GENAISSANCE PHARMACEUTICALS INC, 424B4, 2000-08-02

GENAISSANCE PHARMACEUTICALS INC
424B4, 2000-08-02
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-35314

[LOGO]

6,000,000 Shares

Common Stock

This is the initial public offering of Genaissance Pharmaceuticals, Inc., and we
are offering 6,000,000 shares of our common stock. We have been approved for
listing on the Nasdaq National Market under the symbol "GNSC".

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.

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

<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commission Genaissance
<S> <C> <C> <C>
Per Share $13.00 $0.91 $12.09
Total $78,000,000 $5,460,000 $72,540,000
</TABLE>

We have granted the underwriters the right to purchase up to 900,000 additional
shares to cover over-allotments.

Deutsche Banc Alex. Brown

Bear, Stearns & Co. Inc.

Salomon Smith Barney

UBS Warburg LLC

The date of this prospectus is August 1, 2000.
<PAGE>
PROSPECTUS SUMMARY

ALTHOUGH THIS SUMMARY HIGHLIGHTS INFORMATION WE BELIEVE IS IMPORTANT ABOUT
THIS OFFERING AND OUR BUSINESS, YOU SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS,
INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, FOR A COMPLETE
UNDERSTANDING OF THIS OFFERING AND OUR BUSINESS.

Our Business

We are a leader in developing technology for applying population genomics and
informatics to improve the development, marketing and prescribing of drugs.
Population genomics is the analysis of inherited differences within diverse
groups of people; informatics is storing, manipulating, analyzing, and
visualizing information on a computer. We apply population genomics to discover
inherited differences, or genomic markers, that are predictive of which patients
will respond effectively to a drug. We are marketing our technology to the
pharmaceutical industry as a complete solution for developing "smarter" clinical
trials and for improving the sales of approved drugs. Our solution combines
informatics, our genomic markers and an efficient procedure for analyzing
clinical samples to correlate drug response with patients' inherited
differences. In the future, we believe that our technology should allow
physicians and patients to select specific treatments based on a patient's
genomic markers.

Inherited, or genomic, differences clearly influence how an individual
responds to a drug. However, because there has been no practical method to
correlate drug response with genomic variability, pharmaceutical companies have
not taken genomic differences into account in planning and implementing clinical
trials or in marketing approved drugs. As a result, pharmaceutical companies may
unnecessarily discontinue further development of a drug, fail to obtain
regulatory approval for a promising drug candidate or be unable to market an
approved drug effectively.

Scientists can now measure genomic differences at the DNA level. Some
companies are seeking to discover individual sites of genomic variation, each
commonly referred to as a SNP, as predictive markers for correlating drug
response with genomic variability. A company that seeks to identify these
correlations using the individual SNP approach, however, must examine blood
samples of thousands of patients and perform a complex statistical analysis to
detect possible predictive markers, a large number of which, when the company
performs subsequent testing, may not correlate with a drug response.

Geneticists have historically studied inherited variation by analyzing the
inheritance of traits within an extended family in terms of organized genetic
units called haplotypes. At the molecular level, a haplotype consists of
multiple individual SNPs that are organized into one of the limited number of
combinations that actually exist as units of inheritance in humans. Each
haplotype contains significantly more information than individual, unorganized
SNPs. As a result, these haplotypes contain the information needed to correlate
drug response with genomic variation in a patient population of fewer than 200,
which is comparable to the size of many phase II clinical trials. Subsequent
testing of this information will reveal relatively few haplotypes that do not
correlate with a drug response.

We base our technology on the discovery and application of haplotype markers.
Our approach, which we call HAP Technology, combines our proprietary haplotype
markers, known as HAP Markers, with a sophisticated software tool, our DECOGEN
informatics system, and a procedure, HAP Typing, for measuring which of our HAP
Markers are present in a patient's clinical blood sample. We designed our HAP
Technology for companies to use in clinical trials to predict or explain a
patient's response to a particular drug. We expect to

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provide our HAP Technology to pharmaceutical and biotechnology companies through
our HAP2000 program. Through projects we call our Mednostics program, we also
expect to apply our HAP Technology internally to develop predictive markers for
selected approved drugs which pharmaceutical companies currently sell in highly
competitive markets.

Utilizing our HAP Technology, we have discovered HAP Markers for 1,309 genes
and differentiated patient drug response in an asthma clinical study. In our
first Mednostics program, we have identified HAP Markers from multiple genes
that differentiate how patients have responded to different statins, a class of
approved drugs for lowering cholesterol levels. We are currently capable of
discovering HAP Markers for approximately 50 genes per week and intend to
increase this number to approximately 160 genes per week by the fourth quarter
of 2000.

Our objective is to make our HAP Technology the industry standard for using
genomic variation information throughout the pharmaceutical process of
developing, marketing and prescribing drugs. The key elements of our strategy
include:

- obtaining pharmaceutical partners through our HAP2000 program;

- discovering and marketing HAP Markers for selected approved drugs currently
sold in highly competitive markets through our Mednostics program;

- discovering and patenting HAP Markers for all of the pharmaceutically
relevant genes, which are the genes scientists believe are likely to be
involved in how a patient responds to a drug;

- improving and expanding our DECOGEN informatics system;

- seeking strategic alliances with leading equipment and information
technology providers; and

- increasing awareness of the impact of genomic variation on the practice of
medicine.

We organized as a Delaware corporation on February 22, 1992 as BIOS
Laboratories, Inc. and changed our name to Genaissance Pharmaceuticals, Inc. on
March 18, 1997. Our principal executive offices are located at Five Science
Park, New Haven, Connecticut 06511. Our telephone number is (203) 773-1450. Our
website is located at http://www.genaissance.com. We are sponsoring a website,
http://www.hapcentral.com, to disseminate information on the benefits of using
genomic variation information in healthcare. We do not intend for any of the
information on these websites to be part of this prospectus.

This prospectus contains our trademarks, Genaissance-Registered Trademark-,
HAP-TM- Marker, HAP-TM- Typing, HAP2000-TM- partnership program, HAP-TM-
Technology, DECOGEN-TM- informatics system, ISOGENOMICS-TM- Database, and
Mednostics-TM- program. Each trademark, trade name or service mark of any other
company appearing in this prospectus belongs to its holder.

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The Offering

<TABLE>
<S> <C>
Common stock offered by Genaissance......................... 6,000,000 shares

Common stock outstanding after this offering................ 21,584,191 shares

Use of proceeds............................................. To purchase consumables for
discovery of our HAP Markers; hire
additional informatics personnel;
fund internal Mednostics programs;
file additional patent applications;
and for general corporate purposes.
You should read our discussion under
"Use of Proceeds."

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

The number of shares to be outstanding upon completion of this offering is
based on shares outstanding as of March 31, 2000. This number assumes the
conversion into common stock of all our preferred stock outstanding on that
date, assumes the cashless exercise of warrants into 62,445 shares of common
stock upon the completion of this offering and excludes:

- 1,050,475 shares of common stock subject to options outstanding as of
March 31, 2000, with a weighted average exercise price of $2.52 per share
which includes 14,555 shares of common stock from options exercised after
March 31, 2000;

- 607,013 shares of common stock subject to warrants outstanding as of
March 31, 2000, with a weighted average exercise price of $5.16 per share;
and

- Options to purchase 1,175,780 shares of common stock which we granted in
April and June 2000 at a weighted average exercise price of $11.42 per
share.

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

UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES:

- THAT THE UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO PURCHASE
ADDITIONAL SHARES;

- CONVERSION OF ALL SHARES OF PREFERRED STOCK, INCLUDING SHARES OF NON-VOTING
PREFERRED STOCK, INTO SHARES OF COMMON STOCK UPON COMPLETION OF THIS
OFFERING; AND

- THE FILING OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION UPON
COMPLETION OF THIS OFFERING TO, AMONG OTHER THINGS, INCREASE OUR AUTHORIZED
COMMON STOCK AND DECREASE OUR AUTHORIZED PREFERRED STOCK.

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Summary Financial Data
(in thousands, except per share data)

Net loss.......................................... (784) (1,029) (803) (2,879) (9,449) (1,309) (8,649)
Preferred stock dividends and accretion........... -- -- -- (742) (2,082) (428) (1,609)
Beneficial conversion feature of Series B, KBH and
C preferred stock............................... -- -- -- -- -- -- 50,180
----------- -------- -------- -------- -------- -------- --------
Net loss attributable to common shareholders...... $ (784) $ (1,029) $ (803) $ (3,621) $(11,531) $ (1,737) $(60,438)
=========== ======== ======== ======== ======== ======== ========
Net loss per common share, basic and diluted...... $ (0.38) $ (0.47) $ (0.40) $ (1.67) $ (4.24) $ (0.67) $ (21.49)
Weighted average shares used in computing net loss
per common share................................ 2,052 2,207 1,983 2,165 2,719 2,599 2,812
Pro forma net loss per common share, basic and
diluted......................................... $ (1.79) $ (6.37)
Pro forma weighted average shares used in
computing net loss per common share, basic and
diluted......................................... 5,202 9,192
</TABLE>

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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(1) Excludes non-cash, stock based compensation
expense as follows:
Research and development...................... $ -- $ 219 $ 64 $ 427 $ 499 $ 51 $ 1,575
Selling, general and administrative........... -- 466 42 46 267 6 2,057
----------- -------- -------- -------- -------- -------- --------
$ -- $ 685 $ 106 $ 473 $ 766 $ 57 $ 3,632
=========== ======== ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(1)
-------- ------------- ---------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments...................... $ 54,909 $ 54,909 $126,509
Total assets................................................ 67,355 67,355 138,955
Long-term liabilities....................................... 13,583 13,044 13,044
Redeemable convertible preferred stock...................... 66,830 -- --
Accumulated deficit......................................... (80,091) (80,091) (80,091)
Total stockholders' equity (deficit)........................ (18,428) 49,350 120,950
</TABLE>

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

(1) The pro forma column gives effect to both the conversion of our preferred
stock outstanding as of March 31, 2000 into common stock and the cashless
exercise of certain warrants upon the closing of this offering. The pro forma as
adjusted column reflects the receipt of the net proceeds from the sale of
6,000,000 shares of common stock offered by us at the initial public offering
price listed on the cover page of this prospectus, and the application of the
net proceeds from this offering, after deducting underwriting discounts and
commissions and estimated offering expenses. The pro forma information is
unaudited and reflects adjustments which are necessary, in our management's
opinion, for a fair presentation of our financial condition and results of
operations on a pro forma basis.

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<PAGE>
RISK FACTORS

ANY INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER WITH
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO
BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION COULD SUFFER
SIGNIFICANTLY. IN ANY OF THESE CASES, THE MARKET PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON
STOCK.

Risks Related to Our Business

We are an early stage company that may never be profitable.

We have incurred substantial operating losses since our inception. We have
not generated any revenues from our HAP Technology, other than government
grants, and we do not expect to generate significant revenues for several years,
if ever. From inception through March 31, 2000, we had an accumulated deficit of
approximately $80.0 million. Our losses to date have resulted principally from
costs we incurred in the development of our HAP Technology and, specifically,
our HAP Marker production facility, discovery of our HAP Markers, our DECOGEN
informatics system and general and administrative costs associated with
operations. We expect to dedicate a significant portion of our resources for the
foreseeable future to further develop and maintain our HAP Technology.

We expect to incur additional losses this year and in future years, and we
may never achieve profitability. These losses may increase in the near future as
we expand our technology development activities. In addition, pharmaceutical
companies have never used products such as ours in their drug development or
marketing efforts and, accordingly, they may not choose to use our HAP
Technology. We do not expect our losses to be substantially mitigated by
revenues from our HAP2000 or Mednostics programs for a number of years, if ever.

To generate significant revenues, we must obtain customers for our HAP
Technology.

Our strategy depends on entering into agreements with pharmaceutical and
biotechnology companies for our HAP2000 partnership program. To date, we have no
partners for our HAP2000 partnership program, and we may never have partners for
our HAP2000 partnership program or other partnering programs. However, if we do
enter into any agreements, we do not expect it will be before 2001. We have only
recently commenced efforts to market our HAP Technology. If we are unsuccessful
in selling our technology and services, we may never generate sufficient revenue
to sustain our operations. In addition, we expect that our future HAP2000
partnerships and Mednostics programs will be limited to specific, limited-term
projects. Accordingly, we must continually obtain new customers for our
technology and services in order to be successful.

If we are unable to discover, develop, and sell information regarding the
correlation between genomic variation and drug response derived from our
Mednostics programs, we may not generate sufficient revenues to support our
operations.

To be successful with our internally funded Mednostics programs, we must
discover a correlation between genomic variations and drug response. We may not
have sufficient funds to pursue our Mednostics programs and we may never
discover any pharmaceutically

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relevant correlations as a result of the programs. Even if we discover
information on the correlation between drug response and genomic variation as a
result of our Mednostics programs, we may be unable to sell this information on
terms sufficient to recover our costs.

Our HAP Technology is new and unproven and may not allow us or our partners to
develop commercial products or to increase sales of their currently marketed
products.

Our HAP Technology involves new and unproven approaches. We base these
approaches on the assumption that information about gene association and genomic
variation may help drug development professionals better understand complex
disease processes and the drug response of particular individuals. Although the
pharmaceutical industry is increasing its use of genomics in analyzing diseases
and drug response, we are unaware of any successful drug development program
applying population genomics.

The focus of our HAP Technology is on the rapid discovery of HAP Markers for
all of the pharmaceutically relevant genes. If we are unable to find HAP Markers
for a significant portion of the pharmaceutically relevant genes in a timely
manner, our potential partners may lose confidence in our technology and our
company, and this loss in confidence could decrease our ability to generate
revenues. Even if we are able to discover the HAP Markers for all of the
pharmaceutically relevant genes, this information may not prove to be superior
to genomic variation information discovered by our competitors. Furthermore,
pharmaceutical and biotechnology companies may not choose our technology over
competing technologies.

Our DECOGEN informatics system may also be less effective than we expect or
may not allow our partners to determine a correlation between genomic variation
and drug response. Accordingly, our HAP Markers and HAP Technology may not
improve the development, marketing and prescribing of drugs by our HAP2000 and
Mednostics partners. Furthermore, even if our partners are successful in
identifying a specific correlation between genomic variation and drug response
based on our HAP Technology, they may not be able to develop or sell
commercially viable products or to increase the sales of their existing
products.

We may not be able to obtain sufficient additional funding to meet our expanding
capital requirement.

We have used substantial amounts of cash to fund our research and development
activities. Currently, we are rapidly expanding our research and development
activities to develop further our HAP Technology and, as a result, we have
substantially increased our capital and operating expenditures. We expect our
capital and operating expenditures to increase over the next several years as we
continue to expand the development of our HAP Technology. We plan to pay for our
expansion in research and development activities with funds from:

- our current assets;

- the net proceeds from this offering; and

- income that we may receive from our future HAP2000 partnership programs and
Mednostics programs.

We intend to rely on HAP2000 partners for significant funding in the future
to support our research efforts. We cannot be certain when we will begin to
receive income, if at all, from our HAP2000 partnership programs and Mednostics
programs. If we do not receive this income or do not receive it as rapidly as we
expect, we would spend our current assets and the net proceeds from this
offering more rapidly than we had originally planned. We believe

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that the net proceeds from this offering, existing cash and investment
securities will be sufficient to support our current operating plan for at least
24 months. We have based this belief on assumptions that may prove wrong.

To support our increased development of our HAP Technology, we may seek
additional funding through public or private equity offerings and debt
financings. Additional financing may not be on terms favorable to us or our
stockholders. Stockholders' ownership will be diluted if we raise additional
capital by issuing equity securities. If we raise additional funds through
partnerships and other licensing arrangements, we may have to relinquish rights
to some of our technologies or grant licenses on unfavorable terms. If adequate
funds are not available, we would have to scale back or terminate our discovery
and research programs and our product development programs.

If we are unable to obtain intellectual property protection for our proprietary
technology, trade secrets or know-how, we may not be able to operate our
business profitably.

Our success depends, in part, on our ability to protect our DECOGEN
informatics system, HAP Marker data, and any other proprietary software, methods
and technologies that we develop, under the patent and other intellectual
property laws of the United States and other countries, so that we can prevent
others from using our inventions and proprietary information. Because patent
applications in the United States are confidential until patents issue, third
parties may have filed patent applications for technology covered by our pending
patent applications without our being aware of those applications, and our
patent applications may not have priority over any patent applications of
others. We are aware that there are other firms or individuals who have
discovered, or are currently discovering, genomic variation information similar
to the information we are discovering, who may have filed, and in the future are
likely to file, patent applications covering genes, gene products, SNPs, or
haplotypes that are similar or identical to our technology.

Our pending patent applications may not result in issued patents. The patent
positions of pharmaceutical and biotechnology companies, including ours, are
generally uncertain as a result of the uncertain state of the patent law in the
biotechnology field. There is no uniform, worldwide policy regarding the subject
matter and scope of claims granted or allowable in biotechnology patents,
particularly those involving genomics.

There is substantial uncertainty in the United States and abroad concerning
the patentability of genes, gene fragments, SNPs, or haplotypes having no known
function or medical utility. The U.S. Patent and Trademark Office has proposed
new guidelines that address the requirements for demonstrating the utility and
describing the structure of these substances. While the new guidelines do not
require clinical efficacy data for issuance of patents relating to human
therapeutics and diagnostics, the guidelines have been in effect for only a
short period of time and it is possible that the U.S. Patent and Trademark
Office may interpret them in a way that could delay or adversely affect our
ability or the ability of our partners to obtain patent protection. Similarly,
U.S. courts are addressing the requirements for demonstrating the utility and
describing the structure of these substances in patent infringement and
enforcement proceedings. The biotechnology patent situation outside the United
States is even more uncertain and is currently undergoing review and revision in
many countries. Accordingly, we do not know the degree of future protection for
our proprietary rights or the breadth of claims allowed in any patents issued to
us or to others. Furthermore, we must continually review our patent strategy and
patent applications to address the changing legal standards in the United States
and abroad.

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Our strategy depends on our ability to identify rapidly and seek patent
protection for HAP Markers for all of the pharmaceutically relevant genes. In
order to do so, we must significantly increase our ability to prosecute the
substantial number of resulting patent applications, as well as patent
applications for the large number of discoveries we have made to date for which
we have not yet filed patent applications and for which we may not obtain
patents. In order to ultimately obtain a patent on a HAP Marker, we may need to
both discover the exact set of biological sequences which describe the HAP
Marker as well as to describe the utility of the marker for characterizing
genomic variation that is linked to a particular disease or drug response. This
process will be expensive and time consuming, and we may not be able to increase
sufficiently our patent prosecution capacity or to file and prosecute all
necessary or desirable patent applications at a reasonable cost or in a timely
manner.

If we are unable to prevent others from unauthorized use of, or are unable to
defend our use of, proprietary technology, trade secrets or know-how, we may not
be able to operate our business profitably.

Despite our efforts to protect our proprietary rights, unauthorized parties
may be able to obtain and use information that we regard as proprietary. The
mere issuance of a patent does not guarantee that it is valid or enforceable;
thus even if we obtain patents, they may not be valid or enforceable against
third parties.

We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We generally protect this information with reasonable
security measures, including confidentiality agreements signed by our employees,
academic collaborators and consultants that provide that all confidential
information developed or made known to others during the course of the
employment, consulting or business relationship will be kept confidential except
in specified circumstances. Agreements with employees provide that all
inventions conceived by the individual while employed by us are our exclusive
property. If employees do not honor these agreements, we may not have adequate
remedies for breach. Furthermore, our trade secrets may otherwise become known
or be independently discovered by competitors.

Further, a patent does not provide the patent holder with freedom to operate
in a way that infringes the patent rights of others. A third party may sue us
for infringing on its patent rights. Likewise, we may need to resort to
litigation to enforce a patent issued to us or to determine the scope and
validity of third party proprietary rights. The cost to us of any litigation or
other proceeding relating to intellectual property rights, even if resolved in
our favor, could be substantial, and the litigation would divert our
management's efforts. Some of our competitors may be able to sustain the costs
of complex patent litigation more effectively than we can because they have
substantially greater resources. Uncertainties resulting from the initiation and
continuation of any litigation could limit our ability to continue our
operations.

If any parties should successfully claim that the creation or use of our
DECOGEN informatics system or HAP Marker data infringes upon their intellectual
property rights, in addition to any damages we might have to pay, a court could
require us to stop the infringing activity or obtain a license on unfavorable
terms. Moreover, any legal action against us or our HAP2000 or Mednostics
partners claiming damages and seeking to enjoin commercial activities relating
to the affected products and processes could, in addition to subjecting us to
potential liability for damages, require us or our HAP2000 or Mednostics
partners to obtain a license in order to continue to manufacture or market the
affected products and processes. Any license required under any patent may not
be made available on commercially acceptable

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terms, if at all. In addition, some licenses may be non-exclusive, and
therefore, our competitors may have access to the same technology licensed to
us. If we fail to obtain a required license or are unable to design around a
patent, we may be unable to market effectively some of our technology and
services, which could limit our profitability and possibly prevent us from
generating revenue sufficient to sustain our operations.

