MEDGENESIS INC, 10-12G/A, 2000-11-13

MEDGENESIS INC
10-12G/A, 2000-11-13
MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES

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November 13, 2000

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10

Amendment No. 4

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) or 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934

MEDgenesis Inc.
................................................................................
(Exact name of registrant as specified in its charter)

Minnesota 41-1971978
................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

5182 W. 76th Street
Edina, Minnesota, 55439

Registrant's telephone number, including area code: (952) 979-3600

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

Common Stock, par value $.01 per share
--------------------------------------
Title of Class

<PAGE>

INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED BY REFERENCE

ITEM 1: BUSINESS.

See attached information statement under heading "Business".

ITEM 2: FINANCIAL INFORMATION.

See attached information statement under headings "Financial
Information".

ITEM 3: PROPERTIES.

See attached information statement under heading "Properties".

ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

See attached information statement under heading "Security Ownership
of Certain Beneficial Owners and Management".

ITEM 5: DIRECTORS AND EXECUTIVE OFFICERS.

See attached information statement under heading "Directors and
Executive Officers".

ITEM 6: EXECUTIVE COMPENSATION.

See attached information statement under heading "Executive
Compensation".

ITEM 7: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See attached information statement under heading "Certain
Relationships and Related Transactions".

ITEM 8: LEGAL PROCEEDINGS.

See attached information statement under heading "Legal
Proceedings".

ITEM 9: MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.

See attached information statement under heading "Market Price of
and Dividends on Registrant's Common Equity and Related Stockholder
Matters".

ITEM 10: RECENT SALES OF UNREGISTERED SECURITIES.

See attached information statement under heading "Recent Sales of
Unregistered Securities".

<PAGE>

ITEM 11: DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.

See attached information statement under heading Description of
Registrant's Securities to be Registered".

ITEM 12: LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.

See attached information statement under heading "Liability and
Indemnification of Officers and Directors".

ITEM 13: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See attached information statement under heading "Financial
Statements and Supplementary Data".

ITEM 14: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 15: FINANCIAL STATEMENTS AND EXHIBITS.

See attached information statement under heading "Financial
Statements and Exhibits".

<PAGE>

CHRONIMED INC.

_________, 2000

To the Stockholders of Chronimed Inc.:

The Board of Directors of Chronimed Inc. has authorized a distribution to
the Chronimed stockholders of all of the outstanding shares of MEDgenesis Inc.,
a wholly owned subsidiary of Chronimed. The distribution will be made on or
about ________, 2000, to persons holding shares of Chronimed Inc. which were of
record at the close of business on June 16, 2000.

The distribution of the MEDgenesis Inc. common stock will be made on the
basis of one share of MEDgenesis Inc. common stock for each three shares of
Chronimed common stock outstanding on the record date. No fractional shares of
MEDgenesis will be issued. Persons holding Chronimed shares with rights to a
half or greater fractional MEDgenesis share will receive one share for such
fractional rights. Persons holding Chronimed shares with rights to less than a
half MEDgenesis share will receive only their whole number share entitlement.

MEDgenesis Inc. focuses on blood and urine medical diagnostic products and
related accessories that it either developed and manufactures, owns outright, or
controls through exclusive license or distribution agreements. Following the
distribution, the stock of MEDgenesis Inc. will be traded on the NASDAQ National
Market System under the symbol "MDGN".

The distribution of the MEDgenesis Inc. stock to the stockholders of
Chronimed is intended to allow Chronimed and MEDgenesis to better focus on
growing their respective businesses in today's highly competitive and volatile
markets. The distribution will separate the businesses of Chronimed and
MEDgenesis in a manner that reflects their different missions and different
financial, investment and operating characteristics so that each can pursue
business strategies and objectives appropriate to its specific business. We
expect the separation of the businesses to result in greater focus of our
management teams on the core strengths that make each business successful and to
allow for more effective incentives for key employees of each group. The
separation also will permit our investors, customers, lenders and other
constituencies to evaluate the respective businesses of Chronimed Inc. and
MEDgenesis Inc. on a stand-alone basis.

The attached Information Statement is provided to you solely for
informational purposes. It contains important information about the
distribution, as well as MEDgenesis financial and other business information. No
action is being requested of you. If you hold shares of Chronimed common stock
which were issued and outstanding on the record date you will receive shares of
MEDgenesis Inc. stock in the distribution.

Sincerely,

/s/ Henry F. Blissenbach
------------------------
Henry F. Blissenbach
Chief Executive Officer
and Chairman of the Board

Chronimed Inc. www.chronimed.com
10900 Red Circle Drive
Minnetonka, MN 55343

<PAGE>

Information Statement
Common Stock
(par value $.01 per share)

MEDGENESIS INC. ________, 2000

MEDgenesis Inc., a wholly owned subsidiary of Chronimed Inc., is
furnishing this information statement in connection with its spin-off from
Chronimed. Chronimed will make the spin-off through a distribution to its
stockholders of one share of MEDgenesis common stock for three shares of
Chronimed common stock issued and outstanding on the record date for the
distribution. The Board of Directors of Chronimed fixed the close of business on
June 16, 2000 as the record date for the spin-off. MEDgenesis is mailing this
information statement to holders of Chronimed common stock on or about ________,
2000.

MEDgenesis focuses on blood and urine medical diagnostic products and
related accessories that it either developed and manufactures, owns outright, or
controls through exclusive license or distribution agreements. The spin-off will
result in all of the outstanding shares of MEDgenesis common stock being
distributed to holders of Chronimed common stock on a pro rata basis. Chronimed
stockholders will not pay any consideration for shares of MEDgenesis common
stock. The distribution of the MEDgenesis stock to the Chronimed stockholders is
scheduled to be made on or about ________, 2000.

Currently, there is no public market for the MEDgenesis common stock,
although we expect that a "when-distributed" trading market will develop before
the distribution date. We have applied to list the MEDgenesis common stock, and
we believe that the MEDgenesis common stock will be approved for listing, on
NASDAQ National Market System.

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

NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE SPIN-OFF. NO
PROXIES ARE BEING SOLICITED. PLEASE DO NOT SEND US A PROXY.

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

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

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

THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.

Chronimed stockholders with questions related to the spin-off should
contact Investor Relations, Chronimed Inc., 10900 Red Circle Drive, Minnetonka,
MN 55343-9126, Telephone: (952) 979-3600; or the MEDgenesis common stock
transfer agent, Wells Fargo Shareholder Services, at 1-800-468-9176. Wells Fargo
Shareholder Services also is acting as distribution agent for the spin-off.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
Risk Factors............................................................................................ 1
Governmental Reimbursement.......................................................................... 1
Regulatory Agencies................................................................................. 1
Suppliers........................................................................................... 1
Third Parties....................................................................................... 1
Customers........................................................................................... 2
Risk of Obsolescence................................................................................ 2
Product Development................................................................................. 2
Patents and Intellectual Property................................................................... 2
Chronimed Will Provide No Future Financial Support.................................................. 3
Litigation and Insurance............................................................................ 3
Lack of Operating History........................................................................... 3
Dependence on Key Personnel......................................................................... 3
Certain Federal Income Tax Consequences............................................................. 3
Hazardous Waste Generation.......................................................................... 5

There Has Been Trading Market for MEDgenesis Common Stock............................................5
The Spin-Off Could adversely Affect the Aggregate Value of Investment in CHMD Common Stock...........5
Loss of NASDAQ National Market System Listing........................................................5
Termination of Spin-Off..............................................................................6

Item 1: Business....................................................................................... 7
General............................................................................................. 7
History....................................................................................... 7
Discontinued Product Lines.................................................................... 8
Marketing Strategy............................................................................ 9
Market Trends and Outlook..................................................................... 9
Products......................................................................................10
Production....................................................................................11
Inventory.....................................................................................11
Blood Glucose Monitoring............................................................................12
Product Line Overview.........................................................................12
Blood Glucose Monitoring Market...............................................................12
MEDgenesis' History in Blood Glucose Monitoring...............................................13
MEDgenesis' Blood Glucose Monitoring Products.................................................13
Blood Glucose Meters and Strips.........................................................14
Supreme II(R) Blood Glucose Monitoring System...........................................14
Select GT(R) Blood Glucose Monitoring System............................................14
Assure(R) Blood Glucose Monitoring System...............................................15
Lancets and Lancing Devices.............................................................15
Haemolance(R) Lancets...................................................................16
TechLite(TM) Lancets....................................................................16
SelectLite(TM) Lancing Device...........................................................16
Infusion Sets...........................................................................16
PureLine(TM) Infusion Sets..............................................................17
Marketing Strategy: Blood Glucose Monitoring.................................................17
Growth Strategy: Blood Glucose Monitoring....................................................17
Competitors: Blood Glucose Monitoring........................................................17
Lifescan, Inc...........................................................................17
Roche Boehringer Mannheim Diagnostics...................................................17
Bayer Diagnostics.......................................................................18

</TABLE>

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<PAGE>

MediSense...................................................................................18
Urinalysis Products...............................................................................18
Product Line Overview.............................................................................18
Urinalysis Market.................................................................................20
MEDgenesis' History in Urinalysis.................................................................20
DiaScreen(R) Reagent Strips for Urinalysis........................................................20
Marketing Strategy: Urinalysis...................................................................21
Growth Strategy: Urinalysis......................................................................21
Competitors: Urinalysis..........................................................................21
Bayer Diagnostics.........................................................................21
Roche Diagnostics.........................................................................21
Quidel Corporation........................................................................21
Others....................................................................................21
Insurance..........................................................................................21
Employees..........................................................................................22
Patents............................................................................................22
Compliance with Environmental Laws ................................................................22

Item 2: Financial Information..........................................................................23
Summary Historical Financial Data..................................................................23
Quantitative and Qualitative Disclosures About Market Risk.........................................24

Item 3: Properties.....................................................................................24

Item 4: Security Ownership of Beneficial Owners and Management.........................................25

Item 5: Directors and Executive Officers...............................................................27
Board of Directors of MEDgenesis...................................................................27
MEDgenesis Board Committees........................................................................27
Audit Committee.............................................................................27
Compensation Committee......................................................................28
Director Compensation..............................................................................28
Board Fees..................................................................................28
Stock Options...............................................................................28
Other.......................................................................................28
Executive Officers of MEDgenesis...................................................................29

Item 6: Executive Compensation.........................................................................30
Executive Compensation.............................................................................30
Stock Option Plan..................................................................................31
Stock Purchase Plan................................................................................31
Restricted Stock Compensation Plan.................................................................31
401(k) Retirement Savings Plan.....................................................................32
Employment Agreements and Change in Control Arrangements............................................32

Item 7: Certain Relationships and Related Transactions.................................................33
Common Directors...................................................................................33
Agreements.........................................................................................33
Distribution and Spin-off Agreement.........................................................33
Transition Services Agreement...............................................................35

</TABLE>

ii
<PAGE>

Purchase and Pricing Agreement..............................................................35
Officer Loan................................................................................35
Certain Business Relationships..............................................................35

Item 8: Legal Proceedings..............................................................................37

Item 9: Market Price of and Dividends on Registrant's Common Equity....................................37
and Related Stockholder Matters................................................................38

Item 10: Recent Sales of Unregistered Securities........................................................38

Item 11: Description of Registrant's Securities to be Registered........................................38
General............................................................................................38
MEDgenesis Common Stock............................................................................38
Voting Rights...............................................................................38
Dividend Rights.............................................................................38
Liquidation Rights and Other Provisions.....................................................38
Preemptive Rights...........................................................................39
MEDgenesis Preferred Stock.........................................................................39
Board of Directors.................................................................................39
Shareholder Rights Plan............................................................................39
Control Share Acquisitions.........................................................................41
Business Combinations..............................................................................42

Item 12: Liability and Indemnification of Officers and Directors........................................42

Item 13: Financial Statements and Supplementary Data....................................................43
Selected Historical Financial Data ................................................................44
Forecasted Financial Information ..................................................................44
Forecasted Future Administrative and Public Company Costs .........................................44
Forecasted Interest Expense and Income ............................................................44
Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................................................45

Item 14: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................................................49

Item 15: Financial Statements and Exhibits..............................................................49
Index to Historical Financial Statements...........................................................50
Report of Independent Auditors....................................................................F-1
Balance Sheets....................................................................................F-2
Statements of Income..............................................................................F-3
Statements of Cash Flow...........................................................................F-4
Notes to Financial Statements.....................................................................F-5
Schedule II.......................................................................................S-1

Exhibits Index..........................................................................................51

Signature ..............................................................................................52
</TABLE>

iii
<PAGE>

RISK FACTORS

In addition to the other information contained in this information
statement, recipients of MEDgenesis common stock should carefully consider that
the following important factors, among others, could affect the Company's future
financial performance. The Company urges readers to understand the following
risks:

GOVERNMENTAL REIMBURSEMENT

Currently, many of MEDgenesis' direct (and indirect) customers receive
some form of compensation from various governmental payors. Any adverse actions
of these governmental payors, including reduction of Medicare and Medicaid
reimbursement for products or services provided, or discontinuance or
limitations on governmentally-funded programs, may significantly impact the
ability of the Company's customers to continue purchasing its products.

In addition, MEDgenesis currently generates approximately 5% of its
sales from foreign countries and management expects this percentage to increase.
As a result, changes in current foreign trade practices or regulations may cause
MEDgenesis' growth to be different than currently planned and may impact overall
financial performance. The changes may include, but are not limited to: monetary
and fiscal policies; laws and regulations; changes in social and economic
conditions; trade restrictions or prohibitions; inflation and monetary
fluctuations; import and other charges or taxes; the ability or inability of the
Company to obtain or hedge against foreign exchange rates; unstable governments
and legal systems; and intergovernmental disputes.

REGULATORY AGENCIES

The commercialization of the Company's products (current and future)
requires approvals from the Food and Drug Administration ("FDA") and comparable
regulatory agencies in most foreign countries. To obtain such approvals, the
safety of the products must be demonstrated. There can be no assurance that any
of the products will be shown safe or that regulatory approval of any product
will be obtained, if at all, in a timely manner or maintained once procured.

SUPPLIERS

MEDgenesis relies on several suppliers to produce and deliver key raw
materials and components. There can be no assurance the Company will be able to
maintain its on-going arrangements with these manufacturers, or of its ability
to find suitable replacements. In addition, there is no guarantee of the current
manufacturers' ability to satisfy MEDgenesis' volume requirements, pricing
criteria or quality standards. In particular, the Company procures the membrane
necessary to produce MEDgenesis' Supreme II(R) and Select GT(R) blood glucose
dry reagent test strips from a sole source manufacturer. This supplier is the
only FDA approved laboratory for this product and any interruption of service
from the supplier would have a material impact on the operating results of
MEDgenesis.

THIRD PARTIES

Part of the Company's ongoing growth strategy includes entering into
various agreements with licensors, manufacturers, contract research
organizations or other parties for the development of proprietary and licensed
products. As a result, a significant portion of MEDgenesis' success is dependent
on the success of these outside parties. No assurance can be given that the
Company will be successful in negotiating acceptable arrangements with third
parties in the future, or that current licensing relationships will be
continued.

<PAGE>

CUSTOMERS

MEDgenesis enjoys what it believes to be excellent relations with all
of its customers. However, given the competitive nature of the industry in which
the Company operates, there can be no guarantee that MEDgenesis will be able to
keep all of its existing customers nor that it will be able to obtain new
customers. Currently, the Company has two customers, McKesson and Gulf South
Medical, that individually provide in excess of 10% of MEDgenesis' gross
revenue. The loss of either of these customers would have a significant impact
on the financial results of the company.

RISK OF OBSOLESCENCE

The healthcare diagnostic products industry is experiencing significant
technological change. MEDgenesis expects that technological advancement will
continue to develop in this area, particularly as it relates to blood glucose
testing for people with diabetes. Consequently, MEDgenesis' future success will
depend in large part on its ability to maintain a competitive position. Rapid
technological development may result in the Company's products or processes
becoming obsolete before MEDgenesis is able to market, or recover any portion of
the research, development and commercialization costs associated with new
products.

PRODUCT DEVELOPMENT

Product development and approval within the regulatory framework
discussed above takes a number of years and involves the expenditure of
substantial resources. Many of MEDgenesis' competitors have substantially
greater resources than MEDgenesis, including access to capital, research and
development staffs, sales and marketing experience, new product introduction
expertise and facilities. Product development involves a high degree of risk.
Difficulties or delays in the development or marketing of the Company's products
including, but not limited to, failure to deliver new products and technologies
when anticipated or the ability to develop new technology free of competitors'
existing patents, may significantly impact the financial results of the Company
and the ability of the Company to continue as a going concern.

PATENTS AND INTELLECTUAL PROPERTY

Due to the time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the healthcare
industry has traditionally placed considerable importance on obtaining or
maintaining patent, trade and service mark, or trade secret protection for
significant products. Proprietary rights relating to the Company's products will
be protected from unauthorized use by third parties only to the extent they are
covered by enforceable patents or other rights registrations. If the Company's
intellectual property rights, including but not limited to patents, trade
secrets, trademarks, service marks, and rights granted in licensing agreements
are inadequately protected, or subject to claims that they violate or infringe
another person's intellectual property rights, the Company may be unable to
prevent others from using MEDgenesis' intellectual property.

The Company is currently party to patent infringement litigation
involving one of its products. See Section 8: Legal Proceedings. The Company can
give no assurance regarding a positive outcome to that lawsuit. Future claims by
others that the Company has violated their intellectual property rights could
prevent the sale of Company products and require MEDgenesis to pay damages.
Third parties may claim that the Company's products infringe upon their
intellectual property rights. Defending against third-party infringement claims
could be costly and divert important management resources. Furthermore, if these
claims are successful, the Company may have to pay substantial royalties or
damages, remove the infringing products from the marketplace or expend
substantial amounts in order to modify the products so that they no longer
infringe on third party's rights.

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<PAGE>

CHRONIMED WILL PROVIDE NO FUTURE FINANCIAL SUPPORT TO MEDGENESIS

Although management believes it will be able to fund planned
expenditures and meet general obligations following the spin-off, there can be
no assurance that sufficient funds will be generated or available to MEDgenesis.
Further, there are no guarantees that MEDgenesis will be able to secure
sufficient debt or equity financing to fund its growth strategy. While the
Company has investigated various sources of capital should this need arise,
there can be no assurance the additional capital will be available or if
available, on terms acceptable to the Company. The inability to secure
additional financing on acceptable terms may significantly impact MEDgenesis'
ability to grow or compete in their markets. MEDgenesis has secured a $5 million
bank line of credit, which management believes to be sufficient to meet its
current financing needs. See Exhibits: US Bank Credit Agreement.

Chronimed Inc. has no obligation to provide any financial support to
MEDgenesis after the spin-off. As a result, the Company must maintain its own
credit facilities. As a smaller company engaged in the competitive healthcare
diagnostics arena, the cost of capital may be greater than that experienced by
Chronimed.

LITIGATION AND INSURANCE

In addition to the patent and intellectual property risks discussed
above, developing, manufacturing and selling medical products entails an
inherent risk of product liability. In recent years, participants in the
healthcare industry have become subject to an increasing number of lawsuits
involving product liability or related legal theories, many of which involve
large claims. MEDgenesis may from time to time be subject to such suits as a
result of the nature of its business.

The costs and other impacts of defending or pursuing legal claims may
become excessive. While MEDgenesis has obtained various insurance coverages,
there can be no assurance that claims in excess of the coverage will not occur.
See Item 1: Insurance.

LACK OF OPERATING HISTORY

The Company has been a business unit of Chronimed Inc. since
Chronimed's formation in 1985. As a result, MEDgenesis has always shared common
general and administrative expenses and efficiencies with Chronimed Inc.
Therefore, the actual amount and rate of growth in the Company's general and
administrative expenses could differ materially from the amounts allocated to
MEDgenesis and presented in the enclosed financial statements.

DEPENDENCE ON KEY PERSONNEL

MEDgenesis' success will be largely dependent on the efforts of Maurice
R. Taylor, Chief Executive Officer of the Company and other executive officers
including Chief Operating Officer John Murray and Chief Financial Officer
Richard Thon. The Company's success will also depend on its ability to retain
existing employees and to compete successfully for additional qualified
personnel. MEDgenesis has not obtained a key-man insurance policy for Mr.
Taylor. Chronimed has assigned to and MEDgenesis has assumed Mr. Taylor's
employment contract with Chronimed. See Item 6: Executive Compensation.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the possible, material United States
federal income tax consequences relating to the spin-off. The summary is based
on the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder, and interpretations of the Code and Treasury
regulations by the courts and the Internal Revenue Service ("IRS"), all as they
exist as of the date of this document.

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THE FOLLOWING SUMMARY DOES NOT DISCUSS ALL TAX CONSIDERATIONS THAT MAY
BE RELEVANT TO CHRONIMED STOCKHOLDERS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, NOR DOES IT ADDRESS THE CONSEQUENCES TO CHRONIMED STOCKHOLDERS
SUBJECT TO SPECIAL TAX TREATMENT UNDER THE UNITED STATES FEDERAL INCOME TAX
LAWS, SUCH AS TAX-EXEMPT ENTITIES, NON-RESIDENT ALIEN INDIVIDUALS, FOREIGN
ENTITIES, FOREIGN TRUSTS AND ESTATES AND BENEFICIARIES THEREOF, PERSONS WHO
ACQUIRE CHRONIMED STOCK PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS OR
OTHERWISE AS COMPENSATION, INSURANCE COMPANIES AND DEALERS IN SECURITIES. THIS
SUMMARY ALSO DOES NOT ADDRESS THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO CHRONIMED STOCKHOLDERS WHO DO NOT HOLD THEIR CHRONIMED COMMON STOCK AS A
CAPITAL ASSET. THIS SUMMARY DOES NOT ADDRESS ANY STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES. WE URGE YOU TO CONSULT YOUR TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO YOU OF THE SPIN-OFF.

The spin-off is intended to be a tax-free distribution pursuant to
Sections 355 and 368(a) of the Code to the holders of Chronimed common stock who
receive shares of MEDgenesis common stock. Chronimed will not be seeking a
ruling from the IRS to determine whether the IRS will treat the spin-off as
tax-free. However, Chronimed has received a written tax opinion from the
accounting firm of Ernst & Young LLP (E&Y) to the effect that, for United States
federal income tax purposes, the spin-off should qualify under Sections 355 and
368(a) of the Code as a distribution that is generally tax-free to Chronimed and
its stockholders. While E&Y has determined that the spin-off should qualify as a
tax-free distribution to shareholders, it cannot assure that result. E&Y's
opinion is qualified because it recognizes that if factual representations
supplied by Chronimed are materially incorrect or untrue, if Chronimed or
MEDgenesis do not comply with any representations they made to E&Y, or if the
IRS disagrees with E&Y's interpretation of fact or law, the transaction could be
treated as taxable. Neither Chronimed nor MEDgenesis are aware of any facts or
circumstances that would cause any such representations to be incorrect or
untrue in any material respect.

If Chronimed completes the spin-off and, notwithstanding the tax
opinion, the spin-off is held to be taxable for United States federal income tax
purposes, both Chronimed and its stockholders that receive MEDgenesis common
stock could be subject to a material amount of taxes as a result of the
spin-off. The amount of taxes to which Chronimed would be subject will be based
on the difference between MEDgenesis' aggregate market value immediately
following the spin-off and Chronimed's tax basis in MEDgenesis' common stock at
the time of the spin-off (which Chronimed estimates will be approximately $12
million). MEDgenesis will be liable to Chronimed for 40% of any such corporate
taxes incurred by Chronimed following the spin-off. For a description of
Chronimed's and MEDgenesis' obligations in connection with obtaining the tax
opinion and potential tax liabilities if the spin-off is held to be taxable by
the IRS, see Exhibit 2.1, Distribution and Spin-off Agreement.

The tax opinion received from E&Y provides that for United States
federal income tax purposes:
* No gain or loss should be recognized by, and no amount should
be included in the income of, the Chronimed stockholders upon
their receipt of shares of MEDgenesis common stock in the
spin-off.
* The aggregate basis of MEDgenesis common stock and the
Chronimed common stock in the hands of each Chronimed
stockholder after the spin-off should equal the aggregate
basis of the Chronimed common stock held by such Chronimed
stockholder immediately before the spin-off, allocated between
MEDgenesis common stock and the Chronimed common stock in
proportion to their respective fair market values on the date
of the spin-off.
* The holding period of MEDgenesis common stock received from
Chronimed by each Chronimed stockholder in the spin-off should
include the holding period of the Chronimed common stock held
by such Chronimed stockholder immediately before the spin-off,
provided that such Chronimed stockholder held the Chronimed
common stock as a capital asset on the date of the spin-off.

