) $(744,179) $(2,865,128) ($1,662,243) $(4,751,988)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization.......... -- 1,395 67,602 14,133 383,433
Write off of deferred financing fee.... -- -- 2,500 -- --
Cancellation of note receiveable....... -- -- -- -- 43,258
Amount due under research agreement.... -- -- -- -- 47,500
Amortization of deferred
compensation......................... -- -- -- -- 159,294
Changes in operating assets and
liabilities:
Due from strategic partner............. -- -- -- -- (945,833)
Prepaid expenses....................... (11,445) 11,445 (37,424) (132,944) (552,841)
Other current assets................... (1,000) (100) (65,978) (38,655) (232,624)
Intangibles and other assets........... -- (63,139) (125,810) (61,999) (275,437)
Accounts payable....................... -- 17,294 73,780 147,005 304,126
Accrued expenses....................... -- 86,249 911,461 (85,960) 516,594
Deferred revenue....................... -- -- -- -- 3,272,221
Other noncurrent liabilities........... -- -- -- -- 232,342
---------- --------- ---------- ----------- -----------
Net Cash Flows From Operating
Activities......................... (102,849) (691,035) (2,038,997) (1,820,663) (1,799,955)
---------- --------- ---------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment...... -- (12,366) (1,339,207) (324,560) (1,784,856)
Increase in notes receivable from
employees.............................. -- -- (102,896) (106,111) (13,827)
Purchase of marketable securities
available for sale..................... -- -- (4,547,568) (4,518,611) --
Proceeds from sale and maturity of
marketable securities available for
sale................................... -- -- -- -- 4,396,683
---------- --------- ---------- ----------- -----------
Net Cash Flows From Investing
Activities......................... -- (12,366) (5,989,671) (4,949,282) 2,598,000
---------- --------- ---------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock... 1,000 1,800 17,577 14,827 21,110
Proceeds from issuance of preferred
stock.................................. 400,000 760,000 9,000,000 8,000,000 20,000,000
Payments for stock issuance costs........ -- (8,072) (175,005) (163,974) (872,852)
Proceeds from equipment loan............. -- -- -- -- 1,084,362
Repayments of capital lease obligation
and equipment loan..................... -- -- (25,252) -- (174,529)
---------- --------- ---------- ----------- -----------
Net Cash Flows From Financing
Activities......................... 401,000 753,728 8,817,320 7,850,853 20,058,091
---------- --------- ---------- ----------- -----------
Net Increase in Cash and Cash
Equivalents.............................. 298,151 50,327 788,652 1,080,908 20,856,136
Cash and Cash Equivalents, beginning of
period................................... -- 298,151 348,478 348,478 1,137,130
---------- --------- ---------- ----------- -----------
Cash and Cash Equivalents, end of period... $ 298,151 $ 348,478 $1,137,130 $1,429,386 $21,993,266
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Supplemental Disclosure:
Interest expense paid.................... $ -- $ -- $ 9,024 $ -- $ 64,191
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Non-Cash Transactions:
Equipment acquired under capital
leases................................. $ -- $ -- $ 471,146 $ 471,146 $ --
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Issuance of warrants to lessor........... $ -- $ -- $ -- $ -- $ 42,563
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND SEPTEMBER 30, 1996 AND 1997

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION AND BUSINESS

Gene Logic Inc. (the "Company"), formerly Senatics Corporation, was
incorporated on September 22, 1994, to commercialize technologies for the
discovery of disease-associated genes for the development of therapeutic and
diagnostic products. The Company was previously in the development stage and has
yet to generate any significant revenues.

UNAUDITED INTERIM FINANCIAL INFORMATION

The interim financial statements of the Company for the nine months ended
September 30, 1996, included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at September 30, 1996, and the results of its operations and cash flows
for the nine months ended September 30, 1996.
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, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.

NEW PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share" ("APB Opinion No. 15"). It replaces the presentation of primary EPS with
a presentation of basic EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to primary
EPS pursuant to APB Opinion No. 15.