We may be unable to develop or commercialize our technology and services if we
cannot establish collaborative relationships, and we will depend on our partners
to develop products, which may lead to disputes over rights to technology.

We currently have no HAP2000 or Mednostics partners. Under our current
strategy, and for the foreseeable future, we do not expect to develop or market
pharmaceutical products on our own. As a result, our current and future revenues
will depend on payments from our future HAP2000 and Mednostics partners, if any,
for new products they may develop, or for increased sales of their existing
products, made possible through the use of our HAP Technology. If we are unable
to attract HAP2000 or Mednostics partners, we may never generate sufficient
revenues to sustain our operations.

Our HAP2000 and Mednostics partners, if any, will be responsible for
pre-clinical study and clinical development of their therapeutic and diagnostic
products and for regulatory approval, manufacturing and marketing of any
products or enhanced marketing claims that result from our HAP Technology. We
anticipate that our agreements with HAP2000 and Mednostics partners will allow
them significant discretion in electing whether to pursue these activities. We
cannot control the amount and timing of resources our future HAP2000 and
Mednostics partners will devote to our programs or potential products. Our
HAP2000 and Mednostics arrangements, if any, may also have the effect of
limiting the areas of research that we may pursue either alone or with others.
Because our revenues will be largely dependent on the successful
commercialization or development of our partners' products, if, for any reason,
a HAP2000 or Mednostics partner delays or abandons its development or
commercialization of a product developed using our HAP Technology, we may
receive reduced royalty payments or no royalty payments at all.

Although we intend to retain the rights to all HAP Markers which we discover
as well as to HAP Markers discovered jointly with our HAP2000 partners, we may
not be able to negotiate the retention of these rights. Furthermore, disputes
may arise in the future over the ownership of rights to HAP Markers as well as
any other technology we develop with our HAP2000 partners. These and other
possible disagreements between our HAP2000 partners and us could lead to delays
in the research, development or commercialization of their products. These
disagreements could also result in litigation or require arbitration to resolve.
Any of these events could prevent us from effectively marketing our technology
and services.

We invest considerable amounts of time, effort, and money to sell our technology
and services; and if we are unable to sell our technology and services, we may
not generate sufficient revenue to sustain our operations.

Our ability to obtain customers for our technology and services will depend
in significant part upon the pharmaceutical industry's acceptance that our
technology and services can help accelerate or improve their drug development
and marketing efforts. To achieve this market acceptance, we must educate the
pharmaceutical industry and the public in general as to the potential benefits
of our technology and services. Most importantly, we must convince the research
and development, clinical and marketing departments of large pharmaceutical
companies that our technology and services can accelerate and improve the
processes for

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developing, marketing, and prescribing drugs. Given the amount of time and
effort necessary to educate our potential partners, if we fail to gain this
acceptance, we may never generate sufficient revenues to sustain our operations.
In addition, each of our HAP2000 partnerships will likely involve the
negotiation of agreements containing terms that may be unique to the partner
involved. We may expend substantial funds and management effort to market our
technology and services, without any resulting sales.

Regulatory oversight of our technology and services and public opinion regarding
ethical issues surrounding the use of genetic information may adversely affect
our ability to market our products.

The Secretary's Advisory Committee on Genetic Testing, an advisory panel to
the Secretary of the U.S. Department of Health and Human Services, has
recommended that the U.S. Food and Drug Administration, or the FDA, expand its
regulation of genetic testing to require FDA approval for all new genetic tests
and labeling of genetic tests. Currently, the FDA reviews only genetic tests
that companies package and sell as kits. If the FDA adopts this recommendation,
it could require that we apply for FDA approval as a prerequisite to marketing
our technology and services. If the FDA were to deny any application of this
kind, we could not conduct our business and we would be unable to generate
sufficient revenues to sustain our operations.

Moreover, our success will depend in part on the FDA's and other regulatory
agencies' acceptance of genomic variation analysis as part of the drug approval
process and, more specifically, the validity of our HAP Technology as a basis
for identifying genomic variation and for correlating drug response with genomic
variation. Without this acceptance, we may be unable to market effectively our
technology and services and we may not generate sufficient revenues to sustain
our operations. To date, the FDA has not required in connection with approving
any drug that a physician must have genomic variation information determined
about a patient before the doctor prescribes a drug.

Within the field of personalized health and medicine, governmental or other
entities may enact patient privacy and healthcare laws and regulations that may
limit the use of genomic variation data. To the extent that these laws and
regulations limit the use of our HAP Technology or impose additional costs on
our partners, we may be unable to market effectively our technology and services
and we may not generate sufficient revenues to sustain our operations.

Additionally, public opinion on ethical issues related to the confidentiality
and appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, governmental authorities or other entities may call for limits on,
or regulation of, the use of genetic testing or prohibit testing for genetic
predisposition to certain conditions, particularly for those that have no known
cure. The occurrence of any of these events could reduce the potential markets
for our HAP Technology, which could prevent us from generating sufficient
revenues to sustain our operations.

Furthermore, we may be directly subject to regulations as a provider of
diagnostic information. To the extent that these regulations restrict the sale
of our technology or impose other costs, we may be unable to provide our
technology and services to our customers on terms sufficient to recover our
expenses.

10
<PAGE>
If our future partners, if any, do not seek, or do not receive, marketing
approval for products they develop, if any, using our HAP Technology, we may
receive delayed royalty payments or no royalty payments at all.

Any new drug, biologic, or new drug or biologic indication our partners
develop as a result of using our HAP Technology must undergo an extensive
regulatory review process in the United States and other countries before a new
product or indication of this kind could be marketed. This regulatory process
can take many years and require substantial expense. Changes in FDA policies and
the policies of similar foreign regulatory bodies can prolong the regulatory
review of each new drug or biological license application or prevent approval of
the application. We expect similar delays and risks in the regulatory review
process for any diagnostic product, whenever this regulatory review is required.
Even if a product obtains marketing clearance, a marketed product and its
manufacturer are subject to continuing review. A manufacturer may be forced to
withdraw a product from the market if a previously unknown problem with a
product becomes apparent. Because our revenues will be largely dependent on the
successful commercialization or development of products using our HAP
Technology, any HAP2000 or Mednostics partner's delay in obtaining, failure to
obtain, or failure to maintain regulatory approval for a product developed using
our HAP Technology may delay our receipt of royalty payments or prevent us from
receiving royalty payments sufficient to recover our expenses.

If our partners are unable to obtain FDA approval for therapeutic or diagnostic
products they develop using our technology, the lack of regulatory approval will
diminish the value of our technology and services.

To date, no one has developed or commercialized any therapeutic or diagnostic
products using our HAP Technology. In addition, no one has submitted an
investigational new drug application or investigational device exemption for any
therapeutic or diagnostic product candidate incorporating the use of our
technology. We expect to rely on our HAP2000 and Mednostics partners to file
these applications and generally direct the regulatory review process and obtain
FDA acceptance of our HAP Technology. Our HAP2000 or Mednostics partners may not
submit an application for regulatory review; even if they do submit
applications, they may not be able to obtain marketing clearance for any
products on a timely basis, if at all. If our partners fail to obtain required
governmental clearances for therapeutic or diagnostic products, they will not be
able to market these products unless and until they obtain these clearances. As
a result, we may not receive royalty payments from our customers. The occurrence
of any of these events may prevent us from generating revenue sufficient to
sustain our operations.

Our failure to comply with any applicable government regulation pertaining to
our laboratory and the materials used in our laboratory may affect our ability
to develop, produce, or market our technology or services; and we may have to
pay penalties that exceed our financial resources.

Our research and development, production and service activities involve the
controlled use of biological waste, chemicals, patient samples and small amounts
of hazardous materials, such as nitric acid, formamide and ethidium bromide. We
are subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and waste products, as well as
the conveyance, processing, and storage of and data on patient samples. We
cannot completely eliminate the risk of accidental contamination or injury from
these materials. Further, our HAP Typing facility is subject to

11
<PAGE>
specific government regulation under the Clinical Laboratory Improvement
Amendments of 1988, or CLIA, a federal law administered at the state level,
relating to the certification of all clinical laboratories performing tests on
human specimens for the purpose of providing information for the diagnosis,
prevention or testing of any diseases. Although we believe we comply in all
material respects with the standards prescribed by federal, state and local laws
and regulations, if we fail to comply with applicable laws or regulations,
including CLIA, or if an accident occurs, we may have to pay significant
penalties or be held liable for any damages that result and this liability could
exceed our financial resources and harm our reputation. Furthermore, we may have
to incur significant additional costs to comply with current or future
environmental laws and regulations.

If we do not successfully distinguish and commercialize our technology and
services, we may be unable to compete successfully with our competitors or to
generate revenue significant to sustain our operations.

Numerous entities are attempting to identify genomic variation predictive of
specific diseases and drug response and to develop products and services based
on these discoveries. We face competition in these areas from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government or other publicly-funded agencies, both in the United States and
abroad, most of which have substantially greater capital resources, research and
development staffs, facilities, manufacturing and marketing experience,
distribution channels and human resources than we do.

These competitors may discover, characterize or develop important
technologies applying population genomics before us or our HAP2000 or Mednostics
partners that are more effective than those technologies which we develop or
which our HAP2000 or Mednostics partners develop, or these competitors may
obtain regulatory approvals of their drugs more rapidly than our HAP2000 or
Mednostics partners do, any of which could limit our ability to market
effectively our technology and services.

Some companies and governments are marketing or developing a number of
databases and informatics tools to assist participants in the healthcare
industry and academic researchers in the management and analysis of genomic
data. Companies such as Celera Genomics Group, Genset S.A., Incyte
Genomics, Inc., and Variagenics, Inc. have developed databases containing gene
sequence, gene expression, genomic variation or other genomic information and
are marketing or plan to market their data to pharmaceutical companies. In
addition, numerous pharmaceutical companies, such as SmithKline Beecham and
GlaxoWellcome plc, either alone or in partnership with our competitors, are
developing genomic research programs that involve the use of information that
can be found in these databases.

Celera Genomics Group is developing a SNP database by sequencing the genomes
of at least five individuals. In November 1999, Celera entered into an agreement
with Pfizer, Inc., in which Pfizer gained access to five databases, including
the SNP database. Genset S.A. is developing a high-density SNP map of the human
genome. In July 1997, Genset entered into an agreement with Abbott Laboratories,
in which Abbott gained access to this map. In October 1998, Genset signed an
agreement with Pharmacia & Upjohn, Inc., now called Pharmacia Corp., in which
Genset was to identify SNPs that are associated with a response to an
unidentified drug. Incyte Genomics, Inc. is using software to identify SNPs that
are present in its database of expressed genes. Incyte has two subscribers to
this SNP database, Eli Lilly & Co. as of January 2000 and Abbott Laboratories as
of February 2000. In June 2000, Incyte entered into an agreement with Aventis
Pharma, in which Incyte is to discover and analyze SNPs for genes involved in
drug metabolism.

12
<PAGE>
In order to compete against existing and future technologies, we will need to
demonstrate to potential HAP2000 and Mednostics partners the value of our HAP
Technology and that our technologies and capabilities are superior to competing
technologies. Although we believe that the focus of our existing informatics
system on HAP Markers, rather than random genomic SNPs, differentiates our HAP
Technology from other technologies our competitors are developing, any
technology we create may fail to achieve greater market acceptance than that of
our competitors.

Moreover, our competitors may obtain patent protection or other intellectual
property rights that would limit our rights or our partners' ability to use our
technology to commercialize therapeutic or diagnostic products. If we are unable
to protect our proprietary methods and technologies, we may not be able to
commercialize our technology and services and we may not be able to generate
sufficient revenue to sustain our operations. If the United States and foreign
patent offices do not grant patents for our applications, our competitors may
obtain rights to commercialize our discoveries which would severely limit our
ability to compete.

Furthermore, if the pharmaceutical industry accepts our approach based on
identifying HAP Markers, our competitors may adopt approaches similar to ours.
Also, our competitors' customers may be more successful than our customers in
their drug development and marketing efforts. If the pharmaceutical industry
does not accept our approach or if our competitors are more successful than we
are, we may be unable to market effectively our technology and services and, as
a result, we may be unable to generate revenues sufficient to sustain our
operations.

Genomic technologies have undergone, and are expected to continue to undergo,
rapid and significant change. Our future success will depend in large part on
maintaining a competitive position in the genomics field. We or others may
rapidly develop new technologies that may result in products or technologies
becoming obsolete before we recover the expenses we incur in connection with our
development. Our technology and services could become obsolete if our
competitors offer less expensive or more effective drug discovery and
development technologies, including technologies that may be unrelated to
genomics. We may not be able to make the enhancements to our technology
necessary to compete successfully with newly emerging technologies.

We depend on an affiliate of a competitor as the sole source of supply for our
gene sequencing machines and the sole source of supply for a particular reagent
used in those machines and we may not always be able to obtain these machines
and reagents in sufficient quantities or on terms we find acceptable.

We use ABI Prism-Registered Trademark- 3700 capillary electrophoresis gene
sequencing machines manufactured by Applied Biosystems Group, formerly PE
Biosystems Group, in our computer-aided sequencing operations. These machines
are commercially available, and at least one of our competitors uses these
machines. Applied Biosystems Group produces these machines to meet an
anticipated demand; and if we are unable to obtain access to additional machines
on acceptable terms, we may be unable to find machines with comparable capacity
from competing vendors. We also rely on Applied Biosystems as the sole source
supplier of a particular reagent used in our gene sequencing machines.

13
<PAGE>
Applied Biosystems Group and Celera Genomics Group, one of our competitors,
are both divisions of PE Corporation. Celera is generating genomic information
for use in the drug discovery, development, and marketing process. If Applied
Biosystems were to give preferential treatment to Celera, we may not be able to
obtain sufficient quantities of gene sequencing machines or reagents on a cost
competitive and timely basis. Our inability, for any reason, to obtain the
necessary components on a cost competitive or timely basis or to establish
relationships with suppliers or vendors other than Applied Biosystems may
diminish our productivity, and we may not be able to provide our technology and
services on terms acceptable to our customers. As a result, we may be unable to
generate sufficient revenue to sustain our operations.

If we fail to maintain and further develop our computer hardware, software and
related infrastructure, we could experience loss of, or delay in, revenues and
market acceptance.

Because our business requires manipulating and analyzing large amounts of
data, we depend on the continuous, effective, reliable and secure operation of
our computer hardware, software, and related infrastructure. To the extent that
our hardware or software malfunctions, we will experience reduced productivity.
We protect our computer hardware through physical and software safeguards.
However, our computer hardware is still vulnerable to fire, weather, earthquake,
or other natural disaster and power loss, telecommunications failures, physical
or software break-ins, and similar events. In addition, the software and
algorithmic components of our DECOGEN informatics system are complex and
sophisticated, and as such, could contain data, design or software errors that
could be difficult to detect and correct. Users of our system may find software
defects in current or future products. If we fail to maintain and further
develop the necessary computer capacity and data to support our computational
needs and our customers' drug discovery and development efforts, we could
experience a loss in revenues, or a delay in receiving revenues, and a delay in
obtaining market acceptance for our technology.

If we do not effectively manage our growth, it could affect our ability to
pursue business opportunities and expand our business.

We expect to continue to experience significant growth in the number of our
employees and customers and the scope of our operations. In particular, we plan
significant growth in our HAP Technology and Mednostics programs. Growth in our
business has placed, and may continue to place, a significant strain on our
management and operations. We will need to continue to improve our operational
and financial systems and managerial controls and procedures and expand, train
and manage our workforce. We will have to maintain close coordination among our
production, technical, accounting, business development and research
departments. Our ability to manage this growth will depend upon our ability to
broaden our management team and our ability to attract, hire and retain skilled
employees. Our success will also depend on the ability of our officers and key
employees to continue to implement and improve our operational and other
systems, to manage multiple, concurrent HAP2000 partner relationships and to
hire, train and manage our employees. Our future success is heavily dependent
upon growth and acceptance of our HAP Technology. In addition, we must continue
to invest in customer support resources as the number of our partners and their
requests for support increase. Our partners are likely to have worldwide
operations and may require support at multiple U.S. and foreign sites. If we
cannot scale our business appropriately or otherwise adapt to anticipated growth
in this area, a key part of our strategy may not be successful.

14
<PAGE>
Our operating results may fluctuate significantly and any failure to meet
financial expectations may disappoint securities analysts or investors and
result in a decline in our common stock price.

Our operating results have fluctuated in the past and we expect they will
fluctuate in the future. These fluctuations could cause our common stock price
to decline. Some of the factors that could cause our operating results to
fluctuate include:

- recognition of non-recurring revenue due to receipt of license fees,
achievement of milestones, completion of contracts or other revenues;

- demand for and market acceptance of our HAP Technology;

- timing of HAP2000 partnership programs or other material contracts;

- our competitors' announcements or introduction of new products, services or
technological innovations;

- disputes regarding patents or other intellectual property rights;

- securities class actions or other litigation;

- adverse changes in the level of economic activity in the United States and
other major regions in which we do business; and

- general and industry-specific economic conditions, which may affect our
partners' research and development expenditures and use of our HAP
Technology.

Due to volatile and unpredictable revenues and operating expenses, we believe
that period-to-period comparisons of our results of operations may not be a good
indication of our future performance. It is possible that, in some future
periods, our operating results may be below the expectations of securities
analysts or investors. In this event, the market price of our common stock could
fluctuate significantly or decline.

Risks Related to this Offering

Purchasers in this offering will suffer immediate dilution.

If you purchase common stock in this offering, the value of your shares based
upon our actual book value will immediately be less than the offering price you
paid. This reduction in the value of your equity is known as "dilution." Based
upon the net tangible book value of the common stock at March 31, 2000, your
shares will be worth $7.42 less per share than the price you paid in the
offering. If the options and warrants we previously granted are exercised,
additional dilution is likely to occur. As of March 31, 2000, options to
purchase 1,050,475 shares of common stock were outstanding, at the weighted
average exercise price of $2.52 and warrants to purchase 607,013 shares of
common stock, at the weighted average exercise price of $5.16 will be
outstanding. In addition, if we raise additional funding by issuing more equity
securities, the newly issued shares will further dilute the voting power of your
investment on a percentage basis.

15
<PAGE>
The sale of a substantial number of shares could cause the market price of our
common stock to decline.

Our sale or the resale by our stockholders of shares of our common stock
after this offering could cause the market price of the common stock to decline.
We intend to file registration statements following the offering to permit the
sale of 3,807,375 shares of our common stock to cover shares issuable under our
stock option and employee stock purchase plans.

As of March 31, 2000, options to purchase 1,050,475 shares of our common
stock upon exercise of options with a weighted average exercise price per share
of $2.52 were outstanding. Many of these options are subject to vesting that
generally occurs over a period of up to four years following the date of grant.
In addition, as of March 31, 2000, warrants to purchase 607,013 shares of our
common stock with a weighted average exercise price per share of $5.16 were
outstanding.

Future sales of common stock in the public market following this offering
could also adversely affect the market price of our common stock. After this
offering, we will have 21,584,191 shares of common stock outstanding. Of these
shares, the 6,000,000 shares sold in this offering will be freely transferable
without restriction.

Substantially all of our stockholders will have signed lock-up agreements
before the commencement of this offering. Under these lock-up agreements, these
stockholders will agree, subject to certain limited exceptions, not to sell any
shares owned by them as of the effective date of this prospectus for a period of
180 days thereafter, unless they first obtain the written consent of the
managing underwriter. At the end of 180 days, approximately 5,178,691 shares of
common stock, excluding shares issuable upon exercise of vested options, will be
eligible for immediate resale. Ninety days after the date of this prospectus,
106,500 shares of common stock will be eligible for resale.

The remainder of the approximately 10,299,000 shares of common stock
outstanding will become eligible for sale at various times over a period of
approximately two years. In addition, 607,013 shares of common stock issuable
upon exercise of warrants held by existing warrant holders will become eligible
for sale at various times over a period of approximately two years.

The holders of 14,047,426 shares of common stock issuable upon conversion of
preferred stock and issuable upon the exercise of warrants will have the right
in certain circumstances to require us to register their shares for resale to
the public. Please read our discussion of registration rights under "Description
of Stock."

An active public market for our common stock may not develop or be sustained
after this offering and our common stock may have a volatile public trading
price which could fall below the initial public offering price. As a result, you
could lose all or part of your investment.

Prior to this offering, our equity did not trade in a public market. You may
not be able to sell your shares quickly or at the market price if trading in our
stock is not active.

We and the underwriters, through negotiations, determine the initial public
offering price. The initial public offering price may bear no relationship to
the price at which the common

16
<PAGE>
stock will trade upon completion of this offering. Please see the section in
this prospectus entitled "Underwriting" for more information regarding our
arrangement with the underwriters and the factors considered in setting the
initial public offering price.

The market prices for securities of companies comparable to us have been
highly volatile, and the market has experienced significant price and volume
fluctuations that are unrelated to the operating performance of the individual
companies. Many factors may have a significant adverse effect on the market
price of the common stock, including:

- sales of substantial amounts of our stock by existing stockholders;

- price and volume fluctuations in the stock market at large which do not
relate to our operating performance;

- changes in financial estimates by securities analysts, comments by
securities analysts, or our failure to meet analysts' expectations;

- actual or anticipated variations in quarterly operating results;

- new products or services introduced or announced by us or our competitors;

- changes in the market valuations of other similar companies;

- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments; and

- additions or departures of key personnel.