The tax opinion by E&Y does not address tax basis issues affecting
holders of Chronimed common stock who have blocks of Chronimed common stock with
different per share tax bases. Those holders are urged to consult their tax
advisor regarding the possible tax basis consequences to them of the spin-off.

United States Treasury regulations require that each Chronimed
stockholder receiving shares of MEDgenesis common stock in the spin-off attach
to the holder's United States federal income tax return, for the year in which
such stock is received, a detailed statement of data demonstrating the
applicability of Section 355 of the Code to the spin-off. Within a reasonable
time after the spin-off, Chronimed will provide Chronimed stockholders

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<PAGE>

who receive MEDgenesis common stock in the spin-off with the information
necessary to comply with this requirement, and will provide information
regarding the allocation of tax basis described above.

Chronimed and MEDgenesis urge their shareholders to consult their tax
advisors as to the particular tax consequences of the spin-off, including the
application of state, local and foreign tax laws and any changes in federal tax
laws that occur after the date of this document.

If there is a change of control transaction involving either Chronimed
or MEDgenesis within two years following the spin-off, and the organizations are
unable to rebut presumption that the change of control was contemplated at the
time of the spin-off, the spin-off may be deemed a taxable event. With respect
to tax liability, the party that triggers the change of control event will be
responsible for 100% of the corporate tax liability.

HAZARDOUS WASTE GENERATION

As a part of its manufacturing processes, MEDgenesis generates small
quantities of materials classified as hazardous wastes. Pursuant to Minnesota
Rules Chapter 7045, the Company is allowed to dispose of its hazardous wastes
without a formal permit from the Minnesota Pollution Control Agency. The Company
is defined, under Section 7045.0206, as a "very small quantity generator"
because it produces less than 100 kilograms of hazardous waste per week. As a
very small quantity generator the Company is allowed, under Sections 7045.0280
and 7045.0320, to accumulate, transport and deposit hazardous wastes with a
licensed collection facility. The Company transports and deposits its hazardous
wastes at a licensed facility operated by Hennepin County, Minnesota. Management
believes its waste management programs are effective, adequate, and in
compliance with Minnesota Rules Chapter 7045, as well as all other applicable
State, Federal, and local laws. However, a hazardous waste release could create
environmental liabilities which would have an adverse impact on the Company's
operations and financial condition.

THERE HAS BEEN NO TRADING MARKET FOR MEDGENESIS COMMON STOCK

MEDgenesis has filed an application to include shares of MEDgenesis
common stock on the NASDAQ National Market System under the symbol "MDGN".
MEDgenesis expects its common stock to begin trading on the NASDAQ National
Market System on a "when distributed" basis before the distribution date.
Currently there is no public market for MEDgenesis common stock, and MEDgenesis
cannot predict the prices at which its common stock will trade after the
spin-off. A large number of holders of MEDgenesis common stock may sell their
shares shortly after the spin-off due to the investment objectives and
requirements of those shareholders. Until the MEDgenesis common stock is fully
distributed and an orderly market develops, MEDgenesis believes the prices at
which its common stock will trade may fluctuate significantly. The trading price
of MEDgenesis common stock will be influenced by a variety of factors, including
MEDgenesis' operating results, liquidity of the market for MEDgenesis common
stock, investor perception of MEDgenesis, the industry in which MEDgenesis
operates, and general and economic market conditions.

THE SPIN-OFF COULD ADVERSELY AFFECT THE AGGREGATE VALUE OF INVESTMENT IN
CHRONIMED COMMON STOCK

Following the spin-off, the trading prices of MEDgenesis common stock
and Chronimed common stock will not necessarily be related. The combined trading
prices of MEDgenesis common stock and Chronimed common stock after the spin-off
may be less than the trading price of Chronimed common stock immediately before
the spin-off. As a result of the spin-off, MEDgenesis expects the trading price
range of Chronimed common stock to be lower than the trading price range of
Chronimed common stock immediately before the spin-off.

LOSS OF NASDAQ NATIONAL MARKET SYSTEM LISTING

While it is anticipated that MEDgenesis' common stock will be initially
included in the NASDAQ National Market System, its continued inclusion will
depend on the ability of MEDgenesis to meet certain eligibility requirements
established for the NASDAQ National Market System. Loss of NASDAQ National
Market System eligibility could result, for example, if the minimum bid price of
MEDgenesis common stock falls below $5 per share during the first 30 trading
days. If MEDgenesis common stock becomes ineligible for inclusion in the NASDAQ

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National Market System, this would adversely affect the public market for and
the trading prices for MEDgenesis common stock.

TERMINATION OF SPIN-OFF

Consummation of the spin-off is contingent upon the occurrence of a
number of events, including but not limited to registration of MEDgenesis common
stock under the Securities and Exchange Act of 1934 and approval of MEDgenesis
common stock for inclusion in the NASDAQ National Market System. Even if all of
the conditions precedent to the spin-off are satisfied, Chronimed's Board of
Directors still has the right to abandon, defer or modify the terms of the
spin-off at any time before the distribution date.

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ITEM 1: BUSINESS

GENERAL

MEDgenesis is a developer, manufacturer and distributor of diagnostic
products and related medical devices used outside the human body ("IN VITRO") to
monitor chronic conditions such as diabetes and to screen for acute conditions
utilizing blood and urine diagnostics. The primary focus of the Company's
technology is proprietary dry reagent chemistry that enables rapid point of care
("POC") testing of blood and urine. POC tests take place next to the patient,
and can occur at the patient's bedside at home, in a hospital or long-term care
facility, in a doctor's office, or in an ambulance or emergency room. Typically
POC testing utilizes whole blood (like MEDgenesis' proprietary blood glucose
meters and reagent trips), urine (like the Company's numerous proprietary
DiaScreen(R) reagent test strips), saliva or other body fluids.

Healthcare professionals and individuals use MEDgenesis' products to
routinely screen for or monitor various acute and chronic conditions. The
Company's products provide rapid feedback, thereby enabling individuals and
professionals to make immediate refinements to the treatment of the condition.

MEDgenesis' vertical integration of research and development,
manufacturing, and distribution provide an element of autonomy not usually found
in similar size companies. Management believes the proprietary nature of the
Company's products allows them to define and protect unique niches in the
healthcare market. MEDgenesis also distributes ancillary products related to its
core technology. For example, in the blood glucose market, the company also
sells safety lancets and lancing devices to obtain capillary blood samples, and
infusion sets used with pumps to continuously administer precisely measured
micro-doses of insulin. In the urine diagnostic market, MEDgenesis is also
developing a urine test analyzer.

HISTORY

Chronimed Inc. ("Chronimed") was incorporated under the laws of the
State of Minnesota on March 12, 1985, as Diabetes Center, Inc. From 1985 to
1990, Diabetes Center, Inc. focused on the needs of patients with diabetes. In
1991, the company's name was changed to Chronimed Inc., reflecting the company's
expansion into services directed to persons with other chronic conditions. On
March 23, 1992 Chronimed Inc. became a publicly traded company on the NASDAQ
National Market System (NASDAQ: CHMD).

Despite Chronimed's expansion of services related to other chronic
conditions, diabetes continued as the core focus of its diagnostics business.
Almost from inception, Chronimed's Diagnostic Products business unit had
developed exclusive distribution arrangements with various manufacturers to
provide diabetes products including blood glucose test strips, meters, and
lancing devices. In fiscal year 1994, Chronimed acquired the rights to begin
producing its first proprietary blood glucose test strips and launched its
Supreme(R) Blood Glucose System, targeted to long term care facilities. Since
that time, Chronimed has continued to add to its portfolio of proprietary
products. Some of the Company's key milestones were:

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* March, 1998: Chronimed acquired DiaScreen Corporation, a
Minneapolis-based developer and manufacturer of blood and
urine IN VITRO diagnostic products used by healthcare
professionals in acute and long-term care facilities and
in-home testing markets worldwide. This acquisition included a
state-of-the-art manufacturing and laboratory facility that
enhanced Chronimed's capabilities to develop, produce and
distribute non-diabetes related diagnostic products.
* June, 1998: Chronimed received final 510(k) clearance by the
Food & Drug Administration ("FDA") to market its proprietary,
urine chemistry test strips. These urine chemistry test strips
are used primarily in acute care facilities and physicians'
offices to rapidly screen for acute conditions.
* August, 1998: Chronimed received 510(k) clearance by the FDA
to market the Assure(TM) Blood Glucose Monitoring System which
uses electrochemical biosensor technology.
* March, 1999: Chronimed announced that it had commenced an
action seeking a declaratory judgment against Bayer
Corporation in Minneapolis federal court. Chronimed asserts in
the action that its FDA approved DiaScreen(R) urine test strip
is free from certain Bayer patent claims.
* November, 1999: Chronimed announced that it received a sole
source contract from Beverly Enterprises, Inc. (NYSE: BEV),
the nation's largest nursing home operator, for the
distribution of blood glucose test strips, meters and related
supplies. Beverly purchases its products through a Chronimed
customer and distributor, Gulf South Medical Supply.
* March, 2000: Chronimed announced the Diagnostic products
business would be spun-off as an independent, publicly traded
company whose stock would be distributed to Chronimed
shareholders as a tax-free dividend.

During this period, Chronimed's Diagnostic Products business has seen
revenue from the sales of its proprietary products grow from $5.0 million in
fiscal year 1995 to $19.0 million in fiscal year 2000. While there can be no
assurances this level of growth will continue, the total business has
nonetheless experienced a 19% compounded annual growth rate. See Exhibits:
Financial Statements.

MEDgenesis was incorporated under the laws of the State of Minnesota on
May 3, 2000, as a wholly owned subsidiary of Chronimed. As a subsidiary,
MEDgenesis became a separate operating entity on July 1, 2000, and at that point
was no longer a mere business division of Chronimed. Effective with the
distribution of MEDgenesis stock to Chronimed shareholders, MEDgenesis will
exist as a fully independent company, having formally acquired and assumed
substantially all of the assets and liabilities of Chronimed's Diagnostic
Products business.

DISCONTINUED PRODUCT LINES

One of the products for which Chronimed had an exclusive license was
the Quick Check brand of diabetes test strips. Quick Check was a generic dry
reagent test strip for use with the Lifescan One Touch(R) monitor, the most
widely used blood glucose monitor. In 1993, Lifescan, Inc., a subsidiary of
Johnson & Johnson, sued the manufacturer and supplier of Quick Check, Diagnostic
Solutions, Inc. ("DSI") and Can Am Corp. The lawsuit alleged patent violations
and claimed that use of the Quick Check strips with Lifescan's monitor was
unsafe. Lifescan sought damages and an injunction prohibiting the sale of Quick
Check strips. Chronimed was not a named party to that lawsuit. DSI, Can Am, and
Lifescan settled the lawsuit in 1994.

In January 1995, DSI placed a hold on its production while improvements
were made to the manufacturing process. Shipments did not resume until August
1995.

In December 1996, at the FDA's request, a production hold was placed on
the Quick Check strip. Over the ensuing few months, DSI attempted to resolve its
production issues with FDA. By April 1997, this effort was abandoned and
Chronimed and DSI engaged in discussions regarding Chronimed's possible
acquisition of the manufacturing rights to the product. In August 1997, the
parties determined that this was not viable. Neither Chronimed nor MEDgenesis
has had any business dealings with DSI since fiscal 1997, and MEDgenesis does
not anticipate dealing with DSI in the future.

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Sales of the Quick Check dry reagent strip were approximately $5.9 million in
fiscal 1995, $13.8 in fiscal 1996, $8.3 million in fiscal 1997, or 42%, 48% and
29% of MEDgenesis total revenue for these respective years. See Exhibits:
Financial Statements.

MARKETING STRATEGY

Sales emphasis historically has been placed in the long-term care
field. The addition of the DiaScreen(R) urine reagent strips has opened the
opportunity for penetration into the medical community, primarily through
doctors' offices. The addition of biosensor technology to the company's line of
blood glucose strips has provided the opportunity to develop a stronger presence
with the end user. Durable medical suppliers, medical surgical distributors and
major drug distributors are the Company's primary distribution channels. The
Company's largest distributors are McKesson, Gulf South Medical Supply, and
Bergen Brunswig Drug.

MEDgenesis has 35 direct sales people calling on its various customers.
The sales force is organized on classical lines into four regions each having a
regional sales manager. There is a vice president of sales and a national sales
manager as well as a major accounts manager. The major classes of trade upon
which the force calls are: Long Term Care, Medical-Surgical Distributors, Drug
Wholesalers and Durable Medical Equipment outlets. The company's ability to
service nursing homes through in-service programs has been a significant
contributor to its strong market share in the LTC market. However, the sales
force also has adequate time to expand its coverage into the Medical field as it
develops its urine diagnostic business. The DME business is similar in scope and
coverage to the LTC market. To the extent that the sales force becomes
overextended through expanded trade coverage there is a risk of diluted effort.
This has not been the case to date.

The Company offers firm pricing discounts or rebate programs, based on
sales volumes, to approximately 50 of its over 1,760 US customers. These 50
customers are provided price sheets, which identify firm offer dates, sales
volume thresholds and the associated discounts or rebates. The price sheets
generally remain effective for one-year periods, at which time they expire and
may be re-offered or terminated. Some price sheets allow for automatic annual
renewal but also provide for Company adjustment of terms. None of the price
sheets contain binding commitments obligating customers to any minimum purchase
requirements. Pricing sheets are offered to both distributors and long-term care
facilities.

Of the approximately 50 customers receiving discount or rebate pricing
offers, only three individually accounted for more than approximately 5% of
total product sales during the year ended June 30, 2000. McKesson-Redline, Gulf
South Medical Supply, and Bergen Brunswig Drug Company accounted for
approximately 26%, 14%, and 4%, respectively, of total product sales. A single,
generic pricing agreement, customized as to sales volumes and discounts, is used
for all three of these customers. See Exhibits: Purchase and Price Agreement,
McKesson Redline. No other single customer accounted for more than 3% of total
revenue.

In the last two years, MEDgenesis has expanded its coverage into the
international area. At this point the company is working on appointing exclusive
distributors in most markets. To date, MEDgenesis' products are sold in 37
countries. The company is in a small investment/breakeven posture in developing
these markets. Prices tend to be much lower for the company's products and the
strong dollar has exacerbated this problem. MEDgenesis' strategy is to expand
its current relationships into partnerships with selected companies in the major
marketing areas of the world. Discussions relative to these arrangements are
ongoing.

MARKET TRENDS AND OUTLOOK

Statistical information regarding diabetes is widely available through
a variety of sources. Unless otherwise stated, the market and disease-related
statistics cited below were obtained from the official websites of the American
Diabetes Association and the Juvenile Diabetes Foundation International.

Diabetes is a chronic disease that has no cure. Worldwide, it is
estimated that there are between 100 and 120 million people with diabetes and
the World Health Organization (WHO) estimates that number will increase to 300
million by 2025.

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There are 15.7 million people, or 5.9% of the population, in the United
States who have diabetes. While an estimated 10.3 million have been diagnosed,
5.4 million people are not aware that they have the disease. A new case of
diabetes is diagnosed every 40 seconds. Each day approximately 2,200 people are
diagnosed and about 798,000 people will be diagnosed this year. Diabetes is the
seventh leading cause of death (sixth-leading cause of death by disease) in the
United States. Based on death certificate data, diabetes contributed to 198,140
deaths in 1996. The life expectancy of persons with diabetes, on average, is 15
years less than persons without diabetes.

Diabetes is the leading cause of new cases of blindness in people ages
20 to 74. From 12,000 to 24,000 people lose their sight because of diabetes each
year in the United States. Diabetes is also the leading cause of end stage renal
disease, accounting for about 40% of new cases. In 1995, approximately 27,900
people in the US initiated treatment for end stage renal disease (kidney
failure) because of diabetes.

Approximately 60% to 70% of people with diabetes have mild to severe
forms of diabetic nerve damage, which, in severe forms, can lead to lower limb
amputations. In fact, diabetes is the most frequent cause of non-traumatic lower
limb amputations. The risk of a leg amputation is 15 to 40 times greater for a
person with diabetes. Each year more than 56,000 amputations are performed in
this country among people with diabetes.

Persons with diabetes are also about 2 to 4 times more likely to have
heart disease, which is present in 75% of diabetes-related deaths (more than
77,000 US deaths due to heart disease annually). Diabetes sufferers are 2 to 4
times more likely to experience a stroke.

Diabetes is one of the most costly health problems in America. Health
care and other costs directly related to diabetes treatment, as well as the cost
of lost productivity, run to $98 billion annually. This includes $44 billion in
direct medical and treatment costs and $54 billion for indirect costs attributed
to disability and mortality. In 1997, the US per capita costs of health care for
people with diabetes amounted to $10,071, while health care costs for people
without diabetes amounted to $2,699. One of every four Medicare dollars goes to
pay for health care of people with diabetes.

The IN VITRO diagnostic point-of-care market is growing rapidly.
Statistics published by AMERICAN HEALTH Consultants (The BBI Newsletter, p.29,
February, 2000; Diagnostics Update, v.2 No. 11, November 1999) and CLINICA
REPORTS (853 April 12, 1999, p.28) estimated the 1998 global market for blood
glucose testing to be between $2.3 billion and $3.0 billion, growing at a rate
of between 11% and 18% per year. In the industrialized nations of the world this
growth is being fueled by aging populations and the shift of healthcare delivery
from the acute care setting to alternate care sites. Emerging nations are also
contributing to the growth as they improve the quality of healthcare they
provide to their populations. For example, blood glucose monitoring continues
its double-digit growth because the worldwide incidence of diabetes is
increasing steadily, as is the number of persons regularly testing their glucose
levels.

It has been MEDgenesis' observation that the institutional market,
including physicians' offices and Long Term Care (LTC) facilities, has
experienced an average selling price erosion during the past few years
attributable to the number of physicians and LTC facilities joining buying
groups, chains, or hospital consortiums. The Company has also observed average
selling price declines in the retail market, which appears to be attributable to
an increase in the number of healthcare consumer dollars covered by managed
healthcare plans, who demand and receive lower per unit prices from suppliers.

PRODUCTS

Proprietary diagnostic products represent a vital component of
MEDgenesis' operations. In order to better control the costs and selling prices
of its products and to improve its gross margins on product sales, the Company
continues to emphasize the licensing and development of proprietary products
suitable for distribution through its specialized marketing and distribution
system. MEDgenesis' proprietary products consist of dry reagent diagnostic tests
that it either owns outright, controls through exclusive license or distribution
agreements, or has developed and manufactures itself. Designed for either
institutional (long-term care facilities, hospitals, and clinical settings) or
consumer (in-home healthcare) use, these products are sold to a variety of
customers, including distributors, institutions, independent agents, HMOs,
durable medical equipment suppliers, and secondary retail chain outlets.

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Dry reagents tests are single use tests designed to measure chemical
characteristics in fluids, primarily blood and urine. In the healthcare setting,
these dry reagent tests are routinely used to screen for or monitor various
acute and chronic conditions. Dry reagent tests provide rapid feedback, thereby
enabling individuals and professionals to make immediate refinements to the
treatment of the identified condition.

When a liquid, such as blood, urine, saliva or other body fluid, comes
in contact with a dry reagent test strip, the reagent induces a chemical
reaction in the fluid. The chemical reaction produces either a color change on
the test strip or an enzymatic electrical charge. The test results can be
interpreted with an electronic device or by comparing the color change to a
visual chart. The intensity of the test results dictates whether the patient's
test is considered normal or abnormal, which would require further testing or
treatment.

PRODUCTION

The process of manufacturing dry reagent test strips involves
impregnating paper, fabric or other carrier media with a liquid chemical reagent
and then drying it in a tightly controlled environment. This process makes the
test reagents more stable and converts them into a dry reagent state. The dry
reagent chemicals are further processed to create an end user product. This step
can include such functions as cutting, stripping, laminating or shaping the dry
reagent media onto, or into, another carrier medium in final use form(like a
plastic strip that can be read in a blood glucose meter). Final assembly,
labeling and packaging (including color charts) completes the process.

The manufacturing process involves many points of quality control,
including raw materials acceptance, intermediate work-in-process, and finished
goods assembly and release. The manufacturing process, use of materials and
personnel must operate in compliance with comprehensive FDA regulations, and
other governmental programs and requirements. MEDgenesis dedicates significant
resources to the maintenance of and compliance to these regulatory requirements.

A large percentage of the equipment involved in the manufacturing
process is proprietary and is designed specifically for MEDgenesis' processes
and products. Loss of key equipment or facilities would require significant lead
times to replicate and revalidate the current manufacturing processes.

MEDgenesis' production facilities have received FDA designation as
approved manufacturing sites. The facilities must adhere to FDA dictated
standards. Failure to maintain these standards or loss or FDA facility approval
would have a substantial impact on the Company's production capabilities. The
Company believes its facilities management and quality practices will assure
ongoing FDA site approval.

INVENTORY

Inventories consist of raw materials, work in process and goods held
for resale. These items are carried at the lower of cost or market determined
under the average cost method.

One of MEDgenesis' most critical inventory items is an impregnable
membrane which is custom designed and manufactured to MEDgenesis' specific need.
In order to minimize the overall costs of this membrane, MEDgenesis usually
purchases enough membrane to support six months or more of production. As a
result, the dollar value of inventory on hand can vary greatly from period to
period. In addition, the Company generally maintains a safety stock of
unfinished, but fully processed, dry reagent test strips to protect against
spikes in production demands or interruptions in the manufacture or delivery of
the membrane. If this safety stock was damaged for any reason, MEDgenesis'
production flow could be impacted, and the financial results of the company
would be affected. See Risk Factors: Suppliers.

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Several of the Company's products, including chemicals required to
manufacture the dry reagent test strips, and the finished tests themselves, have
expiration dates or shelf-lives that limit the period of time for which the item
can be sold or used. Currently, management does not feel there is any
significant amount of products or materials in their inventory that will become
obsolete in the near future.

Finally, as a by-product of MEDgenesis' production process, small
amounts of hazardous waste are created. MEDgenesis participates in a disposal
process established under and in accordance with Minnesota Pollution Control
Agency administrative rules and is classified under those rules as a very small
quantity generator. Management feels the programs in place to manage the safe
and lawful disposal of this waste are effective and sufficient. See Risk
Factors: Hazardous Waste Generation.

BLOOD GLUCOSE MONITORING

PRODUCT LINE OVERVIEW

Diabetes is a chronic disease in which the body's metabolism of glucose
is ineffective due to inadequate or complete lack of insulin production by the
pancreas. Many complications can arise from the damage that diabetes inflicts
upon the body's vascular and neural systems, including reduced vision or
blindness, stroke, heart disease, kidney failure, impotence and loss of
circulation in the limbs, possibly leading to amputation.

The National Institutes of Health announced in 1993 the results of a
major multi-year research study. The Diabetes Control and Complications Trial
study demonstrated that more frequent monitoring and control of blood glucose
levels, more frequent insulin injections, and a regimen of diet and exercise
could reduce by as much as 60% the complications of diabetes, such as blindness,
loss of nerve sensation and amputation.

Monitoring is completed using a lancing device, a blood glucose dry
reagent test strip and a blood glucose meter. The monitoring process begins when
a person with diabetes uses a lancing device, such as the Company's
Haemolance(R), TechLite(TM), or SelectLite(TM), to prick a finger, toe, earlobe
or other body part to extract a droplet of blood. The droplet is placed on a dry
reagent blood glucose test strip, which causes a reaction between the chemicals
in the test strip and the glucose in the blood. This chemical reaction is then
measured by either comparing the color change on the test strip to a visual
chart or by an electronic meter such as the Company's Supreme II(R), Select
GT(R), or Assure(R) Blood Glucose Monitoring Systems. Most people treating
diabetes in the United States use a meter to monitor their blood glucose levels.

Most of MEDgenesis' diabetes products are covered by distribution
arrangements which generally require minimum annual purchases or payments to
maintain the exclusive distribution rights. In addition, these rights generally
restrict the distribution territories the Company can service. Exclusive
distribution territories for each of the Company's current agreements include
North America and other markets and are for terms ranging from two years to the
life of the applicable patents.

BLOOD GLUCOSE MONITORING MARKET

According to recent statistics, as published on its official website,
the American Diabetes Association ("ADA") estimates that roughly 16 million
Americans have diabetes. The ADA further estimates the market for diabetes
screening tests in the United States is $300 million per year, and growing at a
rate of 12-18% per year. The National Institutes of Health estimates the annual
direct and indirect costs of diabetes to represent 10% to 13% of total US
healthcare costs. This estimate includes costs due to complications from the
disease as well as monitoring and treatment costs.