SFAS No. 128 is effective for interim periods and fiscal years ending after
December 15, 1997, and early adoption is not permitted. When adopted, it will
require restatement of prior years' EPS. The adoption of SFAS No. 128 will have
no impact on the Company.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 sets standards for reporting and presentation of
comprehensive income and its components in financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and early adoption
is permitted. When adopted,

F-7
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
it will require reclassification adjustments and changes in presentation for all
prior periods shown. The impact of the adoption of SFAS No. 130 on the Company
has not been determined.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are defined as liquid investments with original
maturities of 90 days or less that are readily convertible into cash. All other
investments are reported as marketable securities available for sale. Cash and
cash equivalents as of December 31, 1995 and 1996 and September 30, 1997, are
comprised of:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Cash..................................................................... $ 348,478 $ 117,407 $ 13,425
Money market mutual fund................................................. -- 1,019,723 21,979,841
---------- ------------ -------------
$ 348,478 $ 1,137,130 $21,993,266
---------- ------------ -------------
---------- ------------ -------------
</TABLE>

MARKETABLE SECURITIES AVAILABLE FOR SALE

All marketable securities are classified as available for sale. Available
for sale securities are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary for available for
sale securities are included in other income.

PROPERTY AND EQUIPMENT

Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<S> <C>
Furniture and fixtures............................................ 10 years
Computers and office equipment.................................... 5 years
Lab equipment..................................................... 5 years
</TABLE>

Equipment under capital leases and leasehold improvements are depreciated
and amortized over their useful lives, or the term of the lease, whichever is
shorter.

INTANGIBLES AND OTHER ASSETS

Other assets consists primarily of organization costs, patent costs,
trademarks and licenses. These amounts are being amortized over periods of five
to seventeen years. Accumulated amortization relating to other assets was $695,
$3,518 and $6,545 as of December 31, 1995 and 1996, and September 30, 1997,
respectively. The Company's success is heavily dependent upon its proprietary
technologies. The Company depends upon a combination of patents, trade secrets,
copyright and trademark laws, license agreements, nondisclosure and other
contractual provisions and various other security measures to protect its
technology rights.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations when incurred.

F-8
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION

The Company recognizes revenue from research and development support and
technology and database access fees as they are earned under the terms of the
agreement. Revenue is deferred for fees received before they are earned.
Revenues related to the achievement of certain milestones are recognized when
earned.

INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.

STOCK OPTION PLANS

Prior to January 1, 1996, the Company's policy was to account for its stock
options plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and related interpretations. As such, compensation expense is recorded on
the date of grant only if the current fair value of the underlying stock exceeds
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of options and warrants granted.

PRO FORMA NET LOSS PER COMMON SHARE

Pro forma net loss per common share is computed using the weighted average
number of shares of common stock outstanding giving effect to the conversion of
convertible preferred shares that will automatically convert upon completion of
the Company's initial public offering (using the if-converted method) from the
original date of issuance. Common equivalent shares from stock options and
warrants are excluded from the computation for all periods as their effect is
antidulutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued during
the 12-month period prior to the initial filing of the proposed offering at
prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented.

The conversion of preferred stock will significantly reduce the net loss per
common share, decreasing the relevance of historical net loss per common share
information. As a result, historical net loss per common share is not shown.

F-9
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY

The unaudited pro forma stockholders' equity information as of September 30,
1997 included with the accompanying balance sheets and statements of
stockholders' equity, gives effect to the automatic conversion of the Company's
outstanding preferred stock upon completion of the Company's initial public
offering.