Furthermore, the stock market has from time to time experienced extreme price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, in the past stockholders have initiated class
action lawsuits against biotechnology and pharmaceutical companies following
periods of volatility in the market prices of these companies' stock. In the
future, our stockholders may pursue similar litigation against us. In general,
decreases in our stock price would reduce the value of our stockholders'
investments and could limit our ability to raise necessary capital or make
acquisitions of assets or businesses. If a stockholder instituted litigation on
this basis, it could result in substantial costs and would divert management's
attention and resources.

Concentration of ownership of our common stock among our existing executive
officers, directors and principal stockholders may prevent new investors from
influencing significant corporate decisions.

Upon completion of this offering, our executive officers, directors and
beneficial owners of 5% or more of our common stock and their affiliates will,
in aggregate, beneficially own approximately 34.8% of our outstanding common
stock or 33.7% if the underwriters exercise their over-allotment option in full.
As a result, these persons, acting together, may have the ability to determine
the outcome of matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, these persons, acting together,
may have the ability to control the management and affairs of our company.
Accordingly, this concentration of ownership may harm the market price of our
common stock by:

- delaying, deferring or preventing a change in control of our company;

17
<PAGE>
- impeding a merger, consolidation, takeover or other business combination
involving our company; or

- discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.

Please see the section entitled "Principal Stockholders" for additional
information on concentration of ownership of our common stock.

Anti-takeover provisions in our charter documents and under Delaware law will
make it more difficult for a third party to acquire us, stockholders may be
unable to effect a change in our management or control, and the market value of
our stock could decline.

We are incorporated in Delaware. Anti-takeover provisions of Delaware law and
our charter documents as filed on the closing of this offering may make a change
in control more difficult, even if the stockholders desire a change in control.
Our anti-takeover provisions include provisions in our by-laws providing that
stockholders' meetings may only be called by the president or the majority of
the board of directors and a provision in our certificate of incorporation
providing that our stockholders may not take action by written consent.

Additionally, our board of directors has the authority to issue 1,000,000
shares of preferred stock and to determine the terms of those shares of stock
without any further action by our stockholders. The rights of holders of our
common stock are subject to the rights of the holders of any preferred stock
that we issue. As a result, our issuance of preferred stock could cause the
market value of our common stock to decline and could make it more difficult for
a third party to acquire a majority of our outstanding voting stock.

Our charter also provides for the classification of our board of directors
into three classes and provides that our directors may only be removed from
office for cause. Accordingly, stockholders may elect only a minority of our
board at any annual meeting, which may have the effect of delaying or preventing
changes in management or control.

Delaware law also prohibits a corporation from engaging in a business
combination with any holder of 15% or more of its capital stock until the holder
has held the stock for three years unless, among other possibilities, the board
of directors approves the transaction. The board may use this provision to
prevent changes in our management. Also, under applicable Delaware law, our
board of directors may adopt additional anti-takeover measures in the future.

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<PAGE>
STATEMENTS CONCERNING FUTURE PERFORMANCE

This prospectus contains statements, principally in the sections entitled
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and "Business" regarding our expectations about our future
performance. Generally, these statements can be identified by the use of phrases
like "believe," "expect," "anticipate," "plan," "may," "will," "could,"
"estimate," "potential," "opportunity" and "project" and similar terms and
include statements about:

- our research and development activities and projected expenditures;

- the ability of our technologies to improve the drug development process and
to enhance the marketing and prescribing of approved drugs;

- the advantages of our HAP Technology as compared to other technologies,
including our approach to identifying markers for genomic variation and
correlating drug response with these markers;

- our ability to obtain partners for our HAP2000 program and to license the
intellectual property from our Mednostics program and the terms of these
arrangements;

- the receipt of regulatory approvals by our partners or us;

- our spending of the proceeds from this offering;

- our cash needs;

- implementation of our corporate strategy; and

- our financial performance.

These statements may involve risks and uncertainties. Our actual results
could differ significantly from the results discussed in these statements.
Factors that could cause or contribute to these differences include those
discussed in "Risk Factors." You should carefully consider that information
before you make an investment decision. You should not place undue reliance on
these statements.

19
<PAGE>
USE OF PROCEEDS

We estimate the net proceeds to us from the sale of 6,000,000 shares of
common stock in this offering at our initial public offering price of $13.00 per
share to be $71.6 million after deducting underwriting discounts and commissions
and estimated offering expenses payable by us. The net proceeds to us are
estimated to be $82.5 million if the underwriters exercise their over-allotment
option in full.

We intend to use the net proceeds of this offering as follows:

- approximately $22 million for consumables to accelerate our efforts to
discover HAP Markers for all of the pharmaceutically relevant genes;

- approximately $13 million to hire additional personnel for informatics with
the goal of improving the capabilities and features of our DECOGEN
informatics system;

- approximately $13 million to fund our Mednostics programs;

- approximately $6 million to file additional patent applications to protect
our intellectual property; and

- approximately $17.6 million to support general corporate purposes,
including working capital.

We may use some of these proceeds to acquire complementary businesses or
technologies, although we currently have no specific understandings, commitments
or agreements with respect to any acquisitions. Prior to spending the funds, we
will invest the net proceeds in short-term, investment grade, interest-bearing
securities or guaranteed obligations of the United States government.

Our principal purposes for making this offering are:

- to increase our equity capital;

- to facilitate future access by us to public equity markets;

- to increase visibility and credibility in a marketplace where several of
our current and prospective competitors are, or may in the future be,
public companies; and

- to enhance our ability to use our common stock as consideration for
acquisitions and as a means of attracting and retaining key employees.

DIVIDEND POLICY

We have never paid cash dividends. We currently intend to retain any future
earnings to finance the growth and development of our business. We do not intend
to pay cash dividends on our common stock in the foreseeable future.

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<PAGE>
CAPITALIZATION

The following table sets forth the following information:

- our actual capitalization as of March 31, 2000;

- our pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock into 12,704,166 shares of common
stock upon completion of this offering and after giving effect to the
cashless exercise of warrants into 62,445 shares of common stock; and

- our pro forma capitalization as adjusted to reflect the receipt of the net
proceeds from our sale of 6,000,000 shares of common stock at our initial
public offering price of $13.00 per share in this offering, less
underwriting discounts and commissions and estimated offering expenses
payable by us.

<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(unaudited)(in thousands)
<S> <C> <C> <C>
Long-term debt and capital lease obligations, less current
portion................................................... $ 9,090 $ 9,090 $ 9,090
Accrued preferred stock dividends........................... 1,699 1,159 1,159
Series A and KBL redeemable, convertible preferred stock,
$0.001 par value, 2,768,000 shares authorized; 2,437,500
shares issued and outstanding actual; no shares issued and
outstanding pro forma and pro forma as adjusted........... 11,594 -- --
Series B and KBH redeemable, convertible preferred stock,
$0.001 par value, 9,093,524 shares authorized; 8,727,273
shares issued and outstanding actual; no shares issued and
outstanding pro forma and pro forma as adjusted........... 43,343 -- --
Series C redeemable, convertible preferred stock,
$0.001 par value, 2,242,245 shares authorized; 1,539,393
shares issued and outstanding actual; no shares issued and
outstanding pro forma and pro forma as adjusted........... 11,893 -- --
Puttable warrant............................................ 408 -- --
Stockholders' equity:
Common stock, $0.001 par value; 22,000,000 shares
authorized, 2,817,580 shares issued and outstanding
actual; 15,584,191 shares issued and outstanding, pro
forma; 21,584,191 shares issued and outstanding, pro
forma as adjusted........................................ 3 16 22
Additional paid-in capital................................ 61,762 129,527 201,046
Accumulated deficit....................................... (80,091) (80,091) (80,091)
Deferred offering costs................................... (75) (75) --
Net unrealized investment loss............................ (27) (27) (27)
-------- -------- --------
Total stockholders' equity.................................. (18,428) 49,350 120,950
-------- -------- --------
Total capitalization........................................ $ 59,599 $ 59,599 $131,199
======== ======== ========
</TABLE>

This table does not include:

- 1,050,475 shares subject to outstanding options as of March 31, 2000 at a
weighted average exercise price of $2.52 per share, which includes 14,555
shares of common stock we issued for options exercised after March 31,
2000.

- 607,013 shares of common stock subject to outstanding warrants at a
weighted average exercise price of $5.16 per share.

- options to purchase 1,175,780 shares of common stock which we granted in
April and June 2000 at a weighted average exercise price of $11.42 per
share.

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<PAGE>
DILUTION

Our pro forma net tangible book value as of March 31, 2000, after giving
effect to the automatic conversion of our preferred stock and the cashless
exercise of certain warrants upon the closing of this offering, was
$48.9 million, or $3.14 per share of common stock. Net tangible book value per
share is determined by dividing our tangible book value (total tangible assets
less total liabilities) by the number of outstanding shares of common stock at
that date. After giving effect to the sale of the 6,000,000 shares of our common
stock offered by us at our initial public offering price of $13.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses, our net tangible book value on March 31, 2000 would have been
$120.5 million, or $5.58 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $2.44 per share and an immediate
dilution to new investors of $7.42 per share. The following table illustrates
the calculation of per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $13.00
------
Pro forma net tangible book value per share before this
offering................................................. $3.14
Increase per share attributable to new investors.......... 2.44
-----
Pro forma net tangible book value per share after this
offering.................................................. 5.58
------
Dilution per share to new investors......................... $ 7.42
======
</TABLE>

The following table summarizes on a pro forma basis, as of March 31, 2000,
the number of shares of common stock purchased, the total consideration paid and
the average price per share paid by our existing stockholders. The following
table also enumerates the number of shares of common stock purchased and the
total consideration paid, calculated before deduction of underwriting discounts
and commissions and estimated offering expenses, and the average price per share
paid by the new investors in this offering assuming the sale of 6,000,000 shares
of our common stock at our initial public offering price of $13.00 per share.

<TABLE>
<CAPTION>
Shares Issued Total Consideration
---------------------- ------------------------ Average Price
Number Percent Amount Percent Per Share
----------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 15,584,191 72% $ 73,136,960 48% $ 4.69
New investors...................... 6,000,000 28 78,000,000 52 $13.00
---------- --- ------------ ---
Total............................ 21,584,191 100% $151,136,960 100%
========== === ============ ===
</TABLE>

The above discussion and tables assume no exercise of the underwriters'
over-allotment and no exercise of stock options or warrants outstanding as of
March 31, 2000, except for those warrants which will be exercised upon
completion of the offering, and gives effect to the conversion of all shares of
preferred stock outstanding as of that date into common stock upon completion of
this offering. As of March 31, 2000, there were additional warrants outstanding
to purchase 607,013 shares of common stock at a weighted average exercise price
of $5.16 per share, options outstanding to purchase 1,050,475 shares of common
stock at a weighted average exercise price of $2.52 per share under our stock
option plan, which includes 14,555 shares of common stock we issued for options
exercised after March 31, 2000, and additional shares reserved for future option
grants under this plan. To the extent the warrants and outstanding options are
exercised and the underlying shares are issued, there will be further dilution
to new investors. If all of these options and warrants had been exercised as of
March 31, 2000, net tangible book value per share after this offering would be
$5.43 and total dilution per share to new investors would be $7.57. In addition,
in April and June 2000, we granted options to purchase 1,175,780 shares of
common stock at a weighted average exercise price of $11.42 per share.

22
<PAGE>
SELECTED FINANCIAL DATA

(In thousands, except per share data)

The following selected financial data should be read in conjunction with our
financial statements and related notes included elsewhere in this prospectus and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this prospectus. The selected balance sheet data set forth below,
as of December 31, 1998 and 1999, and the statements of operations data for each
of the years in the three-year period ended December 31, 1999, are derived from
our financial statements which have been audited by Arthur Andersen LLP,
independent public accountants and are included elsewhere in this prospectus.
The selected balance sheet data as of December 31, 1996 and 1997 and selected
statements of operations data for the years ended December 31, 1996 and 1997 are
derived from audited financial statements not included in this prospectus. The
selected balance sheet data as of December 31, 1995 and selected statement of
operations data for the year then ended have been derived from unaudited
financial statements which, in the opinion of management, include all
adjustments necessary for a fair presentation of such data. The selected
financial data as of March 31, 2000 and for the three months ended March 31,
1999 and 2000 are derived from our unaudited financial statements which are
included elsewhere in this prospectus and which include, in our opinion, all
adjustments, consisting of only normal recurring adjustments that are necessary
for a fair presentation of our financial position and results of operations for
those periods. The historical results are not necessarily indicative of the
results we expect for fiscal year 2000.

<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
----------- -------- -------- -------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................................ $ 1,152 $ 1,141 $ 1,505 $ 1,343 $ 680 $ 284 $ 63
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sublicense royalty obligations............... -- 93 19 68 20 -- 514
Research and development(1).................. 1,433 1,010 1,643 3,017 6,259 1,107 2,991
Selling, general and administrative(1)....... 411 304 415 894 2,714 467 1,346
Stock-based compensation..................... -- 685 106 473 766 57 3,632
-------- -------- -------- -------- -------- -------- --------
Total operating expenses....................... 1,844 2,092 2,183 4,452 9,759 1,631 8,483
-------- -------- -------- -------- -------- -------- --------
Loss from operations........................... (692) (951) (678) (3,109) (9,079) (1,347) (8,420)
Interest income (expense), net................. (92) (78) (125) (29) (370) 38 (229)
Realized gains on investments.................. -- -- -- 259 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net loss....................................... (784) (1,029) (803) (2,879) (9,449) (1,309) (8,649)
Preferred stock dividends and accretion........ -- -- -- (742) (2,082) (428) (1,609)
Beneficial conversion feature of Series B, KBH
and C preferred stock........................ -- -- -- -- -- -- (50,180)
-------- -------- -------- -------- -------- -------- --------
Net loss attributable to common shareholders... $ (784) $ (1,029) $ (803) $ (3,621) $(11,531) $ (1,737) $(60,438)
======== ======== ======== ======== ======== ======== ========
Net loss per common share, basic and diluted... $ (0.38) $ (0.47) $ (0.40) $ (1.67) $ (4.24) $ (0.67) $ (21.49)
Weighted average shares used in computing net
loss per common share........................ 2,052 2,207 1,983 2,165 2,719 2,599 2,812
Pro forma net loss per common share, basic and
diluted...................................... $ (1.79) $ (6.37)
Pro forma weighted average shares used in
computing net loss per common share, basic
and diluted.................................. 5,202 9,192
</TABLE>

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

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(1) Excludes non-cash, stock-based compensation
expense as follows:
Research and development.................. $ -- $ 219 $ 64 $ 427 $ 499 $ 51 $ 1,575
Selling, general and administrative....... -- 466 42 46 267 6 2,057
-------- -------- -------- -------- -------- -------- --------
$ -- $ 685 $ 106 $ 473 $ 766 $ 57 $ 3,632
======== ======== ======== ======== ======== ======== ========
</TABLE>

23
<PAGE>
SELECTED FINANCIAL DATA

(In thousands, except per share data)

<TABLE>
<CAPTION>
December 31, March 31,
------------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
----------- -------- -------- -------- -------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments....... $ 14 $ 304 $ 1,420 $ 7,419 $ 3,666 $ 54,909
Total assets................................. 461 782 1,899 8,946 11,514 67,355
Long-term liabilities........................ 1,182 1,113 1,405 2,869 11,446 13,583
Redeemable convertible preferred stock....... -- -- 750 9,945 11,247 66,830
Accumulated deficit.......................... (2,469) (3,645) (4,501) (8,122) (19,654) (80,091)
Total stockholders' equity (deficit)......... (1,989) (822) (1,369) (4,624) (14,832) (18,428)
</TABLE>

24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED FINANCIAL
DATA" AND OUR FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS.

Overview

Since our inception, we have incurred significant operating losses, and, as
of March 31, 2000, we had an accumulated deficit of approximately
$80.0 million. The majority of our losses have resulted from costs we incurred
developing our HAP Technology, and we expect to dedicate a significant portion
of our resources for the foreseeable future to further develop and maintain our
HAP Technology. To date, our revenues have been primarily from licensing fees
pursuant to a sublicensing agreement with Visible Genetics, Inc. and government
grants. We expect that it will be several years, if ever, before we generate
significant revenues.

Results of Operations

THREE MONTHS ENDED MARCH 31, 2000 AND 1999

Revenue consists primarily of proceeds received in connection with research
grants and through the sublicensing of a patent. Revenue decreased to $62,833 in
the three months ended March 31, 2000 from $283,569 in the three months ended
March 31, 1999. The 2000 revenue consists of royalties received and the
amortization, over the remaining life of the sublicensed patent, of upfront
payments received. The decrease resulted primarily from a $274,721 decrease in
grant research revenue. The decrease in grant research revenue occurred because
we decided not to pursue research grant funding but to focus instead on
commercializing our HAP2000 program and obtaining private equity financing.
During the three months ended March 31, 2000, we amended our sublicensing
agreement with Visible Genetics, Inc. which generated a nonrefundable fee of
approximately $2.1 million. We will recognize the nonrefundable fee by
amortizing such payment into revenue over the remaining term of the sublicensing
agreement.

Sublicense royalty expense represents royalties incurred by us on
sublicensing fees received. The $513,912 of sublicense royalty expense for the
three months ended March 31, 2000 relates primarily to the nonrefundable cash
payment received in connection with the sublicensing agreement amendment.

Research and development expenses consist primarily of payroll and benefits
for research and development personnel, material and reagent costs, depreciation
and maintenance costs for equipment used for HAP Marker discovery and facility
related costs. We expense our research and development costs as incurred.
Research and development expenditures increased to approximately $3.0 million in
the three months ended March 31, 2000 from $1.1 million in the three months
ended March 31, 1999. The increase in expenditures is attributable to the
significant increase in the discovery of HAP Markers during 2000. The increased
HAP Marker discovery required additional personnel, materials and reagents and
additional equipment, which resulted in additional depreciation expense. Payroll
costs also increased in connection with the development of our propriety DECOGEN
informatics system. Lastly, facility related costs increased as a result of our
relocation to a larger facility in February 1999. We expect research and
development costs to continue to increase

25
<PAGE>
significantly over the next few years as we continue to increase our HAP Marker
discovery and as we continue to invest in ongoing product development efforts
related to our DECOGEN informatics system.

Selling, general and administrative expenses consist primarily of payroll and
benefits for executive, business development, legal, finance and other
administrative personnel, as well as business development efforts, facility
related costs and outside professional fees incurred in connection with legal,
patent and financial matters. Selling, general and administrative expenses
increased to approximately $1.3 million in the three months ended March 31, 2000
from $467,149 in the three months ended March 31, 1999. The increase is
primarily attributable to an increase in business development, legal and
administrative personnel to support our continued growth, our expanded business
development efforts related to our HAP Technology and our increased number of
patent applications. In addition, facility related costs increased as a result
of our relocation. We expect selling, general and administrative costs to
continue to increase over the next few years to support our growth, to fund our
patent strategy, to broaden the marketing of our products and to pay the costs
of operating as a public company.

Stock based compensation expense relates primarily to options granted to
scientific advisory board members and a sale of stock, in exchange for a note,
between two of our officers and a major shareholder. The accounting for options
granted to scientific advisory board members requires us to record periodic
charges for unvested options based on an increase in the fair value of our
common stock and the related vesting of the options. The accounting for the
stock sale requires us to record periodic charges based on an increase in the
fair value of our common stock to recognize the benefit obtained by the Company
as a result of this stock sale. Stock based compensation increased to
approximately $3.6 million in the three months ended March 31, 2000 from $57,238
in the three months ended March 31, 1999. The increase is due to our decision to
vest fully all unvested options previously granted to scientific advisory board
members which resulted in a one-time expense of approximately $1.4 million, as
well as the recording of approximately $2.2 million of expense related to the
stock purchase agreement due to the increase in the fair value of our stock at
the end of the period. As of March 31, 2000, there were no outstanding unvested
options for scientific advisory board members.

Interest income results primarily from investing proceeds raised through the
issuance of equity securities. Interest income increased to $327,727 in the
three months ended March 31, 2000 from $143,833 in the three months ended
March 31, 1999. The increase is the result of our investment of the proceeds
raised in connection with our issuance of preferred stock in February and
March 2000.

Interest expense results from capital lease obligations, other long-term
debt, and our adjustment of an outstanding puttable warrant to its fair value.
Interest expense increased to $556,608 in the three months ended March 31, 2000
from $104,915 in the three months ended March 31,1999. The increase is due to
additional capital lease and other debt obligations resulting from our
significant investment in equipment to support the increased discovery of our
HAP Markers, as well as costs incurred in connection with the expansion of our
facility. Additionally, the increase in value of our outstanding put warrant
accounted for $200,000 of this increase.