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The United States is not alone. The International Diabetes Foundation
estimates that up to 150 million people worldwide are affected by diabetes, and
according to a recent study by CLINICA (853 April 12, 1999, p.28), annual
worldwide expenditures for blood glucose testing and monitoring exceed $2.6
billion. The World Health Organization forecasts that the number of people
suffering from diabetes will grow by 13% per year until 2005, and then by as
much as 20% per year through 2025.

Approximately 80-90% of persons diagnosed with diabetes are Type II and
the remainder are Type I. With Type I diabetes, the pancreas produces little or
no insulin and Type I diabetics require daily insulin injections for survival.
Type I diabetics have the greatest need for products supplied by the Company.
The Company believes that a person with Type I diabetes spends an average of
about $1,000 a year on required supplies. Type II patients often do not require
insulin but do use some of the same diabetes testing products and, like Type I
patients, require ongoing education, self-care and clinical monitoring to
maintain glucose control. Both Type I and Type II diabetics need appropriate
products to monitor their glucose levels on a daily basis. MEDgenesis serves
diabetics with blood glucose control systems and supplies through a number of
distribution channels.

MEDGENESIS' HISTORY IN BLOOD GLUCOSE MONITORING

Chronimed Inc. ("Chronimed") was incorporated under the laws of the
State of Minnesota on March 12, 1985, as Diabetes Center, Inc. From 1985 to
1990, Diabetes Center focused on the needs of patients with diabetes.

From its inception, Chronimed's Diagnostic Products division developed
exclusive distribution arrangements with various manufacturers to sell blood
glucose test strips, meters, and lancing devices. In fiscal year 1994, Chronimed
acquired the rights to begin producing its first proprietary blood glucose test
strips. Since that time, Chronimed has continued to add to its portfolio of
proprietary products. Some of the Company's key milestones have been:

* August, 1995: Chronimed acquired the stock of British American
Medical ("BAM"), a California-based medical products
distributor. At the time of acquisition, 1995 annualized
revenues for BAM was $1.5 million against total revenue for
Diagnostic Products (excluding BAM) of $25 million. British
American Medical's business and assets were merged into
Diagnostic Products and on August 18, 1997, BAM was formally
dissolved.
* April, 1997: Chronimed announced the first shipments of the
Supreme II(R) Blood Glucose System. This system represented
the second generation of Chronimed's highly successful
Supreme(R) Blood Glucose System. The Supreme II(R) is faster,
lighter in weight, and has enhanced memory capabilities.
* March, 1998: Chronimed announced the first shipments of its
second proprietary blood glucose system, the Select GT(R).
This value-priced system is sold through several retail
distribution channels, including medical products and
mail-order distributors, as well as drug wholesalers,
retailers, and private-labelers.
* August, 1998: Chronimed received 510(k) clearance by the FDA
to market the Assure(TM) Blood Glucose Monitoring System which
uses electrochemical biosensor technology.
* November, 1999: Chronimed announced that it received a sole
source contract from Beverly Enterprises, Inc. (NYSE: BEV),
the nation's largest nursing home operator, for the
distribution of blood glucose test strips, meters and related
supplies. Beverly purchases its products through a Chronimed
customer and distributor, Gulf South Medical Supply.

MEDGENESIS' BLOOD GLUCOSE MONITORING PRODUCTS

MEDgenesis develops, manufactures and distributes a broad range of
diabetes products, such as blood glucose monitors, test strips, infusion sets,
lancing devices, infusion devices and accessories. The arrangements pursuant to
which these products are distributed generally require minimum annual purchases
or payments to maintain exclusive distribution rights within specified
territories. Exclusive distribution territories for each of the Company's
current agreements include North American and other markets and are for terms
ranging from two years to the life of the applicable patents.

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The Company's products are designed for either institutional (long-term
care facilities, hospitals, and clinical settings) or consumer (in-home
healthcare) use. These products are sold to a variety of customers, including
distributors, institutions, independent agents, HMOs, durable medical equipment
suppliers, and secondary retail chain outlets.

MEDgenesis' goal is to produce easy-to-use diabetes products that
provide fast and accurate glucose test results. The Company is currently
exploring new proprietary diagnostic products and new generations of current
products. Such products, if they are determined to be economically feasible,
will be distributed to new and existing markets.

Blood Glucose Meters and Strips

SUPREME II(R) BLOOD GLUCOSE MONITORING SYSTEM

The Supreme II(R) is a small hand held device used to monitor blood
glucose levels of individuals with diabetes. It is the second generation of
MEDgenesis' first proprietary blood glucose meter, the Supreme(R) Blood Glucose
System. Introduced in April, 1997, the Supreme II(R) is faster, lighter in
weight, has enhanced memory capabilities, and a wider test and hematocrit range.

The Supreme II(R) utilizes photometric technology. This means that
glucose in the patient's blood, applied to the test strip either inside or
outside of the meter, creates a reaction to and color change in the chemicals in
the test strip. This color change is then read by the meter's photo optic
sensors. The more intense the color change, the higher the blood glucose
concentration. As an added benefit of this color change, test strips can be read
visually to confirm the meter results. Supreme II(R) stores up to 100 test
results in memory, has a test range of 30 to 600 mg/dL, is easy to use, and
requires minimal cleaning of the strip platform and optics. Finally, the Supreme
II(R) can be programmed to display results in mg/dL or mmol/L and can report
results in plasma/serum or whole blood values.

The Company believes that the Supreme II(R) blood glucose monitor is
well-suited for use in healthcare facilities, particularly long-term care
facilities, where the same monitor is used to test the blood glucose levels of
more than one patient. By license from Hypoguard, Ltd. under "evergreen"
contract renewal terms, the Company has the exclusive rights to manufacture and
market the Supreme II(R) test strips in defined territories and its production
met all of its sales requirements in fiscal 2000. The Supreme II(R) meter is
purchased from a third party manufacturer, but the manufacturing agreement
terminated in September, 2000. However, the manufacturer has agreed to provide
sufficient quantities of meters to meet demand for the remaining product market
life.

SELECT GT(R) BLOOD GLUCOSE MONITORING SYSTEM

Introduced in March, 1998, the Select GT(R) Blood Glucose Testing
System represents MEDgenesis' second proprietary blood glucose system. The
Select GT(R) is a small hand held system that, except for minor cosmetic changes
and accessories designed specifically for in-home use, is identical to the
Supreme II(R).

As with the Supreme II(R), the Select GT(R) utilizes photometric
technology. The Select GT(R) also stores up to 100 test results in memory, has a
test range of 30 to 600 mg/dL, is easy to use, and requires minimal cleaning of
the strip platform and optics. Like the Supreme II(R), the Select GT(R) can be
programmed to display results in mg/dL or mmol/L and can calculate report
results in plasma/serum or whole blood values.

Management believes the Select GT(R) blood glucose monitor is
well-suited for its consumer sector target market. The value-priced Select GT(R)
is sold through several retail distribution channels, including medical products
and mail-order distributors, as well as wholesalers, retailers, and other
private-labelers. The company continues to update its technology to provide
state of the art products to its customers and end users. Plans are being
developed to update this product with the new Quick Tech product mentioned
below.

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In the interim, licensing arrangements covering the Supreme technology
also apply to the Select product. Both are licensed from Hypoguard, Ltd. under
"evergreen" contract renewal terms. The Select meter is purchased from a third
party manufacturer, but the manufacturing agreement terminated in September,
2000. However, the manufacturer has agreed to provide sufficient quantities of
the meters to meet demand for the remaining product market life.

ASSURE(TM) BLOOD GLUCOSE MONITORING SYSTEM

The Assure(TM) Blood Glucose Monitoring System was introduced in
August, 1998. This new diabetes testing product is the third member in
MEDgenesis' family of proprietary blood glucose systems.

The Assure(TM) Blood Glucose Monitoring System uses electrochemical
biosensor technology. With a biosensor meter, the chemical reaction between the
glucose in the patient's blood and the test strip creates an enzymatic reaction
that emits an electrical charge which is read by the meter. High concentrations
of blood glucose cause a stronger electrical charge and thus a higher reading on
the meter. Conversely, lower blood glucose levels produce a lower the electrical
charge and lower reading on the meter.

The Assure(TM) Blood Glucose Monitoring System features a large
soft-touch screen display that has required minimal cleaning. The test range of
the Assure(TM) is from 30 to 550 mg/dL with results in 35 seconds. Assure(TM) is
capable of storing 180 tests with a date and time stamp. Data can be downloaded
from the Assure(TM) meter to a personal computer for data manipulation and trend
analysis. Blood sugar trend analysis provides a powerful tool in fine tuning the
correct dosage of insulin, especially when in the hands of a health care
professional. Finally, the Assure(TM) can be programmed to display results in
mg/dL or mmol/L, however it only reports results in whole blood values.

While both types of the Company's meters, biosensor and photometric,
must pass stringent FDA accuracy testing, consumer demand for the latest
technology drives the demand for the Assure(TM) meter. The Company believes this
biosensor product will allow MEDgenesis to compete in the broad market on a more
competitive basis as this technology is becoming the market standard. Assure(TM)
is marketed and sold through both local and national medical distributors to
local and national retail pharmacies, to hospitals, long term care facilities,
and individuals with diabetes. The Assure(TM) is purchased from a Taiwanese
company on an exclusive basis for the Western hemisphere under a contract
extending through November, 2003. MEDgenesis also maintains non-exclusive rights
under the contract to market new generations of the Assure product
internationally.

LANCET AND LANCING DEVICES

Lancets are sterile, disposable devices used to obtain a small drop of
blood. They are most often used by healthcare professionals and individuals who
need capillary blood samples for IN VITRO diagnostic tests such as monitoring
blood glucose levels.

Lancets are made from sterile, steel needles and come in many different
sizes, ranging from 21 to 28 gauge. The higher the gauge the sharper the needle,
resulting in a smaller puncture wound and less pain for the individual. Higher
gauge lancets yield a smaller blood sample.

Lower gauge lancets (i.e. 21 gauge) are used when a person has calluses
and it is difficult to obtain a drop of blood. Higher gauge lancets (i.e. 28
gauge) are used when a patient requires frequent finger pricks or has thin skin,
such as a child or elderly person.

A standard lancet, such as the Company's TechLite(TM), can be held
directly in the hand or used with a lancing device (like MEDgenesis'
SelectLite(TM)). A lancing device eases the use of a lancet needle. An
alternative for lancing is a safety lancet, such as the Company's Haemolance(R).
These lancet-and-holder devices contain in a spring mechanism and offer built-in
needle protection in that the needle is not exposed until the user activates the
device. After use, the needle retracts back into the device to guard against
accidental sticks.

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MEDgenesis' strategy is to sell a broad selection of these products at
the higher end of the quality scale to avoid the commoditization of the line.

HAEMOLANCE(R) LANCETS

MEDgenesis licenses the distribution of Haemolance(R) lancets on an
exclusive basis in North America and a non-exclusive basis in South America. The
contract has been in existence since 1994 and is continued year to year. The
next extension for the contract occurs at the end of calendar 2000. Management
is in on-going discussions with the supplier of Haemolance(R) lancets to ensure
continuity.

The Haemolance(R) lancet is a "safety lancet", which is most often used
by healthcare professionals to obtain a capillary blood sample. The patient
never actually sees the lancet during use. This system protects staff and
patient from accidental punctures before and after use, eliminating the risk of
cross-contamination. The Haemolance(R) lancet is available in two sizes:
21 gauge and 25 gauge.

TECHLITE(TM) LANCETS

TechLite(TM) lancets are purchased by MEDgenesis from a Southeast Asian
manufacturer. The Company is in the process of outlining a long-term letter of
agreement with the manufacturer. It is expected that MEDgenesis will have
worldwide marketing rights to the lancets under its own trademark and will
maintain exclusive rights to the United States.

The TechLite(TM) lancet is compatible with most standard lancing
devices and is available in the most popular needle gauge formats (21, 23, 25,
26, and 28 gauge).

SELECTLITE(TM) LANCING DEVICE

The SelectLite(TM) Lancing Device is provided to the Company by a
California manufacturer. MEDgenesis does not have any type of exclusivity
arrangement with the manufacturer. MEDgenesis has worldwide marketing rights for
this product under the SelectLite(TM) trademark.

The SelectLite(TM) Lancing Device is a small, spring-loaded pen-shaped
device that is used with a standard lancet. The device is used in long-term care
facilities, physician's offices, and by individuals. The device features an
adjustable tip that allows users to choose from five settings for maximum
comfort. It is compatible with most standard lancets.

INFUSION SETS

Diabetes is a chronic disease in which the failure by the pancreas to
produce adequate insulin reduces the body's ability to metabolize glucose. In
order to metabolize glucose, many people with diabetes must take insulin to
counteract their body's insufficient production of insulin. For people who
manage their diabetes with insulin, there are two primary delivery options
available. They can either inject themselves one or more times a day with an
insulin syringe or they can utilize an insulin infusion pump. An infusion pump
delivers a continual, very small dose of insulin on a subcutaneous basis with
the use of an infusion set.

An insulin pump is made up of a pump reservoir (similar to, but larger
than, a regular syringe) filled with insulin, a small battery operated pump, and
a computer chip that allows the user to control the delivered insulin dosage. It
is all contained in a plastic case about the size of a pager.

The pump reservoir delivers insulin to the body by way of a thin plastic tube
called an "infusion set." Infusion sets come in 24 inch and 42 inch lengths and
have a needle or soft cannula at the end, through which the insulin passes into
the body. The needle or cannula is inserted under the skin, usually on the
abdomen. The process of putting the infusion set in place is called "insertion"
and is very much like giving a standard insulin injection. The infusion set is
changed approximately every two to three days.

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<PAGE>

The pump is intended to deliver insulin on a continual basis 24 hours a
day, according to a programmed plan unique to each pump wearer. The volume and
rate of the continual insulin dose is called the "basal rate". This insulin
keeps blood glucose in the desired range between meals and over night. When food
is eaten, the user programs the pump to deliver a "bolus dose" of insulin
matched to the amount of food that will be consumed.

PURELINE(TM) INFUSION SETS

MEDgenesis' licenses the distribution of PureLine(TM) Infusion Sets
from a European manufacturer, on a non-exclusive basis in the United States and
related territories. The company is in current discussions with the manufacturer
to ensure continuity of this relationship.

PureLine(TM) Infusion Sets include the tubing, needle and pump used to
deliver insulin from the pump into the patient. There are three varieties of
PureLine(TM) Infusion Sets: PureLine(TM) Comfort, PureLine(TM) Basic, and
PureLine(TM) Contact. The PureLine(TM) Comfort has a soft, Teflon-coated
catheter that remains in place after insertion. This version also has a feature
that enables users to disconnect from the pump and gives them the freedom
necessary for bathing, exercise, swimming, and other activities. The
PureLine(TM) Basic and the PureLine(TM) Contact feature a needle that remains in
place after insertion. The Basic has a pre-bent 30-degree needle. The Contact
has a 90-degree needle.

MARKETING STRATEGY: BLOOD GLUCOSE MONITORING

Historically, MEDgenesis has focused primarily on the long-term care
market. The ease of use and simplicity of the Supreme(R) blood glucose
monitoring systems have been well suited for the LTC market. Additionally, its
field sales force has provided the quality of service necessary to consistently
penetrate this market. More recently, MEDgenesis has expanded the scope of its
efforts to include Durable Medical Equipment (DME) suppliers and Home Medical
Equipment (HME) suppliers that sell directly to persons with diabetes.
MEDgenesis has also started expansion into select retail pharmacies not targeted
by the larger manufacturers.

GROWTH STRATEGY: BLOOD GLUCOSE MONITORING

Moving forward, MEDgenesis will continue penetration of the long-term
care, DME, HME and select retail pharmacies. Expansion of the field sales force
and the introduction of new products will help facilitate this growth.
Additionally, MEDgenesis will expand their target markets to include the next
tier of retail pharmacies and aggressively pursue private label opportunities
with key distributors.

COMPETITORS: BLOOD GLUCOSE MONITORING

Market leaders in this segment include LifeScan, Roche Diagnostics,
Bayer Diagnostics and MediSense (a subsidiary of Abbott Laboratories).

LIFESCAN, INC.
LifeScan is a subsidiary of Johnson & Johnson and only markets diabetes
products. They are widely regarded to be the largest distributor of blood
glucose meters and test strips in the world. LifeScan's product line includes
the One Touch(R) family (Basic(R), Profile(R), SureStep(R) and FastTake(R).
Their products are distributed in over 50 different countries. Lifescan
consistently provides quality support materials and service to health care
professionals including endocrinologists, certified diabetes educators, and
pharmacists. Its products are also readily available in virtually all retail
pharmacies throughout the US. Lifescan's primary focus is hospitals, key
healthcare professionals, and high volume retailers.

ROCHE BOEHRINGER MANNHEIM DIAGNOSTICS
Roche Diagnostics (formerly Boehringer Mannheim Diagnostics) is
generally considered to be the second largest distributor of diabetes products
in the world. Roche's product line includes the Accu-Chek(R) family
(Advantage(R), Complete(TM), Simplicity(TM) and Instant(TM). Roche consistently
provides quality support materials and service to health care professionals
including endocrinologists, certified diabetes educators, and pharmacists.

17
<PAGE>

Roche products are also readily available in virtually all retail pharmacies
throughout the US. Its primary focus is hospitals, key healthcare professionals,
and high volume retailers.

BAYER DIAGNOSTICS
Bayer Diagnostics is considered the world's third largest distributor
of blood glucose meters and test strips. Bayer's product line includes the
Glucometer(R) family (Elite(R), Elite(R) XL, DEX(TM), and Encore(R) QA +). Bayer
provides acceptable support materials and service to health care professionals
including endocrinologists, certified diabetes educators, and pharmacists.
Bayer's products are also readily available in most retail pharmacies throughout
the US. Its primary focus is key healthcare professionals and high volume
retailers. It appears that Bayer competes less effectively in the hospital
market.

MEDISENSE
MediSense, acquired by Abbott Laboratories in 1996, is currently
believed to be the fourth largest blood glucose meter manufacturer in the world.
MediSense's product line includes the Precision family (Qo Io D(R) Sensor, Qo Io
D(R) Pen, Xtra(TM), G and PCx), the ExacTech(R) family (Ro So G(TM) Sensor and
Card Sensor) and the MediSense(R) 2 family (Card Sensor and Pen Sensor). The
Precision PCx is a sophisticated meter designed for use in large hospitals.
MediSense consistently provides good support materials and service to health
care professionals including endocrinologists, certified diabetes educators, and
pharmacists. Its products are also readily available in almost all retail
pharmacies throughout the US. Its primary focus is hospitals, key healthcare
professionals, and high volume retailers. MediSense appears to be positioned to
challenge Bayer's status as third largest worldwide distributor of these
products.

URINALYSIS PRODUCTS

PRODUCT LINE OVERVIEW

10-parameter urine test strips (one strip that performs ten distinct
tests) are the most widely used urine screening tests and generate a major
portion of urine diagnostic revenues worldwide. MEDgenesis' 10-test strip is a 4
3/8" x 3/16" piece of inert plastic with ten reagent test pads affixed to it.
Its test strips are packaged in bottles of 100 with a desiccant to absorb excess
ambient moisture that may enter the container. Shelf life of these products is
16 to 24 months from the date of manufacture and the use life is 60 to 90 days
after the product has been opened.

To perform a test, the strip is momentarily immersed in a fresh,
well-mixed urine sample and removed immediately. Each test is read at a
specified time after removing the strip from the urine specimen and is compared
to a color chart on the side of the bottle or read with a meter-type analyzer.
The intensity of the color that develops on a test pad indicates whether the
patient's test is considered normal or abnormal, which would require further
testing or treatment.

Doctors prefer the 10-test combination because it allows them to screen
for a wide variety of acute and chronic health conditions. These tests can
provide early warning signs for several serious afflictions such as kidney and
liver disease, hepatitis, and diabetes, among others. The dry reagent urine
tests currently available are:

Leukocytes
During a bacterial infection of the urogenital tract, leukocytes (white
blood cells) move toward the focus of inflammation to kill germs. This increased
accumulation of leukocytes in the tissue of the bladder or the kidneys leads to
an excretion of leukocytes in the urine. Presence of leukocytes can indicate an
infection of the kidney or the lower urinary tract. Clinical conditions can
include pyelonephritis, cystitis, urethritis and renal tuberculosis.

Specific Gravity
The specific gravity of the urine demonstrates the concentrating and
diluting ability of the kidneys. In healthy persons, urine specific gravity
varies from 1.000 g/ml (after water intake) up to 1.040 g/ml (after prolonged
fluid deprivation). Normal values range between 1.020 and 1.030 g/ml. Reduced
specific gravity can indicate the kidneys do not have the ability to concentrate
urine. Clinical conditions include diabetes insipidus, glomerulonephritis,
pyelonephritis or other renal disorders. Elevated specific gravity indicates
excessive loss of water (sweating, fever, vomiting, diarrhea), adrenal
insufficiency, liver diseases or congestive heart failure.

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Glucose
Reduced insulin secretion by the islet cells of the pancreas leads to
an insufficient utilization of glucose, resulting in increased blood glucose. If
the blood glucose level surpasses the renal threshold of approximately 180
mg/dL, there is a corresponding increase of the glucose content of the urine.
Clinical conditions include diabetes mellitus and renal glycosuria.

Ketone
Ketone bodies include acetone and acetoacetic acid. These substances
are formed by healthy individuals, but concentrations are so small they cannot
be detected with conventional methods. A number of conditions may lead to an
increased formation of ketone bodies. They include severe malnutrition,
weight-reducing diets where carbohydrate intake is reduced and replaced by
protein rich foods, hyperemesis gravidarum, acetonemic emesis of infants, and
febrile states.

Blood
Excreted erythrocyte (red blood cells) concentrations in healthy
persons' urine are below conventional chemical tests' detection thresholds. The
presence of blood in urine may indicate disorders of the kidneys or urogenital
tract. This can occur due to stone formation, tumors of the kidneys,
glomerulonephritis, pyelonephritis, cystitis, trauma to the kidneys, or
diabetes. It can also occur with poisoning, burns, myocardial infarction,
muscular lesions and progressive myopathies.

Nitrite
The urine of a healthy person does not contain nitrites. Even a small
concentration in the urine is a specific indicator for a urinary tract
infection. High-risk groups include pregnant women, diabetics, and patients with
gout or calculosis. Nitrite forming bacteria (particularly E. coli) convert the
nitrate present in urine into nitrite.

Bilirubin
Erythrocytes (red blood cells) circulating in the blood stream have a
life expectancy of 120 days. When these cells die they release hemoglobin.
Hemoglobin degradation occurs predominantly in the spleen and liver. The
resulting product is bilirubin. Bilirubin is excreted via the gall bladder into
the intestines, where bacteria digest the bilirubin to produce urobilinogen and
stercobilinogen. While Bilirubin is largely reabsorbed, the non-absorbed portion
is excreted with the stool in the form of urobilin and stercobilin. Bilirubin
cannot be detected in the urine in healthy subjects. Clinical conditions
indicated by excess bilirubin include liver diseases such a obstructive
jaundice, hepatitis and hepatocirrhosis. Excess bilirubin can also occur with
bilirubin metabolism disorders such as Dubin-Johnson syndrome or Rotor syndrome.

Urobilinogen
Urobilinogen and stercobilinogen are from the byproducts of bilirubin
reduction in the intestines. Some excretion of urobilinogen in the urine is
normal. The presence of excess urobilinogen usually indicates a liver disease or
hemolytic disease. Examples are pernicious anemia, hemolytic anemia, viral
hepatitis, hepatocirrohosis, chronic hepatitis, toxicopathic hepatic lesions and
carcinoma of the liver.

Protein
When blood passes through the kidneys, normally low-molecular weight
proteins are filtered out and high-molecular weight proteins are retained.
Low-molecular weight proteins are reabsorbed in the tubules of the kidneys and
only a small amount of these filtered proteins are actually excreted in the
urine. Proteinuria refers to a condition where excreted protein concentration
exceeds standard values. Benign proteinuria can occur in patients with healthy
kidneys. It can be caused by strenuous physical (sports) or emotional stress,
fever, hypothermia, influenza or pregnancy. Pathological proteinuria can occur
in colics, heart attacks and cardiac insufficiencies. It can also indicate
glomerulonephritis, pyelonephritis, nephrotic syndrome, glomerulosclerosis,
gouty kidney, cystitis and nephrotoxic damages.

pH
pH expresses the concentration of hydrogen ions in a solution, on a
scale from 0 to 14. Values from 0 to 6 characterize an acidic solution whereas
values from 8 to 14 identify a solution as alkaline. A pH of 7 is considered
neutral. A healthy person's urine pH value usually ranges between 5 and 8.
Alkaline urine (pH greater than 8) can indicate urinary tract infection.
Strongly acidic urine (pH less than 6) can indicate gout, fever, heavy
perspiration or a high dose of phenacetin.