NOTE 2. MARKETABLE SECURITIES:

The following is a summary of the Company's investment portfolio as of
December 31, 1995 and 1996 and September 30, 1997:

<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
COST LOSSES FAIR VALUE
------------ ----------- ------------
<S> <C> <C> <C>
December 31, 1995
Unit Investment Trust................................................... $ -- $ -- $ --
Government Securities................................................... -- -- --
------------ ----------- ------------
Total................................................................. $ -- $ -- $ --
------------ ----------- ------------
------------ ----------- ------------
December 31, 1996
Unit Investment Trust................................................... $ 2,483,352 $ (13,215) $ 2,470,137
Government Securities................................................... 2,064,216 -- 2,064,216
------------ ----------- ------------
Total................................................................. $ 4,547,568 $ (13,215) $ 4,534,353
------------ ----------- ------------
------------ ----------- ------------
September 30, 1997
Unit Investment Trust................................................... $ 150,885 $ (1,303) $ 149,582
Government Securities................................................... -- -- --
------------ ----------- ------------
Total................................................................. $ 150,885 $ (1,303) $ 149,582
------------ ----------- ------------
------------ ----------- ------------
</TABLE>

All marketable securities mature within one year or have no stated maturity.
As of December 31, 1995 and 1996 and September 30, 1997, all of the Company's
investments were classified as current as the Company may not hold its
investments until maturity in order to take advantage of market conditions.
During the nine months ended September 30, 1997, a portion of the Unit
Investment Trust was sold for total proceeds of $2,357,044, resulting in
realized losses of $11,912.

F-10
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment includes the following as of December 31, 1995 and
1996 and September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
--------- ------------ -------------
<S> <C> <C> <C>
Furniture and fixtures............................... $ -- $ 105,061 $ 145,130
Computers and office equipment....................... -- 276,912 1,634,372
Lab equipment........................................ 12,366 932,479 1,315,446
Lab equipment under capital lease.................... -- 471,146 471,146
Leasehold improvements............................... -- 37,121 41,481
--------- ------------ -------------
12,366 1,822,719 3,607,575
Less--Accumulated depreciation....................... (700) (65,479) (445,885)
--------- ------------ -------------
Property and Equipment, net.......................... $ 11,666 $ 1,757,240 $ 3,161,690
--------- ------------ -------------
--------- ------------ -------------
</TABLE>

Depreciation expense was $0, $700, $64,779, $10,805, and $380,406 for the
period from September 22, 1994 (inception) through December 31, 1994, and the
years ended December 31, 1995 and 1996, and for the nine months ended September
30, 1996 and 1997, respectively.

NOTE 4. ACCRUED EXPENSES:
Accrued expenses consists of the following as of December 31, 1995 and 1996,
and September 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
--------- ------------- -------------
<S> <C> <C> <C>
Consulting........................................... $ 68,155 $ -- $ 72,681
Property additions................................... -- 877,962 751,446
Professional fees.................................... 18,094 56,039 350,673
Payroll taxes and benefits........................... -- 63,709 173,546
Other................................................ -- -- 162,411
--------- ------------- -------------
Total............................................ $ 86,249 $ 997,710 $ 1,510,757
--------- ------------- -------------
--------- ------------- -------------
</TABLE>

NOTE 5. LICENSE ARRANGEMENTS:

The proprietary rights and technical information covered by various patent
applications have been licensed by the Company from third parties. These
licenses will continue for the life of the respective patent or until terminated
by either party. The license costs are being amortized over the useful life of
the related patents. The agreements call for the payment of royalties over the
life of the patents or a shorter life if no patents are issued.

NOTE 6. STRATEGIC ALLIANCES:
During May 1997, the Company entered into a strategic alliance with Procter
& Gamble Pharmaceuticals Inc., a division of Procter & Gamble Company ("Procter
& Gamble") for the discovery of drug targets in the field of heart failure. In
connection with the agreement, the Company received technology access fees and
research and development support of $3 million. Revenue from this initial
payment is being recognized ratably over the 18 month initial phase of the
agreement of which approximately $667,000 has been recognized as revenue during
the nine months ended September 30, 1997. Payments by Procter & Gamble to the
Company in the form of committed technology access fees and research funding
will total a minimum of $10.1 million if the research

F-11
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. STRATEGIC ALLIANCES (CONTINUED):
program continues for its 4 1/2 year term and the Company performs its research
obligations under the agreement. Procter & Gamble will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development and associated regulatory milestones.
Procter & Gamble will also pay the Company royalties on worldwide net sales of
all products that may result from the alliance. Procter & Gamble also has the
option to expand the alliance to include two additional fields upon terms,
including committed research funding, identical to those covering the initial
program in heart failure.