During the three months ended March 31, 2000, we recorded a one-time non-cash
dividend of $50,180,000 to our series B, KBH, and C preferred stockholders in
connection with the sale of those shares to investors in February and March of
2000. This dividend reflected

26
<PAGE>
the beneficial conversion feature associated with those shares and was charged
directly to our accumulated deficit. The charge increased our net loss
applicable to common shareholders and related net loss per share for that
period.

YEARS ENDED DECEMBER 31, 1999 AND 1998

Revenue decreased to $680,065 in 1999 from $1.3 million in 1998. The decrease
resulted primarily from a $648,898 decrease in grant research revenue. The
decrease in grant research revenue occurred because we decided not to pursue
research grant funding.

Research and development expenses increased to approximately $6.3 million in
1999 from $3.0 million in 1998. The increase was attributable to the increased
production of HAP Markers and the development of our proprietary DECOGEN
informatics system.

Selling, general and administrative expenses increased to approximately
$2.7 million in 1999 from $893,574 in 1998. The increase was attributable to an
increase in personnel from our expanded operations, additional business
development costs from marketing our products, additional patent costs from an
increase in patent applications and higher operating costs from our move to a
larger facility in February 1999.

Stock based compensation expense increased to $776,500 from $472,692 due to
an increase in the fair value of our common stock applied to the additional
vesting of options and the stock sale between two of our officers and a major
shareholder.

Interest income increased to $266,596 in 1999 from $88,284 in 1998. The
increase was due to proceeds received in connection with the issuance of
preferred stock in August of 1998, which resulted in an increase in funds
available for investment.

Interest expense increased to $636,594 in 1999 from $118,044 in 1998. The
increase was due primarily to additional capital lease and other debt
obligations.

Realized gains on investments in 1998 resulted from the one-time sale of an
investment in common stock that was acquired by us in 1996.

YEARS ENDED DECEMBER 31, 1998 AND 1997

Revenue decreased to $1.3 million in 1998 from $1.5 million in 1997. The
decrease resulted from a decrease in other income, which was partially offset by
an increase in grant research revenue.

Research and development expenses increased to $3.0 million in 1998 from
$1.6 million in 1997 primarily because of an increase in the number of research
personnel and related costs for the development of our HAP Marker discovery
technologies.

Selling, general, and administrative expenses increased to $893,574 in 1998
from $415,981 in 1997 primarily attributable to an increase in personnel as we
expanded our operations and business development activities.

Stock based compensation increased to $472,692 in 1998 from $105,976 in 1997
as a result of both the increase in the fair value of our stock and the granting
of additional options to scientific advisory board members.

27
<PAGE>
Liquidity and Capital Resources

On March 31, 2000, cash, cash equivalents and short-term investments totaled
$54.9 million compared to $3.7 million at December 31, 1999. Our cash reserves
are held in interest-bearing high-grade corporate bonds and money market
accounts.

We have financed our operations primarily through the private sale of common
and preferred stock, government research grants, payments under licensing
agreements, loans and capital leases. From inception through March 31, 2000, we
have received aggregate gross proceeds of approximately $73.1 million from
issuance of common and preferred stock. In addition, through March 31, 2000, we
had received $4.5 million of government grant funding and $3.9 million from
license fees, royalties and research contracts. We also have received
$10.1 million from capital lease financing and $4.1 million from other loans.
The proceeds from capital lease financing and other loans have been used to
acquire $12.8 million of property and equipment. On March 31, 2000, we had
available borrowing capacity of $5.2 million under capital lease agreements and
$2.4 million under long-term loans for facility improvement costs. We are using
the $5.2 million available under capital lease agreements to finance equipment
purchases. In June 2000, our board of directors approved an additional
$10.0 million in capital lease financing, which is being used to purchase 34
more ABI Prism-Registered Trademark- 3700 capillary sequencers. Also in
June 2000, our board of directors approved a loan of $1.5 million from
Connecticut Innovations, Incorporated for further leasehold improvements which
financing we expect to close during the third quarter of 2000. We are using the
$2.4 million available under long-term loans for facility improvements to
finance the construction of an 8,000 square foot HAP Typing facility and an
additional 12,000 square feet of office and laboratory space. We are also
committed to make net payments of approximately $6.7 million over the next three
years to Sequenom, Inc. and Gene Logic, Inc. pursuant to our agreements with
these companies. It is our intention to continue to expand production and office
facilities and to acquire state-of-the art equipment to continue to accelerate
the discovery of HAP Markers for all pharmaceutically relevant genes.

Cash used in operations for the three months ended March 31, 2000 was
$1.5 million compared with $930,016 for the same period in 1999. A net loss of
$8.6 million for the first three months of 2000 was partially offset by non-cash
charges of $3.6 million for stock based compensation expense, $2.0 million of
deferred revenue, $456,378 of non-cash charges for depreciation and amortization
expense and an increase of $724,550 in accrued expenses. During the three months
ended March 31, 2000, we received net proceeds of $53.9 million from the
issuance of preferred stock, of which $12.0 million was invested in marketable
securities.

We believe that our current cash reserves, the proceeds we raise from this
offering and our available borrowing capacity will be sufficient to support our
planned operations for at least 24 months.

Our cash requirements will vary depending upon a number of factors, many of
which are beyond our control, including:

- the demand for our HAP Technology;

- the efforts and success of our HAP2000 partnership program;

- the results of our Mednostics programs;

- the level of competition we face;

28
<PAGE>
- our ability to develop, market and license new technology; and

- our ability to effectively manage operating expenses.

Income Taxes

We have not generated any taxable income to date and, therefore, have not
paid any federal income taxes since inception. At December 31, 1999 we had
available unused net operating loss carryforwards of approximately
$12.7 million and $12.5 million which may be available to offset future federal
and state taxable income, respectively. Use of our federal and state net
operating loss carryforwards, which will begin to expire in 2007 and 2000,
respectively, may be subject to limitations. The future utilization of these
carryforwards may be limited due to changes within our current and future
ownership structure as defined within the income tax code. We have recorded a
full valuation allowance against our deferred tax asset, which consists
primarily of net operating loss carryforwards, because of uncertainty regarding
its recoverability, as required by Financial Accounting Standard No. 109
"Accounting for Income Taxes."

Market Risk

Our exposure to market risk is principally confined to our cash equivalents
and investments, all of which have maturities of less than two years. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limits the amount of credit exposure to any one issue, issuer or
type of instrument. In view of the nature and mix of our total portfolio, a 10%
movement in market interest rates would not have a significant impact on the
total value of our investment portfolio as of March 31, 2000.

At March 31, 2000, we had aggregate fixed rate debt of approximately
$12.0 million, including borrowings outstanding under term loans and capital
lease obligations. A 10% change in interest rates would cause a corresponding
increase in our annual expense of approximately $100,000.

Recent Accounting Pronouncements

In December 1999, Staff Accounting Bulletin No. 101 (SAB 101), REVENUE
RECOGNITION, was issued. The revenues included in the accompanying statements of
operations, for all periods presented, are in accordance with the provisions of
SAB 101.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND FOR HEDGING ACTIVITIES (SFAS
No. 133) which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. SFAS No. 133
is effective for fiscal years beginning after January 1, 2001. We do not believe
that the adoption of SFAS No. 133 will have an impact on our results of
operations or financial condition as we hold no derivative financial instruments
and we do not engage in hedging activities.

29
<PAGE>
BUSINESS

Company Overview

We are a leader in developing technology for applying population genomics to
improve the development, marketing and prescribing of drugs. We discover genomic
markers that are predictive of which patients will respond effectively to a
drug. We market our technology to the pharmaceutical industry as a means of
developing more efficient clinical trials and of improving the sales of existing
drugs, by taking into account the genomic differences that exist between
individuals. Our technology combines informatics, genomic markers and an
efficient process for analyzing clinical samples to correlate drug response with
patients' genomic variation.

We believe that a fundamental improvement will occur in the delivery of
healthcare if the pharmaceutical and biotechnology industries begin efficiently
using population genomics. We foresee healthcare providers using knowledge of
each individual's unique genome to predict disease susceptibility and
progression as well as each individual's response to a drug. We believe that the
pharmaceutical industry will first use population genomics to design and conduct
smaller and better informed clinical trials. We also see the pharmaceutical
industry applying population genomics to currently marketed drugs, so as to gain
approval for new indications and maintain or increase market share through
differentiation from competing products and to develop second generation drugs.
Ultimately, we believe that our technology will allow physicians and patients to
select specific treatments based on a patient's genome. Our goal is to have our
technology become the standard for incorporating population genomics throughout
the pharmaceutical process of developing, marketing and prescribing drugs.

Industry Overview

The pharmaceutical industry faces intense pressure to become more productive.
Two of the industry's most challenging issues are the high cost and low success
rate of developing drugs and the need to differentiate approved drugs in highly
competitive markets.

The drug development process is costly and subject to a high failure rate.
The average cost of developing a drug is estimated to be $500 million, including
the cost of unsuccessful drug candidates. Even with recent technological
advances, including advances in areas such as genomics, the failure rate of
clinical trials remains very high. In the United States, only one in five drug
candidates that enters clinical trials reaches the market. Seventy percent of
the drug candidates that enter clinical trials successfully complete phase I,
33% complete phase II, 25% complete phase III and only 20% achieve regulatory
approval. The decision to enter phase III, the most costly phase of clinical
trials, is generally based upon the results obtained from the limited number of
individuals, often fewer than 200, typically studied in phases I and II. The
typical patient population in phase III is between 1,000 and 5,000 individuals,
and the average amount of money spent in a single phase III clinical trial is
estimated to be greater than $40 million.

Approved drugs often face intense competition. The period of market
exclusivity for the first drug in a new therapeutic class is typically much
shorter today than it was a few years ago. Consequently, marketing expenditures
have increased rapidly as companies attempt to maintain or increase market
share. Of the approximately $50 billion spent in 1999 on U.S.-based drug
discovery, development and marketing, the pharmaceutical industry spent over
$25 billion on marketing drugs. Marketing departments are also under pressure to
maximize the revenue generated from approved products in order to meet
corporate-wide revenue and

30
<PAGE>
earnings goals. In addition, the Boston Consulting Group reports that it expects
large pharmaceutical companies to lose a substantial portion of their present
revenues by 2003 due to the expiration of patents on existing drugs and the
effect of generic drugs on competition. Thus, in order to maintain revenue
growth rates and profitability, pharmaceutical companies must both improve the
success rate of clinical trials and differentiate their drugs in a crowded
market place.

The medical community generally acknowledges that most drugs work more
effectively for some patients than others. The pharmaceutical industry often
poorly understands this variability in patient response. Consequently,
pharmaceutical companies may unnecessarily discontinue further drug development,
fail to obtain regulatory approvals for promising drug candidates, or, even if a
drug obtains approval, be unable to market an approved drug effectively or to
obtain approval for third party reimbursement.

Scientists have known for a long time that genomic differences influence how
patients respond to drugs. However, pharmaceutical companies generally have not
considered genomic differences between patients in developing and implementing
clinical trials or in the marketing of approved drugs. If pharmaceutical
companies were able to correlate genomic variation with drug response in
clinical trials, they could improve the drug development and marketing process.
For example, pharmaceutical companies could use the correlation data from phase
I and phase II clinical trials to determine the size of the patient population
that would likely benefit from the drug under development. They would also know
the size of the clinical group needed for a phase III clinical trial to obtain
statistically significant data to support the clinical development program. The
pharmaceutical companies would, therefore, have a better understanding of the
cost required to complete the development of the drug and the likely economic
return on their investment before proceeding to a phase III clinical trial. In
addition, understanding the correlation between genomic differences and drug
response would enable pharmaceutical companies to improve the marketing of their
drugs by identifying those patients for whom particular drugs are likely to be
most effective.

POPULATION GENOMICS

Population genomics is the analysis of genomic variation within groups of
people. The genomic blueprint each person inherits from his or her biological
parents determines differences, such as height, hair color, and eye color. Our
DNA, which is composed of four building blocks called nucleotides, encodes the
information responsible for these differences. The relative order, or sequence,
of the four nucleotides determines the information content of the DNA. The
entire DNA content of humans consists of 23 structures called chromosomes and
approximately three billion nucleotides. These nucleotides are organized into
approximately 100,000 units of information called genes. The information
contained in genes is translated into a product called a protein.

Humans have two copies of each chromosome. Individuals inherit one set of the
23 chromosomes, a complete genome, from each parent. Therefore, humans inherit
two copies of the human genome. Differences between siblings arise because the
23 individual chromosomes can be shuffled in more than eight million different
ways. In addition, during the reproductive process, physical exchange occurs
between regions of each chromosomal pair. Thus, each individual inherits two
versions of each chromosome in a form that is slightly different from that found
in either parent. Likewise, each individual may inherit two different versions
of any specific gene. As a result of this process, there may be differences
between versions of a gene within an individual and among groups of people. On
the other hand,

31
<PAGE>
individuals, whether they are related or not, may inherit similar versions of
specific genes. Differences between versions of a gene, whether within an
individual or among groups of people, are referred to as genomic variation.

Small differences between the DNA sequences of two individuals may cause
profound differences between these two people. Population geneticists estimate
that there is approximately a 0.1% difference in the DNA sequence between any
two individuals; at the DNA level, this 0.1% difference translates into three
million sites of genomic variation. Moreover, in order to predict drug response,
one must not only take into account the genomic variation between two
individuals, but also across diverse groups of people. As few as fifty people
selected from two different geographic regions can have 30 million sites of
genomic variation.

As scientists better understand genetic variation at the molecular or genomic
level, they are more certain that an individual's response to a drug is
dependent upon that individual's unique genome. In addition, more than one gene
generally determines how an individual responds to a drug. Every drug generally
interacts, directly and indirectly, with a variety of different proteins
produced by different genes. Therefore, in order to predict a specific drug
response, scientists must analyze genomic variation in multiple genes.

A practical approach to understanding why individuals have different
responses to the same drug may be to group individuals together based upon
specific genomic similarity, particularly if the similarity correlates with drug
response or disease susceptibility. This genomic similarity can occur in
unrelated individuals from different geographic regions.

Any approach to commercialize the use of population genomics must:

- take into account that each individual has two versions of every gene;

- recognize that multiple genes are involved in an individual's response to a
drug;

- measure accurately and efficiently substantial genomic variation between
individuals from diverse groups; and

- detect, with sophisticated software programs, the correlation of genomic
variation with a drug response.

SINGLE NUCLEOTIDE POLYMORPHISMS AND HAPLOTYPES

At the DNA level, genomic variation occurs mainly as a result of variation of
a single nucleotide, commonly referred to as a single nucleotide polymorphism or
SNP. Several international efforts are underway which are intended to serve as
the starting point for understanding genomic variation. One is the Human Genome
Project whose scientists recently announced that they have made publicly
available a rough draft of a sequence of a single composite human genome. This
sequence provides a starting point to identify SNPs. Another effort is the SNP
Consortium, which is an industry sponsored initiative, whose goal is to identify
300,000 SNPs distributed randomly throughout the entire genome. However,
geneticists believe that only a small portion of the human genome constitutes
gene information. Thus, only a small number of the SNPs that the SNP Consortium,
or other entities following a similar approach, will identify are likely to fall
within these gene regions of DNA.

Some companies are proposing to correlate genomic variability with drug
response by analyzing individual SNPs. A company that seeks to identify these
correlations using the individual SNP approach, however, must examine blood
samples from thousands of patients

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and perform a complex statistical analysis to detect possible predictive
markers. This approach may lead to a large number of markers that, when the
company performs subsequent testing, may not correlate with a drug response.

Geneticists historically studied genetic variation by analyzing the
inheritance of traits within an extended family. Classical population
geneticists coined the term haplotype to describe the physical organization of
genetic variation as its occurs on each pair of chromosomes in an individual.
The haplotype is the standard for measuring genetic variation. At the molecular
level, a haplotype consists of multiple individual SNPs that are organized into
one of the limited number of combinations that actually exist as units of
inheritance in humans. Each haplotype contains significantly more information
than individual, unorganized SNPs. As a result, clinicians need fewer patients
to detect a statistically significant correlation with a drug response if they
use haplotypes rather than individual, unorganized SNPs.

Haplotypes provide:

- an accurate measurement of the genomic variation in each individual's two
genomes;

- a practical method of organizing this genomic variation information;

- an efficient tool for measuring this genomic variation in diverse groups of
people; and

- enough information to allow clinicians to extract statistically accurate
data from small populations.

Both the Human Genome Project and the SNP Consortium will produce basic
information for use by academic and industrial researchers. However, these
efforts will not:

- determine how SNPs are organized within a gene to constitute a haplotype;

- determine the frequency with which SNPs or haplotypes are found in various
populations; or

- create an informatics interface for using this information in a clinical
setting.

Through the use of haplotypes, together with sophisticated software programs,
pharmaceutical companies could determine with statistical accuracy the
correlation between genomic variation and drug response in a small population of
the size commonly seen in phases I and II of clinical trials and, therefore,
make better informed decisions on whether or not to enter phase III clinical
trials. In addition, understanding the correlation between genomic differences
and drug response would enable pharmaceutical companies to improve the marketing
of their drugs by identifying those patients for whom particular drugs are
likely to be most effective.

The Genaissance Solution

We combine sophisticated informatics and proprietary procedures with
state-of-the-art DNA sequencing and genomic variation measurement capabilities
to allow pharmaceutical companies to integrate population genomics into the
development, marketing and prescribing of new and existing medicines. We have
invested considerable resources in constructing a production process to discover
genomic variation and are scaling up this process with the goal of discovering
the range of genomic variation among all of the pharmaceutically relevant genes.
We call this complete solution our HAP Technology.

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The key components of our HAP Technology are:

- a database of highly informative, proprietary measures of genomic
variation, or haplotypes, for pharmaceutically relevant genes;

- a proprietary informatics system, including unique algorithms, for
correlating genomic variation with drug response; and

- a cost effective efficient process for measuring genomic variation in
clinical DNA samples.

We designed our HAP Technology to permit pharmaceutical and biotechnology
companies to use population genomics in a variety of ways for drug development
and commercialization.

DRUG DEVELOPMENT. We designed our HAP Technology to improve the success rate
of drugs in clinical trials by:

- assessing efficiently the genomic variation among the patients involved in
a clinical trial, thereby permitting pharmaceutical companies to
incorporate genomic variation information into all decisions required
during the course of a clinical trial;

- creating better informed, or "smarter," clinical trials through the design
of protocols which result in the inclusion of those patients most likely to
benefit from the proposed therapeutic product;

- facilitating earlier "go/no-go" decisions on whether to proceed to the next
phase of clinical trial testing which should result in a more efficient use
of clinical resources; and

- reducing the size and, hence, the cost of late-stage clinical trials by
enrolling a group of patients who are most likely to respond to a drug.

DRUG MARKETING. We also designed our HAP Technology to maximize the value of
an approved drug by:

- creating diagnostic tests employing HAP Markers that are predictive of drug
response, as well as developing supporting software to be used in tandem
with the prescribing and/or marketing of a drug;

- integrating genomic variation information into marketing strategies to
sustain and enhance a market leading position or to address problems such
as poor market penetration, competitive pricing issues, safety, risk of
therapeutic substitution, and limited patent life; and

- targeting new markets and obtaining approval for new indications.

Our HAP Technology may also be useful for improving the drug discovery
process through the selection and validation of drug targets. In addition,
pharmaceutical companies could incorporate data obtained during clinical trials
into the drug discovery process to develop second generation drugs. If widely
adopted, our HAP Technology could enable the healthcare system to personalize
treatment based upon an individual's unique genome.

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Our Strategy

Our objective is to make our HAP Technology the industry standard for using
genomic variation information throughout the pharmaceutical development,
marketing and prescribing process. The key elements of our strategy include the
following:

COMMERCIALIZE OUR HAP TECHNOLOGY THROUGH OUR HAP2000 PARTNERSHIP PROGRAM. We
are currently in discussions and negotiations with selected pharmaceutical and
biotechnology companies to become the initial partners in our HAP2000
partnership program. Our HAP2000 program will give our partners access to our
HAP Technology, including access to our proprietary HAP Markers, our DECOGEN
informatics system, and our HAP Typing capabilities. In return, we expect to
receive annual subscription fees, payments for work on specific drug development
or marketing projects and for HAP Typing. In addition, we expect license,
milestone, and royalty payments for the use of our HAP Markers.

PURSUE MEDNOSTICS OPPORTUNITIES. Our Mednostics programs will apply our HAP
Technology to currently marketed drugs to enhance their competitive position. We
believe the application of our HAP Technology to these drugs will create
intellectual property from which we will derive considerable financial value. We
intend to market this intellectual property to those parties who may most
benefit from it, including pharmaceutical, diagnostic, and medical information
companies, as well as healthcare providers.

DISCOVER AND PATENT HAP MARKERS FOR ALL OF THE PHARMACEUTICALLY RELEVANT
GENES. We have accelerated the rate at which we are discovering HAP Markers. We
are seeking to discover HAP Markers for all of the pharmaceutically relevant
genes. We are filing composition of matter patents to protect HAP Markers, as
well as their association with clinical applications such as disease risk, drug
response and side effects. If we discover and protect these HAP Markers, we
believe we will have created the most comprehensive coverage of informative
genomic markers available. We believe that this coverage of genomic variation
would give us a competitive advantage as the premier source for correlating
genomic variation with drug response. We plan to file method patents covering
discoveries we make relating to diagnosing a patient's predisposition to a
particular disease or for prescribing a drug safely and efficaciously.