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URINALYSIS MARKET

According to CLINICA, the annual worldwide market for dry reagent
urinalysis products is approximately $250 million (Medical & Healthcare
Marketplace Guide, pg. I-740, 1999). MEDgenesis management believes that the
U.S. market for these products represents roughly half the worldwide market, or
an annual $125 million.

In another CLINICA report (853 April 12, 1999, p.28), it is estimated
that worldwide demand for dry reagent urinalysis products will increase 4.7%
during the period from 1999 to 2004. In addition, management believes that while
Bayer Diagnostics has historically enjoyed dominance in the market, its lead is
eroding as companies like Roche Diagnostics and MEDgenesis develop comparable
products and find better ways to compete in the market.

There are ten different tests that can be performed on a patient's
urine using dry reagent chemistry. These tests can be "mixed and matched" on a
test strip to create a multitude of different test combinations. Currently,
MEDgenesis is one of only three U.S. owned manufacturing companies in the dry
reagent urine chemistry market and one of only four companies with FDA approved,
patented or patent pending leukocytes and specific gravity tests.

MEDGENESIS' HISTORY IN URINALYSIS

In March 1998, Chronimed Inc. acquired DiaScreen Corporation, a
Minneapolis-based developer and manufacturer of blood and urine IN VITRO
diagnostic products used by healthcare professionals in acute care, long-term
care, and in-home testing markets worldwide. This acquisition included a
state-of-the-art manufacturing and laboratory facility that enhanced Chronimed's
capabilities to develop, produce and distribute blood glucose and non-diabetes
related diagnostic products.

On June 24, 1998, Chronimed announced it had received final 510(k)
clearance by the Food & Drug Administration (FDA) to market DiaScreen's
proprietary urine chemistry testing strips, making the Company one of only three
businesses in the world to have a 10-parameter urine test strip. On November 4,
1998, Chronimed began shipping its new DiaScreen(R) Reagent Strips for
Urinalysis to both domestic and international customers.

On March 8, 1999, Chronimed announced that it had commenced an action
against Bayer Corporation in Minneapolis federal court. At the time the suit was
filed, Chronimed's management believed that Bayer was unfairly opposing efforts
to introduce the DiaScreen(R) family of urine test strips into the market by
claiming the DiaScreen(R) products infringed Bayer's patents. The declaratory
judgment action seeks a ruling that Chronimed's FDA approved DiaScreen(R) urine
test strip is free from any patent infringement claims by Bayer. See Item 8:
Legal Proceedings.

DIASCREEN(R) REAGENT STRIPS FOR URINALYSIS

MEDgenesis is one of only three U.S.-owned manufacturing companies in
the global dry reagent urine chemistry screening market, estimated to be $250
million per year. MEDgenesis' DiaScreen(R) family of reagent strips for
urinalysis includes the DiaScreen(R) 10 with leukocytes and specific gravity
tests. The 10-parameter urine test strip is the most widely used urine screening
test in the world, and generates 80% of urine diagnostic revenues worldwide.

Urine test strips are used in physicians' offices, hospitals, and in
the home to detect a variety of acute and chronic health conditions. Easy to use
and non-invasive, a single DiaScreen(R) test strip screens 10 different clinical
markers in a patient's urine. If positive, more definitive tests can be
conducted to confirm a diagnosis. MEDgenesis currently offers 14 different
reagent strip configurations.

MARKETING STRATEGY: URINALYSIS

MEDgenesis' strategy for marketing the DiaScreen(R) Reagent Strips is
to create awareness and stimulate demand for the Company's urine test strips
among physicians, veterinarians and long-term care facilities. This is

20
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accomplished using the Company's national sales force and identifying for
customers the key value differences between MEDgenesis' products and those of
the competition. In addition, MEDgenesis works at ensuring ongoing, active
product demand through appropriate pricing incentives, cultivating strong
business relationships, and by providing superior service to its customers.

GROWTH STRATEGY: URINALYSIS

MEDgenesis' strategy for growth in the dry reagent urine test market
will be to:

* Refine chemical formulations of current tests that will enhance
patent protection and performance;
* Introduce new tests to increase the number of conditions to be
detected;
* Complete development of an analyzer to automatically read the test
strips; and
* Apply and maximize excess production capacities through contract
manufacturing projects.

COMPETITORS: URINALYSIS

Bayer Diagnostics
Bayer is the largest manufacturer and distributor of urine chemistry
reagent strips in the world. Management believes that Bayer has been successful
maintaining market share because of contract pricing and the large population of
instruments they have sold and placed during the past twenty years. Management
estimates that Bayer controls about 50% to 55% of the worldwide urine chemistry
market.

Roche Diagnostics
Roche Diagnostics is the second largest manufacturer and distributor of
urine chemistry reagent strips in the world. They carry a broad line of
diagnostic products, and management estimates Roche has about 35% to 40% of the
worldwide urine chemistry market.

Quidel Corporation
Quidel Corporation recently purchased their urinalysis business from
Dade Behring. Management estimates that Quidel has less than 3% of the worldwide
urine chemistry market.

Others
In addition to these major competitors, there are several smaller dry
reagent, urine chemistry manufacturers including Teco, Macherey Nagel,
Yeongdong, Chung-Do, Eiken and Kyoto Daiichi.

INSURANCE

Chronimed's general insurance policies cover all activities of
Chronimed's Diagnostic Products business and MEDgenesis prior to July 1, 2000.
MEDgenesis has purchased a variety of insurance policies, underwritten by
several different companies, with coverage equivalent to those maintained while
a division of Chronimed. MEDgenesis is partially self-insured for certain claims
in amounts that management believes to be customary and reasonable.

MEDgenesis maintains several types of insurance to cover a variety of
potential risks. The major types of insurance carried and the corresponding
policy limits (in millions) are: Personal Property ($9.4), Business Income
($10.0), Directors & Officers Liability ($10.0), and Employment Practices
($2.0). Other policies cover losses in varying amounts for fiduciary liability,
commercial crime, earthquake and flood, automobile, worker's compensation,
foreign liability, personal & advertising injury, and errors and omissions. An
umbrella liability policy provides additional liability protection up to $10.0
million.

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Although management believes that MEDgenesis maintains insurance
coverage that is adequate for the risks involved, there is always a risk that
the Company's insurance may not be sufficient to cover any particular loss, or
that the insurance policies may not respond to a particular type of loss. For
example, while MEDgenesis maintains product liability insurance, this type of
insurance is limited in coverage and it is possible that an adverse claim could
arise that exceeds the Company's coverage.

The insurance rates charged as a stand-alone entity may over time
differ from those rates obtained as a division of Chronimed. Insurance rates
have historically been subject to wide pricing fluctuations. Changes to the
pricing offered by underwriters could result in substantial increases to
MEDgenesis' cost of insurance, require the Company to assume more risk by
accepting higher deductibles and co-insurance levels, or cause the Company to
drop a particular insurance policy altogether. See Risk Factors: Litigation and
Insurance.

EMPLOYEES

As of July 1, 2000, MEDgenesis employed approximately 125 persons
full-time. None of the Company's employees is represented by a labor union, and
the Company believes that its employee relations are excellent.

PATENTS

MEDgenesis utilizes patented technology in a number of its products. It
maintains the right to use these patents either through direct ownership of
patent rights or through license of rights from third parties, both of which are
to be assigned by Chronimed to MEDgenesis effective with the spin-off. See Risk
Factors: Patents and Intellectual Property, and Risk Factors: Third Parties.

Chronimed has filed patent applications covering aspects of its urine
diagnostic product line. Patent applications related to the urine test strip
leukocyte test feature include U.S. Patent Serial Numbers 60/116,613 (filed
01/21/99), #60/142,383 (filed 07/12/99), #60/365,322 and #60/365,592 (both filed
07/30/99). A patent application related to the urine test strip specific gravity
feature has been filed under Serial Number 60/116,611 (filed 01/21/99). These
patent applications will be assigned by Chronimed to MEDgenesis on or before
distribution of MEDgenesis stock.

Chronimed also filed a Patent Cooperation Treaty patent application on
January 21, 2000 covering the leukocyte test technology claimed in patent
applications #60/352,322 and 60/352,592. This patent application will be
assigned by Chronimed to MEDgenesis on or before the distribution of MEDgenesis
stock.

Effective with the spin-off, MEDgenesis will manufacture, distribute
and sell the Select and Supreme blood glucose meters, Supreme blood glucose test
strips, Haemolance(R) Lancets and TechLite(TM) Lancets, and PureLine(TM)
Infusion Sets under agreements with third party patent holders or licensees.

COMPLIANCE WITH ENVIRONMENTAL LAWS

The costs associated with compliance with Federal, State, and local
environmental laws are minimal. For these reasons, MEDgenesis' compliance with
such laws does not have a material effect on its capital expenditures, earnings,
or its competitive position in the marketplace.

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ITEM 2: FINANCIAL INFORMATION

SUMMARY HISTORICAL FINANCIAL DATA

The following table sets forth certain historical financial data of
MEDgenesis. The financial information presented under the headings "June 30,
2000", "July 2, 1999", "July 3, 1998", and "June 27, 1997" is audited
information. The remaining information is unaudited. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and the Notes
thereto. The following information may not be indicative of future operating
results.

<TABLE>
<CAPTION>
YEAR ENDED
----------

JUNE 30, JULY 2, JULY 3, JUNE 27, JUNE 28, JUNE 30,
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
(in thousands except per share information)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA

Revenues 32,949 $29,672 $24,984 $28,964 (a) $28,975 (a) $13,953 (a)
Operating Income 2,479 5,671 9,224 8,183 (b) 7,488 1,679
Net Income 1,840 (c) 3,459 5,671 5,022 (b) 4,642 1,042
Pro Forma Earnings
Per Share (d)
Basic 0.46 (c)
Basic weighted-average shares 4,039
Diluted 0.46 (c)
Diluted weighted-average shares 4,039

BALANCE SHEET DATA

Total Assets $14,088 $14,132 $14,135 $ 8,622 $11,043 $ 5,565
Long-Term Debt -- -- -- -- -- --
Total Equity (e) 10,468 11,624 12,269 6,304 7,120 3,532
</TABLE>

(a) Includes revenue from a discontinued product line, Quick Check, of $8.3
million, $13.8 million and $5.9 million in fiscal 1997, 1996 and 1995,
respectively.

(b) Includes unfavorable impact of write-off of HCI note - operating income
($1,374) and net income ($844).

(d) Basic and diluted pro forma earnings per share have been calculated
using pro forma basic and diluted weighted average shares outstanding
for only the latest fiscal year because, as a division of Chronimed,
historical earnings per share amounts are not meaningful. Pro forma
basic weighted average shares have been calculated by adjusting
Chronimed's historical basic weighted average shares outstanding for
the applicable period to reflect the number of MEDgenesis shares that
would have been outstanding at the time assuming the distribution of
one share of MEDgenesis common stock for three shares of Chronimed
common stock. Pro forma diluted weighted average shares for MEDgenesis
reflect an estimate of the potential dilutive effect for common stock
equivalents. Such estimate is calculated based on Chronimed's dilutive
effect of stock options divided by three to reflect the distribution
ratio.

(e) Total equity has been reduced by the net cash paid by MEDgenesis as an
internal business unit to Chronimed Inc. as the corporate fiduciary for
cash management. Total Assets and Total Equity therefore do not
necessarily reflect the balances that would have been created if
MEDgenesis had been a standalone entity.

23
<PAGE>

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY EXCHANGE RATE RISK
MEDgenesis generates approximately five percent of its revenue from
business outside of the United States. All billings to foreign distributors and
customers are in U.S. dollars and are recorded as accounts receivable in U.S.
dollars.

MEDgenesis acquires approximately sixty-five percent of its direct
products and components from foreign countries. All payments to foreign
suppliers are in U.S. dollars and are recorded as accounts payable in U.S.
dollars. Based on the above, the Company believes its foreign currency exchange
rate risk is minimal.

EQUITY PRICE RISK

As identified in Note 2 of Notes to the Company's Financial Statements,
MEDgenesis held 180,000 shares of the common stock of Cell Robotics
International, Inc. (CRII) as of June 30, 2000, which were acquired in 1999 as
part of a distribution agreement. As of June 30, 2000, the price of CRII common
stock was $4.04 per share, compared to the Company's acquisition cost of $1.50
per share. Because CRII is a small cap stock being traded on an over-the-counter
stock exchange, it should be viewed as a high-risk investment. The Company's
maximum negative exposure against its acquisition cost of CRII is $270,000
(180,000 shares times $1.50). The Company intends to sell the remaining 180,000
shares within one year as certain stock selling restrictions expire.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION

See Item 13: Financial Statements and Supplementary Data, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

ITEM 3: PROPERTIES

Following the spin-off MEDgenesis intends to continue leasing
manufacturing, product distribution and general office space (currently leased
by Chronimed) at two suburban Minneapolis locations:

<TABLE>
<CAPTION>
SIZE
FUNCTIONS LOCATIONS (Square Feet) LEASE EXPIRATION
--------- --------- ------------- ----------------
<S> <C> <C> <C>
General office, including 5182 West 76th Street 32,483 October 31, 2005
Manufacturing and product Edina, MN
Distribution

Manufacturing and product 6214 Bury Drive 18,040 August 31, 2002
Distribution Eden Prairie, MN
</TABLE>

Chronimed has assigned both leases to MEDgenesis and the landlords have
have given the parties their written consent to the assignments.

MEDgenesis is also subleasing corporate office space from Chronimed, at
Chronimed's Minnetonka, Minnesota headquarters, until December 31, 2000. That
address is 10900 Red Circle Drive, Minnetonka, MN, 55343. MEDgenesis expects to
relocate its corporate offices to a new site, in proximity to the West 76th
Street facility, on or before January 1, 2001.

24
<PAGE>

The phone number for Chronimed's Red Circle Drive headquarters is (952)
979-3600 and the telephone number for MEDgenesis' West 76th Street facility is
(952) 835-3446. Based on current growth projections, the Company estimates its
manufacturing facilities will be able to handle the majority of all
manufacturing and product distribution needs for the next two years. With modest
expansion of these facilities, management believes these locations will have the
capacity to support operations for five years or more.

Neither Chronimed nor the Company have had any problems with current
landlords, nor been given any indication that current leases will not be
renewed. However, there can be no assurance the Company will be able to renew
these leases or, if the leases are not renewed, find suitable replacements. In
addition, there is no guarantee that when the current leases expire, MEDgenesis
will be able to enter into new agreements at rent levels similar to its current
leases.

ITEM 4: SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

The spin-off distribution of MEDgenesis common stock to Chronimed
shareholders will result in significant MEDgenesis stock ownership by MEDgenesis
directors and management personnel. The following table shows information
concerning each person who, to the knowledge of the Company, (i) would be the
beneficial owner of more than 5% of MEDgenesis' common stock, (ii) is
anticipated to be a director of the Company, (iii) is a named executive officer
of the Company and (iv) is anticipated to be a member of the directors and
executive officers of the Company as a group, as of June 30, 2000. All persons
have or will have sole or joint with spouse voting and investment power with
respect to all shares shown beneficially owned by them. The shares identified in
the table are Chronimed shares, which will be subject to the dividend
distribution of one share of MEDgenesis common stock for every three shares of
Chronimed common stock issued and outstanding on the record date.

AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------------ -------------------- --------
Heartland Advisors, Inc.(1) 1,360,101 11.2%
Milwaukee, Wisconsin

Maurice R. Taylor, II 121,520 (2) 1.0%

Earl K. Beitzel (3) -- --

Leo T. Furcht, M.D. (3) -- --

John Murray 808(4) --

Richard Thon(5) -- --

John McCrea(6) -- --

Robert Cramer(7) 1,003 --

Bruce MacFarlane(5) -- --

All directors and executive officers
as a group (8 persons) 123,331 1.0%

(1) Analyst D. Rodney Hathaway is responsible for voting the Chronimed
shares held by Heartland Advisors, Inc. All voting is reviewed and
authorized by portfolio managers Bill Mascavic and Eric Miller. Messrs.
Hathaway, Mascavic and Miller collaborate on investment decisions.

(2) Chairman and CEO Maurice Taylor is beneficial owner of 121,520 shares
of Chronimed stock and 372,600 options to acquire Chronimed stock
exercisable within 60 days. Upon Chronimed's issuance of the MEDgenesis
stock dividend, Mr. Taylor will receive 40,507 shares of MEDgenesis
stock. The Chronimed Board of Directors, pursuant to the terms of
applicable Chronimed stock option plans, have agreed to extend
termination of Mr. Taylor's Chronimed stock options to June 30, 2001.
His options will continue to

25
<PAGE>

vest during that period. With continued vesting and non-exercise, Mr.
Taylor will hold 407,400 Chronimed options as of June 30, 2001. If
MEDgenesis issues Mr. Taylor MEDgenesis options at the time of
termination of his Chronimed options, on a one for three ratio similar
to the Chronimed dividend of MEDgenesis stock, Mr. Taylor's Chronimed
options would equate to 135,800 MEDgenesis options. All Chronimed
options will be adjusted at the time of the MEDgenesis stock
distribution to reflect the change in value of Chronimed stock caused
by the spin-off. Mr. Taylor's Chronimed options described above are
calculated pre-adjustment. MEDgenesis is under no obligation to issue
MEDgenesis options to any executive or other employee. See Item 6:
Executive Compensation, Stock Options.

(3) Directors Earl Beitzel and Leo Furcht own no Chronimed stock and will
receive no MEDgenesis shares as a part of the Chronimed spin-off
dividend. Each of them will receive MEDgenesis stock options following
the spin-off, consistent with the MEDgenesis 2000 Stock Option Plan.
See Item 5: Director and Executive Officers, Director Compensation.

(4) Chief Operating Officer John Murray is beneficial owner of 808 shares
of Chronimed stock and 7,738 options to acquire Chronimed stock
exercisable within 60 days. Upon issuance of the MEDgenesis stock
dividend, Mr. Murray will receive 269 shares of MEDgenesis stock. Mr.
Murray's Chronimed stock options are held subject to a three-month
right to exercise following the dividend distribution of MEDgenesis
stock, which is deemed a termination event under the applicable
Chronimed stock option plan. If MEDgenesis were to issue Mr. Murray
MEDgenesis options, on a one for three ratio similar to the Chronimed
dividend of MEDgenesis stock, Mr. Murray's present Chronimed options
would equate to 2,579 MEDgenesis options. Mr. Murray's options are
described "pre-adjustment", as detailed in Footnote (2) above.

(5) Chief Financial Officer Richard Thon and Vice President Bruce
MacFarlane own no Chronimed stock or stock options and will receive no
MEDgenesis stock as a result of the Chronimed dividend distribution of
MEDgenesis stock. Mr. Thon and Mr. MacFarlane will be eligible to
receive MEDgenesis stock options.

(6) Vice President John McCrea owns no shares of Chronimed stock and 2,700
options to acquire Chronimed stock exercisable within 60 days. Upon
issuance of the MEDgenesis stock dividend, Mr. McCrea will receive no
shares of MEDgenesis stock. Mr. McCrea's Chronimed stock options are
held subject to a three-month right to exercise following the dividend
distribution of MEDgenesis stock, which is deemed a termination event
under the applicable Chronimed stock option plan. If MEDgenesis were to
issue Mr. McCrea MEDgenesis options, on a one-for-three ratio similar
to the Chronimed dividend of MEDgenesis stock, Mr. McCrea's present
Chronimed options would equate to 900 MEDgenesis options. Mr. McCrea's
options are described "pre-adjustment", as detailed in Footnote (2)
above.

(7) Vice President Robert Cramer is beneficial owner of 1,003 shares of
Chronimed stock and 9,000 options to acquire Chronimed stock
exercisable within 60 days. Upon issuance of the MEDgenesis stock
dividend, Mr. Cramer will receive 334 shares of MEDgenesis stock. Mr.
Cramer's Chronimed stock options are held subject to a three month
right to exercise following the dividend distribution of MEDgenesis
stock, which is deemed a termination event under the applicable
Chronimed stock option plan. If MEDgenesis were to issue Mr. Cramer
MEDgenesis options, on a one for three ratio similar to the Chronimed
dividend of MEDgenesis stock, Mr. Cramer's present Chronimed options
would equate to 3,000 MEDgenesis options. Mr. Cramer's options are
described "pre-adjustment", as detailed in Footnote (2) above.

26
<PAGE>

ITEM 5: DIRECTORS AND EXECUTIVE OFFICERS

BOARD OF DIRECTORS OF MEDGENESIS

MEDgenesis' Bylaws, as amended, create a Board consisting of not less
than three directors. Three directors have been elected and are serving on the
Board. It is anticipated that the Board will be expanded and that two additional
directors will be named to the Board shortly after the spin-off. Each director
will serve until the end of the annual shareholders meeting at which elections
are held for the director Class to which the individual belongs. Dr. Furcht and
a director to be appointed will be members of Class I and will serve until the
end of the 2000 annual meeting. Mr. Beitzel and a director to be appointed will
be a members of Class II and will serve until the end of the 2001 annual
meeting. Mr. Taylor is a member of Class III and will serve until the end of the
2002 annual meeting. See Item 11: Description of Registrant's Securities to be
Registered, Board of Directors.

The following table provides information about the directors of
MEDgenesis Inc.:

NAME AGE
---- ---

Earl K. Beitzel, Director 45
Leo T. Furcht, M.D., Director 53
Maurice R. Taylor, II, Chairman and Chief Executive Officer 54

Earl K. Beitzel is a principal and senior consultant with MedTrust,
Inc., a company providing services to healthcare organizations involved in
restructurings and turnarounds, where he has been employed for more than five
years. Mr. Beitzel is a Certified Public Accountant. Mr. Beitzel serves on the
board of directors of The Scripps/Whittier Institute for Diabetes, a non-profit
organization dedicated to research, education and patient care in the field of
diabetes. He is also on the board of directors of ProUroCare, Inc., a
development stage medical device company focusing on urologic conditions.

Leo T. Furcht, MD, is a professor of Ophthalmology, professor of
Department of Laboratory Medicine and Pathology, Medical Director, Medical
Technology Program, and Head of the Department of Laboratory Medicine and
Pathology at the University of Minnesota, where he has been employed for more
than five years. Dr. Furcht has also held numerous academic committee posts in a
variety of areas. He has been involved in a number of national committees and
activities related to the National Institutes of Health. In addition, he serves
or has served on several editorial boards for medical publications.

Maurice R. Taylor, II, a co-founder of Chronimed Inc., has served as a
director of Chronimed since 1985. He was Chronimed's Chief Executive Officer
from 1985 to June, 2000 and Chairman from 1994 to June, 2000. Additionally, Mr.
Taylor served as Chronimed's President from 1985 through April 1997, until the
hiring of Henry F. Blissenbach, Pharm.D. Prior to Chronimed, Mr. Taylor held
various management positions in companies whose principal activities were
manufacturing, distribution and international trade. Mr. Taylor is also Chairman
of The Scripps/Whittier Institute for Diabetes.

MEDGENESIS BOARD COMMITTEES

The Board has standing Audit and Compensation committees.

AUDIT COMMITTEE

The Audit Committee is comprised of independent directors who are not
employees of MEDgenesis or any of its subsidiaries. Messrs. Beitzel and Furcht
are members of the Audit Committee, with Mr. Beitzel as Chairman. A third,
independent director will be appointed to the Audit Committee. The primary
functions of the Audit Committee are:

* assessing the independence and performance of the Company's
independent auditors,
* recommending to the Board the selection and discharge of the
independent auditors,

27
<PAGE>

* evaluating the adequacy of internal financial controls, and
* oversight of management of the accounting and financial activities
of the Company.

The Company's independent auditors have unrestricted access to the Audit
Committee and vice versa.