During September 1997, the Company entered into a strategic alliance with
Japan Tobacco Inc. ("Japan Tobacco") for discovery of drug targets and drug
leads in the field of renal disease. Payments by Japan Tobacco to the Company in
the form of committed technology access fees and research funding will total a
minimum of $15.0 million if the research program continues for its five year
term and the Company performs its research obligations under the agreement.
During the nine months ended September 30, 1997, the Company has recognized
approximately $107,000 of revenue under the alliance. In addition, Japan Tobacco
will also make a $3 million investment in common stock of the Company at the
time of an initial public offering by the Company, provided that an offering
closes within two years of the agreement date. Japan Tobacco will be obligated
to make additional payments to the Company for the achievement of specified
target discovery and related product development and associated regulatory
milestones. Japan Tobacco will also pay the Company royalties on worldwide net
sales of all products that may result from targets discovered pursuant to the
alliance. Japan Tobacco also has the option to expand the alliance to include
two other fields upon terms, including committed research funding, identical to
those covering the initial program in renal disease.

Under the terms of the strategic alliance agreements, payments for
technology access fees and research and development support are recognized as
revenue ratably over the period for which the payment is made. Payments related
to the achievement of certain milestones are recognized as revenue when the
milestones are achieved.

Both strategic alliance partners have the right to terminate their research
programs by giving the Company six months notice at any time after 12 months
from the date of commencement of the research program under the agreement and
have comparable rights to terminate the research programs in the optional
fields. Procter & Gamble also has the right to terminate the agreement upon
certain change of control events with respect to the Company. Neither strategic
alliance partner has any refund rights in the event of a termination.

The Company's strategy for developing and commercializing pharmaceutical
products based on its target discoveries depends on the formation of strategic
alliances with pharmaceutical companies. The Company has established two such
alliances, both in 1997. There can be no assurance that the Company will be able
to establish additional strategic alliances or that any alliances established
will be successful.

NOTE 7. INCOME TAXES:

The actual income tax expense for the period from September 22, 1994
(inception) to December 31, 1994, and the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 and 1997, is

F-12
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. INCOME TAXES (CONTINUED):
different from the amount computed by applying the statutory federal income tax
rates to losses before income tax expense. The reconciliation of these
differences is as follows:

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) DECEMBER 31, SEPTEMBER 30,
THROUGH ---------------------- ------------------------
DECEMBER 31, 1994 1995 1996 1996 1997
------------------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)

Tax benefit at statutory
rate.................. $ (30,737) $(253,021) $ (977,518) $(626,507) $(1,540,264)
State income taxes, net
of federal income tax
effect................ (4,177) (34,381) (132,827) (85,131) (209,285)
Other................... (4,420) 9,799 (49,813) -- (14,646)
Increase in valuation
allowance............. 39,334 277,603 1,160,158 711,638 1,864,195
-------- --------- ----------- ----------- -----------
Income tax expense...... $ -- $ -- $ -- $ -- $ 100,000
-------- --------- ----------- ----------- -----------
-------- --------- ----------- ----------- -----------
</TABLE>

The tax effect of cumulative temporary differences at December 31, 1995 and
1996 and September 30, 1997, follow:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ------------- -------------
<S> <C> <C> <C>
Deferred Tax Assets:
Japanese withholding............................. $ -- $ -- $ 100,000
Tax carryforwards................................ -- 1,128,927 3,039,250
Start-up costs................................... 316,937 403,889 335,304
Accrued vacation................................. -- 7,457 32,437
---------- ------------- -------------
316,937 1,540,273 3,506,991
Less: Valuation allowance........................ (316,937) (1,477,095) (3,341,290)
---------- ------------- -------------
Net deferred tax asset......................... $ -- $ 63,178 $ 165,701
---------- ------------- -------------
---------- ------------- -------------
Deferred Tax Liabilities:
Depreciation..................................... $ -- $ 51,380 $ 112,532
Prepaid expenses................................. -- 2,046 13,169
Capital leases................................... -- 9,752 40,000
---------- ------------- -------------
Net deferred tax liabilities................... $ -- $ 63,178 $ 165,701
---------- ------------- -------------
---------- ------------- -------------
</TABLE>