CONTINUE IMPROVING AND EXPANDING OUR DECOGEN INFORMATICS SYSTEM. We are
continually expanding the capability of our DECOGEN informatics system with the
goal of establishing it as the industry standard for integrating genomic
variation into the pharmaceutical development and marketing process. We have
invested considerable resources in building our informatics team and will
continue to do so. We believe our DECOGEN informatics system is the only
platform available that combines sophisticated genomic variation analysis tools
with state-of-the-art clinical statistics in an intuitive, graphical user
interface. We believe our DECOGEN informatics system effectively integrates
population genomics into the design and analysis of clinical trials.

SEEK STRATEGIC ALLIANCES WITH LEADING EQUIPMENT AND INFORMATION TECHNOLOGY
PROVIDERS. We plan to form strategic alliances with research and diagnostic
equipment manufacturers and diagnostic and information technology companies to
expand the applications of our HAP Technology, with the goal of establishing our
HAP Technology as a standard component in the delivery of healthcare.

INCREASE AWARENESS OF THE IMPACT OF GENE VARIATION ON THE FUTURE PRACTICE OF
MEDICINE. We intend to work closely with regulatory agencies, third party
payers, the medical community and healthcare consumers to build awareness about
the benefits of using genomic variation

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data in the development, marketing and prescribing of new and existing drugs.
Our goal is to establish our HAP Technology as the industry standard in the
healthcare field for evidence-based medicine.

Our Commercial Programs

HAP2000 PARTNERSHIP PROGRAM

We have developed a program intended to give pharmaceutical and biotechnology
companies access to our HAP Technology throughout each phase of drug development
and marketing. Each partner will gain access to our proprietary HAP Markers, our
DECOGEN informatics system, and our HAP Typing capabilities. Partners may select
a limited number of genes annually for HAP Marker discovery. We anticipate that
each partnership will be for a minimum of three years. While we expect to retain
all intellectual property rights in HAP Markers discovered during the
partnership, our partners will have the option to receive multiple exclusive
licenses for the use of these HAP Markers for the development of diagnostic and
therapeutic products within specified drug classes and for particular disease
indications.

As part of the HAP2000 program, our partners will gain access to our HAP
Typing facility, which we will use to measure HAP Markers from individual
patient samples provided by our partners. Under our HAP2000 program, we seek to
obtain both near-term and deferred payments including:

- annual subscription fees for access to our DECOGEN informatics system,
including our proprietary HAP Markers;

- fees for research projects focused on development or marketing issues
associated with particular drugs;

- fees for HAP Typing clinical samples supplied by our partners; and

- license fees, milestone payments and royalties based on product sales for
the exclusive use of HAP Markers for drugs within a specific class and for
specific disease indications.

Although we are currently in discussions with a number of pharmaceutical and
biotechnology companies for our HAP2000 partnership program, we currently do not
have a partner for this program.

MEDNOSTICS PROGRAM

Our internally funded Mednostics programs apply our HAP Technology to drugs
currently marketed by third parties. Through our Mednostics programs, we seek to
find HAP Markers that identify individuals who:

- will respond better to a particular drug within a competitive class than to
other drugs in the same class or to one competing class of drugs as
compared to another class of drugs;

- are prone to side effects and adverse reactions; and

- are currently not undergoing therapy for a given disease yet are at risk
and will respond well to a given drug.

Identification of individuals who would benefit from a particular drug may
solidify or improve the market position of a particular drug in a highly
competitive market and assist in

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obtaining approval for third party reimbursement. Identification of individuals
who are at risk of developing a side effect may increase patient compliance and
expand the market for a drug. Early identification of individuals who are at
risk of developing a particular disease may improve the treatment for a number
of significant diseases and conditions, including many central nervous system
disorders, neurogenerative disorders, and cardiovascular disease, and expand the
market for already approved drugs.

As an example of our Mednostics program, we are applying our HAP Technology
to the statin class of drugs, which doctors use to treat patients with high
cholesterol and lipid levels and who are, therefore, at risk for cardiovascular
disease. This is a highly competitive market with multiple approved products
seeking to gain increased market share. Currently, the market is approximately
$11 billion worldwide and experts forecast that the market will at least double
in size by 2005. Identification of genomic markers that would allow the right
drug to reach the right patient would allow a company to boost its market share
and would improve patient compliance, which are both particularly important
factors when maximizing profit from drugs that patients take over the course of
a lifetime.

To gather data for this Mednostics program, we are studying approximately 200
individuals who have been prescribed one of several cholesterol lowering drugs.
We obtained full medical and family histories and extensive clinical
measurements for these individuals from the Ludwigshafen Risk and Cardiovascular
Health Study in Germany, a large, ongoing longitudinal study being managed by
Dr. Bernard Winkelmann at a teaching hospital of the University of Mainz in
Germany. Doctors have diagnosed these individuals to have conditions such as
coronary artery disease, diabetes, obesity, high cholesterol levels and
hypertension. To date, we have identified HAP Markers from multiple genes that
differentiate how patients have responded to different statins. These drugs
include pravastatin (sold by Bristol-Myers Squibb Company as
Pravacol-Registered Trademark-), atorvastatin (sold by Pfizer Inc. and
Warner-Lambert Company as Lipitor-Registered Trademark-) and cerivastatin (sold
by Bayer AG as Baycol-Registered Trademark-). We intend to approach a number of
companies which may have an interest in any intellectual property we develop
from this Mednostics program. These companies include pharmaceutical companies,
which have a significant product franchise in cardiovascular disease and would
be interested in improving or strengthening their market position. We also
intend to approach diagnostic and health maintenance organizations, both of
which may see economic benefit in having genomic markers for identifying
patients most likely to respond to a particular cholesterol lowering drug. We
also intend to target other major diseases for which the market is fragmented
among multiple currently marketed drugs and there appears to be an opportunity
for our HAP Technology to confer a competitive advantage on one of the
participants in the market.

We do not currently expect to manufacture and market pharmaceutical and
diagnostic products ourselves.

Asthma Clinical Study

To demonstrate how the pharmaceutical industry could use our HAP Technology,
we conducted a clinical study to determine a correlation between our HAP Markers
or SNPs and an asthma patient's response to the drug albuterol (sold by
GlaxoWellcome as Ventolin-Registered Trademark-), a standard treatment for
persons with asthma. We conducted the study in collaboration with Dr. Stephen
Liggett, our executive medical advisor and a professor of medicine at the
University of Cincinnati Medical Center. We initially examined genomic variation
in the target of the drug, the (2) adrenergic receptor ((2)-AR). We determined
the sites of variation in this gene and then used our DECOGEN informatics system
to organize the SNPs into HAP Markers. We found 13 SNPs in the (2)-AR gene,
which were organized into only 12 HAP Markers out of

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a theoretical possibility of 8,192 (2(13)) haplotypes. We collapsed the 12 HAP
Markers into four major groups using our proprietary methods of population
genomics to increase the likelihood of finding a statistically relevant
correlation.

Dr. Liggett recruited 121 asthmatic individuals for clinical treatment.
Dr. Liggett made a large number of standard pulmonary measurements, after which
he treated the patients with albuterol in a controlled setting. Approximately 30
minutes after treatment, Dr. Liggett repeated the pulmonary measurements. The
response to the drug differed significantly from patient to patient and the drug
was clinically effective in only 40% of these patients as measured by generally
accepted clinical criteria. Dr. Liggett and his staff drew blood samples and
extracted DNA for HAP Typing of the (2)-AR receptor gene. We did the HAP Typing
and entered the clinical information and the results from HAP Typing into the
DECOGEN informatics system. The search engine of our DECOGEN informatics system
analyzed the data for a correlation between combinations of HAP Markers as well
as individual SNPs and the response to albuterol.

Our DECOGEN informatics system found a correlation between specific pairs of
HAP Markers in the (2)-AR receptor gene and both a positive response and a poor
response to albuterol. By contrast, no individual SNP correlated with the
response to albuterol in this study. This study, which was similar in sample
size used for a phase II clinical trial, showed that a patient's response to
albuterol correlated, in a statistically significant manner, with specific HAP
Markers. We have filed a patent application on the correlation and have
submitted a more detailed description of this study for publication in a peer
reviewed scientific journal.

Our Technology

OVERVIEW

Our process for discovering HAP Markers eliminates the need to find and then
test large numbers of families or related individuals to determine genomic
variation. Initially, we discover individual SNPs by high-throughput sequencing
of DNA samples of unrelated and related individuals that are representative of
the individuals who constitute the major pharmaceutical markets of the world. We
use our proprietary algorithms to organize the SNPs into HAP Markers. Using
these algorithms, we find that the number of actual HAP Markers per gene is
significantly less than the theoretically large number of ways in which SNPs
could be organized.

Our DECOGEN informatics system contains a number of components. Our
ISOGENOMICS Database contains our HAP Markers including information about their
sequence, frequency and distribution. Our DECOGEN informatics system also
contains a proprietary collection of algorithms and a search engine that
correlates a patient's HAP Markers with a particular response to a drug. Using
our DECOGEN informatics system, we can determine with statistical accuracy the
correlation between HAP Markers and drug response in a small population of the
size commonly seen in phase I and phase II of a clinical trial.

HAP Typing is our process for measuring which HAP Marker pairs are present in
a patient's DNA sample. Our HAP Typing facility uses proprietary software,
robotics and Sequenom's MassARRAY-TM- platform to determine, on a
high-throughput basis, which two HAP Markers for a gene are present in a
patient's DNA sample. We integrated the resulting data into our DECOGEN
informatics system to search for a correlation with a patient's drug response.

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The following outlines the components of our HAP Technology and how we use
our HAP Technology to detect a correlation with a drug response.

[DIAGRAM]

GENE SELECTION

Our goal is to discover HAP Markers for all of the pharmaceutically relevant
genes. We prioritize these genes for HAP Marker discovery based upon the
anticipated needs of our HAP2000 partners and our Mednostics programs. We obtain
genomic information relevant for gene selection from publicly available sources,
such as the Human Genome Project, and from proprietary databases. We are
discovering HAP Markers for genes that:

- are, or will likely become, drug targets;

- are associated with drug target pathways;

- are involved in how drugs modify cell communication or regulate other
genes; and

- are involved in the metabolic process by which the body absorbs a drug and
breaks it down.

INDEX REPOSITORY

We use our Index Repository, a collection of diverse DNA samples, to discover
the SNPs that are present in genes. We designed our Index Repository to:

- contain genomic information that would be representative of the people who
constitute the major pharmaceutical markets of the world;

- aid in the quality control analysis of the SNPs we discover; and

- facilitate the organization of SNPs into HAP Markers.

To build our Index Repository, we engaged a contract research organization,
commonly referred to as a CRO, to recruit 200 individuals whose parents and
grandparents came from specified geographical regions. The CRO obtained personal
information from each individual, including sex, date of birth, and general
medical information, as well as a detailed family history. The CRO drew blood
samples so that we could create continually multiplying cells from the white
cells present in the blood. The resulting cells, called permanent cell lines,
provide us with a supply of DNA from which to discover SNPs. We store frozen
samples of

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each cell line at multiple locations to ensure that all of these cell lines are
available in the future. To supply sufficient DNA for the production process, we
routinely grow the cell lines in our cell culture facility. We employ quality
control procedures that permit each DNA sample to be unambiguously matched to
its corresponding cell line. We store all of the information about a cell line
in our proprietary ISOGENOMICS Database that is a component of our DECOGEN
informatics system.

We are adding to the content of our Index Repository and will have at least
300 additional individuals whose parents and grandparents are from geographical
regions that represent emerging and specialized pharmaceutical markets. We plan
to use this new resource to obtain additional population variability information
for specialized applications.

DISCOVERING SNPS

We use a subset of our Index Repository to discover SNPs. We employ
principles of population statistics to determine the minimum number of unrelated
individuals that we need to have a 99% probability of detecting a SNP or HAP
Marker that occurs:

- in at least 5% of the general population or

- in at least 10% of a population from a specific geographical region.

We sequence individual samples of DNA so that we can accurately determine the
frequency of a SNP in the population. Our procedure allows us to detect SNPs
that are present at lower frequencies than if we were to analyze a mixture of
DNA from different individuals, as is done by some companies.

We sequence 93 individual, human DNA samples, or 186 individual genomes, from
our Index Repository in the following genomic regions for each selected gene:

- the region responsible for controlling when a gene is active, the control
region;

- the regions containing coding information that is found in the protein
product of the gene, the coding regions;

- the boundaries between the genomic regions containing coding information
and those interspersed regions that do not contain coding information, the
non-coding regions; and

- the region at the end of a gene immediately after the last region
containing coding information.

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The following diagram shows the regions of genomic DNA we sequence.

[DIAGRAM]

Our process of discovering SNPs distinguishes us from other companies. Some
companies sequence cDNA, which is a test tube synthesized product that does not
contain sequence information for some key genomic regions that we sequence. As a
result, these companies cannot detect the SNPs that are present in these
regions. In addition, the DNA we use is easily obtainable from blood samples
whereas tissue biopsies may be necessary to obtain cDNA products for certain
genes.

Our sequencing process is highly automated, from picking the regions to be
sequenced through loading the samples onto one of our sequencing machines. We
designed the process in a modular fashion so that we can easily update
procedures with improved technology without the need to shut down the entire
production process. We operate our sequencing facility 24 hours a day, seven
days a week. We currently have 37 ABI Prism-Registered Trademark- 3700 capillary
sequencers manufactured by Applied Biosystems Group, a division of PE
Corporation, and will receive 22 more machines, which are scheduled to be
operational by the end of the third quarter of 2000. We plan on ordering
additional machines by the end of the third quarter of 2000.

We have also developed a proprietary laboratory information management system
to track genes as they progress through the production pipeline. We use this
system to monitor the overall quality of data we produce to ensure that the
sequencing process is operating according to our established standards. The
sequence information undergoes two forms of quality control analysis. We use
electronic procedures and established population genomic principles to identify
and validate that a SNP exists at a given position.

HAP MARKERS AND ISOGENOMICS DATABASE

Geneticists use the term haplotype to describe how SNPs are organized on a
chromosome. They study the inheritance of genetic variability in extended
families in order to determine haplotypes. Family studies allow a geneticist to
differentiate which of the two copies of a chromosome an individual inherited
from each parent. The haplotype is the standard for describing genetic
variability.

We do not need to conduct family studies to discover haplotypes. Rather than
relying on family studies, we have developed an entirely computerized process
for discovering haplotypes. Our proprietary method works because we analyze a
large number of individual samples and we have members of extended families in
our sample set. We have validated the

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accuracy of our computerized process by conventional family studies and
molecular techniques. We use our proprietary computational methods and
algorithms to determine how the SNPs in a gene are organized on each of the two
chromosomes in each sample we sequence from our Index Repository. We use the
term HAP Marker, derived from haplotype, to describe the organization of SNPs we
find for a gene. Without our high-throughput computerized process, the discovery
of our HAP Markers would not be commercially feasible.

Our computerized process assigns a confidence value to each HAP Marker we
discover. If the HAP Markers we discover for a gene fall below a defined
confidence level, we subdivide the gene into regions. We reexamine each region
until we identify HAP Markers that meet our acceptance level. We then enter each
HAP Marker into our proprietary ISOGENOMICS Database. We also enter other
relevant population information, such as the distribution and frequency of each
HAP Marker among people from different geographical regions. We also include in
our ISOGENOMICS Database other genomic markers that others have identified and
are available in public databases.

As of July 28, 2000, we had processed 1,309 pharmaceutically relevant genes
through our production process and deposited our HAP Markers and associated
information into our ISOGENOMICS Database. All of the nearly 500 current drug
targets have either gone through our production process or are in some stage of
our production pipeline. We are currently discovering HAP Markers for about 50
genes per week. We intend to increase this number to approximately 160 genes per
week by the fourth quarter of 2000. To date, we have found an average of
approximately 13 SNPs per gene. There are generally two possible forms of a SNP
that are found at a site of genomic variation. Therefore, these 13 SNPs could
theoretically be organized into 2(13) or 8,192 potential HAP Markers. Using our
proprietary algorithms, we found that these SNPs are organized into an average
of only approximately 15 HAP Markers per gene.

THE DECOGEN INFORMATICS SYSTEM

We have assembled a team of 42 informatics professionals, 18 of whom have a
Ph.D., to integrate the high information content of our HAP Markers into the
pharmaceutical development and marketing process. This team consists of
individuals with training and experience in software engineering, population
statistics, clinical statistics, workflow systems, and computational molecular
biology. We have constructed a proprietary informatics system, called DECOGEN,
which is short for decoding genes. Our DECOGEN informatics system contains the
proprietary database of population information for our Index Repository and our
proprietary ISOGENOMICS Database of HAP Markers. This database can accommodate
information from a variety of populations, including individuals suffering from
a specific disease and patients in clinical trials, as well as associated data
such as detailed medical histories including responses to drugs. The portal to
the ISOGENOMICS Database is the DECOGEN search engine, which we designed with an
intuitive, graphical user interface so that drug development clinicians can
easily manage their data to find a correlation between HAP Markers and a drug
response.

We have constructed the graphical interface to display a series of views that
contain information, beginning with a summary and extending down into details.
For example, in each project, we define a set of candidate genes for use in the
clinical study. This collection of genes can generally be organized into a
series of biochemical pathways, which we graphically display in our DECOGEN
informatics system. The user can point and click on any gene in the pathway and
obtain detailed information about that gene. One view provides information on
the structure of a gene and the physical location of the SNPs, along with the
limited number of ways in which these SNPs are organized into HAP Markers. This
view also displays the

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frequency of each HAP Marker in the different sub-populations. With another
view, a user can see the HAP Markers for individual patients in a clinical trial
alongside of their demographic and clinical data.

Our DECOGEN informatics system provides more detailed views for experts in
various areas. For example, population genomic data are available at the click
of a mouse. We also provide views that show the statistics behind any
correlation found between HAP Markers and a drug response. Our DECOGEN
informatics system can use either qualitative or quantitative clinical
measurements as a clinical endpoint to search for a correlation with our HAP
Markers. Our DECOGEN informatics system has the ability to exchange information
with standard software packages used in the pharmaceutical industry.

Additional tools are available in our DECOGEN informatics system to help in
the design and operation of clinical trials. To avoid introducing a bias,
clinicians take into account factors such as age and sex when they randomize
patients between the drug and placebo arms of a clinical trial. Clinicians can
use our HAP Markers to compare the genomic background of the patients in the two
arms of a clinical trial. This function allows the clinician to determine
whether the two patient populations were genetically comparable. Clinicians can
also use this function to match patients for assignment to the two arms of a
trial to ensure that the genomic backgrounds are comparable.

Through December 31, 1999, we were developing a prototype of our DECOGEN
informatics system, which did not have all the major functions and was not ready
for initial customer testing. We established technological feasibility during
the first quarter of 2000, when we evolved the prototype into a working model
which expanded the functionality of our DECOGEN informatics system. In
June 2000, we made our DECOGEN informatics system available for initial customer
testing and in July 2000, we placed a test model with a potential customer for
evaluation.

HAP TYPING

We use the term HAP Typing to describe the process of determining which HAP
Marker is present for each of the two versions of each gene in a patient's
clinical sample. The first step in searching for a clinical correlation is to do
HAP Typing on the clinical samples we will receive from our HAP2000 partners or
obtain for our Mednostics programs. Because of the information content in our
HAP Markers, we can detect a correlation between a HAP Marker and a drug
response with statistical accuracy in a small population, such as is used in
phase II clinical trials. Other companies propose using numerous, unorganized
SNPs to detect a correlation. We have done simulation studies to determine the
predictive power of individual SNPs. If clinicians use individual SNPs as
genomic markers, they need a large number of patients, similar to what
pharmaceutical companies generally use in phase III trials, to find a
correlation with similar statistical accuracy. However, our analysis showed that
one will obtain a significant number of spurious correlations if one uses
individual, unorganized SNPs.

Our DECOGEN informatics system contains a proprietary computational tool that
facilitates the use of HAP Markers for HAP Typing. Our SNP discovery process
identifies the positions of variation within a gene. Thus, we examine only these
variable positions in a clinical sample. Our proprietary algorithms determine
the minimal number and combination of variable sites, which we must analyze in
order to identify, with high confidence, the two HAP Markers that are present
for each gene in a clinical sample of DNA. This proprietary tool exploits an
established genetic principle. That is, the presence of a given form of genomic
variation at one position can be highly predictive of the form of genomic
variation present at another site in a gene. This predictability reduces the
complexity of the information needed to identify a HAP Marker in a genomic
sample. Scientists can determine this predictability, however, only if the
haplotype or the organization of SNPs is already known for a gene. Our HAP
Markers contain this needed information.

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We choose genes to analyze based upon knowledge of the drug in question, the
drug's known or likely target, the disease, and drug metabolism considerations.
The number of genes we analyze will increase as the costs for HAP Typing
decrease. If we fail to detect a correlation with HAP Markers for a given gene,
we eliminate that gene from further consideration. If we cannot detect a
significant correlation, we analyze additional genes. We then test in a
prospective study any correlation that we detect in order to confirm the
predictability of the HAP Markers.