COMPENSATION COMMITTEE

The Compensation Committee is comprised of independent directors who
are not employees of the Company or any of its subsidiaries. Messrs. Beitzel and
Furcht are members of the Compensation Committee, with the Chairman to be named.
A third, independent director will be appointed to the Compensation Committee.
The primary functions of the Compensation Committee are:

* recommending to the Board the compensation to be paid to the
Company's directors an officers, and
* subject to review and approval of certain matters by the full Board
of Directors, administering compensation plans for executive
officers.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

No member of the MEDgenesis Compensation Committee is or has been a
member of the Chronimed Compensation Committee or an executive or employee of
MEDgenesis. No executive of MEDgenesis is or has been a member of a compensation
committee or director of another entity one of whose executive officers or
compensation committee members is or has served as a director or Compensation
Committee member of MEDgenesis.

DIRECTOR COMPENSATION

BOARD FEES

Each non-employee Director will receive the following fees:

* $12,000 per year for each year in which the person serves as a
Director, and
* $3,000 per year for the Committee Chairmen.

STOCK OPTIONS

The MEDgenesis' 2000 Stock Option Plan is designed in part to encourage
non-employee directors to obtain an equity interest in MEDgenesis. A total of
six hundred thousand (600,000) shares of MEDgenesis common stock may be subject
to options under the plan. Management believes that stock ownership in
MEDgenesis will motivate the directors to work toward long-term growth and
development. Under the plan, non-employee directors, upon initial election, will
be granted ten thousand (10,000) options to purchase MEDgenesis common stock at
exercise prices equal to the market price on the date of grant. In addition,
directors will be granted options each year to purchase an additional five
thousand (5,000) shares of MEDgenesis common stock, with the exercise price
equal to that of the market price of MEDgenesis stock on the date of grant. It
is anticipated that options granted to non-employee directors may be issued
subject to a four year vesting schedule which may be accelerated based on
Company performance. The options will become immediately exercisable upon the
death or disability of the director, as defined under the plan. The options will
also be immediately exercisable upon the occurrence of a change of control
event, as defined in the plan.

OTHER

Directors will be reimbursed for reasonable expenses associated with
travel to and from Board and committee meetings.

28
<PAGE>

EXECUTIVE OFFICERS OF MEDGENESIS

Set forth below is information with respect to MEDgenesis' executive
officers.

NAME AGE POSITION
---- --- --------

Maurice R. Taylor, II 54 Chief Executive Officer,
Chairman of the Board

John Murray 63 Chief Operating Officer

Richard Thon 45 Chief Financial Officer

John McCrea 34 Vice President,
Manufacturing

Robert Cramer 46 Vice President, Marketing &
Product Development

Bruce MacFarlane 48 Vice President, Regulator
Affairs & Quality Systems

Maurice Taylor is a co-founder of Chronimed Inc. and has served as a
director since 1985. He was Chairman of Chronimed Inc. from 1994 to June, 2000,
President from 1985 to April 1997, and Chief Executive Officer from 1985 to
June, 2000. He will continue as a director of Chronimed until the 2000 Annual
Meeting of Chronimed Shareholders, at which time he will decline re-election.

Richard Thon joined MEDgenesis in May 2000 as its Chief Financial
Officer. Mr. Thon had served as Corporate Controller for The Instant Web
Companies, a commercial printing company, from 1998 to 2000. From 1990 to 1998,
Mr. Thon was employed as Zone Controller for Sanofi Diagnostics Pasteur, a
manufacturer of IN VITRO diagnostics tests. Mr. Thon holds a Bachelor's Degree
in Business Administration from the University of Michigan and an MBA from the
University of Wisconsin.

John Murray was appointed to the Chief Operating Officer post after
serving as Vice President of Marketing for Chronimed's Diagnostic Products
Division. Mr. Murray joined Chronimed in 1998 following Chronimed's acquisition
of the DiaScreen Corporation, a manufacturer and marketer of urine diagnostic
products. Mr. Murray was President of DiaScreen, which he had founded in 1987.
Mr. Murray earned both a Bachelor's Degree and an MBA at Harvard University.

John McCrea has been named as the Vice President of Manufacturing for
MEDgenesis. Mr. McCrea joined Chronimed in 1997 and served as the financial
liaison to the Diagnostic products business and was appointed Director,
Operations and Finance in 1998. Prior to joining Chronimed, Mr. McCrea
co-founded Newbridge Wellness Centers, which was created in 1996 to develop a
new delivery system for complementary health care therapies and products. From
1991 to 1996, Mr. McCrea held various financial roles at United Healthcare, most
recently as Manager, Financial Reporting and Analysis, EDI Services division.
Mr. McCrea holds Bachelor Degrees in Accounting and Economics from Luther
College and a MBA from the University of Minnesota.

Robert Cramer was named as MEDgenesis' Vice President, Marketing &
Business Development following three years as Director of Marketing for the
Diagnostic products Division of Chronimed. Prior to Chronimed, Mr. Cramer held
the position of Group Manager for Wound Care and Incontinence products at
Hollister Inc. from 1994 through 1997, and numerous positions at Bayer
Diagnostics (formerly Miles Laboratories) from 1979 through 1994, most recently
Marketing Director, Alternate Care. Mr. Cramer received a BS degree at the
University of Tulsa.

Dr. Bruce MacFarlane joined MEDgenesis in June 2000 as Vice President,
Regulatory Affairs & Quality Systems. His professional experience includes
executive positions at several companies in the medical devices industries,
including Director of Regulatory Affairs and Quality Systems for DiaSorin, Inc.
from 1998 to 2000, Director of Regulatory Affairs and Quality Assurance for
Iotek, Inc. from 1997 to 1998, and Vice President of Regulatory Affairs and
Quality Assurance for Bio-Vascular, Inc. from 1991 to 1997. Dr. MacFarlane
received a BA from Yale University, holds a doctorate from the University of
Pennsylvania, and conducted postdoctoral research at The Johns Hopkins
University.

29
<PAGE>

ITEM 6: EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

MEDgenesis executives began receiving compensation from MEDgenesis on
July 1, 2000. CEO Maurice Taylor is compensated pursuant to an Employment
Agreement entered into with Chronimed and assigned to MEDgenesis effective July
1, 2000. Mr. Taylor's Employment Agreement is described below in the section
"Employment Agreements and Change of Control Arrangements" and is attached as an
exhibit. See Exhibit: Maurice R. Taylor Employment Agreement.

The following table sets forth the compensation paid to MEDgenesis' CEO
and other executive officers. Compensation reported for fiscal years 2000, 1999,
and 1998 represents compensation paid by Chronimed. It is anticipated that each
of the named executive officers will receive total compensation from MEDgenesis
in excess of $100,000 during the current fiscal year.

LONG TERM
COMPENSATION
AWARDS
SECURITIES ALL OTHER
FISCAL ANNUAL COMPENSATION UNDERLYING COMPENSATION
NAME & PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS (#)(2) ($)(3)
------------------------- ---- --------- ----------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Maurice Taylor(4) 2000 325,800 60,000 100,000 --
Chairman of the Board, 1999 325,800 50,000 116,800 4,900
Chief Executive Officer 1998 304,500 123,000 -- 4,000

John Murray(5) 2000 111,874 16,781 9,345 2,622
Chief Operating Officer 1999 105,333 19,020 9,345 1,944
1998 -- -- 10,000 --

Richard Thon(6) 2000 -- -- -- --
Chief Financial Officer 1999 -- -- -- --
1998 -- -- -- --

John McCrea(7) 2000 -- -- -- --
Vice President 1999 -- -- -- --
Manufacturing 1998 -- -- -- --

Robert Cramer 2000 116,700 13,129 7,000 2,475
Vice President, 1999 119,137 7,090 7,000 2,325
Marketing & Product 1998 110,000 11,303 -- 366
Development

Bruce MacFarlane(8) 2000 -- -- -- --
Vice President, 1999 -- -- -- --
Regulatory Affairs & 1998 -- -- -- --
Quality Systems
</TABLE>

(1) Bonus amounts are reported during the fiscal year in which they were
earned. Earned bonuses are paid during the next fiscal year.
(2) All identified securities are Chronimed stock options. Chronimed
options awarded to Mr. Taylor will terminate June 30, 2001. Chronimed
options awarded other named executives will terminate 90 days following
the dividend distribution of MEDgenesis stock. All named executives
will be eligible to receive MEDgenesis stock options and restricted
stock. The MEDgenesis Board of Directors has the discretion to
determine whether MEDgenesis options will be issued to named executives
in replacement of terminated Chronimed options. A committee of
independent directors will determine the terms by which any stock
options and restricted stock may be issued.
(3) All Other Compensation consists of Chronimed 401(k) employer
contributions.
(4) Mr. Taylor received no additional cash compensation for service as a
Chronimed director.

(5) Mr. Murray joined Chronimed on March 17, 1998. His compensation for
fiscal year 1998, ended July 3, 1998, was below reporting thresholds.

30
<PAGE>

(6) Mr. Thon was hired by Chronimed on May 17, 2000 to serve as MEDgenesis'
CFO. Prior to July 1, 2000, Chronimed compensated Mr. Thon on behalf of
MEDgenesis. Total compensation paid to Mr. Thon during the fiscal year
ended July 2, 2000, was below reporting thresholds.
(7) Total compensation paid by Chronimed to Mr. McCrea during each of the
identified fiscal years was below reporting thresholds.
(8) Mr. MacFarlane joined Chronimed on June 5, 2000. Total compensation
paid to Mr. MacFarlane during the fiscal year ended July 2, 2000 was
below reporting thresholds.

STOCK OPTION PLAN

MEDgenesis executives will receive no MEDgenesis stock options until
after the dividend distribution of MEDgenesis stock, at which time they will be
eligible to participate in the MEDgenesis 2000 Stock Option Plan. Issuance of
MEDgenesis stock options, and the terms of issuance, will be subject to the
discretion of the MEDgenesis Board of Directors and in accordance with the 2000
Stock Option Plan. See Exhibits: 2000 Stock Option Plan.

STOCK PURCHASE PLAN

The 2000 MEDgenesis Employee Stock Purchase Plan will allow employees,
including executives, to purchase MEDgenesis common stock through a payroll
deduction plan. The plan will allow two offering periods per year and
participating employees will be able to purchase MEDgenesis stock at a price
equal to 85% of the lower of the market price on the first day or last day of
the offering period. No employee owning stock comprising 5% or more of the total
combined voting power or value of all classes of stock of the Company will be
allowed to participate. The Board of Directors has authorized 100,000 shares to
be made available for employee purchase under the Plan. The Company will file
with the Securities and Exchange Commission an S-8 registration statement
relative to the Plan shares prior to employee enrollment. See Exhibits: 2000
Employee Stock Purchase Plan.

RESTRICTED STOCK COMPENSATION PLAN

The MEDgenesis 2000 Long-Term Incentive Plan is intended to enable the
Company to attract and retain the services of key employees and to provide those
employees with a proprietary interest in the success of the Company. The Plan
will be implemented following the spin-off.

The Plan creates a pool of 350,000 shares of Company stock available
for issuance. The Plan is administered by a Committee of not fewer than two
outside directors. The Committee has the discretion, within the terms of the
Plan, to determine the employees to whom grants will be made, the number of
shares granted, the price to be paid by the recipient, if any, the restriction
period, date of grant, vesting of shares, performance objectives, and other
terms.

Shares issued may not be sold, transferred, pledged or assigned during
a restriction period as designated by the Committee, but the grant recipient may
vote the shares, receive dividends, and exercise other rights of share ownership
during the restriction period. Upon expiration of the restriction period,
occurrence of performance objectives, or other events as dictated by the
committee, the recipient may freely transfer the shares. Certain recipients may
remain subject to trading restrictions under Rule 144 of the Securities Act of
1933. Termination of employment would cause a forfeiture of unvested shares. The
Company will file with the Securities and Exchange Commission an S-8
registration statement relative to the Plan shares prior to any issuance. See
Exhibits: 2000 Long-Term Incentive Plan

31
<PAGE>

401(k) RETIREMENT SAVINGS PLAN

MEDgenesis has established a retirement savings plan under IRC Section
401(k). This plan will allow employees to make before-tax contributions to the
plan on a tax deferred basis, and will also allow for an employer match of
employee contributions up to a specified maximum. All employees who meet the
requirements for eligibility under the plan will be eligible to participate,
which will include virtually all of the full time employees of MEDgenesis.

An eligible employee may defer up to 15% of compensation into the plan,
subject to government mandated maximums. MEDgenesis will match 40% of the first
5% of employee contribution, again subject to regulated maximums. There will
also be an option for the MEDgenesis Board of Directors, at its sole discretion,
to declare an additional lump sum profit sharing match on an annual basis.
Employee contributions are immediately vested, and employer matching
contributions will be subject to a graded vesting schedule.

Loans will be available under certain conditions as specified in the
plan. Additionally, hardship withdrawals are available under certain specified
conditions, as are withdrawals upon attainment of age 59 1/2. Participants may
invest their contributions, as well as the employer contributions on their
behalf, in one or more investment fund choices. A distribution of a
participant's before and after tax contributions, and vested employer
contributions, may be made when a participant terminates employment, becomes
disabled, dies or retires. This plan is intended to contribute greatly toward a
more financially secure retirement for the employees.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

Effective July 1, 2000, Chronimed assigned to MEDgenesis and MEDgenesis
assumed an existing Employment Agreement with Mr. Taylor as the Chief Executive
Officer. The Employment Agreement has a remaining term of two years as of the
date of the assignment. Thereafter, automatic renewal will occur every two
years, subject to notice of termination provisions. Mr. Taylor has agreed that
he will not seek or participate in discussions regarding modification of his
assigned Employment Agreement for at least 6 months following the spin-off.
MEDgenesis or Mr. Taylor may seek renegotiation of his employment agreement
after that time.

Under the terms of the Agreement, Mr. Taylor's base salary is set at
$325,800 per year and may be increased at the discretion of the Board of
Directors. Mr. Taylor is eligible to receive an annual bonus at levels
established by the Board of Directors and upon attainment of qualitative and
quantitative initiatives. Mr. Taylor is also eligible to receive MEDgenesis
stock options under the 2000 MEDgenesis Stock Option Plan, the number and terms
of which are subject to the discretion of the Board of Directors, and restricted
stock under the 2000 Long-Term Incentive Plan, the number and terms of which are
also subject to the discretion of a Committee of independent directors. Mr.
Taylor receives all other standard employee benefits in accordance with the
terms of the terms and provisions of such plans.

The Agreement further provides that if MEDgenesis terminates Mr.
Taylor's employment for any reason other than for cause, or upon disability or
death, or Mr. Taylor terminates the Agreement due to a change of employment, all
as defined in the Agreement, Mr. Taylor will be entitled to receive salary equal
to twelve months of base salary, payment of the average of any bonus paid for
the preceding two fiscal years, vesting of all outstanding stock options, and
benefit plan participation at the regular ongoing employee rate for up to twenty
four months.

"Cause" is defined as (i) employee's breach of the covenants contained
in the Agreement, (ii) commission of any criminal act, or any act of fraud or
dishonesty in connection with or related to employee's employment, or (iii)
failure to substantially perform duties reasonably required by the Company that
are consistent with employee's position. "Change of employment" includes (a) a
material and adverse change, without cause, in employee's position, duties, or
title, (b) reduction, without cause, in employee's salary or benefits, or (c) a
change in the location of performance of most of employee's duties from the
general geographic location in which employee performed such duties

32
<PAGE>

The Employment Agreement also addresses possible change in control of
the Company. "Change-in control" is defined as (i) when any "person" as defined
in Section 3(a)(9) of the Securities Exchange Act as used in sections 13(d) and
14(d), including a "group" as defined in Section 13(d) of the Securities
Exchange Act, but excluding the Company or any subsidiary or parent or any
employee benefit plan sponsored or maintained by the Company or any subsidiary
or parent (including any trustee of such plan acting as trustee), directly or
indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act), of securities of the Company representing greater than
50 (fifty) percent of the combined voting power of the Company's then
outstanding securities, (ii) when subsequent to the effective date of the
Agreement, the individuals who, at the beginning of such period, constitute the
Board ("Incumbent Directors") cease for any reason other than death to
constitute at least a majority of the Board, provided however that a Director
who was not a Director at the beginning of the period will be deemed to have
satisfied the definition of "Incumbent Director" if such Director was elected
by, or with the approval or substantially all of the assets of the Company or
the adoption of any plan or proposal for the liquidation or dissolution of the
Company.

If, within two years following a Change-in-Control event, the Company
terminates Mr. Taylor's employment other than for cause, Mr. Taylor is asked to
assume a position, duties, or level of responsibility which are unacceptable to
him, or Mr. Taylor is asked to relocate to an unacceptable geographic location,
then Mr. Taylor will be entitled to receive thirty-six months of salary
continuation; the average sum of the annual bonus compensation paid for
preceding three calendar years, in aggregate, and vesting of all outstanding
options. See Exhibits: Taylor Employment Agreement.

ITEM 7: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

COMMON DIRECTORS

Maurice R. Taylor is a director of both MEDgenesis and Chronimed. Mr.
Taylor has resigned his positions of Chairman and CEO of Chronimed and is the
Chairman and CEO of MEDgenesis. Mr. Taylor will continue to serve as a director
of Chronimed until the Chronimed Shareholders' 2000 Annual Meeting, at which
time he will decline re-election. There will be no other common officers or
directors among MEDgenesis and Chronimed following the spin-off.

AGREEMENTS

MEDgenesis has entered a number of agreements with Chronimed which are
effective or will become effective upon the closing date of the MEDgenesis
spin-off. These agreements include the Distribution and Spin-off Agreement, the
Transition Services Agreement, and a Purchase and Pricing Agreement.

DISTRIBUTION AND SPIN-OFF AGREEMENT

MEDgenesis and Chronimed have executed a Distribution and Spin-off
Agreement (the "Agreement") effective July 1, 2000. The Agreement dictates the
terms and conditions by which Chronimed will transfer the assets and liabilities
of its Diagnostic Products division to MEDgenesis and distribute all of the
outstanding shares of MEDgenesis stock to Chronimed shareholders. Pursuant to
the Agreement, Chronimed and MEDgenesis will collaborate on various actions and
filings preliminary to public issuance of MEDgenesis stock, including
preparation and filing of this Form 10, a shareholders' Information Statement, a
NASDAQ listing application, and any materials the parties may deem necessary or
appropriate under state blue sky laws.

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To effect the transfer of Chronimed's Diagnostic Products division's
assets and liabilities to MEDgenesis, the Agreement provides for the execution
of a Subscription Agreement and a Bill of Sale and Assumption Agreement. The
Subscription Agreement obligates Chronimed to contribute capital to MEDgenesis,
in the form of the Diagnostic Products division assets and business, in exchange
for all of the MEDgenesis stock to be issued. The Bill of Sale and Assumption
Agreement constitutes the actual transfer of title document and provides a
detailed listing of the assets, liabilities, and business conveyed.

The Agreement further establishes the terms by which Chronimed
shareholders will receive from Chronimed all of the shares of MEDgenesis in the
form of a dividend. The Agreement provides for treatment of fractional share
ownership. Shareholders with rights to a half or greater fractional MEDgenesis
share will receive one share for such fractional rights. Shareholders with
rights to less than a half MEDgenesis share will receive only their whole number
share entitlement. Any non-distributed MEDgenesis shares held by Chronimed
following the dividend distribution will be returned to MEDgenesis.

The Agreement contains comprehensive cross indemnification covenants.
MEDgenesis will indemnify Chronimed for any liabilities incurred by MEDgenesis
subsequent to the spin-off effective date, certain transferred liabilities, and
any breach of a representation or warranty in the Agreement. Transferred
liabilities include liabilities under assigned contracts with vendors and
customers, product liability accruing prior to the effective date of transfer,
any pre-transfer administrative or regulatory liability, pre- and post-transfer
environmental liability, patent and other intellectual property liability
associated with Chronimed's Diagnostic Products division or MEDgenesis products,
other liabilities specific to MEDgenesis' business, brokerage commissions which
would be due to PaineWebber in the event of a subsequent sale of substantially
all of the stock or assets of MEDgenesis, and liability under Chronimed's patent
infringement action with Bayer Diagnostics. Included in MEDgenesis'
indemnification was the August 30, 2000 payment of the Hypoguard license
transfer fee. This payment and associated legal fees are the responsibility of
MEDgenesis, for which Chronimed will not indemnify MEDgenesis. See Item 8: Legal
Proceedings for further discussion of the Bayer action and the Hypoguard
transfer fee settlement.

Chronimed will indemnify MEDgenesis for any liabilities not transferred
to MEDgenesis under the Agreement or other ancillary agreements, as well as any
breach of the Agreement. The Agreement also establishes the respective
responsibilities among the parties for transaction expenses.

MEDgenesis and Chronimed further indemnify one another under the
Agreement for taxes related to their respective post spin-off businesses. The
Agreement establishes procedures for preparing and filing returns and the
parties' respective rights and obligations related to adjustments, credits or
refunds. Tax indemnification under the Agreement also addresses possible taxes
related to the spin-off transaction. While the spin-off is anticipated to be a
tax free event, the Agreement provides that in the event of any subsequent
adverse determination by the IRS, tax liabilities assessed at the corporate
level will be shared 40% by MEDgenesis and 60% by Chronimed.

The Agreement also established a calculation basis by which adjustments
were made between Chronimed and MEDgenesis for transferred working capital,
property, and equipment accounts for business activities occurring up to the
date of operational and accounting separation, June 30, 2000. This section of
the Agreement requires MEDgenesis to pay Chronimed for working capital increases
and new capital projects that benefit MEDgenesis after spin-off and reimburse
Chronimed for the net proceeds on the sale of 68,200 shares of Cell Robotics
stock sold in July, 2000.

The Agreement requires that the parties enter into a Transition
Services Agreement, by which Chronimed will provide MEDgenesis with support in
the areas of accounting, information systems, and legal affairs for various
periods of time following the spin-off. The Agreement also enables the parties
to obtain access to one another's records as necessary following the spin-off
and ensures cooperation in the event of administrative, regulatory, or
litigation actions.

With regard to employees and benefits, the Agreement establishes the
parties' respective responsibilities for accrued benefits, vacation, flex
account and other benefit balances maintained by Chronimed employees who will
become MEDgenesis employees. See Exhibits: Distribution and Spin-off Agreement.

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TRANSITION SERVICES AGREEMENT

MEDgenesis and Chronimed have executed a Transition Services Agreement
effective July 1, 2000. The Transition Services Agreement establishes that
certain Chronimed functions and employees will provide support services to
MEDgenesis through December 31, 2000. Individuals with accounting, legal, and
information systems skills will provide consulting services to MEDgenesis during
the transition. Chronimed will charge MEDgenesis for these consulting services
on both an hourly and a flat rate basis, depending on the area of service.
MEDgenesis will pay Chronimed on a monthly basis. The individual consultants
will remain Chronimed employees and MEDgenesis will have no employer/employee
obligations with regard to these individuals. Either party may terminate
portions or all of the Transition Services Agreement under conditions stated
therein. See Exhibits: Transition Services Agreement

PURCHASE AND PRICING AGREEMENT

MEDgenesis and Chronimed have also executed a product Purchase and
Pricing Agreement. Under that Agreement, MEDgenesis agrees to extend to
Chronimed certain volume pricing incentives for purchase of MEDgenesis glucose
test systems, lancing products, infusion products, and urine diagnostic
products. Chronimed sells these products to end users through its Home Service
Medical business unit. The agreement is similar to MEDgenesis pricing agreements
with other customers and contains standards terms and conditions, including
product liability indemnification and insurance requirements. The Purchase and
Pricing Agreement does not obligate Chronimed to minimum purchase volumes other
than to obtain volume pricing discounts. See Exhibits: Purchase and Pricing
Agreement, Home Service Medical.

OFFICER LOAN

On July 14, 2000, MEDgenesis paid $674,900 to US Bank in satisfaction
of a personal loan US Bank had made to Maurice Taylor. Concurrent with such
payment, MEDgenesis obtained from Mr. Taylor his personal promissory note in the
amount of $674,900, plus a $674,900 mortgage on his residence and a pledge
agreement, both securing repayment of the loan. The promissory note provides for
repayment in full on December 31, 2001, with interest accruing at the US Bank
prime lending rate plus 1/2%. The US Bank prime lending rate on the date of the
loan was 9.5%. Payments of outstanding interest, plus $25,000 in principal, are
due quarterly beginning October 31, 2000. The mortgage is a standard residential
mortgage governed by Minnesota law. The pledge agreement gives MEDgenesis the
right to offset any loan default against compensation due Mr. Taylor, subject to
Minnesota law. See Exhibits: Promissory Note, Mortgage, and Pledge Agreement.