Net operating loss carryforwards for income tax purposes are approximately
$7,726,000, as of September 30, 1997. The Company also has research and
development tax credit carryforwards of approximately $56,000 as of December 31,
1996. The carryforwards, if not utilized, will expire in increments through
2011. Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the ownership change limitations provided by the
Internal Revenue Code of 1986.

F-13
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. LONG-TERM DEBT:
Long-term debt at September 30, 1997, consists of the following:

<TABLE>
<S> <C>
Equipment loan.................................................. $ 988,681
Less--Current portion........................................... (244,764)
---------
Total long-term debt............................................ $ 743,917
---------
---------
</TABLE>

As of September 30, 1997, principal payments on long-term debt for the next
five years are as follows:

<TABLE>
<S> <C>
Three months ending December 31, 1997........................... $ 59,149
Year ending December 31, 1998................................... 250,312
Year ending December 31, 1999................................... 273,795
Year ending December 31, 2000................................... 299,480
Year ending December 31, 2001................................... 105,945
---------
$ 988,681
---------
---------
</TABLE>

In March 1997, the Company entered into a loan agreement for the purchase of
laboratory and computer equipment. The Company may borrow up to $1.5 million,
bearing interest at 9.0%. In April 1997, the Company borrowed $1,084,362 under
this agreement. The loan will be repaid in 48 equal monthly installments. The
Company has granted the lender a security interest, collateralized by all of the
equipment and fixtures acquired under the loan. In conjunction with the
agreement, the Company granted warrants to the lender to purchase 30,051 shares
of the Company's Series B Convertible Preferred stock at an exercise price of
$2.20 per share.

NOTE 9. CONVERTIBLE PREFERRED STOCK:
Four series of mandatory redeemable preferred stock have been issued--Series
A Convertible Preferred stock ("Series A"), Series A-1 Convertible Preferred
stock ("Series A-1"), Series B Convertible Preferred stock ("Series B") and
Series C Convertible Preferred stock ("Series C"). Each holder of common and
preferred stock is entitled to one vote for each share held.

During 1994, the Company sold 266,666 shares of Series A stock for $400,000.

During 1995, the Company sold 66,667 shares of Series A stock for $100,000
and 412,500 shares of Series A-1 stock for $660,000. Warrants to purchase an
additional 50,000 shares of Series A-1 stock at an exercise price of $1.60 per
share were issued and expires August 2005.

During 1996, the Company sold 4,090,909 shares of Series B stock for
$9,000,000.

During July 1997, the Company sold 4,444,443 shares of Series C Convertible
Preferred Stock for net proceeds of approximately $19.1 million. The Company
also agreed to issue a warrant for an additional 48,889 shares of Series C stock
at an exercise price of $4.50. The fair value of this warrant, approximately
$118,000, has been recorded as Series C stock in the accompanying balance sheet.
The fair value of this warrant was calculated using the Black-Scholes option
pricing model using the same assumptions used for options granted during the
period (see Note 13).
The preferred stock is convertible into an equal number of shares of common
stock at the option of the holder, with certain additional antidilutive
protection provided to the holder. Conversion is mandatory upon the closing of
an underwritten public offering that meets certain minimum conditions as to
offering price and net