We will use our HAP Typing capabilities to support our HAP2000 partners and
our Mednostics programs and to obtain additional population information for
certain HAP Markers. We have installed our first HAP Typing system at our
facility. We are investing significant funds to construct a customized 8,000
square foot facility, compliant with government regulations, which we will
dedicate to HAP Typing. We are also developing proprietary software to track
samples through the facility. This facility, which we designed to handle
initially at least three million genomic tests per year, is scheduled for
completion in the third quarter of 2000. We have adopted Sequenom's
MassARRAY-TM- high-throughput technology to do our HAP Typing. We expect
additional shifts of technicians and MassARRAY-TM- systems to increase the
capacity to at least 18 million genomic tests per year. We plan to develop
genomic tests for a significant number of our HAP Markers and intend to use
these tests for clinical studies with our HAP2000 partners and for our
Mednostics programs.

Our Collaborations

To date, we have entered into the following licenses and collaborations:

GENE LOGIC

Effective June 28, 2000, we entered into a three-year collaboration agreement
with Gene Logic, Inc., under which we have licensed their gene expression
databases on a non-exclusive, perpetual, royalty-free basis, in exchange for the
payment by us of annual access fees. Gene Logic has licensed from us on a
non-exclusive, perpetual, royalty-free basis certain of our SNP data in exchange
for their payment to us of annual access fees. Gene Logic will use our SNP data
to indicate, in their gene expression databases, the amount of genomic
variability that we found in certain genes. We will use their gene expression
information to indicate, in our ISOGENOMICS Database, the expression level that
Gene Logic observed for a gene in different tissues under different
circumstances. We will also use their data to help select genes for analysis in
our Mednostics programs. Furthermore, Gene Logic will analyze for our Mednostics
programs the level of gene expression in various samples which we will provide
to them during the term of the agreement. The agreement will automatically
terminate after three years unless we choose to extend the term. Either party
may terminate the agreement early if the other party breaches the agreement or
if either party meets certain criteria.

SEQUENOM

Effective May 28, 2000, we entered into a three-year collaboration agreement
with Sequenom, Inc., under which we have committed to use Sequenom's
MassARRAY-TM- system as our exclusive equipment platform for high-throughput SNP
analysis in our new HAP Typing facility. In return, Sequenom will provide
equipment and supplies, as well as ongoing access to information about new
technology and products in development by Sequenom, so that we can adapt such
new technologies and products for use at our HAP Typing facility in the shortest
possible time. In addition, we have the option to be a test site for these new

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technologies and products. We are also collaborating with Sequenom to define a
MassARRAY-TM- standard equipment configuration designed to be implemented in the
laboratories of our customers who wish to use our HAP Marker sets themselves in
a high-throughput setting. This joint development effort will include, for
example, the definition and creation of an interface between the software tools
which each of us offers for data generation and interpretation. Working with
Sequenom, we also plan to develop joint marketing tools and to target potential
customers for joint presentations. The agreement requires us to purchase a
minimum number of MassARRAY-TM- systems and allows for predetermined pricing of
consumables. The agreement will automatically terminate after three years, but
either party may terminate the agreement early if the other party breaches the
agreement or if the terminating party is able to meet certain criteria.

VISIBLE GENETICS

Effective November 21, 1996, we granted to Visible Genetics, Inc. a worldwide
exclusive license to our patented technology relating to the coupled
amplification and sequencing, or CAS, of DNA for diagnostic use. This technology
is not part of our HAP Technology. Under the terms of the agreement, Visible
Genetics paid us a one-time licensing fee and continues to pay us royalties
based on global sales of products using the licensed technology. Visible
Genetics incorporated the CAS technology in its TruGene-TM- HIV diagnostic kit
which they designed to perform pharmacogenomic analysis of HIV and to customize
HIV and AIDS therapy for particular patient sub-groups. In March 2000, we
amended the agreement to, among other things, reduce the amount of royalties
payable under the agreement and expand the field of the license to the research
products market. In return for the reduction of royalties and broadening of the
field, Visible Genetics has paid us an additional one-time fee of $2 million.
The term of the agreement extends until the last of the patents covered by the
agreement expires. Either party may terminate the agreement early if the other
party breaches the agreement, and we can terminate the agreement early if
Visible Genetics fails to make any payments.

TELIK

Effective February 11, 1998, we entered into a research collaboration with
Telik, Inc. to collaborate on genomics research into estrogen-related
conditions, such as breast cancer and osteoporosis. We amended this
collaboration in February 1999 to extend the term of the collaboration. Telik's
chemoinformatics technologies were used to identify drug candidates that could
modulate the activity of proteins expressed by genes identified by our HAP
Markers and that were associated with various estrogen receptors. We jointly own
the compounds or other intellectual property rights arising from the
collaboration and have agreed to jointly seek a corporate partner to continue
development of these compounds. We will share the revenues received from any
resulting corporate partnering agreements in the same proportion. The agreement
will terminate if we have not entered into a third party license agreement or
otherwise agreed to a joint development program by August 11, 2000. Either party
may terminate the agreement early if the other party breaches the agreement.
Upon termination, the parties are obligated to consult with each other before
independently developing the jointly owned compounds and other intellectual
property rights.

Intellectual Property

We are pursuing an active program of intellectual property development and
acquisition. In particular, we are developing a system to integrate the
discoveries from our HAP

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Technology into our patent process in order to protect all of our intellectual
property. We rely on patents, trade secrets, non-disclosure agreements,
copyrights and trademarks to protect our proprietary technologies and
information. In addition, we are actively pursuing licensing to third parties
our intellectual property that is peripheral to our core products and services.

We focus our intellectual property strategy on several key areas:

- fundamental methods for conducting our genomics and informatics business;

- HAP Markers defining the genomic variation discovered in human populations
as well as the genes embodying the HAP Markers;

- the ISOGENOMICS Database and other components of the DECOGEN informatics
system;

- other proprietary informatics systems for storing and analyzing genomic
variation data; and

- novel business methods that utilize our technologies for providing genomic
services to the pharmaceutical and biotechnology industry.

As of July 28, 2000, our patent portfolio included a total of one issued and
787 pending patent applications, which we own or for which we are the exclusive
licensee. We have received a U.S. patent, which covers collecting and analyzing
genes from both chromosomes from multiple individuals in different
sub-populations. Of our 788 issued and pending patent applications, 773 pending
patent applications cover HAP Markers for 773 different genes. To protect and
extend our proprietary position in population genomics, we are pursuing patent
protection for any correlation between our HAP Markers and a drug response or
susceptibility to a disease. We have also filed patent applications for
components of our DECOGEN informatics system, including the process for
assembling HAP Markers and for determining genomic associations. We are pursuing
both composition of matter and method-of-use claims. Our goal is to file patent
applications in the U.S. and abroad on HAP Markers for every pharmaceutically
relevant gene.

We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We generally protect this information with reasonable
security measures, including confidentiality agreements that provide that all
confidential information developed or made known to others during the course of
the employment, consulting or business relationship shall be kept confidential
except in specified circumstances. Agreements with employees provide that all
inventions conceived by the individual while employed by us are our exclusive
property.

Competition

There is significant competition among entities attempting to use genomic
variation data and informatics tools to develop and market new and existing
medicines. We expect the intensity of the competition to increase. We face, and
will continue to face, competition from pharmaceutical, biotechnology and
diagnostic companies, both in the United States and abroad. Several entities are
attempting to identify and assemble SNP databases. These databases are based on
various technologies and approaches, including the sequencing of either cDNA or
genomic DNA and a genome-wide approach or a candidate gene approach. Some of
these entities are now advocating the use of haplotypes as a measure of genomic
variation. In addition, some of these entities are providing or intend to
provide informatics tools for integrating the use of SNPs into the drug
development process. These entities include, among others, Celera Genomics
Group, Genset S.A., Incyte Genomics, Inc. and

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Variagenics, Inc. In addition, numerous pharmaceutical companies are developing
internal capabilities for identifying and utilizing gene variation data. In
order to compete successfully against existing and future entities, we must
demonstrate the value of our HAP Technology and that our informatics
technologies and capabilities are superior to those of our competitors. Many of
our competitors have greater resources, gene variation discovery capabilities
and informatics development capabilities than we do. Therefore, our competitors
may succeed in identifying gene variation and applying for patent protection
more rapidly than we do.

We expect that our ability to compete will be based on a number of factors,
including:

- the speed with which we can identify HAP Markers and develop the next
generation of our DECOGEN() informatics system;

- our ability and the ability of our partners to develop and commercialize
therapeutic and diagnostic products based upon our HAP Technology;

- our ability to attract partners;

- our ability to attract and retain qualified personnel;

- our ability to obtain patent protection; and

- our ability to secure sufficient resources to fund our technology
development and Mednostics programs.

Government Regulation

Regulation by governmental entities in the United States and other countries
will be a significant factor in the development, manufacturing and marketing of
any product that we or our partners develop. Various federal and, in some cases,
state statutes and regulations govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of human therapeutic and
diagnostic products. The extent to which these regulations may apply to us or
our partners will vary depending on the nature of the product. The FDA does not
require companies seeking product approvals to provide data regarding the
correlation between therapeutic response and genomic variation.

Virtually all of the pharmaceutical products developed by our partners will
require regulatory approval by governmental agencies prior to commercialization.
In particular, the FDA in the United States and similar health authorities in
foreign countries will impose on these products an extensive regulatory review
process before they can be marketed. This regulatory process typically involves,
among other requirements, preclinical studies, clinical trials, and often
post-marketing surveillance of each compound. This process can take many years
and requires the expenditure of substantial resources. Delays in obtaining
marketing clearance could delay the commercialization of any therapeutic or
diagnostic products developed by our partners, impose costly procedures on our
partners' activities, diminish any competitive advantages that our partners may
attain and lessen our potential royalties. Any products we or our partners
develop may not receive regulatory approval in a timely fashion or at all.

The FDA regulates human therapeutic and diagnostic products in one of three
broad categories: drugs, biologics, or medical devices. Products developed using
our technologies could potentially fall into any of these three categories.

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The FDA generally requires the following steps for pre-market approval of a
new drug or biological product:

- preclinical laboratory and animal tests;

- submission to the FDA of an investigational new drug application, which
must become effective before clinical trials may begin;

- adequate and well-controlled human clinical trials to establish the safety
and efficacy of the product for its intended indication;

- submission to the FDA of a new drug application, or NDA, if the FDA
classifies the product as a new drug, or a biological license application,
or BLA, if the FDA classifies the product as a biologic; and

- FDA review of the NDA or BLA in order to determine, among other things,
whether the product is safe and effective for its intended uses.

The FDA classifies medical devices, which include diagnostic products, as
class I, class II or class III, depending on the nature of the medical device
and the existence in the market of any similar devices. Class I medical devices
are subject to general controls, including labeling, premarket notification and
good manufacturing practice requirements. Class II medical devices are subject
to general and special controls, including performance standards, postmarket
surveillance, patient registries and FDA guidelines. Class III medical devices
are those which must receive premarket approval, or PMA, by the FDA to ensure
their safety and effectiveness, typically including life-sustaining,
life-supporting, or implantable devices or new devices which have been found not
to be substantially equivalent to currently marketed medical devices. It is
impossible to say at this time which of these categories will apply to any
diagnostic product incorporating our technologies.

Before a new device can be introduced into the U.S. market, it must, in most
cases, receive either premarket notification clearance under section 510(k) of
the Food, Drug, and Cosmetic Act or approval pursuant to the more costly and
time-consuming PMA process. A PMA application must be supported by valid
scientific evidence to demonstrate the safety and effectiveness of the device,
typically including the results of clinical trials, bench tests, laboratory and
animal studies. A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed class I or class II medical device or a class III medical device for
which the FDA has not called for PMAs. While less expensive and time-consuming
than obtaining PMA clearance, securing 510(k) clearance may involve the
submission of a substantial volume of data, including clinical data, and may
require a lengthy substantive review.

Even if regulatory clearance is obtained, a marketed product and its
manufacturer are both subject to continuing review. Discovery of previously
unknown problems with a product may result in withdrawal of the product from the
market, which could reduce our revenue sources and hurt our financial results.
Violations of regulatory requirements at any stage during the process, including
preclinical studies and clinical trials, the review process, post-marketing
approval or in manufacturing practices or manufacturing requirements, may result
in various adverse consequences to us, including:

- the FDA's delay in granting marketing clearance or refusal to grant
marketing clearance of a product;

- withdrawal of a product from the market; or

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- the imposition of civil or criminal penalties against the manufacturer and
holder of the marketing clearance.

Generally, similar regulatory requirements apply to products intended for
marketing outside the United States.

We use clinical samples of blood from individuals in developing our Index
Repository and in our Mednostics programs. A CRO with which we have a contract
collects these blood samples, plus personal and medical information about each
individual. Our CRO prepares, subject to our approval, the sample collection
protocol and the patient informed consent form, as well as identifying the
clinical laboratories which collect the samples. The individual clinical sites
recruit the patients for each clinical study and, following the study protocol,
explain and obtain the signed and witnessed informed consent documents from each
patient. The informed consent form includes the patient's authorization to use
the patient's blood sample and data derived from it for developing commercial
products. Our contract with the CRO requires that an independent institutional
review board approve the study protocol, the patient informed consent form, and
the transmission of the samples to us. We do not know the identity of any of the
individuals from whom we receive clinical samples. We believe that these
procedures comply with all applicable federal, state, and institutional
regulations.

While the FDA does not currently regulate our HAP Typing facility, CLIA
defines standards that constitute good clinical laboratory practice. Although
this is a federal law, each state is responsible for administering the statute.
Accordingly, for our HAP Typing facility to be CLIA compliant, auditors from a
division of the Connecticut Department of Health will have to inspect the
laboratory. In addition to this inspection, auditors from the New York State
Department of Health will also inspect the HAP Typing facility. Experts consider
this agency to have formulated the most comprehensive standards for defining
what constitutes good laboratory practices. We also anticipate that before we
obtain samples from our HAP2000 partners, they will hire auditors to inspect the
HAP Typing facility in order to ensure that the facility meets their
expectations for operating a facility according to good clinical laboratory
practices. Before the state auditors or our pharmaceutical partners do their
inspections, we will hire auditors to inspect our HAP Typing facility. These
auditors will provide a confidential report indicating any existing deficiency
and suggesting the actions necessary to bring the operation into compliance with
CLIA, Connecticut and New York regulations for the equivalent of good laboratory
practices. We estimate that we will spend approximately $30,000 and that it will
take about three months to bring our HAP Typing facility into compliance with
these various regulations.

Human Resources

As of June 22, 2000, we had 113 full-time employees, 93 of whom were engaged
in research and development activities and 20 of whom conducted general and
administrative functions. Of the 93 employees engaged in research and
development, 42 were engaged in informatics and 51 were engaged in industrial
genomics. Thirty-three of our employees hold Ph.D. or M.D. degrees and twelve
hold other advanced degrees.

None of our employees are covered by a collective bargaining agreement, and
we consider our relations with our employees to be good.

Facilities

Our executive offices and laboratories are located at Five Science Park, New
Haven, Connecticut. We lease approximately 64,000 square feet of space, under a
lease expiring on

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February 28, 2004, which we may extend for 10 years. We currently occupy 24,000
square feet of this space and are in the process of renovating the remainder. We
have a right of first refusal on an additional 4,000 square feet within the same
building complex and 24,000 square feet in an adjacent building.

Legal Proceedings

We are not a party to any material legal proceedings.

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MANAGEMENT

Executive Officers, Directors and Key Employees

Set forth below is certain information regarding our executive officers,
directors and key employees, including their ages as of July 31, 2000:

<TABLE>
<CAPTION>
Name Age Position
---- -------- ------------------------------------------
<S> <C> <C>
Jurgen Drews, M.D......................... 66 Chairman of the Board and Director

Gualberto Ruano, M.D., Ph.D............... 41 Chief Executive Officer and Director

Kevin Rakin............................... 39 Executive Vice President, Chief Financial
Officer and Director

Gerald F. Vovis, Ph.D..................... 57 Senior Vice President of Genomics

Richard S. Judson, Ph.D................... 41 Senior Vice President of Informatics

Paul Oestreicher, Ph.D.................... 42 Vice President of Public Affairs

Melodie W. Henderson...................... 41 Director of Intellectual Property

Mark Rabin, Ph.D.......................... 48 Senior Director of HAP Typing Facility

Joel Claiborne Stephens, Ph.D............. 46 Executive Director of Population Genomics

Gerhard Laur, M.D......................... 49 Director

Harry H. Penner, Jr....................... 55 Director

Seth Rudnick, M.D......................... 51 Director

Stefan Ryser, Ph.D........................ 40 Director

Christopher Wright........................ 43 Director
</TABLE>

JURGEN DREWS, M.D. Dr. Drews has served as Chairman of the board of
directors since August 1999 and a Director since August 1998. In 1998,
Dr. Drews cofounded International Biomedicine Management Partners, Inc., a
venture capital company of which he is a partner and Chairman of the board. From
1985 to 1997, Dr. Drews served as President of Global Research and Development
at Hoffmann-LaRoche Inc., a pharmaceutical company, and also served as a member
of the Corporate Executive Committee of the Roche Group. He holds a M.D. in
internal medicine from the University of Heidelberg. He serves on the boards of
Exelixis Pharmaceuticals; GPC Biotech AG; Human Genome Sciences, Inc.; MorphoSys
GmbH; and Protein Design Labs, Inc.

GUALBERTO RUANO, M.D., PH.D. Dr. Ruano cofounded Genaissance and has served
as Chief Executive Officer and Director since 1995. Prior to founding
Genaissance, Dr. Ruano was engaged in research at Yale University where he
focused on haplotyping technologies for profiling genome diversity stemming from
population and evolutionary genetics. Dr. Ruano holds a B.A. degree in
biophysics from The Johns Hopkins University and a M.D. and a Ph.D. in
population genetics from Yale University, where he was a fellow of the Medical
Scientist Training Program and the Ford Foundation.

KEVIN RAKIN. Mr. Rakin cofounded Genaissance and has served as Executive
Vice President, Chief Financial Officer and Director since 1995. Prior to 1998,
Mr. Rakin was also a Principal at the Stevenson Group, a consulting firm, where
he provided financial and strategic planning services to high-growth technology
companies and venture capital firms. Prior to

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this, Mr. Rakin was a manager with Ernst & Young's entrepreneurial services
group. Mr. Rakin holds a B.S. in business and a M.S. degree in finance from the
University of Cape Town and a M.B.A. from Columbia University. He is a chartered
accountant.

GERALD F. VOVIS, PH.D. Dr. Vovis has been our Senior Vice President of
Genomics since April 1999. From 1980 to 1999, Dr. Vovis was affiliated with
Genome Therapeutics Corporation, a genomics company, most recently as Senior
Vice President of Scientific Affairs. He has twenty years of experience in the
management of genetic research and in the development and management of
collaborative research programs with pharmaceutical and biotechnology companies.
Dr. Vovis holds a B.A. degree in chemistry from Knox College and a Ph.D. in
molecular biology from Case Western Reserve University.

RICHARD S. JUDSON, PH.D. Dr. Judson has been our Senior Vice President of
Informatics since April 2000 and our Vice President of Informatics since
November 1999. He joined Genaissance in February 1999 as Associate Director,
Bioinformatics. From January 1997 to February 1999, he served as Group Leader in
the Bioinformatics Department of CuraGen Corporation, a genomics company, where
he was responsible for developing software for protein-protein interactions and
DNA sequence analysis. From January 1990 to December 1996, he served as Senior
Member of the Technology Staff at Sandia National Laboratories, leading modeling
projects in several areas including computational drug design, protein modeling
and sequence analysis. Dr. Judson holds a B.A. in chemistry and physics from
Rice University and a M.A. and a Ph.D. in chemistry from Princeton University.

PAUL OESTREICHER, PH.D. Dr. Oestreicher has been our Vice President of
Public Affairs since April 2000. From 1995 to 2000, he served as Executive Vice
President and General Manager at Edelman Public Relations Worldwide. From 1992
to 1995, Dr. Oestreicher was Senior Vice President at Medicus Public Relations.
From 1986 to 1992, he was associated with Hoffman-La Roche Inc., initially as a
clinical project coordinator and subsequently with the department of Public
Policy and Communications. Dr. Oestreicher holds a B.A. in biology from the
University of Rochester and a M.S. and a Ph.D. in nutritional biochemistry from
Rutgers University.

MELODIE W. HENDERSON. Ms. Henderson has been our Director of Intellectual
Property since May 1999. She joined Genaissance after several years as a
registered patent attorney in private practice where she specialized in the
preparation and prosecution of biotechnology-related patent applications. Prior
to obtaining her J.D. at the University of Connecticut, Ms. Henderson spent over
10 years as a scientist in the biotechnology industry, with job responsibilities
including research and development of products for life science research,
customer service, and marketing. Ms. Henderson also holds a M.S. in biochemistry
from Saint Louis University.