CERTAIN BUSINESS RELATIONSHIPS

Director Leo Furcht owns approximately 23% of the outstanding stock of
DiaScreen Corporation. Pursuant to and in performance of the January 13, 1998
Asset Purchase Agreement between Chronimed and DiaScreen, by which Chronimed
acquired the assets of DiaScreen and which has been assigned to MEDgenesis in
the spin-off, MEDgenesis may be required to make substantial additional purchase
price payments to DiaScreen. These additional purchase price "earn-out" payments
are contingent upon achievement of minimum sales levels of urine diagnostic test
strips during the twelve-month periods ending September 30 each year through
2003. Chronimed made purchase price earn-out payments to DiaScreen in the amount
of $549,000 during Chronimed's fiscal year ended June 30, 2000. Earn-out
payments are based on sales percentages which decrease over time. Earn-outs are
also capped as to the maximum possible payments due.

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ITEM 8: LEGAL PROCEEDINGS

Effective with the spin-off, MEDgenesis will assume Chronimed's rights
and liabilities in the lawsuit Chronimed Inc. v. Bayer Corporation, USDC (Minn),
#99CV369. Under the terms of the Distribution and Spin-off Agreement, MEDgenesis
will indemnify Chronimed against all costs, fees, and damages incurred or
assessed following the spin-off. MEDgenesis will receive the benefit of any
judgment rendered in favor of Chronimed and the parties will share, pro rated on
the basis of expenditure, any legal fees and litigation costs awarded to
MEDgenesis. While MEDgenesis will not be substituted as the named Plaintiff,
MEDgenesis will assume the full prosecution of Chronimed's cause of action and
defense of Bayer's counterclaims.

In the Bayer action, Chronimed has sued Bayer seeking a declaratory judgment
that technology Chronimed uses in its urine diagnostic strips, in particular its
leukocyte test feature, is clear of claims asserted in a portfolio of Bayer
patents related to leukocyte testing. Bayer counterclaimed alleging infringement
of its patents covering both leukocyte and specific gravity tests. Bayer also
pleads unspecified actual and statutory treble damages. The lawsuit was
commenced in March, 1999 and is in the pre-trial discovery phase. The District
Court calendar appears to support a mid-2001 trial date. While Chronimed and
MEDgenesis are confident in the merits of their case, and will continue to
vigorously pursue Chronimed's rights, an adverse ruling could have a material,
negative impact on MEDgenesis' business. Possible adverse judgments could
include an injunction against the future sale of urine test strips containing
leukocyte or specific gravity tests, damages for past sales, treble damages on a
finding of willful infringement, and an award of legal fees and costs.

Effective with the spin-off, MEDgenesis will assume Chronimed's rights
in two customer bankruptcy actions. Chronimed has filed a Proof of Claim in the
matter In Re Diabetics Wholesale Club, Inc., Bankr. E.D.N.Y., #99-86372, in
which Chronimed seeks payment of an account past due in the amount of $42,677.
The claim is non-priority and unsecured. Chronimed has also filed a Proof of
Claim in the matter In Re Sun Healthcare Group Inc. et. al., Bankr. Del.,
#99-3657 through 99-3841, in which Chronimed has asserted an unsecured,
non-priority claim for a past due account in the amount of $67,576.

On June 30, 2000, Hypoguard Ltd. Commenced a CPR Part 8 action against
Chronimed in Commercial Court, Queens Bench Divisions, London (2000 Claim No.
737). The action was related to Chronimed's request that Hypoguard consent to
Chronimed's assignment of the parties' 1993 Patent and Know-How License
Agreement to MEDgenesis. Hypoguard's action was injunctive in nature and
Hypoguard claimed that Chronimed had no contractual or legal right to assign the
parties' Patent License Agreement to a third party without Hypoguard's consent.
Hypoguard sought four elements of relief, including a judicial declaration that
Hypoguard's consent was necessary for any assignment, an injunction against any
Chronimed assignment without such consent, recovery of attorney's fees and
expenses, and any other equitable relief the Court deemed appropriate. The
action did not assert or seek monetary damages.

On August 30, 2000, Chronimed and MEDgenesis entered an
agreement settling the dispute. The Amendment and Assignment: Patent and
Know-How License Agreement modifies the 1993 Patent License, contains
Hypoguard's consent to assignment of the modified 1993 Patent License to
MEDgenesis, provides for payment of a transfer fee to Hypoguard in consideration
of its consent to assignment, and requires dismissal of the Hypoguard injunction
action. Pursuant to the August 30, 2000 settlement, Hypoguard requested and the
Court ordered dismissal of the action. The Court's dismissal order was entered
on September 8, 2000. MEDgenesis paid the transfer fee to Hypoguard pursuant to
MEDgenesis' general indemnification of Chronimed under the July 1, 2000
Distribution and Spinoff Agreement between MEDgenesis and Chronimed. The
MEDgenesis indemnification requires it to indemnify Chronimed for costs
generally associated with or arising out of the operation of MEDgenesis, and
specifically for costs related to litigation involving the business of
MEDgenesis. See Exhibit 2.1 Distribution and Spinoff Agreement; Exhibit 10.12a.
Amendment to License Agreement.

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ITEM 9: MARKET PRICE OF AND DIVIDENDS ON
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is currently no public market for the common stock of MEDgenesis
Inc. In conjunction with the filing of this Registration Statement, MEDgenesis
will file an application to include the shares of its common stock on the NASDAQ
National Market System under the symbol "MDGN". See Risk Factors: There Has Been
No Trading Market for MEDgenesis Common Stock; Loss of NASDAQ National Market
Systems Listing.

Following completion of the distribution by Chronimed of the shares of
MEDgenesis to the shareholders of Chronimed, MEDgenesis expects that it will
have approximately 500 shareholders of record and approximately 7,000 beneficial
owners. The distribution is expected to be completed on or before ________,
2000. At such time, there are expected to be approximately 4,100,000 shares of
the Company's Common Stock outstanding.

MEDgenesis has never declared or paid cash dividends on its capital
stock. MEDgenesis currently intends to retain its earnings to finance its future
growth and therefore does not anticipate paying any dividends in the foreseeable
future. It is anticipated that the terms of any line of credit the Company may
procure will likely prohibit MEDgenesis from paying any dividends or
distributions to stockholders unless certain working capital and liquidity
requirements are met.

MEDgenesis has no outstanding warrants or options. As of the date of
the spin-off, upon return by Chronimed of all MEDgenesis shares not distributed
to Chronimed shareholders, no MEDgenesis affiliates will own MEDgenesis stock.

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ITEM 10: RECENT SALES OF UNREGISTERED SECURITIES

On June 2, 2000, MEDgenesis issued 4,500,000 shares of common stock to
Chronimed for $1,000. These shares were issued pursuant to Section 4(2) of the
Securities Act of 1933 as a transaction by an issuer not involving any public
offering.

ITEM 11: DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED

GENERAL

MEDgenesis' authorized capital stock as of the spin-off will consist of
40 million shares of common stock, par value $.01 per share, and 5 million
shares of preferred stock, par value $.01 per share. On June 2, 2000 4,500,000
shares of common stock were issued, and are outstanding and owned solely by
Chronimed. While no shares of preferred stock will be issued or outstanding, the
Directors will have designated 200,000 shares of Series A Junior Preferred
stock, in accordance with the Company's Shareholder Rights Plan. See Exhibits:
Shareholder Rights Plan Agreement. All of the shares of issued and outstanding
common stock will be distributed by Chronimed as a dividend to persons holding
Chronimed shares of record. Following the Chronimed dividend distribution,
Chronimed will not own any shares of MEDgenesis. All of the MEDgenesis common
shares distributed to Chronimed shareholders will be fully paid and
non-assessable.

MEDGENESIS COMMON STOCK

VOTING RIGHTS

Holders of MEDgenesis common stock will be entitled to one vote for
each share on all matters voted on by shareholders. MEDgenesis common stock will
possess all voting power of MEDgenesis, except as otherwise required by law or
provided in any resolution adopted by the MEDgenesis Board designating any
series of MEDgenesis preferred stock. The shares of MEDgenesis common stock will
not have cumulative voting rights.

Although holders of MEDgenesis common stock are generally entitled to
vote by simple majority for the approval of amendments to MEDgenesis' Articles
of Incorporation, any amendment by shareholders of Article VI of MEDgenesis'
Articles of Incorporation, pertaining to constitution of the Board, must be
approved by an 80% majority of all shares entitled to vote. See Exhibits:
Articles of Incorporation.

DIVIDEND RIGHTS

Subject to any preferential or other rights of any outstanding series
of MEDgenesis preferred stock that the Board may designate, and subject to the
terms of any possible MEDgenesis debt agreements or credit facilities, holders
of MEDgenesis common stock will be entitled to such dividends as may be declared
from time to time by MEDgenesis' Board from funds legally available.

LIQUIDATION RIGHTS AND OTHER PROVISIONS

Subject to the prior rights of creditors and the holders of preferred
stock that may be outstanding from time to time, the holders of common stock are
entitled in any liquidation, dissolution or winding up to share pro rata in the
distribution of all remaining assets.

MEDgenesis common stock is not liable for any calls or assessments and
is not convertible into any other securities. There are no redemption or sinking
fund provisions applicable to MEDgenesis common stock and ownership of
MEDgenesis stock will not render any person liable on account of the debts or
obligations of MEDgenesis.

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PREEMPTIVE RIGHTS

No holder of MEDgenesis stock of will have any preemptive right to
purchase MEDgenesis shares or securities.

MEDGENESIS PREFERRED STOCK

MEDgenesis' Board is authorized to issue shares of preferred stock, in
one or more series, and to fix the voting powers, designations, preferences and
relative, participating, optional and other special rights, qualifications,
limitations or restrictions of such shares, subject to the Minnesota Business
Corporation Act, without the prior approval of MEDgenesis shareholders. While no
shares of preferred stock will be issued in connection with the spin-off, the
Directors will have designated 200,000 shares of Series A Junior Preferred
stock, in accordance with the Company's Shareholder Rights Plan. See Exhibits:
Shareholder Rights Plan Agreement.

BOARD OF DIRECTORS

MEDgenesis' Articles of Incorporation and By-laws establish three
classes of directorship tenure, resulting in a "staggered" Board. MEDgenesis'
Board consists of three directors, one of whom is designated as a Class I
director, one of whom is designated as a Class II director, and one of whom is
designated as a Class III director. Additional directorships will be apportioned
as evenly as possible among the three classes. Class I directors will serve
until the conclusion of the 2000 Annual Meeting of Shareholders, Class II
directors will serve until the conclusion of the 2001 Annual Meeting of
Shareholders, and Class III directors will serve until the conclusion of the
2002 Annual Meeting of Shareholders. Beginning with the 2000 Annual Meeting of
Shareholders, an elected director will serve until the conclusion of the third
succeeding annual meeting following the director's election. In addition to
director removal consistent with the Minnesota Business Corporation Act, and
subject to the rights of any holders of any class or series of preferred shares
then outstanding, MEDgenesis shareholders may remove a director at any time,
with or without cause, but only if such removal is approved by an 80% vote of
all the outstanding shares of MEDgenesis stock.

SHAREHOLDER RIGHTS PLAN

On the date of the dividend distribution of MEDgenesis stock, the
MEDgenesis Board of Directors will declare a dividend of one preferred share
purchase right (a "Right") per share for each outstanding share of common stock,
par value $.0l (the "Common Shares"), of MEDgenesis. The dividend will be
payable 30 days following the MEDgenesis stock distribution date (the "Record
Date") to shareholders of record on that date.

Each Right will entitle the registered holder to purchase from
MEDgenesis one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $.0l (the "Preferred Shares"), of MEDgenesis at a
price of $120 per one one-thousandth of a Preferred Share (the "Purchase
Price"), subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement'), dated as of June 2, 2000,
between MEDgenesis and Norwest Bank Minnesota, National Association, as Rights
Agent (the "Rights Agent").

Initially, the Rights will be evidenced by the certificates
representing Common Shares then outstanding and no separate Right Certificates
will be distributed. The Rights will separate from the Common Shares, and a
Rights Distribution Date will occur upon the earlier of: (i) the first date of
public announcement that a Person or group of affiliated or associated Persons
has become an "Acquiring Person" (i.e., has become, subject to certain
exceptions, the beneficial owner of 15% or more of the outstanding Common
Shares) (except pursuant to a Permitted Offer, as hereinafter defined) and (ii)
the 10th day following the commencement or public announcement of a tender offer
or exchange offer, the consummation of which would result in a Person or group
of affiliated or associated Persons becoming, subject to certain exceptions, the
beneficial owner of 15% or more of the outstanding Common Shares (or such later
date as may be determined by the Board of Directors of MEDgenesis prior to a
Person or group of affiliated or associated Persons becoming an Acquiring
Person) (the earlier of such dates being called the "Rights Distribution Date").

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Until the Rights Distribution Date, (i) the Rights will be evidenced by
the Common Share certificates and will be transferred with and only with the
Common Shares, (ii) new Common Share certificates issued after the Record Date
upon transfer or new issuance of the Common Shares will contain a notation
incorporating the Rights Agreement by reference, and (iii) the surrender for
transfer of any Common Share certificate, even without such notation or a copy
of the Summary of Rights attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate.

As promptly as practicable following the Rights Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Common Shares as of the close of business on
the Rights Distribution Date, and such separate Right Certificates alone will
evidence the Rights.

The Rights are not exercisable until the Rights Distribution Date. The
Rights will expire on 10 years following issuance, unless extended or earlier
redeemed or exchanged by MEDgenesis as described below.

The Purchase Price payable and the number of Preferred Shares or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution: (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain
rights, options or warrants to subscribe for or purchase Preferred Shares or
convertible securities at less than the then current market price of the
Preferred Shares, or (iii) upon the distribution to holders of the Preferred
Shares of evidences of indebtedness or assets (excluding regular periodic cash
dividends or dividends payable in Preferred Shares) or of subscription rights or
warrants (other than those described in clause (ii) of this paragraph). With
certain exceptions, no adjustment in the Purchase Price will be required until
cumulative adjustments require an adjustment of at least 1% in the Purchase
Price.

No fraction of a Preferred Share (other than fractions in integral
multiples of one one-thousandth of a share) will be issued and, in lieu thereof,
an adjustment in cash will be made based on the closing price on the last
trading date prior to the date of exercise.

The number of outstanding Rights and the number of one one-thousandth
of a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Rights Distribution Date.

Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $.0l per share but will be entitled to an
aggregate dividend of 1,000 times the dividend declared per Common Share. In the
event of liquidation, the holders of the Preferred Shares will be entitled to a
minimum preferential liquidation payment of $1,000 per share but will be
entitled to an aggregate payment of 1,000 times the payment made per Common
Share. Each Preferred Share will have 1,000 votes, voting together with the
Common Shares. Finally, in the event of any merger, consolidation or other
transaction in which Common Shares are exchanged, each Preferred Share will be
entitled to receive 1,000 times the amount received per Common Share. These
rights are subject to adjustment in the event of a stock dividend on the Common
Shares or a subdivision, combination or consolidation of the Common Shares.

In the event that a person or group becomes an Acquiring Person (except
pursuant to a Permitted Offer (as defined below)), each holder of a Right, other
than the Acquiring Person or the affiliates, associates or transferees thereof
(whose Rights will thereafter be void), will thereafter have the right to
receive upon exercise thereof at the then current exercise price of the Right
that number of Common Shares having a market value of two times the exercise
price of the Right, subject to certain possible adjustments.

In the event that MEDgenesis is acquired in certain mergers or other
business combination transactions or 50% or more of the assets or earning power
of MEDgenesis and its subsidiaries (taken as a whole) are sold after a person or
group becomes an Acquiring Person (except pursuant to a Permitted Offer),
holders of the Rights will thereafter have the Right to receive, upon exercise
thereof at the then current exercise price of the Right, that number of Common
Shares of the acquiring company (or, in certain cases, one of its Affiliates)
having a market value of two times the exercise price of the Right.

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A "Permitted Offer" is a tender offer or an exchange offer for all
outstanding Common Shares of MEDgenesis at a price and on terms determined by a
majority of the Board of Directors of MEDgenesis who are not officers of
MEDgenesis and who are not Acquiring Persons or affiliates or associates of an
Acquiring Person and after receiving advice from one or more investment banking
firms, to be (a) fair to shareholders (taking into account all factors which the
Board of Directors deems relevant) and (b) otherwise in the best interests of
MEDgenesis and its shareholders, employees, customers, suppliers and creditors
and the communities in which MEDgenesis does business, and which the Board of
Directors determines to recommend to the shareholders of MEDgenesis.

At any time after a Person becomes an Acquiring Person (subject to
certain exceptions), and prior to the acquisition by a Person of 50% or more of
the outstanding Common Shares, the Continuing Directors may exchange all or part
of the Rights for Common Shares at an exchange ratio per Right equal to the
result obtained by dividing the exercise price of a Right by the current per
share market price of the Common Shares, subject to adjustment.

At any time before a Person has become an Acquiring Person, the
Continuing Directors may redeem the Rights in whole, but not in part, at a price
of $.0l per Right (the "Redemption Price"), subject to adjustment. The
redemption of the Rights may be made effective at such time, on such basis and
with such conditions as such Continuing Directors may, in their sole discretion,
establish.

A "Continuing Director" is a member of the Board of Directors who was a
member of the Board on the date of the dividend distribution of MEDgenesis
stock, or who subsequently became or becomes a member of the Board of Directors
with the recommendation or approval of a majority of the Continuing Directors.
Continuing Directors do not include any Acquiring Person or affiliate or
associate of an Acquiring Person.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of MEDgenesis, including without limitation, the right
to vote or to receive dividends. See Exhibits: Shareholder Rights Plan
Agreement.

CONTROL SHARE ACQUISITIONS

Shares of publicly traded, Minnesota corporations obtained in a control
share acquisition will be afforded full voting rights only if the control share
acquirer follows the procedures required under Minnesota Business Corporation
Act Section 302A.671. This "Control Share Acquisition" statute is triggered,
unless expressly exempted in the public corporation's articles or bylaws, any
time that a person or group proposes to acquire at least 20% of a class of the
public corporation's shares

To preserve potential voting rights, an acquirer must deliver to the
public corporation an information statement including the identity and
background of the acquiring person; the number and class of shares beneficially
owned by the acquirer before the control share acquisition; the number and class
of shares proposed to be acquired; and certain other information.

Following submission of the information statement, the acquirer must
request a special meeting of the public corporation's shareholders. The acquirer
may not call the special meeting unless at the time of delivery of the
information statement, the acquirer has entered into and delivered to the public
corporation copies of a definitive financing agreement for any of the
acquisition funds not provided by the acquirer.

The shares acquired within the percentage ranges specified in the
information statement will have full voting rights within their class of shares
only if the control share acquisition is approved by a majority of shares
entitled to vote, both including and excluding shares held and voted by the
acquirer. The control share acquisition must be consummated within 180 days of
approval in order for the acquired shares to retain voting rights. If the
control acquisition is not approved by the shareholders, shares obtained in the
control acquisition will not have voting rights unless or until they are
re-conveyed to a person other than the acquirer. If the re-conveyance itself
would constitute a control share acquisition, the new transfer is also subject
to the control share acquisition statute.

Further, if an information statement is not delivered to the public
corporation within ten days of a control share acquisition, or the shareholders
fail to approve the control share acquisition, the corporation may redeem all,
but not less than all, the control shares acquired. The redemption price would
be the market value at the time of the redemption call.

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BUSINESS COMBINATIONS

The Minnesota Business Corporation Act, Section 302A.673 requires that
boards of public corporations be afforded the opportunity to review proposed
business combinations. Under the business combinations statute, an issuing
public corporation may not engage in a business combination with an interested
shareholder, within four years of the interested shareholder's share acquisition
date, unless the business combination or interested shareholder's share
acquisition has received prior approval by a committee of disinterested
directors. Boards of public corporations are obligated to review and respond to
written, good faith, definitive business combination or share acquisition
proposals within 30 days. A recipient board must form a committee of
disinterested persons to review the proposal.

ITEM 12: LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Minnesota Business Corporation Act, Section 302A.521, requires
corporate indemnification of persons acting in their official capacity on behalf
of the corporation. The indemnification obligation extends to directors,
officers, and employees. An officer, director or employee will qualify for
indemnification if, with respect to the act for which indemnification is sought,
the person:

1. Has not been indemnified by another organization,
2. Acted in good faith,
3. Received no improper personal benefit,
4. In the case of a criminal proceeding, had no reasonable cause
to believe the act was unlawful, and
5. Reasonably believed the act was in the best interests of the
corporation, or not opposed to the best interests of the
corporation, depending on the nature of the corporation.

Section 302A.521 permits a corporation, in its articles or bylaws, to
prohibit or limit indemnification if such prohibition or limitation is applied
equally to all persons within a given class and is not applied retroactively to
deny a right previously existing. MEDgenesis' Articles and Bylaws do not
prohibit or limit indemnification of officers, directors or employees.

Consistent with Minnesota Business Corporation Act Section 302A.251,
MEDgenesis' Articles of Incorporation establish that MEDgenesis directors shall
not be personally liable to MEDgenesis or its shareholders for monetary damages
for breach of duty as a director, except for:

1. liability based on a breach of loyalty to the corporation or
the shareholders,
2. liability for acts or omissions not in good faith or involving
knowing violation of the law,
3. liability based on the payment of an improper dividend or
repurchase of the corporation's stock, or
4. liability for any transaction for which the director received
an improper personal benefit, or
5. liability for any act occurring prior to the effective date of
the Articles of Incorporation.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
MEDgenesis pursuant to the foregoing provisions, MEDgenesis has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.

42
<PAGE>

ITEM 13: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SELECTED HISTORICAL FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED
----------

JUNE 30, JULY 2, JULY 3, JUNE 27, JUNE 28, JUNE 30,
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
(in thousands except per share information)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA

BALANCE SHEET DATA

Total Assets $14,088 $14,132 $14,135 $ 8,622 $11,043 $ 5,565
Long-Term Debt -- -- -- -- -- --
Total Equity (e) 10,468 11,624 12,269 6,304 7,120 3,532
</TABLE>

(a) Includes revenue from a discontinued product line, Quick Check, of $8.3
million, $13.8 million and $5.9 million in fiscal 1997, 1996 and 1995,
respectively.

(b) Includes unfavorable impact of write-off of HCI note - operating income
($1,374) and net income ($844).

(d) Basic and diluted pro forma earnings per share has been calculated
using pro forma basic and diluted weighted average shares outstanding
for only the latest fiscal year because, as a division of Chronimed,
historical earnings per share amounts are not meaningful. Pro forma
basic weighted average shares have been calculated by adjusting
Chronimed's historical basic weighted average shares outstanding for
the applicable period to reflect the number of MEDgenesis shares that
would have been outstanding at the time assuming the distribution of
one share of MEDgenesis common stock for three shares of Chronimed
common stock. Pro forma diluted weighted average shares for MEDgenesis
reflect an estimate of the potential dilutive effect for common stock
equivalents. Such estimate is calculated based on Chronimed's dilutive
effect of stock options divided by three to reflect the distribution
ratio.

43
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA
Selected Quarterly Financial Data has been provided in Note 14 of Notes
to the Financial Statements.

FORECASTED FINANCIAL INFORMATION
Prior to July 1, 2000, the diagnostic products business operated within
Chronimed and not as a separate company or subsidiary. The financial statements
reflect assets, liabilities, revenues and expenses that were directly
attributable to the diagnostic products business plus an allocation of certain
facilities expenses and general and administrative costs for senior management,
information systems, accounting, investor relations, insurance, and legal and
corporate services, which were incurred at a corporate level within Chronimed.
These costs were allocated between the continuing Chronimed business and
MEDgenesis based on revenues, personnel, occupied space, and estimates of usage
or time spent to provide services, as deemed appropriate by Chronimed's
management to equitably allocate the full cost of doing business to the
respective entities. Pursuant to the terms of the Distribution and Spin-Off
Agreement and the Transitions Service Agreement, Chronimed will continue to
provide many of these services during a six-month transition period, as needed
by MEDgenesis. Chronimed will charge MEDgenesis for these services on a basis
that is consistent with their previous cost allocations. As a result, these
spin-off agreements will not have a material effect on the historical financial
statements.

Cash generated by the diagnostic products business was used for general
corporate purposes and to fund the growth of Chronimed's other businesses. No
inter-divisional advance accounts were kept, and no interest was credited to the
diagnostic products business.