F-14
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. CONVERTIBLE PREFERRED STOCK (CONTINUED):
proceeds under the Securities Act of 1933. At the option of a majority of the
holders of outstanding preferred stock, the Company shall redeem all preferred
stock on March 31, 2002, 2003 and 2004, at a rate of 33-1/3%, 50% and 100%,
respectively, and at a price of $1.50 per share of Series A, $1.60 per share of
Series A-1, $2.20 per share of Series B and $4.50 per share of Series C, plus
any declared, accrued or unpaid dividends of Series A and Series A-1 and any
accrued or unpaid dividends of Series B and Series C whether declared or
undeclared. If funds are insufficient to redeem all outstanding shares, the
Company will redeem as many shares as funds are legally available to redeem on a
pro-rata basis among all preferred stockholders. The difference between the
redemption value of the preferred stock and its carrying value is being accreted
through a charge to retained earnings over the period until redemption.
With the approval of the holders of 66 2/3% of the outstanding shares of
preferred stock, the Company can declare or pay dividends in the amount of
$0.120, $0.128, $0.176 and $0.360 per share of Series A, Series A-1, Series B
and Series C preferred stock outstanding, respectively. Upon liquidation, Series
A, Series A-1, Series B and Series C stockholders will receive $1.50, $1.60,
$2.20 and $4.50 per share plus any accrued or unpaid dividends, whether or not
declared, respectively, prior to any other distributions.

NOTE 10. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 17,000,000 shares of common stock and
9,550,000 shares of preferred stock as of September 30, 1997.

In October 1996, an officer of the Company resigned. In January 1997, in
connection with the resignation, the 55,000 shares of the Company's common stock
held by the officer were canceled in satisfaction of the $50,000 note receivable
and accrued interest obligation from the officer to the Company (see Note 14).

NOTE 11. COMMITMENTS AND CONTINGENCIES:

OPERATING LEASE

During October 1997, the Company renegotiated its current lease of
laboratory and office space under an agreement which expires February 28, 1998,
with an option to continue on a month-to-month basis with 60 days written notice
to terminate. The Company intends to renew on a month-to-month basis until the
relocation to the new facility is complete. In addition, the Company entered
into an operating sublease for office space in Berkeley, California. The lease
term is for 22 months with monthly rent payments of $9,158.

During August 1997, the Company entered into an operating lease for new
laboratory and office space. The Company is responsible for the design and
renovation of an existing facility owned by the lessor. These costs will be
funded by the lessor while the responsibility for performance and liability
during construction remains with the Company. The lease term is ten years with
monthly payments of $89,211 plus 3% annual inflation; however, monthly payments
could increase if construction costs exceed a certain amount. The lease also
requires the Company to pay for building operating costs. In addition to future
minimum lease payments, the Company has issued a warrant to purchase 20,000
shares of common stock at an exercise price of $5.40 per share in connection
with the lease. The fair value of the warrant, approximately $43,000, is being
recorded as rent expense over the term of the lease. The fair value of the
warrant was calculated using the Black-Scholes option pricing model using the
same assumptions used for options granted during the period (see Note 13). Such
warrant will expire upon the completion of the Company's initial public offering
(see Note 15).

F-15
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum lease payments on these operating leases areas follows:

<TABLE>
<S> <C>
Three months ending December 31, 1997.......................... $ 237,929
Year ending December 31, 1998.................................. 1,278,919
Year ending December 31, 1999.................................. 1,169,516
Year ending December 31, 2000.................................. 1,138,572
Year ending December 31, 2001.................................. 1,172,729
Year ending December 31, 2002 and thereafter................... 7,693,371
----------
$12,691,036
----------
----------
</TABLE>

Rent expense for the period from September 22, 1994 (inception) through
December 31, 1994, the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996 and 1997, were $0, $0, $238,930, $168,619 and
$218,758, respectively.