MARK RABIN, PH.D. Dr. Rabin has been our Senior Director of HAP Typing
Facility since December 1999. Previously, he was Director, Molecular Profiling
Services Laboratory, at Gene Logic and Oncormed, Inc. Prior to this, Dr. Rabin
was a Senior Investigator in the Molecular Diagnostics Department at SmithKline
Beecham Pharmaceuticals, Inc. From 1987 to 1994, he was an Assistant Professor
at the University of Miami Medical School and served as Director, Clinical DNA
Diagnostic Laboratory, in the Department of Pediatrics. Dr. Rabin holds a B.A.
and a M.A. in biology from SUNY, Binghamton and a Ph.D. in biochemistry from the
University of Illinois. He is a Fellow of the American College of Medical
Genetics and is certified in clinical molecular genetics by the American Board
of Medical Genetics and in genetic testing for molecular oncology by the New
York State Department of Health.

JOEL CLAIBORNE STEPHENS, PH.D. Dr. Stephens has been our Executive Director
of Population Genomics since June 2000 and our Director of Population Genomics
since April

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1999. Prior to this, he served as the Head of the Bioinformatics Group at the
National Cancer Institute's Laboratory of Genomic Diversity. Previously, he was
a Senior Research Associate at Yale's Howard Hughes Medical Institute & Human
Gene Mapping Library and the Department of Human Genetics. He researched
population genetics and molecular evolution at the Center for Demographic and
Population Genetics at the University of Texas Health Science Center.
Dr. Stephens holds a B.A. in zoology and mathematics from Duke University and a
Ph.D. in genetics from the University of Georgia.

GERHARD LAUR, M.D. Dr. Laur has been a director since March 2000. He is
Director, Head of Merchant Banking at A&A Actienbank, a merchant bank. From 1998
to 1999, he was Director, Mergers and Acquisitions/Life Sciences for BHF-BANK
AG, a commercial bank. From 1992 to 1998, Dr. Laur was Head of Corporate
Planning/Life Sciences at BASF AG and held various management positions with
Knoll AG, the pharma-division of BASF AG. Dr. Laur holds a M.D. in clinical
medicine from Mannheim and Heidelberg University.

HARRY H. PENNER, JR. Mr. Penner has been a director since August 1998. He is
the President and Chief Executive Officer of Neurogen Corporation, a
neuropharmaceutical company. Prior to this, Mr. Penner served as President of
Novo Nordisk of North America, Inc. and Executive Vice President of Novo Nordisk
A/S. Mr. Penner is currently a member of the governing body of the Emerging
Companies section of the Biotechnology Industry Organization (BIO). Mr. Penner
holds a J.D. from Fordham University, a L.L.M. from New York University and a
B.A. in history from the University of Virginia. He serves on the boards of
Avant Immunotherapeutics, Inc. and PRA International, Inc.

SETH RUDNICK, M.D. Dr. Rudnick has been a director since February 2000. He
is a medical consultant and a clinical professor of medicine at the University
of North Carolina at Chapel Hill and has been a venture partner at Canaan Equity
Partners, a venture capital firm, since 1998. From 1991 until 1997, he served as
Chief Executive Officer of CytoTherapeutics, Incorporated, a company engaged in
the development of cell and gene based therapeutics and he served as its
Chairman of the Board from 1993 until 1998. Dr. Rudnick received a M.D. from the
University of Virginia and a B.A. from the University of Pennsylvania. He also
serves on the boards of Esperion Therapeutics, Inc., NaPro
BioTherapeutics, Inc. and OraPharma, Inc.

STEFAN RYSER, PH.D. Stefan Ryser, Ph.D. has been a director since
August 1998. Since April 2000, Dr. Ryser has been a Managing Director of Bear
Stearns Health Innoventures, a venture capital fund. Dr. Ryser has also been a
member and delegate of the board of International Biomedicine Management
Partners, Inc., a venture capital company, since 1998. Prior to his position
with Bear Stearns Health Innoventures, Dr. Ryser had served as the Chief
Executive Officer of Biomedicine Management International Partners, Inc. since
1998. From 1989 to 1997, Dr. Ryser held various positions at Hoffmann-LaRoche,
Inc., a pharmaceutical company, in Basel, Switzerland, and in Nutley, New
Jersey, including Scientific Assistant to the President of Global Research and
Development, and was also responsible for maintaining the scientific liaison
between Roche and Genentech. Dr. Ryser served on the joint steering committee of
Roche and Millennium Pharmaceuticals, Inc., a genomics company, from 1994 to
1995. Dr. Ryser is a director of Arena Pharmaceuticals, Inc.,
Cytokinetics, Inc. and Telik, Inc. He holds a Ph.D. in molecular biology from
the University of Basel.

CHRISTOPHER WRIGHT. Mr. Wright has been a director since August 1998. He is
the head of the Global Private Equity businesses of Dresdner Kleinwort Benson, a
bank, which manages approximately $2 billion in private equity investments
worldwide. He has also been the Chairman of the Group Private Equity Board for
Dresdner Kleinwort Benson since 1997. From 1995 to 1997, Mr. Wright served as
Executive Vice President to Dresdner Kleinwort Benson.

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Mr. Wright holds a M.A. in philosophy and economics from Oxford University and a
C. Diploma in accounting and finance. He serves on the boards of Merifin Capital
Group and Roper Industries Inc.

Scientific Advisory Board

We address certain technical matters by consulting with medical, scientific
and information technology advisors who have demonstrated expertise in the areas
of molecular and genomic technologies, statistical epidemiology, drug
development and clinical correlations. Board members meet on a regular basis to
exchange ideas with management and actively participate in our development. In
addition, three members of our scientific advisory board serve as our executive
scientific, medical, and genetics and informatics advisors on an additional as
needed basis. Our advisors are as follows.

STEPHEN LIGGETT, M.D., EXECUTIVE MEDICAL ADVISOR TO MANAGEMENT. Dr. Liggett
is a Professor in the Departments of Medicine, Pharmacology and Molecular
Genetics at the University of Cincinnati. Prior to this, he served as an
Associate Professor and Chief, Pulmonary and Critical Care Medicine at the
University of Cincinnati College of Medicine. His research focuses on
correlating genomic variation and clinical response with a specific focus on the
function of G-coupled protein receptors. He is particularly interested in how
gene variation in the structure of a receptor alters function at the cellular
level and how this affects responsiveness to therapeutic agents. These efforts
have been applied towards asthma and congestive heart failure. Dr. Liggett holds
a M.D. from the University of Miami School of Medicine.

RICHARD MYERS, PH.D., EXECUTIVE SCIENTIFIC ADVISOR TO MANAGEMENT. Dr. Myers
is a Professor of Genetics at the Stanford University School of Medicine and the
Director of the Stanford Human Genome Center. Dr. Myers was a founder of
Mercator Genetics Incorporated. He is a specialist in genome analysis,
positional cloning and the study of DNA variation. His professional interests
and accomplishments have spanned a number of genetic diseases including
Huntington disease, progressive myoclonus epilepsy, basal cell carcinoma,
haemochromatosis and autism. Dr. Myers holds a Ph.D. in biochemistry from the
University of California at Berkeley.

NEIL RISCH, PH.D., EXECUTIVE GENETICS & INFORMATICS ADVISOR TO
MANAGEMENT. Dr. Risch is Professor of Genetics at Stanford University where he
also holds appointments in Biostatistics and Epidemiology. Prior to this,
Dr. Risch was Professor of Genetics at Yale University School of Medicine.
Dr. Risch is a genetic epidemiologist focusing on complex disorders using
association studies designed with novel biostatistical algorithms. He has
contributed to the understanding of the genetic basis of breast cancer, autism,
psychiatric disorders, coronary heart disease, Alzheimer's Disease, and genetic
malformations of the palate. Dr. Risch holds a Ph.D. in biomathematics from the
University of California at Los Angeles.

FRANK H. RUDDLE, PH.D., CHAIRMAN OF THE SCIENTIFIC ADVISORY
BOARD. Dr. Ruddle is Sterling Professor of Biology and Professor of Genetics at
Yale University. Dr. Ruddle is a member of the National Academy of Sciences, a
former President of the Society for Developmental Biology, the editor of
GENOMICS and a member of the editorial boards of several major scientific
journals. Dr. Ruddle is an authority in genome diversity, developmental biology
and transgenic animals. Dr. Ruddle holds a Ph.D. in cell biology from the
University of California at Berkeley.

BARUCH S. BLUMBERG, M.D., PH.D. AND NOBEL LAUREATE. Dr. Blumberg is a
Distinguished Scientist at Fox Chase Cancer Center, Philadelphia and University
Professor of Medicine and

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Anthropology at the University of Pennsylvania. His research has covered many
areas including clinical research, epidemiology, virology, genetics and
anthropology. He was awarded the Nobel Prize in 1976 for "discoveries concerning
new mechanisms for the origin and dissemination of infectious diseases" and
specifically for the discovery of the Hepatitis B virus. In 1993, he was elected
to the National Inventors Hall of Fame for inventing the Hepatitis B vaccine and
the diagnostic test for Hepatitis B with his co-inventor Dr. Irving Millman.
Dr. Blumberg holds a M.D. from Columbia University and a Ph.D. in biochemistry
from Balloil College at Oxford University.

FRITZ BUHLER, M.D. Dr. Buhler is Deputy Chairman of the board of
International Biomedicine Management Partners, Inc, a venture capital company.
Prior to this, he served in several capacities at the Roche Group, including
Head, Worldwide Clinical Research and Development and Chief Medical Officer.
Dr. Buhler is Director of the European Center for Pharmaceutical Medicine at the
University Hospital of Basel. Dr. Buhler is a cardiologist whose career has
spanned 35 years in academic medicine and pharmaceutical industry research and
development. He holds a M.D. from the University of Basel.

STEPHEN DELLAPORTA, PH.D. Dr. Dellaporta is a Professor in the Department of
Molecular, Cellular and Developmental Biology at Yale University. He is an
expert in plant breeding and genetics. He received a Ph.D. in biomedical science
from Worcester Consortium.

MARTIN E. KREITMAN, PH.D. Dr Kreitman is Professor of Ecology and
Evolutionary Biology at the University of Chicago. Dr. Kreitman was previously
Associate Professor of Ecology and Evolutionary Biology at Princeton University.
He is an expert in population genetics and molecular evolution.

LOUIS LASAGNA, M.D., SC.D. Dr. Lasagna is Dean of the Sackler School of
Graduate Biomedical Sciences and Scientific Affairs School of Medicine at Tufts
University and Chairman of the Board, Tufts Center for the Study of Drug
Development. Dr. Lasagna is an expert in the areas of clinical trial
methodology, analgesics, medical ethics and the placebo effect. He was Chairman
of the National Committee to review procedures for approval of new drugs for
cancer and AIDS. He holds a M.D. from Columbia University and was awarded a
honorary Sc.D. from both the Hahnemann Medical School and Rutgers University.

ALEX MAKRIYANNIS, PH.D. Dr. Makriyannis is Professor of Molecular and Cell
Biology and Director of the Drug Discovery Institute at the University of
Connecticut and Director of the Connecticut Critical Technologies Drug Design
Program. Dr. Makriyannis has provided expertise in the areas of drug design,
synthesis and testing to Abbott Laboratories, Bayer Corporation, Boehringer
Ingelheim Pharmaceuticals, Inc., Pfizer Inc., Sphinx Pharmaceuticals, Inc. and
Bristol-Myers Squibb Company. He holds a Ph.D. in medicinal chemistry from the
University of Kansas.

MARTIN SCHULTZ, PH.D. Dr. Schultz is the Arthur K. Watson Professor of
Computer Science at Yale University. Dr. Schultz's primary research interest is
high performance computing. He has recently concentrated on applying parallel
architectures with massively parallel processors or clusters of workstations or
personal computers for use in traditional scientific supercomputing
applications, such as in visualization and advanced databases techniques.

Board of Directors

Our board of directors is currently comprised of eight directors. Our
certificate of incorporation provides for a classified board of directors
consisting of three classes, with each class being as nearly equal in number as
possible. The term of one class expires and their

55
<PAGE>
successors are elected for a term of three years at each annual meeting of the
stockholders. We have designated three class I directors, Drs. Ryser and Laur
and Mr. Penner; three class II directors, Dr. Drews and Messrs. Rakin and
Wright; and two class III directors, Drs. Ruano and Rudnick. These class I,
class II and class III directors will serve until the annual meetings of
stockholders to be held in 2001, 2002 and 2003, respectively, and until their
respective successors are duly elected and qualified, or until their earlier
resignation or removal. The board of directors appoints officers who serve until
the next annual meeting of the board of directors.

In February 2000, the board of directors designated a compensation committee
and in March 2000 the board of directors designated an audit committee. Prior
thereto, there were no such committees of the board of directors, and decisions
regarding the compensation of executive officers were made by the board of
directors as a whole. The compensation committee, which consists of Drs. Drews
and Rudnick and Mr. Wright, makes recommendations to the Board concerning the
compensation of our officers and directors and the administration of our stock
option plan and employee stock purchase plan 2000. The audit committee, which
consists of Messrs. Wright and Penner and Dr. Laur, reviews our financial
controls, evaluates the scope of the annual audit, reviews audit results,
consults with management and our independent auditors prior to the presentation
of financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our internal accounting controls and financial affairs.

Director Compensation

Except for Dr. Drews and Mr. Penner, directors currently do not receive any
cash compensation from Genaissance for their services as members of the board of
directors, although members are reimbursed for expenses in connection with
attendance at board of directors and committee meetings. Dr. Drews receives a
non-accountable expense allowance of $30,000 per year. Mr. Penner receives
$1,000 per board meeting he attends. Directors are eligible to participate in
our stock plans. As of March 31, 2000, we had granted options to purchase 25,000
shares of common stock to our non-employee directors.

Compensation Committee Interlocks and Insider Participation

The compensation committee currently consists of Drs. Drews, Rudnick and
Mr. Wright. Prior to the formation of the compensation committee, the board of
directors as a whole performed the functions typically assigned to a
compensation committee. Both Dr. Ruano and Mr. Rakin participated in the board's
deliberations concerning compensation of officers other than themselves. No
member of the compensation committee has been an officer or employee of ours at
any time. None of our executive officers serves as a member of the board of
directors or compensation committee of any other company that has one or more
executive officers serving as a member of our board of directors or compensation
committee.

56
<PAGE>
Executive Compensation

The following table summarizes the compensation paid to or earned during the
fiscal year ended December 31, 1999 by our chief executive officer and all of
our other executive officers whose salary and bonus exceeded $100,000. We refer
to these persons as the named executive officers.

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Compensation Options Compensation(1)
--------------------------- -------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Gualberto Ruano, M.D., Ph.D........ 1999 $225,000 $24,942(2) -- $2,500
Chief Executive Officer
Kevin Rakin........................ 1999 205,000 -- -- 2,500
Chief Financial Officer
Gerald F. Vovis, Ph.D.............. 1999 131,753(3) 41,619(4) 100,000 --
Senior Vice President of Genomics
Richard S. Judson, Ph.D............ 1999 94,231(5) -- 50,000 520
Senior Vice President of
Informatics
</TABLE>

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

(1) Consists of contributions to our 401(k) plan made on behalf of the named
executive officers to match the deferral contributions made by each to the
plan.

(2) Consists of $19,500 of interest forgiven on note payable to us and $5,442
related to auto allowance, life insurance, and disability insurance.

(3) Dr. Vovis joined us in April 1999.

(4) Consists of $37,057 related to reimbursed moving expenses and $4,562
related to life insurance and disability insurance.

(5) Dr. Judson joined us in February 1999.

Stock Option Grants

The following table contains certain information regarding stock option
grants during the twelve months ended December 31, 1999 by us to the named
executive officers:

Option Grants In Last Fiscal Year

<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted Exercise for Option Term(1)
Options to Employees Price Expiration -------------------------
Name Granted in Fiscal Year Per Share Date 5% 10%
---- ---------- -------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gualberto Ruano, M.D.,
Ph.D.(2)................... -- -- % $ -- -- $ -- $ --
Kevin Rakin(2)............... -- -- -- -- -- --
Gerald F. Vovis, Ph.D.(3).... 100,000 26.3 3.00 4/15/09 $1,817,563 $3,071,865
Richard S. Judson,
Ph.D.(4)................... 50,000 13.1 3.00 9/19/09 $ 908,782 $1,535,933
</TABLE>

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

(1) The dollar amounts under these columns are the result of calculations at
the 5% and 10% rates set by the Securities and Exchange Commission and,
therefore, are not intended to forecast possible future appreciation, if
any, in the price of the underlying common stock. No gain to the optionees
is possible without an increase in price of the common stock, which will
benefit all stockholders proportionately. The potential realizable values
are calculated on the basis of our initial public offering price of $13.00
per share and assuming that the market price appreciates from this price at
the indicated rate for the entire term of each option and that each option
is exercised and sold on the last day of its term at the appreciated price.

57
<PAGE>
(2) In April 2000, we granted Dr. Ruano and Mr. Rakin each an option to
purchase 400,000 shares of common stock at an exercise price of $12.00 per
share. These options vest quarterly over a six year period with the ability
to be accelerated upon the achievement of certain milestones.

(3) After December 31, 1999, we granted Dr. Vovis an option to purchase
25,000 shares of common stock at an exercise price of $10.00 per share which
vests over four years.

(4) After December 31, 1999, we granted Dr. Judson an option to purchase
50,000 shares of common stock at an exercise price of $10.00 per share which
vests over four years.

Option Exercises and Year-End Option Values

The following table provides information about the number of shares issued
upon option exercises by the named executive officers during the year ended
December 31, 1999 and the value realized by the named executive officers. The
table also provides information about the number and value of options held by
the named executive officers at December 31, 1999. As our common stock is not
publicly traded, a readily ascertainable market value is not available.

Fiscal Year-End Option Values

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End Fiscal Year-End(1)
--------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gualberto Ruano, M.D., Ph.D................ 44,444 55,556 $516,439 $645,561
Kevin Rakin................................ 44,444 55,556 516,439 645,561
Gerald F. Vovis, Ph.D...................... 12,500 87,500 125,000 875,000
Richard S. Judson, Ph.D.................... -- 50,000 -- 500,000
</TABLE>

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

(1) Based on the difference between the option exercise price and our initial
public offering price of $13.00 per share of common stock.

Employment Agreements

We have entered into employment agreements with each of Dr. Ruano,
Mr. Rakin, Dr. Vovis and Dr. Judson.

Dr. Ruano's employment agreement, entered into as of August 24, 1998,
provides for his employment as President and Chief Executive Officer through
August 31, 2003. The agreement is automatically renewed for successive one year
terms thereafter, unless terminated by either party. The agreement provides for
a salary of $225,000 per year, subject to yearly merit and performance based
bonuses to be granted in an amount in the board of directors' discretion. On the
date the agreement became effective, we granted Dr. Ruano a cash retention bonus
of $150,000 and an option to purchase 100,000 shares of our common stock at
$1.38 per share, with accelerated vesting upon the termination of the agreement
under certain circumstances. If we terminate Dr. Ruano without cause, he is
entitled to his base salary for twelve months following the time of the
termination. If we terminate Dr. Ruano following a change of control, we are
obligated to pay him a lump sum equal to three hundred percent of his salary as
in effect at the time of the termination. For purposes of his agreement, a
change of control occurs if one person or entity acquires control of 35% or more
of our stock, there is a change of control of the board of directors, we sell
substantially all of our assets or are the disappearing party in a merger.

Mr. Rakin's agreement, entered into as of August 24, 1998, provides for his
employment as Executive Vice President, Chief Financial Officer and Treasurer
through August 31, 2003.

58
<PAGE>
Thereafter, the agreement is automatically renewed for successive one year
terms, unless terminated by either party. The agreement provides for a salary of
$205,000 per year, subject to yearly merit and performance based bonuses to be
granted in an amount in the board of directors' discretion. On the date the
agreement became effective, we granted Mr. Rakin a cash retention bonus of
$150,000 and an option to purchase 100,000 shares of our common stock at $1.38
per share, with accelerated vesting upon the termination of the agreement under
certain circumstances. If we terminate Mr. Rakin without cause, he is entitled
to his base salary for twelve months following the time of the termination. If
we terminate Mr. Rakin following a change of control, we are obligated to pay
him a lump sum equal to three hundred percent of his salary as in effect at the
time of the termination. For purposes of his agreement, a change of control
occurs if one person or entity acquires control of 35% or more of our stock,
there is a change of control of the board of directors, we sell substantially
all of our assets or are the disappearing party in a merger.

Dr. Vovis' agreement, entered into as of April 15, 1999, provides for his
employment as our Senior Vice President of Genomics, through April 15, 2003, and
will be renewed for a successive one year term unless terminated by either
party. The agreement provides for a salary of $185,000 per year, subject to
periodic increases and annual performance based bonuses to be awarded in amounts
to be determined by Dr. Ruano acting in his sole discretion. We granted
Dr. Vovis an option to purchase 100,000 shares of our common stock at $3.00 per
share. If we terminate Dr. Vovis without cause, or if Dr. Vovis terminates the
agreement under certain circumstances, we are obligated to pay him his salary
for a period of six months following the date of such termination.