Readers are advised that MEDgenesis' future prospects may reflect the
following items that are not currently factored into the historical financial
statements:

FORECASTED FUTURE ADMINISTRATIVE AND PUBLIC COMPANY COSTS
As a stand-alone business following the spin-off, management projects
that MEDgenesis' cost for senior management and investor relations will be
higher than the amounts allocated by Chronimed during the historical period,
noted above. Based on MEDgenesis current management team expenses for salaries,
bonus, and travel, plus estimates of such corporate expenses as insurance,
director's fees, and audit fees, it is forecasted that MEDgenesis will incur
additional costs of approximately $700,000. Additional investor relations
expenses are anticipated to add another $75,000 in annual cost. Management also
projects that MEDgenesis' plan to outsource information systems to a third party
supplier will result in cost savings of $250,000 to $300,000 per year. Net
additional costs for all these items are projected to be in the range of
$525,000 to $600,000 per year, which would reduce pre-tax operating income by
the same amount, and would reduce after-tax net income by $320,000 to $370,000
per year. The earnings per share impact of these additional costs would be $0.08
to $0.09.

FORECASTED FUTURE INTEREST EXPENSE AND INCOME
On July 1, 2000 Chronimed and MEDgenesis began keeping separate
accounting ledgers, fixing June 30, 2000 as a "settlement date" on which to
calculate certain cash adjustments for activities from the date the spin-off was
announced through the settlement date. See Item 7, Agreements: Distribution and
Spin-off Agreement. Pursuant to the terms of the Distribution and Spin-off
Agreement, MEDgenesis' opening balance sheet as of July 1, 2000 had no cash. The
net working capital amount on that date was fixed at the net working capital
balance as of March 31, 2000. Accordingly, MEDgenesis will compensate Chronimed
for increased working capital ($415,000) and asset purchases ($62,000) incurred
between March 31, 2000 and June 30, 2000. MEDgenesis will also compensate
Chronimed for the net proceeds on the sales of Cell Robotics stock occurring in
July, 2000 ($205,000). Other long term assets and liabilities include only those
items directly attributable to the diagnostic products business valued at
Chronimed's net book value. Shareholders' equity was computed as the difference
between the assets and liabilities (including amounts due to Chronimed) as
determined above as of June 30, 2000.

Management believes it likely that following the spin-off it will be
necessary for MEDgenesis to fund its working capital needs by drawing upon its
bank line of credit from time to time, but that if future cash flows continue to
be positive, investments in interest bearing accounts and securities will
produce interest income. Consequently, the company will record both interest
income and expense in future periods. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the related "Liquidity and
Capital Resources" section for additional information on cash flow.

44
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following is a discussion of the results of operations and current
financial position of MEDgenesis on a stand-alone basis. This discussion should
be read in conjunction with the Financial Statements and Notes thereto.

The fiscal years and quarter periods referenced herein are as follows:

FISCAL YEAR YEAR ENDED
----------- ----------
2000 6/30/2000 (52 weeks)
1999 7/2/1999 (52 weeks)
1998 7/3/1998 (53 weeks)

INCOME AND EXPENSE ITEMS AS A PERCENTAGE OF REVENUE

YEAR ENDED
2000 1999 1998
---- ---- ----

Revenues 100.0% 100.0% 100.0%
----- ----- -----
Cost of revenues 61.6 52.9 37.5
Gross profit 38.4 47.1 62.5
Operating expenses
Selling and marketing 16.2 15.3 15.0
Research and development 3.3 2.9 1.4
General and administrative 11.4 9.8 9.2
----- ----- -----
30.9 28.0 25.6
Income from operations 7.5 19.1 36.9
Other income 1.6 -- --
Income tax expense 3.5 7.5 14.2
----- ----- -----

Net income 5.6% 11.6% 22.7%
===== ===== =====

BUSINESS

The Company is a medical product and service business focusing on blood and
urine medical diagnostic products and related accessories that it has either
developed and manufactures, owns outright, or controls through exclusive license
or distribution agreements. Designed for either institutional use (long-term
care facilities, hospitals and clinical settings) or consumer use (in-home
healthcare), these products are sold to a variety of customers, including
distributors, institutions, independent agents, HMOs, durable medical equipment
suppliers and secondary retail chain outlets.

45
<PAGE>

RECAP OF RESULTS

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999-- Total revenues increased $3.3
million or 11.0% to $32.9 million compared to the prior year's revenue of $29.7
million. The Assure biosensor meter introduced in late fiscal 1999 accounted for
$4.7 million of revenue growth. The Assure revenue growth was partially offset
by a decline in revenue from the Company's proprietary blood glucose systems,
Supreme and Select, which combined were down $1.9 million. The remaining
$500,000 of revenue growth came primarily from the lancet and DiaScreen urine
lines.

Income from operations decreased from $5.7 million to $2.5 million due
to lower margins combined with higher operating expenses. Gross margins declined
from 47.1% to 38.4%, or 8.7 percentage points. Of this, approximately 3
percentage points are attributable to increased competitive pricing pressures
while 7 percentage points are due to a higher percentage sales mix of lower
margin distributed products (32% of sales in 1999 versus 45% in 2000), offset by
a 1 percentage point reduction of other costs of sales (royalties, freight, and
meter depreciation). Margins on manufactured products decreased from 73.8% in
1999 to 68.7% in 2000, while margins on distributed products declined from 33.8%
to 30.1%. As a percentage of sales, operating expenses increased from 28.0% to
30.9%, or 2.9 percentage points. This increase is due primarily to higher
general and administrative expenses due to legal expenses related to the Bayer
lawsuit (0.8 percentage points) and to increased provisions for bad debts (0.8
percentage points) due to unfavorable credit and product returns experience, an
R&D increase related to new product development costs (0.6 percentage points),
and higher selling and marketing costs due to increased advertising and
promotional spending (1.1% percentage points). The unfavorable credit and
product returns experienced in fiscal 2000 is related to increased pricing
pressures and reductions in government reimbursement programs affecting long
term care facilities and the distributors that service them, resulting in
increased consolidations and bankruptcy filings in these industries. The Company
expects these conditions to continue, and to continue to experience a higher
level of bad debts than in past years.

Other income of $540,000 consisted of gains on the sale of
available-for-sale securities. Net income was $1.8 million, or 5.6% of revenue,
compared to $3.5 million, or 11.7% in the prior year.

Net cash provided by operations continued to be strong in fiscal 2000,
though down $2.2 million from last year due primarily to decreased net income.
The Company provided direct financing to Chronimed of $3.3 million compared to
$4.3 million for the prior year.

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998 Total revenues for 1999 increased
$4.7 million or 19% to $29.7 million compared to the prior year of $25.0 million
on the strength of the Company's new Select GT blood glucose system, which was
aimed at the retail consumer market. Revenue from this new product in 1999 was
$3.1 million. Additional new product introductions in the lancet and urine lines
accounted for the remaining revenue growth of $1.7 million.

Despite the increased revenue, income from operations decreased 39%,
from $9.2 million to $5.7 million, due to a combination of lower gross margins
and higher operating expenses. Gross margin fell 15.4 percentage points from its
historical high of 62.5% in 1998 to 47.1% in 1999, as a result of increased
pricing pressures (8 percentage points), a one-time inventory repayment from a
former supplier in 1998 (3 percentage points), and higher meter depreciation (6
percentage points) due to increased meter placements and the adoption of a
shorter depreciable life for the meters, offset by lower royalties (1.0
percentage points).The one-time inventory repayment from a supplier that
occurred in fiscal 1998 was in settlement of a fiscal 1997 inventory write-off
of the same amount. Management determined in fiscal 1997 that blood glucose
strip inventory provided by a third party supplier could not be resold due to
the voluntary recall by the third party supplier prompted by FDA review.
Management further determined in fiscal 1997 that the value of the inventory
would not likely be recovered from the supplier due to the impact of the recall
on the supplier, and therefore wrote off the inventory in fiscal 1997. In fiscal
1998, the supplier became fully operational and was able to pay the Company for
the inventory. As a result, fiscal 1997 gross margin was negatively impacted by
the inventory write-off and fiscal 1998 was favorably impacted by the repayment.
Further, because fiscal 1998 reflected the one-time favorable event, comparison
of fiscal 1999 to fiscal 1998 was unfavorable.

Operating expenses as a percentage of sales increased 2.4 percentage
points. Of this, 1.1 percentage points was due to an increase in general and
administrative costs, attributable to an increase in information systems costs

46
<PAGE>

allocated to the Diagnostic Products division from Chronimed, while the building
of an increased research and development capability in support of new product
initiatives accounted for another 1.4 percentage points. Selling and marketing
expenses increased 21.3% over 1998 spending due to the addition of the field
sales employees and the home office sales support staff needed to generate and
support increased sales levels. As a percentage of sales, selling and marketing
expenses were nearly flat year-to-year, at 15.3% and 15.0% in 1999 and 1998,
respectively.

Net cash provided by operations was $8.0 million in 1999 compared to
$4.5 million in 1998 on the strength of working capital improvements. The
Company used $4.1 million for the purchase of property, plant and
equipment--mostly monitoring equipment--and other investing activities in 1999,
compared to $4.8 million in 1998, of which $1.9 million was used for the
DiaScreen urine line acquisition.

ALLOCATED EXPENSES

The financial statements include an allocation of certain general
corporate expenses of Chronimed for information systems, finance, legal and
corporate services which was based upon revenues, personnel, space, and
estimates of usage or time spent to provide services. Allocated general and
administrative expenses were approximately $2.1 million in 2000, $2.0 million in
1999, and $1.6 million in 1998.

It is expected that after the spin-off the Company will have its own
senior management, information services, investor relations, accounting and
human resources instead of sharing the cost of these functions with Chronimed.
Management anticipates these additional costs related to operating as a
stand-alone public corporation to be between $525,000 and $600,000 annually.

ACQUISITIONS

In March 1998, the Company acquired the assets of DiaScreen
Corporation, a medical diagnostic products company, for $1.9 million in cash.
The purchase agreement provides for additional payments up to a maximum of $3.2
million if certain product revenue levels are met or exceeded. As of June 30,
2000, the Company has paid $549,000 in additional payments to DiaScreen which
have been recorded as goodwill.

TAX MATTERS

As a result of the separation from Chronimed, the results of MEDgenesis
operations will no longer be combined with those of Chronimed in reporting
income for income tax purposes. This should not have a material adverse effect
on income taxes or earnings beyond what has been provided for in the historical
financial statements that have been prepared as if the Company was a separate
entity.

The effective tax rates in the historical financial statements were
39.0%, 39.0%, and 38.5% for the three years ended 2000, 1999, and 1998,
respectively. The Company's future effective tax rate will largely depend on its
structure and tax strategies as a separate company.

LIQUIDITY AND CAPITAL RESOURCES

Chronimed manages its cash and financing activities at the corporate
level. As a result, cash and cash equivalents, corporate investments, debt and
related interest income and expense were not allocated to the Company in the
financial statements. The Company's financing requirements are represented by
cash transactions with Chronimed and are reflected in the "Net Investment by
Chronimed" account (See Note 7 of Notes to the Financial Statements). Activity
in the "Net Investment by Chronimed" account relates to net cash flows of the
Company as well as changes in the assets and liabilities not allocated to the
Company.

In recent years, the Company has been able to generate internal cash
for its capital financing needs and has no allocated debt from Chronimed. Net
cash provided by operations was $5.8 million for the year ended June 30, 2000
compared to $8.0 million for the year ended July 2, 1999. The decrease is due
mainly from a decline in net income of $1.6 million. Offsetting the decline in
net cash provided by operations was a $1.2 million reduction in cash used in
investing activities, due mainly to reduced purchases of property and equipment
and net proceeds from the sale of securities. During fiscal years 2000, and 1999
the Company provided $3.3 million and $4.3 million in cash, respectively, to
Chronimed. In 1998, Chronimed provided $300,000 in cash to the Company. The
major

47
<PAGE>

reasons the Company reversed direction in 1998 from being a provider of cash to
Chronimed to being a user of cash from Chronimed were the $1.9 million
acquisition of the DiaScreen line, increased investment in inventory and
receivables of $3.0 million, and increased purchases of property and equipment
of $1.4 million.

It is anticipated that cash flows will continue to satisfy internal
operating needs through fiscal 2001. For the last three years, the major use of
cash has been for purchases of property and equipment --- $2.7 million, $3.1
million, and $2.9 million for fiscal years 2000, 1999, and 1998 , respectively.
If capital requirements exceed current expectations, long term financing may be
required. Due to a long track record of profitability and positive cash flow,
the prospect of obtaining financing at attractive market rates appears
reasonable, though not guaranteed. The Company has obtained a bank line of
credit of $5 million in July 2000. See Exhibits: US Bank Credit Agreement.

NEW ACCOUNTING STANDARDS

Certain accounting standards have been issued which the Company is not
yet required to adopt. See Notes to Financial Statements for a discussion of the
applicable standards.

MEDGENESIS' FISCAL YEAR

MEDgenesis has adopted a fiscal year ending the Friday closest to
December 31, in contrast to the Chronimed fiscal year, which ends the Friday
closest to June 30. MEDgenesis will continue to use a four-week, four-week,
five-week (4-4-5) quarterly accounting cycle. The Company's first fiscal year
following the spin-off will be a stub period from the Distribution Date to
December 29, 2000. The fiscal year 2001 will end on December 28, 2001.

48
<PAGE>

ITEM 14: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 15: FINANCIAL STATEMENTS AND EXHIBITS

The Financial Statements filed as part of this Form 10 can be found and
referenced in the following "Index to Historical Financial Statements." The
Financial Statement Schedule, Valuation and Qualifying Accounts and Reserves,
can be found on page S-1, immediately following the Financial Statements.

49
<PAGE>

INDEX TO HISTORICAL FINANCIAL STATEMENTS

PAGE
Report of Independent Auditors ..............................................F-1

Balance Sheets as of June 30, 2000, and July 2, 1999 ........................F-2

Statements of Income for the years ended June 30, 2000, July 2, 1999,
and July 3, 1998 ...................................................F-3

Statements of Cash Flows for the years ended June 30, 2000, July 2, 1999,
and July 3, 1998 ...................................................F-4

Notes to Financial Statements ...............................................F-5

50
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Stockholders
Chronimed Inc.

We have audited the accompanying balance sheets of the businesses of Chronimed
Inc. that comprise MEDgenesis Inc., (as described in Note 1 to the financial
statements) as of June 30, 2000 and July 2, 1999, and the related statements of
income and cash flows for each of the three years in the period ended June 30,
2000. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and schedule 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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 MEDgenesis Inc. at June 30,
2000 and July 2, 1999, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
August 3, 2000

F-1
<PAGE>

MEDgenesis Inc.
Balance Sheets
(in thousands)

<TABLE>
<CAPTION>
JUNE 30, 2000 JULY 2, 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable (net of allowance of $365 and $75
at June 30, 2000 and July 2, 1999) $ 4,727 $ 3,741
Inventories 3,723 4,391
Other current assets 599 171
Deferred taxes 159 --
------------ ------------
Total current assets 9,208 8,303

Property and equipment 14,784 12,104
Allowance for depreciation (11,337) (7,752)
------------ ------------
3,447 4,352

Available-for-sale securities 727 608
Goodwill, net 706 869
------------ ------------
Total assets $ 14,088 $ 14,132
============ ============

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 1,495 $ 1,313
Accrued royalties 227 627
Accrued commissions 251 193
Accrued compensation 325 220
Due to Chronimed 682 --
Other accrued expenses 216 --
Deferred taxes 208 72
------------ ------------
Total current liabilities 3,404 2,425

Deferred taxes 216 83

Equity
Common Stock, issued and outstanding shares --
4,500 and 0, respectively 45 --
Discount to par value (44) --
Accumulated other comprehensive income 456 158
Net investment by Chronimed 10,011 11,466
------------ ------------
10,468 11,624
------------ ------------
Total liabilities and equity $ 14,088 $ 14,132
============ ============
</TABLE>

SEE ACCOMPANYING NOTES.

F-2
<PAGE>

MEDgenesis Inc.
Statements of Income
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
June 30, July 2, July 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 32,949 $ 29,672 $ 24,984
Cost of revenues 20,283 15,691 9,364
---------- ---------- ----------
Gross profit 12,666 13,981 15,620

Operating expenses
Selling and marketing 5,349 4,550 3,751
Research and development 1,087 858 351
General and administrative 3,751 2,902 2,294
---------- ---------- ----------
Total operating expenses 10,187 8,310 6,396
Income from operations 2,479 5,671 9,224
Gain on sale of securities 540 -- --
---------- ---------- ----------
Income before taxes 3,019 5,671 9,224
Income tax expense 1,179 2,212 3,553
---------- ---------- ----------
Net income $ 1,840 $ 3,459 $ 5,671
========== ========== ==========

Pro forma net income per share
Pro forma Basic earnings per share $ 0.46
Pro forma Basic weighted-
average shares 4,039

Pro forma Diluted earnings per share $ 0.46
Pro forma Diluted weighted-
average shares 4,039
</TABLE>

SEE ACCOMPANYING NOTES.

F-3
<PAGE>

MEDgenesis Inc.
Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,840 $ 3,459 $ 5,671
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 3,911 3,894 1,611
Gain on sale of securities (540) -- --
Deferred income taxes 110 121 22
Changes in operating assets and liabilities
Accounts receivable (986) (331) (638)
Inventory 668 721 (1,557)
Accounts payable 182 379 (846)
Accrued expenses 661 265 249
Other assets (41) (548) (9)
---------- ---------- ----------
Net cash provided by operating activities 5,805 7,960 4,503

INVESTING ACTIVITIES
Acquisitions, net of cash acquired (549) (101) (1,869)
Purchases of property and equipment (2,680) (3,147) (2,928)
Purchases of available-for-sale securities -- (450) --
Proceeds from sale of securities 719 -- --
---------- ---------- ----------
Net cash used in investing activities (2,510) (3,698) (4,797)

FINANCING ACTIVITIES
Net cash provided (to) from Chronimed Inc. (3,295) (4,262) 294
---------- ---------- ----------
Net cash (used in) provided by financing activities (3,295) (4,262) 294

Increase (decrease) in cash -- -- --
---------- ---------- ----------
Cash at beginning and end of year $ -- $ -- $ --
========== ========== ==========
</TABLE>

SEE ACCOMPANYING NOTES.

F-4
<PAGE>

MEDGENESIS INC.
NOTES TO FINANCIAL STATEMENTS

1. BACKGROUND, BASIS OF PRESENTATION AND NATURE OF OPERATIONS

BACKGROUND

MEDgenesis Inc. (the "Company" or "MEDgenesis") is a newly formed
Minnesota corporation, which initially will be a wholly owned subsidiary of
Chronimed Inc. ("Chronimed"). On March 13, 2000, Chronimed announced its
intention to spin-off its diagnostic products business as an independent,
publicly owned company. This transaction is expected to be effected through a
tax-free dividend of shares of the Company to Chronimed shareholders during the
month of September, 2000 (the "Distribution"). Prior to the Distribution,
Chronimed plans to transfer to the Company substantially all of the assets and
liabilities associated with Chronimed's diagnostic products business at
historical cost. The assets will be separated and liabilities assumed at net
book value. There will be no write up or write down of assets or liabilities and
therefore no goodwill associated with the transfer. Chronimed and the Company
have entered into a number of agreements to facilitate the Distribution and the
transition of the Company to an independent business enterprise. Immediately
following the Distribution, Chronimed will no longer have an equity investment
in the Company other than shares of the Company held in trust for employee
benefit plans. Chronimed will retain liabilities under the lawsuit with Bayer
Corporation relating to patent rights assigned to MEDgenesis in the spin-off.
MEDgenesis will fully indemnify Chronimed for any payments which may be made
toward these liabilities. Neither Chronimed nor MEDgenesis has recorded any
contingent liabilities. Refer to Note 13, Legal Proceedings, for additional
disclosure.

Chronimed believes that the Distribution should be tax-free to
Chronimed and its shareholders, based on certain limitations. One limitation
would restrict certain transactions after the distribution that result in a
change of control of either Chronimed or MEDgenesis. Chronimed has not received
a tax ruling from the Internal Revenue Service in advance of the Distribution.
Should the Distribution be challenged by the Internal Revenue Service and deemed
to be taxable, MEDgenesis has indemnified Chronimed for a portion of the
corporate tax liability paid by Chronimed on the Company's behalf. Any
shareholder tax liability arising from the Distribution is the sole
responsibility of the shareholder.

BASIS OF PRESENTATION

Prior to the distribution and through June 30, 2000, the diagnostic
products business operated simply as a division within Chronimed and not as a
separate company or subsidiary. The financial statements reflect assets,
liabilities, revenues and expenses that were directly related to the diagnostic
products business plus an allocation of certain facilities expenses and general
and administrative costs for senior management, information systems, accounting,
investor relations, insurance, and legal and corporate services, which were
incurred at a corporate level within Chronimed. These costs were allocated
between the continuing Chronimed business and MEDgenesis based on revenues,
personnel, occupied space, and estimates of usage or time spent to provide
services, as deemed appropriate by Chronimed's management to equitably allocate
the full cost of doing business to the respective entities. Allocations and
estimates, as described in Note 4, are based on assumptions that Chronimed
management believes are reasonable and present fairly the costs and expenses of
the Company.

Chronimed manages its cash and financing activities at the corporate
level. As a result, cash and cash equivalents, corporate investments, debt and
related interest income and expense were not allocated to the Company in the
financial statements. The Company's financing requirements are represented by
cash transactions with Chronimed and are reflected in the "Net Investment by
Chronimed" account (See Note 7). Activity in the "Net Investment by Chronimed"
account relates to net cash flows of the Company as well as changes in the
assets and liabilities not allocated to the Company.

F-5
<PAGE>

The financial information included herein does not contain estimates of
the additional costs that may be incurred as a result of operating as a
stand-alone business or of the interest income resulting from the investment of
cash generated by the business during the periods shown. As a result, the
financial position, results of operations, and cash flows of the Company
presented may not be fully indicative of what the financial position, results of
operations, and cash flows would have been if the Company had operated on a
stand-alone basis.

As a stand-alone business following the spin-off, it is likely that
MEDgenesis' cost for senior management, information systems, accounting,
investor relations, insurance, and legal and corporate services will be higher
than the amounts allocated from Chronimed during the historical period, noted
above. For example, rather than share a portion of the larger company's senior
management expenses, the new entity will incur the full cost of its own senior
management team.

Pursuant to the terms of the Distribution and Spin-off Agreement,
MEDgenesis' balance sheet at June 30, 2000 had no cash. The net working capital
amount was fixed at the net working capital balance as of March 31, 2000.
Accordingly, MEDgenesis will compensate Chronimed for increased working capital
($415,000) and asset purchases ($62,000) incurred between March 31, 2000 and
June 30, 2000. MEDgenesis will also compensate Chronimed for the net proceeds
from the sale of Cell Robotics stock occurring in July 2000 ($205,000). Other
long term assets and liabilities include only those items directly attributable
to the diagnostic products business valued at Chronimed's net book value. Equity
was computed as the difference between the assets and liabilities (including
amounts due to Chronimed) as defined above as of June 30, 2000.

Management believes it likely that following the spin-off, it will be
necessary for MEDgenesis to fund its working capital needs by drawing upon its
bank line of credit from time to time, but that if future cash flows continue to
be positive, investments in interest bearing accounts and securities will
produce interest income. Consequently, the company will record both interest
income and expense in future periods.

NATURE OF OPERATIONS
The Company focuses on blood and urine medical diagnostic products and
related accessories that it has either developed and manufactures, owns
outright, or controls through exclusive license or distribution agreements.
Designed for either institutional use (long-term care facilities, hospitals and
clinical settings) or consumer use (in-home healthcare), these products are sold
to a variety of customers, including distributors, institutions, independent
agents, HMOs, durable medical equipment suppliers and secondary retail chain
outlets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

The Company has historically used a four-week, four-week, five-week
(4-4-5) quarterly accounting cycle with the fiscal year ending on the Friday
closest to June 30.

The fiscal years referenced herein are as follows:

FISCAL YEAR YEAR ENDED
----------- ----------
2000 June 30, 2000 (52 weeks)
1999 July 2, 1999 (52 weeks)
1998 July 3, 1998 (53 weeks)

MEDgenesis has elected to adopt a 4-4-5 quarterly accounting cycle with
the fiscal year ending on the Friday closest to December 31. The Company's first
fiscal year following the spin-off will be a stub period from the Distribution
Date to December 29, 2000. The fiscal year 2001 will end on December 28, 2001.