CAPITAL LEASE

During 1996, the Company entered into a capital lease to purchase equipment
for $471,146. Accumulated amortization for this equipment was $29,447 and
$88,343 at December 31, 1996 and September 30, 1997, respectively. Payments
during the year ended December 31, 1996 and the nine months ended September 30,
1997, totaled $25,252 and $102,825, respectively. Future minimum lease payments
are as follows:

<TABLE>
<S> <C>
Three months ending December 31, 1997............................ $ 34,275
Year ending December 31, 1998.................................... 137,104
Year ending December 31, 1999.................................... 137,104
Year ending December 31, 2000.................................... 102,827
---------
Total minimum lease payments................................. 411,310
Less: Amounts representing imputed interest...................... (44,264)
---------
Present value of net minimum payments........................ 367,046
Less: Current portion............................................ (112,736)
---------
Noncurrent portion of capital lease obligation............... $ 254,310
---------
---------
</TABLE>

In conjunction with this lease agreement, the Company granted a warrant to
the lessor to purchase 13,636 shares of the Company's Series B Convertible
Preferred stock at an exercise price of $2.20 per share. Such warrant expires
five years from the completion of an initial public offering (see Note 15).

Clinical trials, manufacturing, marketing and sale of any of the Company's
partners' potential therapeutic or diagnostic products may expose the Company to
liability claims from the use of such pharmaceutical products. The Company
currently does not carry product liability insurance.

NOTE 12. 401(K) RETIREMENT PLAN:
During 1996, the Company established the Gene Logic Inc. 401(k) Retirement
Plan (the "401(k) Plan") for its employees under Section 401(k) of the Internal
Revenue Service code. Under this plan, all employees over 21 years of age and
with at least six months of service with the Company are eligible to contribute
from 2% to 15% of their salary. Employee contributions are 100% vested. The
Company is not required to make any contributions to the 401(k) Plan and has not
made any contributions through September 30, 1997.

F-16
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 13. STOCK BASED COMPENSATION:
During 1996, the Company instituted a stock plan (the "Plan") whereby the
Company's compensation committee (the "Committee"), at its discretion, can grant
options, award stock or provide opportunities to make direct purchases of stock
to employees, officers, directors and consultants of the company and related
corporations. The Plan is authorized to grant options of up to 6,100,000 shares
of common stock. Options are to be granted at the fair market value of the
common stock at the grant date. The options, awards and opportunities to
purchase stock expire at the earlier of termination or the date specified by the
Committee at the date of grant, but not more than ten years.

The following is a rollforward of option activity for the year ended
December 31, 1996 and the nine months ended September 30, 1997:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period.................................... -- $ -- 424,000 $ 0.15
Granted........................................................... 524,000 0.12 2,192,881 1.15
Exercised......................................................... (100,000) 0.01 (140,732) 0.15
Cancelled......................................................... -- -- (51,768) 0.15
--------- ----------
Outstanding, end of period.......................................... 424,000 0.15 2,424,381 1.05
--------- ----------
Exercisable, end of period.......................................... 77,710 0.15 367,272 0.22
--------- ----------
--------- ----------
Weighted average fair value of options granted...................... $ 0.05 $ 2.04
--------- ----------
--------- ----------
Weighted average remaining contractual life (in years).............. 9.86 9.59
--------- ----------
--------- ----------
</TABLE>

During the nine months ended September 30, 1997, the Company granted options
with exercise prices below fair value. The Company has recorded deferred
compensation of $6,689,228 at September 30, 1997, and compensation expense of
$159,294 for the nine months then ended for these options.

The following table provides further information on options granted with
exercise prices below fair value, compared to options granted with exercise
prices equal to fair value for the nine months ended September 30, 1997.

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE FAIR
WEIGHTED VALUE OF
WEIGHTED AVERAGE COMMON
AVERAGE OPTION FAIR STOCK ON
SHARES EXERCISE PRICE VALUE GRANT DATE
---------- --------------- ------------- -------------

<S> <C> <C> <C> <C>
Options whose exercise price equals the fair value of the
stock on the grant date.................................. 20,000 $ 0.15 $ 0.07 $ 0.15
Options whose exercise price is less than the fair value of
the stock on the grant date.............................. 2,172,881 1.16 2.04 4.24
</TABLE>

Also, subsequent to September 30, 1997, the Company granted additional
options with exercise prices below fair value. In connection with these grants
the Company will record additional deferred compensation of

F-17
<PAGE>
GENE LOGIC INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 13. STOCK BASED COMPENSATION (CONTINUED):
$207,200 during the three months ended December 31, 1997 which will be
recognized as compensation expense over the four year vesting period of the
option.

During 1996, an officer of the Company purchased 100,000 shares of common
stock for $0.15 per share under the Plan, subject to a declining buy-back right
of the Company.

Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the Plan,
consistent with the method of SFAS No. 123, the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ------------ ------------------
<S> <C> <C> <C>
Net loss:
As reported..................................................... $ (744,179) $ (2,865,128) $ (4,751,988)
Pro forma....................................................... (744,179) (2,873,805) (4,708,951)
Net loss:
As reported..................................................... $ (0.13) $ (0.31) $ (0.46)
Pro forma....................................................... (0.13) (0.31) (0.46)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following assumptions:

<TABLE>
<S> <C>
Expected volatility......................................................... 60.0%
Risk-free interest rates.................................................... 5.72% to 5.85%
Expected lives.............................................................. 1-3 years
Dividend rate............................................................... 0%
</TABLE>

NOTE 14. RELATED PARTY TRANSACTIONS:
During 1996, the Company made loans to two officers of the Company of
$50,000 each to offset relocation costs. These notes receivable were secured by
common stock previously issued to the officers. In January 1997, one of these
notes was cancelled (see Note 10). The remaining note is due in 2002 and bears
interest (see Note 15).

NOTE 15. CONTEMPLATED INITIAL PUBLIC OFFERING:
On October 7, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering ("IPO") of
3,000,000 shares of common stock at an anticipated initial offering price of $8
per share. Net proceeds of the offering (not including the concurrent Japan
Tobacco investment previously described), after underwriting commissions and
expenses are expected to be approximately $21,720,000 ($25,068,000 if the
underwriters' over-allotment option is exercised in full). Concurrent with the
IPO, a note receivable of $50,000 plus interest, from an officer of the Company
will be forgiven, the vesting of certain options will be accelerated and the
authorized capital stock of the Company will be increased to 60,000,000 shares
of common stock and 10,000,000 shares of preferred stock. The Company intends to
use the proceeds for working capital to support research and development,
capital expenditures and general corporate purposes.

F-18
<PAGE>
DRUG TARGET DISCOVERY

"MOLECULAR MOVIE"

[graphical depiction of series of Molecular Topography snapshots] 10,000 GENES

DIFFERENTIALLY EXPRESSED, DISEASE-ASSOCIATED GENES

[graphical depiction of differential expression of disease-associated
genes] 50-500 GENES

PRIORITIZATION OF POTENTIAL DRUG TARGETS

[numbers and letters representing gene sequences] 5-50 GENES

The core of Gene Logic's Accelerated Drug Discovery system is its proprietary
READS-TM- (Restriction Analysis of Differentially-expressed Sequences)
technology for analyzing patterns of gene expression. Using READS-TM-. Gene
Logic rapidly generates a gene expression profile, or Molecular Topography-TM-,
representing a quantitative snapshot of the levels of expression of essentially
all the genes expressed in a tissue sample.

The drug target discovery process comprises the following steps:

1. The Company compares normal and diseased tissues through a series of
Molecular Topography snapshots, a "molecular movie," to identify the changes
in gene expression that occur as the disease develops and progresses.

2. Using its bioinformatics tools, Gene Logic analyzes these changes to
identify which expressed genes are associated with the disease.

3. Gene Logic prioritizes disease-associated genes as drug targets using its
bioinformatics system. This prioritization depends upon a number of factors
including: (i) a gene's temporal association with the disease process; (ii)
the tissue distribution of its expression; (iii) any homology it may have
with known target classes, such as membrane receptors, enzymes or ion
channels; (iv) its involvement in known metabolic or signal transduction
pathways; and (v) the feasibility of developing a screening assay.
<PAGE>
[LOGO]