F-6
<PAGE>

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 amounts reported in the financial statements and
accompanying notes. Those assumptions and estimates are subject to constant
revisions, and actual results could differ from those estimates. Principal areas
requiring use of estimates include: allocation of shared general and
administrative costs between the Company and Chronimed, determination of
allowances for uncollectible accounts receivable, sales returns and discounts,
obsolete or excess inventories, and assessments of recoverability of certain
long-lived assets.

REVENUE RECOGNITION
Revenue is recognized upon shipment of products and when persuasive
evidence of an arrangement exists, price to the buyer is fixed and determinable,
and collectibility is reasonably assured.

RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.

AVAILABLE FOR SALE SECURITIES

In fiscal 1999, the Company invested $450,000 to acquire 300,000 shares
of the common stock of Cell Robotics International, Inc. (CRII) as part of an
exclusive distribution and accessory manufacturing agreement for the Lasette
Laser Lancing Device. Available-for-sale securities as of June 30, 2000 and July
2, 1999 consist entirely of these CRII equity securities. During fiscal 2000,
the Company amended the agreement to be a nonexclusive distributor and accessory
manufacturer. Subsequently the Company decided to begin divesting itself of the
CRII common stock and, realized a net gain of $540,000 on sales of 120,000
shares during fiscal 2000. Management determines the appropriate classification
of securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Securities are classified as "available-for-sale" as of
July 2, 1999 and June 30, 2000. The Company considers the net unrealized gain on
this investment of $158,000 and $456,000 at July 2, 1999 and June 30, 2000,
respectively, to be temporary and as such has been recorded as other
comprehensive income.

ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance based upon an analysis of the
collectibility of specific accounts and the aging of the accounts receivable.

INVENTORIES
Inventories consist of raw materials, work in process and goods held
for resale, and are carried at the lower of cost or market determined under the
average cost method.

Inventories consist of the following:

JUNE 30, 2000 JULY 2, 1999
------------- ------------

Raw materials $ 1,027,000 $ 1,942,000
Work in process 220,000 208,000
Goods held for resale 2,516,000 2,241,000
Less: Reserve for Obsolescence (40,000) --
----------- -----------
$ 3,723,000 $ 4,391,000
=========== ===========

F-7
<PAGE>

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation on property and
equipment is computed using the straight-line method. Depreciation occurs over
estimated useful lives of one to seven years. Depreciation expense was
$3,585,000, $3,644,000, and $1,336,000 in fiscal 2000, 1999, and 1998,
respectively.

Property and equipment consist of the following:

JUNE 30, 2000 JULY 2, 1999
------------- ------------

Monitoring equipment $ 8,902,000 $ 7,477,000
Production equipment 4,724,000 3,476,000
Office equipment 101,000 501,000
Leasehold improvements 456,000 246,000
Computer equipment 601,000 404,000
------------ ------------
$ 14,784,000 $ 12,104,000
============ ============

GOODWILL

Goodwill is amortized on a straight-line basis over two to twenty
years. The Company periodically evaluates its goodwill for impairment by
comparison of the carrying value against anticipated business performance.
Amortization expense was $326,000, $250,000, and $275,000 in fiscal 2000, 1999,
and 1998, respectively. Accumulated amortization was $1,597,000 and $1,272,000
at fiscal year end 2000 and 1999 respectively.

IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed of". SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or circumstances indicate the carrying
amount of an asset may not be recoverable. The Company evaluates potential
impairment by comparing the carrying amount of the assets with the estimated
undiscounted cash flows associated with them. If an impairment exists, the
Company measures the impairment utilizing discounted cash flows.

INCOME TAXES
As an operating unit within Chronimed, the Company does not file
separate tax returns but rather is included in the income tax returns filed by
Chronimed. For purposes of the financial statements, the Company's allocated
share of Chronimed's income tax provision has been prepared assuming MEDgenesis
was a separate entity. Deferred tax assets and liabilities have been 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. The balance for accrued current income taxes for
MEDgenesis is included in the Net Investment by Chronimed equity account because
Chronimed currently pays all taxes and receives all tax refunds on the Company's
behalf. No material tax-related balances are due to or from Chronimed as of each
balance sheet date presented.

In connection with the distribution, MEDgenesis and Chronimed have
entered a Distribution and Spin-off Agreement which contains an agreement
regarding tax allocation. Under the terms of the Distribution Agreement,
MEDgenesis will be responsible for all taxes and associated liabilities relating
to the historical businesses of MEDgenesis, occurring on or after July 1, 2000.
Tax liabilities existing prior to July 1, 2000 will be the responsibility of
Chronimed, and tax liabilities arising on or after July 1, 2000 will be the
responsibility of MEDgenesis. The Distribution Agreement also provides that any
tax liabilities associated with the spin-off shall be assumed and paid by
MEDgenesis subject to certain exceptions relating to changes in control of
Chronimed. The Distribution Agreement further provides that in the event there
is a tax liability associated with the historical operations of the Company that
is offset by a tax benefit of Chronimed, Chronimed will apply the tax benefit
against such tax liability and will be reimbursed for the value of such tax
benefit when and as Chronimed would have been able to otherwise utilize that tax
benefit for its own businesses.

F-8
<PAGE>

The Company's future effective tax rate will largely depend on its structure and
tax strategies as a separate company.

PRO FORMA EARNINGS PER SHARE

Basic and diluted pro forma earnings per share have been calculated using pro
forma basic and diluted weighted average shares outstanding for only the latest
fiscal year because, as a division of Chronimed, historical earnings per share
amounts are not meaningful. Pro forma basic weighted average shares have been
calculated by adjusting Chronimed's historical basic weighted average shares
outstanding to reflect the number of MEDgenesis shares that would have been
outstanding at the time assuming the distribution of one share of MEDgenesis
common stock for three shares of Chronimed common stock. Pro forma diluted
weighted average shares for MEDgenesis reflect an estimate of the potential
dilutive effect for common stock equivalents. Such estimate is calculated based
on Chronimed's dilutive effect of stock options divided by three to reflect the
distribution ratio.

RECENT ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). FAS 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. FAS 133, as recently amended, is
effective for fiscal years beginning after June 15, 2000. The Company believes
the adoption of FAS 133 will not have a material effect on the Company's
financial position or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101. "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on the recognition, presentation, and disclosure
of revenue in financial statements of all public registrants. The Company has
adopted SAB 101 and its implementation has not had a material adverse impact on
its existing revenue recognition policies or its reported results of operations.

3. ACQUISITIONS

In March 1998, the Company acquired the assets of DiaScreen
Corporation, a medical diagnostic products company, for $1.9 million in cash
plus future contingent payments up to a maximum of $3.2 million if certain
revenue levels are met or exceeded. These contingent payments are earn-out
payments and, accordingly, are recorded as additional goodwill when the
contingency level is reached. The initial excess purchase price over book value
of the net assets acquired was $400,000, of which $230,000 was allocated to
property and equipment and is being depreciated over five years, and $170,000
was allocated to goodwill and is being amortized on a straight-line basis over
seven years. In fiscal 2000, the Company paid a contingent payment of $549,000
to DiaScreen. The payments made since the acquisition date have been capitalized
as goodwill as reflected in "Goodwill, net" on the Balance Sheets and are being
amortized through March 2005. The acquisition was accounted for as a purchase
and accordingly, operating results of this business subsequent to the date of
the acquisition were included in the Company's financial statements.

F-9

<PAGE>

4. CORPORATE ALLOCATIONS

The Company's income statements include all costs of doing business, including
allocated costs incurred by Chronimed on its behalf. Certain general and
administrative costs incurred by Chronimed for senior management, information
systems, finance, legal and corporate services were historically allocated
monthly to the diagnostic products business. Corporate general and
administrative expenses were allocated based upon revenues, personnel, space,
and estimates of usage or time spent to provide services. Allocated general and
administrative expenses were $2,100,000, $2,000,000, and $1,600,000 in fiscal
2000, 1999, and 1998, respectively.

5. OPERATING LEASES AND RENT EXPENSE

The Company leases its manufacturing and distribution facilities under
separate operating lease agreements and does not share the related space with
other Chronimed businesses. The Company does share space with Chronimed for
general office use and has been allocated rent expense consistent with the
market rate provided in the Chronimed lease. The remaining lease terms of the
manufacturing and distribution facilities range from one to three years as of
June 30, 2000.

Future minimum lease payments, including current real estate taxes and
operating expenses, under the separate operating leases for the specific
manufacturing and distribution space with lease terms in excess of one year at
June 30, 2000, are approximately as follows:

2001 329,000
2002 238,000
2003 30,000
--------
$597,000

Total rent expense was $476,000, $293,000, and $245,000 during fiscal 2000,
1999, and 1998, respectively, including the rent expense allocation for the
shared general office space.

6. INCOME TAXES

The components of the provision for income taxes are as follows:

2000 1999 1998
---- ---- ----
Current $1,069,000 $2,091,000 $3,531,000
Deferred 110,000 121,000 22,000
---------- ---------- ----------
$1,179,000 $2,212,000 $3,553,000
========== ========== ==========

The Company's income tax expense differs from the applicable federal
rate of 34%. The reconciliation of differences is:

2000 1999 1998
---- ---- ----
Federal statutory rate $1,026,000 $1,925,000 $3,137,000
State taxes, net of federal benefit 110,000 210,000 341,000
Goodwill amortization 77,000 77,000 75,000
Other (34,000) -- --
---------- ---------- ----------
$1,179,000 $2,212,000 $3,553,000
========== ========== ==========

F-10
<PAGE>

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

2000 1999
---- ----
Deferred tax assets:
Allowance for doubtful accounts $102,000 $29,000
Inventory reserve 16,000 14,000
Accrued vacation 37,000 46,000
Goodwill amortization 4,000 6,000
Other -- 56,000
---------- ----------
159,000 151,000
Deferred tax liabilities:
Depreciation 58,000 (89,000)
Prepaid assets (203,000) (67,000)
Royalties (279,000) (150,000)
---------- ----------
(424,000) (306,000)
---------- ----------
Net deferred tax liabilities ($265,000) ($155,000)
========== ==========

7. EQUITY

Prior to the distribution, the diagnostic products business operated
within Chronimed and not as a separate company or subsidiary. Chronimed manages
its cash and financing activities at the corporate level. The Company's
financing requirements are represented by cash transactions with Chronimed and
are reflected in the "Net Investment by Chronimed" equity account. The equity
account for MEDgenesis represents the accumulated net income of MEDgenesis
adjusted by the net cash provided to or received from Chronimed. In June 2000,
pursuant to a Subscription Agreement entered between MEDgenesis and Chronimed as
a part of MEDgenesis' formation, MEDgenesis issued Chronimed 4,500,000 shares of
$.01 par common stock in exchange for $1,000. Changes in equity during each of
the years were as follows:

<TABLE>
<CAPTION>
COMMON STOCK
--------------------
DISCOUNT NET CUMULATIVE
ON INVESTMENT COMPREHENSIVE TOTAL
SHARES AMOUNT PAR VALUE BY CHRONIMED INCOME EQUITY
-------- --------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 27, 1997 6,304,000 6,304,000
Net amount received from Chronimed 294,000 294,000
Net income 5,671,000 5,671,000
---------- -----------

Balance at July 3, 1998 12,269,000 12,269,000
Net amount paid to Chronimed (4,262,000) (4,262,000)
Net income 3,459,000 3,459,000
Unrealized gain on available-for-sale securities 158,000 158,000
----------- ---------- -----------
Subtotal -- Comprehensive Income 3,459,000 158,000 3,617,000
----------- ---------- -----------

Balance at July 2, 1999 11,466,000 158,000 11,624,000
Net amount paid to Chronimed (3,295,000) (3,295,000)
Net income 1,840,000 1,840,000
Unrealized gain on available-for-sale securities 298,000 298,000
----------- ---------- -----------
Subtotal -- Comprehensive Income 1,840,000 456,000 2,138,000
----------- ---------- -----------
Common stock issued to parent 4,500 $ 45,000 $ (44,000) 1,000
-------- --------- --------- ----------- ---------- -----------

Balance at June 30, 2000 4,500 $ 45,000 $ (44,000) $10,011,000 $ 456,000 $10,468,000
======== ========= ========= =========== ========== ===========
</TABLE>

F-11
<PAGE>

8. SIGNIFICANT CONCENTRATIONS

The Company manufactures the Supreme and Select blood glucose reagent
strips and distributes them through its direct sales force. These two products
accounted for 49%, 62%, and 65% of the total revenue of the Company in fiscal
years 2000, 1999, and 1998.

9. EMPLOYEE BENEFIT PLANS

The Company participated with Chronimed in a qualified 401(k) Employee
Savings Plan covering substantially all employees. Company contributions are
required. The cost of this plan, including matching contributions, was included
in corporate general and administrative costs allocated to the Company (see Note
4).

10. STOCK BASED COMPENSATION

STOCK OPTION PLANS

Employees, as well as directors of Chronimed, hold various options to
purchase shares of Chronimed. The employees of Chronimed's diagnostic products
division were effectively terminated by Chronimed and hired by MEDgenesis on
July 1, 2000. Under the terms of Chronimed's stock option plans, these
employees' Chronimed stock options will terminate 90 days following the dividend
distribution of MEDgenesis stock. By agreement with the Chronimed Board of
Directors, CEO Maurice Taylor's Chronimed stock options will terminate on June
30, 2001. It is anticipated MEDgenesis may grant options in its stock that
represent substantially equivalent value and terms to each new employee who held
Chronimed options at the time of spin-off. MEDgenesis has provided for up to
600,000 shares in its option plans to cover the above-described option grants.
The Company cannot currently determine the exact number of shares of its common
stock that will be subject to these substitute awards after the Distribution.

STOCK PURCHASE PLAN

The Company maintains an employee stock purchase plan which allows
employees, through payroll deductions, to purchase Company stock at a price
equal to 85% of the lower of the market price on the first day or last day of
the offering period. Offering periods are established by the Board of Directors
and historically Chronimed has offered two six-month periods per year.

RESTRICTED STOCK COMPENSATION PLAN

The Company has adopted a restricted stock compensation plan intended
to create incentive compensation for key employees. Shares may be issued to
recipients at prices determined by a committee of outside directors. Prior to
full vesting, a recipient may vote shares and exercise other rights, but may not
transfer the shares. Shares may vest upon achievement of performance goals but,
assuming continued employment, must fully vest within a defined period of time.
Terms of issuance are subject to the discretion of the Committee.

11. RELATED PARTY TRANSACTIONS

DISTRIBUTION AND SPIN-OFF AGREEMENT
The Company and Chronimed have entered into a Distribution and Spin-off
Agreement which dictates the terms and conditions by which Chronimed will
transfer the assets and liabilities of its diagnostic products division to the
Company and distribute all of the outstanding shares of the Company to Chronimed
shareholders. The Distribution Agreement establishes all of the steps to be
taken by the Company and Chronimed, jointly and individually, to effectuate the
spin-off. It contains numerous covenants and indemnifications, including
agreements allocating all actual and potential tax liabilities.

Pursuant to this agreement, at June 30, 2000 MEDgenesis recorded a
liability under the caption of "Due to Chronimed" of $682,000, representing
compensation for increased working capital ($415,000) and asset purchases
($62,000) incurred between March 31 and June 30, 2000, as well as the proceeds
to be received from the sales of Available for Sales Securities occurring in
July, 2000 ($205,000). As equity at June 30, 2000 was computed as the difference
between assets and liabilities, these amounts due to Chronimed resulted in
reduced equity, and were not included in the results of operations.

F-12
<PAGE>

TRANSITION SERVICES AGREEMENT

The Company has entered into a transition services agreement with
Chronimed for a period of up to six months from the Distribution date. Under the
agreement, Chronimed will provide certain services requested by the Company. The
fee for these services will be based on rates similar to those being allocated
to the Company prior to the spin-off. The transition services to be provided
under this agreement include accounting, legal, and information systems.

PRODUCT DISTRIBUTION AGREEMENT

The Company has entered into a product distribution agreement with
Chronimed pursuant to which the Company will agree to provide certain diabetes
supply products at a negotiated price. The distribution agreement with Chronimed
is similar to other pricing agreements with other customers and contains
standard terms and conditions. The agreement does not obligate Chronimed to
minimum purchase volumes

OFFICER LOAN - SUBSEQUENT EVENT

In July, 2000, subsequent to the Company's June 30, 2000 financial
statements, included herein, the Company loaned to Chairman and CEO Maurice
Taylor $674,900 in retirement of a personal loan Mr. Taylor had with US Bank and
which had been guaranteed by Chronimed. Mr. Taylor has given the Company a
promissory note payable on December 31, 2001, with interest accruing at the US
Bank's prime lending rate plus 1/2%. The US Bank's prime lending rate at the
time of the loan was 9.5%. Payments of accrued interest and $25,000 in principal
are due quarterly. Mr. Taylor has given the Company a mortgage on his residence
and a salary pledge agreement to secure repayment.

DIASCREEN ASSET PURCHASE AGREEMENT
Pursuant to a January 13, 1998 Asset Purchase Agreement, the Company
may be obligated to make additional payments to the DiaScreen Corporation as
consideration for the purchase, contingent upon the achievement of certain
revenue levels (see footnote 3, "Acquisitions"). During fiscal 2000, the Company
made additional payments totaling $549,000. MEDgenesis director Leo Furcht owns
in excess of 23% of the stock of DiaScreen Corporation.

12. BUSINESS SEGMENT INFORMATION

Prior to the intended spin-off, Chronimed Inc. disclosed three business
segments: Diagnostic Products, Specialty Pharmacy Services and Disease
Management. As a result of the spin-off, MEDgenesis will receive virtually all
of the assets and liabilities of the Diagnostic Products segment from Chronimed.
At the time of the proposed spin-off, MEDgenesis intends to report one business
segment, which is the medical diagnostic products business.

13. LEGAL PROCEEDINGS

MEDgenesis has assumed Chronimed's rights and liabilities in the
lawsuit Chronimed Inc. v. Bayer Corporation. While Chronimed remains the formal
party in the lawsuit, MEDgenesis' assumption agreement with Chronimed will cause
MEDgenesis to fully indemnify Chronimed against any adverse financial impacts.
Chronimed sued Bayer seeking judgment that specific technology which Chronimed
uses in its urine diagnostic strips is not in violation of Bayer patents. Bayer
counterclaimed alleging infringement of its patents and also pleads unspecified
actual and statutory treble damages. Chronimed and MEDgenesis are confident in
the merits of the case, and continue to vigorously pursue Chronimed's rights. An
adverse ruling could include an injunction against the future sale of urine test
strips containing leukocyte or specific gravity tests, as well as a requirement
of monetary compensation to Bayer for specified damages. The lawsuit was
commenced in March 1999, and is currently in the pre-trial discovery phase. A
mid-2001 trial date is expected. Management does not believe that the Company
has a material, estimable, and probable liability regarding the Bayer lawsuit
and therefore has not recorded such liability in its financial statements.

F-13
<PAGE>

14. QUARTERLY FINANCIAL DATA

The following tabulation sets forth unaudited quarterly financial data
for the years ended June 30, 2000 and July 2, 1999:

<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4 TOTAL
------ ------ ------ ------ -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
2000
Revenues $8,014 $8,811 $8,001 $8,123 $32,949
Gross profit 3,134 3,671 3,126 2,735 12,666
Operating expenses 2,420 2,610 2,559 2,598 10,187
Income from operations 714 1,061 567 137 2,479
Net income 436 647 635(a) 122(b) 1,840
Pro forma earnings per share
Basic (c) 0.11 0.16 0.16 0.03 0.46
Diluted (c) 0.11 0.16 0.16 0.03 0.46

1999
Revenues $7,425 $7,635 $7,600 $7,012 $29,672
Gross profit 3,955 3,960 3,356 2,710 13,981
Income from operations 1,885 2,041 2,236 2,148 8,310
Operating income 2,070 1,919 1,120 562 5,671
Net income 1,263 1,171 683 342 3,459
</TABLE>

(a) The third quarter includes favorable impact of gain on sale of
securities --- after tax $289, and proforma EPS of $.07.

(b) The fourth quarter includes favorable impact of gain on sale of
securities - after tax $40, and proforma EPS of $.01.

(c) Basic and diluted pro forma earnings per share have been calculated
using pro forma basic and diluted weighted average shares outstanding
for only the latest fiscal year because, as a division of Chronimed,
historical earnings per share amounts are not meaningful. Pro forma
basic weighted average shares have been calculated by adjusting
Chronimed's historical basic weighted average shares outstanding for
the applicable period to reflect the number of MEDgenesis shares that
would have been outstanding at the time assuming the distribution of
one share of MEDgenesis common stock for three shares of Chronimed
common stock. Pro forma diluted weighted average shares reflect an
estimate of the potential dilutive effect for common stock equivalents.
This estimate is calculated based on Chronimed's dilutive effect of
stock options divided by three to reflect the distribution ratio.

15. SUBSEQUENT EVENT - (UNAUDITED)

On August 31, 2000, Chronimed, MEDgenesis, and Hypoguard Ltd. executed
an agreement by which Hypoguard consented to Chronimed's assignment of
the February, 1993 Patent and Know-How License agreement between
Hypoguard and Chronimed by which Chronimed licensed the rights to
manufacture, distribute, and sell Supreme blood glucose system test
strips, to MEDgenesis, in consideration of a payment of $475,000. This
amount will be recorded as an expense on the books of MEDgenesis during
its fiscal quarter ending September 29, 2000.

F-14
<PAGE>

MEDGENESIS INC.

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
ADDITIONS
------------ ------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
------------ ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Description Year ended June 30, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 75,000 $ 385,000 $ -- $ 95,000 $ 365,000
========== ========== ========== ========== ==========

Year ended July 2, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 77,000 $ 22,000 $ -- $ 24,000 $ 75,000
========== ========== ========== ========== ==========

Year ended July 3, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for doubtful accounts $ 71,000 $ 29,000 $ -- $ 23,000 $ 77,000
========== ========== ========== ========== ==========
</TABLE>

---------------------------------
(1) Uncollectible accounts written off, net of recoveries.

S-1
<PAGE>

Required exhibits are referenced as follows:

EXHIBIT INDEX

2.1 Distribution and Spin-Off Agreement, as amended (incorporated by
reference, Form 10, Amendment No. 1, filed 7/31/00)

3.1 Articles of Incorporation, as amended (incorporated by reference, Form
10, Amendment No. 1, filed 7/31/00)

3.2 Bylaws, as amended (incorporated by reference, Form 10, Amendment No.
1, filed 7/31/00)

4.1 Shareholder Rights Plan Agreement (incorporated by reference, Form 10,
Amendment No. 3, filed 10/23/00)

10.01 US Bank Credit Agreement (incorporated by reference, Form 10, Amendment
No. 1, filed 7/31/00)

10.02 Transition Services Agreement (incorporated by reference, Form 10 filed
5/5/00)

10.03* Purchase and Price Agreement, Home Service Medical

10.04 2000 Stock Option Plan (incorporated by reference, Form 10 filed
5/5/00)

10.05 2000 Employee Stock Purchase Plan (incorporated by reference, Form 10,
Amendment No. 3, filed 10/23/00)

10.06 2000 Long Term Incentive Plan (incorporated by reference, Form 10,
Amendment No. 1, filed 7/31/00)

10.07 Maurice R. Taylor Employment Agreement (incorporated by reference, Form
10 filed 5/5/00)

10.08 Taylor Promissory Note, Mortgage, Pledge Agreement (incorporated by
reference, Form 10, Amendment No. 1, filed 7/31/00)

10.09 Lease, Bury Drive Facility

10.10 Lease, West 76th Street Facility

10.10a Lease Amendment, West 76th Street Facility

10.11* Distribution Agreement, Arta Plast AB

10.12* Patent License and Know-How Agreement, Hypoguard Ltd

10.12a License Agreement Amendment (incorporated by reference, Form 10,
Amendment No. 3, filed 10/23/00)

10.13 Deleted

10.14* Purchase and Price Agreement, McKesson Redline

10.15* Asset Purchase Agreement, Dia-Screen Corporation

10.16* ODM Distributor Agreement, Apex Biotechnology Corp.

23.1.1 Consent of Ernst & Young LLP

27.1 Financial Data Schedule . (incorporated by reference, Form 10,
Amendment No. 3, filed 10/23/00)

* Exhibits 10.03, 10.11, 10.12, 10.14, 10.15, and 10.16 contain redacted
information. Application for confidential treatment has been made to
the SEC.

51
<PAGE>

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.

MEDgenesis Inc.

By: /s/ Maurice R. Taylor, II
-------------------------
Chairman of the Board and
Chief Executive Officer

Date: November 13, 2000