Dr. Judson's agreement, entered into as of November 16, 1999, provides for
his employment as our Vice President of Informatics. The agreement provides for
him to be paid a base salary of $125,000 per year, subject to merit and
performance based bonuses to be paid in amounts and at times at the discretion
of Dr. Ruano. Under this agreement, Dr. Judson was granted the option to
purchase 50,000 shares of our stock at $3.00 per share, these options to vest
ratably over four years.

Employee Benefits Plans

STOCK OPTION PLAN

Our stock option plan authorizes the grant of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
nonqualified stock options for the purchase of an aggregate of 3,557,375 shares
of common stock, subject to adjustment for stock splits and similar capital
changes. The 3,557,375 includes an increase of 2,000,000 shares of common stock
issuable under the stock option plan that the board of directors approved in
April 2000. Employees and, in the case of non-qualified stock options,
directors, consultants or any affiliate, as defined in the plan, are eligible to
receive grants under the plan. The board of directors has appointed the
compensation committee to administer the plan. As of June 30, 2000, we had
options outstanding to purchase 2,211,700 shares of common stock under the stock
option plan. After the increase of 2,000,000 shares of common stock authorized
by the board of directors and based on the number of options outstanding on
June 30, 2000, there are 1,331,120 shares available for issuance for future
grants under the stock option plan. In addition, on August 1, 2000, we granted
an option to purchase 200,000 shares of common stock at an exercise price of
$12.00 per share to an employee who will become our Chief Medical Officer. This
option vests as to 20,000 shares immediately and the balance will vest quarterly
over the next four years.

59
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN 2000

The board of directors adopted the employee stock purchase plan on April 18,
2000, and the stockholders approved it in July 2000. Under the employee stock
purchase plan, employees may purchase shares of common stock at a discount from
fair market value. We have reserved 250,000 shares of common stock for issuance
under the purchase plan. The purchase plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended. The compensation committee grants rights to purchase
common stock under the purchase plan. The compensation committee also determines
the frequency and duration of individual offerings under the plan and the dates
when employees may purchase stock. Eligible employees participate voluntarily
and may withdraw from any offering at any time before they purchase stock.
Participation terminates automatically upon termination of employment. The
purchase price per share of common stock in an offering will not be less than
85% of the lesser of its fair market value at the beginning of the offering
period or on the applicable exercise date and employees may pay through payroll
deductions, periodic lump sum payments or a combination of both. The purchase
plan terminates on April 18, 2010. As of July 31, 2000, we had issued no shares
of common stock under the purchase plan.

401(K) PLAN

We have a 401(k) defined contribution retirement plan covering substantially
all full-time employees. We match 25% of employee contributions up to 8% of
employee compensation. We contributed approximately $25,000 to the plan during
1999.

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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In August 1998, we made a loan in the amount of $325,000 to Dr. Ruano, our
President and Chief Executive Officer. Dr. Ruano incurred the loan in connection
with the exercise of options to buy 260,000 shares of our common stock. The loan
is represented by a promissory note and secured by a pledge of the stock
purchased with the loan proceeds. It bears interest at the rate of six percent
per year, payment of which is forgiven as long as Dr. Ruano is our employee.
Although the entire principal amount is currently outstanding, during 1998 we
recorded a reserve of $325,000 which has been offset against the note
receivable. The entire unpaid principal amount of the loan and unforgiven
accrued interest will be formally forgiven upon the closing of this offering.

In June 1994, we entered into an agreement with Yale University to license a
patent, the basis of which is technology Dr. Ruano invented. Under the terms of
the original agreement, we were obligated to make certain payments to Yale
University for the license and Yale University was obligated to pay Dr. Ruano a
royalty based on a percentage of net income it received from the licensing of
the patent. In August 1998, we amended the license agreement to provide that we
would make the payments that Yale University is obligated to pay Dr. Ruano under
the license agreement directly to Dr. Ruano and deduct the amount of these
payments from the license fees we are obligated to pay to Yale University under
the agreement. Pursuant to the terms of the amended license agreement, we have
obligations to Dr. Ruano of approximately $35,000 and $10,000 for 1998 and 1999
and $248,000 in the first quarter of 2000. We have paid these obligations to
Dr. Ruano.

Dr. Ryser, a member of our board of directors, is a member and delegate of
the board of International Biomedicine Management Partners Inc., an affiliate of
International BM Biomedicine Holdings, Inc., which is one of our stockholders.
In August 1998, we sold International BM Biomedicine Holdings, Inc. 1,000,000
shares of our series A convertible preferred stock, at $4.00 per share, and in
February 2000 we sold 732,054 shares of our series B convertible preferred
stock, at $5.50 per share. In November 1999, we issued International BM
Biomedicine Holdings, Inc. a warrant to purchase 5,455 shares of common stock at
$5.50 per share. Upon the closing of this offering, these shares, excluding the
shares issuable upon the exercise of the warrant, will automatically convert to
1,732,054 shares of our common stock. Dr. Ryser also serves on the board of
Telik, Inc., with which we have a research collaboration agreement.

Dr. Drews, a member of our board of directors, is the Chairman of the board
of International Biomedicine Management Partners Inc., which is the affiliate of
one of our stockholders, International BM Biomedicine Holdings, Inc., as
described above.

Dr. Rudnick, a member of our board of directors, is a venture partner of
Canaan Partners, which is the manager of Canaan Equity Partners II LLC, which is
the general partner of two of our stockholders, Canaan Equity II, LP and Canaan
Equity II, LP (QP) and is the manager of another stockholder, Canaan Equity II
Entrepreneurs LLC. In February 2000, we sold an aggregate of 895,454 shares of
our series B convertible preferred stock to these three stockholders at a price
of $5.50 per share. Upon the closing of this offering, these shares will convert
into 895,454 shares of our common stock.

Mr. Wright, a member of our board of directors, is an executive officer at
Dresdner Kleinwort Benson, the parent company of our stockholders, Kleinwort
Benson Holdings, Inc. and Kleinwort Benson Limited. In August 1998, we sold
Kleinwort Benson Limited 297,450 shares of our series KBL nonvoting preferred
convertible stock and 208,800 shares of our

61
<PAGE>
series A convertible preferred stock at a price of $4.00 per share. In
November 1999, we issued to Kleinwort Benson Holdings, Inc. a warrant to
purchase 3,636 shares of common stock at $5.50 per share. In February 2000, we
sold Kleinwort Benson Holdings, Inc. 374,250 shares of our series B convertible
preferred stock and 165,374 shares of series KBH nonvoting preferred stock at
$5.50 per share. Upon the closing of this offering, these shares, excluding the
shares issuable upon exercise of the warrant, will convert into 1,045,874 shares
of our common stock.

Pursuant to the terms of a stock purchase agreement between Dr. Ruano,
Mr. Rakin and Dr. Kouri, one of our stockholders, Dr. Ruano and Mr. Rakin each
are obligated to pay Dr. Kouri $160,000 upon the completion of this offering. We
intend to issue a promissory note to each of Dr. Ruano and Mr. Rakin for
$160,000, the proceeds of which shall be used to satisfy this obligation. The
principal and interest due on these notes will be forgiven at the end of 2000 if
Dr. Ruano and Mr. Rakin remain our employees.

We entered into agreements with Connecticut Innovations, Incorporated, one of
our stockholders, to finance leasehold improvements and other costs associated
with our facility expansion. In September 1998, we entered into a promissory
note with Connecticut Innovations, Incorporated in the amount of $950,000
bearing interest at 6.5% per year. In December 1999, we obtained a commitment
from Connecticut Innovations, Incorporated to provide an additional $2,720,000
of funding for the continued expansion of our facility. In the first fiscal
quarter of 2000, we borrowed approximately $295,000 under this commitment. Both
the promissory note and the commitment provide for payments of interest only for
the first two years with monthly payments of principal and interest thereafter.
As of March 31, 2000, we have made payments of $63,000 to Connecticut
Innovations, Incorporated. Final payments are due in April 2007 and July 2008.
The related leasehold improvements secure borrowings under the promissory note
and the commitment. In June 2000, we received approval for an additional
$1,500,000 of leasehold improvement funding from Connecticut Innovations,
Incorporated. We expect to close this financing during the third quarter of
2000.

62
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of June 30, 2000 and as adjusted to
reflect the sale of common stock offered for (1) each person who we know to
beneficially own more than 5% of our common stock, (2) each of our directors,
(3) each of the named executive officers, and (4) all directors and executive
officers as a group. Except as indicated in the table below or the footnotes
thereto and pursuant to applicable community property laws, the stockholders
named in the table have sole voting and investment power with respect to the
shares set forth opposite each stockholder's name

The "Percentage of Shares Outstanding" column below is based on 15,536,301
shares of common stock outstanding before the offering, and 21,598,746 shares of
common stock outstanding after the offering which includes shares issuable upon
the cashless exercise of warrants. Shares of common stock subject to options and
warrants that are currently exercisable or exercisable within 60 days of
June 30, 2000 are deemed to be outstanding and to be beneficially owned by the
person holding the options or warrants for the purpose of computing the
percentage ownership of the person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.

Connecticut Innovations, Inc.(3).......................... 1,575,616 10.1% 7.3%
999 West Street
Rocky Hill, CT 06067

Kleinwort Benson(4)....................................... 1,057,584 6.8% 4.9%
c/o Dresdner Kleinwort Benson North America LLC
75 Wall Street
New York, NY 10005-2889

CB Capital Investors, LLC(5).............................. 933,333 6.0% 4.3%
c/o Chase Capital Partners
380 Madison Avenue, 12th Floor
New York, NY 10017

A&A Geninvest LLP(6)...................................... 909,090 5.9% 4.2%
c/o A&A Actienbank Gmbh
IM Trutz Frankfurt 55
60322 Frankfurt, Germany

Sofinov Societe Financiere D'Innovation Inc.(7)........... 909,090 5.9% 4.2%
1981 McGill College Avenue
Montreal, Quebec, Canada

Canaan Partners(8)........................................ 895,454 5.8% 4.2%
105 Rowayton Avenue
Rowayton, CT 06853
</TABLE>

63
<PAGE>

<TABLE>
<CAPTION>
Percentage of
Shares Outstanding
Number of Shares -----------------------
of Common Stock Before After
Name and Address of Beneficial Owner (1) Beneficially Owned Offering Offering
---------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Gualberto Ruano, M.D., Ph.D.(9)........................... 672,433 4.3% 3.1%
Kevin Rakin (10).......................................... 663,333 4.3% 3.1%
Gerald F. Vovis, Ph.D.(11)................................ 32,813 * *
Richard S. Judson, Ph.D.(11).............................. 8,125 * *
Jurgen Drews, M.D.(12).................................... 1,737,509 11.2% 8.0%
Gerhard Laur, M.D.(13).................................... 909,090 5.9% 4.2%
Harry H. Penner, Jr.,(14)................................. 11,667 * *
Seth Rudnick, M.D.(15).................................... 909,090 5.9% 4.2%
Stefan Ryser, Ph.D.(16)................................... 1,737,509 11.2% 8.0%
Christopher Wright(17).................................... 1,057,584 6.8% 4.9%
All executive officers and directors as a group
(10 persons)(18)........................................ 6,001,644 38.1% 27.5%
</TABLE>

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

* Indicates less than 1%

(1) Unless otherwise indicated, the address of each shareholder is
Genaissance Pharmaceuticals, Inc., Five Science Park, New Haven,
Connecticut 06511.

(2) Includes 5,455 shares of common stock issuable upon exercise of a warrant
currently exercisable. Dr. Felix Ehrat and Gaudenz Staehlein, as
President and Vice President of International BM Biomedicine
Holdings, Inc., respectively, jointly have authority to vote such shares.

(3) Includes 38,218 shares of common stock issuable upon exercise of warrants
currently exercisable. The finance committee of the board of directors
has the authority to vote such shares.

(4) Consists of 514,687 shares of common stock owned by Kleinwort Benson
Limited, 539,624 shares of common stock owned by Kleinwort Benson
Holdings, Inc. and 3,273 shares of common stock issuable upon exercise of
a warrant held by Kleinwort Benson Holdings, Inc. The investment
committees of both Kleinwort Benson Limited and Kleinwort Benson
Holdings, Inc. have the authority to vote such shares, pursuant to a vote
of three of the five members.

(5) Jeffrey Walker, managing general partner of Chase Capital Partners, which
is the Investment Manager of CB Capital Investors, LLC, has the authority
to vote such shares.

(6) A&A Private Equity Jersey, Inc. is the General Partner of A&A Geninvest
LLP, whose directors, Iain Lambert and Thomas Kemmerer, jointly have
authority to vote such shares.

(7) Sofinov is a wholly owned subsidiary of the Caisse de depot et placement
du Quebec, whose corporate secretary has the authority to vote such
shares in accordance with applicable government regulations.

(8) Consists of the following shares: 586,522 shares owned by Canaan Equity
II L.P., 262,368 shares owned by Canaan Equity II L.P. (QP), and 46,564
shares owned by Canaan Equity II Entrepreneurs LLC. Canaan Equity
Partners II LLC is the general partner of Canaan Equity II L.P. and
Canaan Equity II L.P. (QP) and the manager of Canaan Equity II
Entrepreneurs LLC. Canaan Partners, of which Dr. Rudnick is a venture
partner, is the manager of Canaan Equity Partners II LLC. The managers of
Canaan Equity Partners II LLC have the authority to vote these shares
pursuant to a two-thirds vote of these managers.

(9) Includes 83,333 options exercisable within 60 days of June 30, 2000.

(10) Includes 40,000 shares owned by The Alison N. Hoffman and Kevin L. Rakin
Irrevocable Trust, two trusts for the benefit of certain members of
Mr. Rakin's family and of which Lloyd Hoffman, Mr. Rakin's
brother-in-law, is the sole trustee with sole authority to vote such
shares. Also includes 83,333 options exercisable within 60 days of
June 30, 2000.

(11) Consists solely of shares of common stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of June 30,
2000.

(12) Consists solely of shares of common stock owned by International BM
Biomedicine Holdings, Inc. Dr. Drews is

64
<PAGE>
the Chairman of the Board of International Biomedicine Management
Partners, Inc., a company that manages investments on behalf of
International BM Biomedicine Holdings, Inc. Dr. Drews disclaims
beneficial ownership of these shares except to the extent of his
pecuniary interest. See footnote (2).

(13) Consists solely of shares of common stock owned by A&A Geninvest LLP.
Dr. Laur is Director, Head of Merchant Banking of A&A Actienbank, a
company that is the general partner of A&A Private Equity Jersey, Inc.,
the general partner of A&A Geninvest. Dr. Laur disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest.
See footnote (6).

(14) Consists solely of shares of common stock issuable upon exercise of
options currently exercisable or exercisable within 60 days of June 30,
2000.

(15) Includes 895,454 shares owned by Canaan Partners. Dr. Rudnick is a
venture partner of Canaan Partners and has voting and investment control
over the shares owned by that entity. Dr. Rudnick disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest.
See footnote (8).

(16) Consists solely of shares of common stock owned by International BM
Biomedicine Holdings, Inc. Dr. Ryser is a member and delegate of the
board of International Biomedicine Management Partners, Inc., a company
that manages investments on behalf of International BM Biomedicine
Holdings, Inc. Dr. Ryser disclaims beneficial ownership of these shares
except to the extent of this pecuniary interest. See footnote (2).

(17) Consists of 514,687 shares of common stock owned by Kleinwort Benson
Limited, 539,624 shares of common stock owned by Kleinwort Benson
Holdings, Inc. and 3,273 shares of common stock issuable upon exercise of
a warrant held by Kleinwort Benson Holdings, Inc. Mr. Wright is an
executive officer of Dresdner Kleinwort Benson, the parent company of
Kleinwort Benson Limited and Kleinwort Benson Holdings, Inc. Mr. Wright
has voting and investment control over the shares owned by these
entities. Mr. Wright disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest. See footnote (4).

(18) See footnotes (9)-(17). Includes 227,999 shares of common stock issuable
upon exercise of options or warrants currently exercisable or exercisable
within 60 days of June 30, 2000. Includes only 1,737,509 of the shares
attributed to Drs. Drews and Ryser as a result of their affiliation with
International BM Biomedicine Holdings, Inc.

65
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock as of March 31, 2000 consisted of 20,000,000
shares of common stock, 2,000,000 shares of nonvoting common stock, and
30,000,000 shares of preferred stock. As of March 31, 2000, there were
outstanding 2,817,580 shares of common stock and 12,704,166 shares of preferred
stock. These shares were held of record by a total of 102 stockholders.

Upon the closing of this offering:

- Our certificate of incorporation will be amended and restated to provide
for total authorized capital consisting of 58,000,000 shares of common
stock, 2,000,000 shares of non-voting common stock, and 1,000,000 shares of
preferred stock;

- All shares of preferred stock will convert into common stock, and no shares
of preferred stock will be outstanding; and

- Based on the number of shares outstanding as of March 31, 2000, a total of
21,584,191 shares of common stock will be outstanding, assuming no exercise
of the underwriters' over-allotment option, after giving effect to the sale
of common stock we are offering and the issuance of 62,445 shares upon the
cashless exercise of warrants.

Common Stock

Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor as the
board may from time to time determine. Each holder of common stock is entitled
to one vote for each share of common stock held on all matters submitted to a
vote of stockholders. Cumulative voting for the election of directors is not
provided for in Genaissance's certificate of incorporation, which means that the
holders of a majority of the shares voted can elect all of the directors then
standing for election. The common stock is not entitled to preemptive rights and
is not subject to conversion or redemption. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.

We have non-voting common stock authorized to accommodate certain
stockholders who are subject to banking regulations restricting their ownership
of voting securities. These shares of non-voting common stock will be identical
to the shares of common stock other than voting rights. The holders of
non-voting common stock shall not be entitled to vote on any matters submitted
for vote by the stockholders, except as provided under Delaware General
Corporation Law. The shares of non-voting common stock convert to common stock
at the election of the holder of the non-voting common stock. We are not
offering these shares in this offering.

Preferred Stock

As of the closing date of this offering, each outstanding share of preferred
stock will automatically convert into one share of common stock. Pursuant to an
amended and restated certificate of incorporation to be filed upon the closing
of this offering, a total of 1,000,000 shares of preferred stock will be
authorized for issuance, none of which has been designated in any series. Our
board of directors is authorized, without further stockholder action, to
authorize and issue any of the 1,000,000 undesignated shares of preferred stock
in one or more series and to fix the voting rights, liquidation preferences,
dividend rights, repurchase

66
<PAGE>
rights, conversion rights, preemption rights, redemption rights, and terms,
including sinking fund provisions and certain other rights and preferences of
such shares of our preferred stock. The issuance of any class or series of
preferred stock could adversely affect the rights of the holders of common stock
by restricting dividends on, diluting the power of, impairing the liquidation
rights of common stock, or delaying, deferring, or preventing a change in
control of Genaissance. We have no present plans to issue any preferred stock.

Anti-Takeover Provisions of Delaware Law and Charter and Bylaw Provisions

Section 203 of the Delaware General Corporation Law is applicable to
corporate takeovers of Delaware corporations. Subject to exceptions enumerated
in Section 203, Section 203 provides that a corporation shall not engage in any
business combination with any "interested stockholder" for a three-year period
following the date that the stockholder becomes an interested stockholder
unless:

- prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;

- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, though some shares may be excluded from the
calculation; and

- on or subsequent to that date, the business combination is approved by the
board of directors of the corporation and by the affirmative votes of
holders of at least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.

Except as specified in Section 203, an interested stockholder is generally
defined to include any person who, together with any affiliates or associates of
that person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation, any time within three years immediately prior to the
relevant date. Under certain circumstances, Section 203 makes it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period, although the stockholders may elect not to
be governed by this section, by adopting an amendment to our certificate of
incorporation or by-laws, effective 12 months after adoption. Genaissance's
certificate of incorporation and its by-laws do not exclude Genaissance from the
restrictions imposed under Section 203. It is anticipated that the provisions of
Section 203 may encourage companies interested in acquiring Genaissance to
negotiate in advance with the board since the stockholder approval requirement
would be avoided if a majority of the directors then in office excluding an
interested stockholder approve either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control of Genaissance, which could depress the market price of the
common stock and which could deprive stockholders of opportunities to realize a
premium on shares of the common stock held by them.

Our certificate of incorporation and by-laws contain provisions that could
discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. Genaissance's certificate of incorporation
provides that stockholders may not take action by written consent but may only
act at a stockholders' meeting, and our by-laws provide that special meetings of
the stockholders of Genaissance may only be called by the

67
<PAGE>
president or a majority of the board and requires advance notice of business to
be brought by a stockholder before the annual meeting. The certificate of
incorporation includes provisions classifying the board of directors into three
classes with staggered three-year terms. Under the certificate of incorporation
and by-laws, the board of directors may enlarge the size of the board and fill
any vacancies on the board. The by-laws provide that nominations for directors
may not be made by stockholders at any annual or special meeting unless the
stockholder intending to make a nomination notifies us of its intention a
specified period in advance and furnishes certain information.

Registration Rights

After this offering, the holders of approximately 13,480,413 shares of common
stock and the holders of warrants to purchase approximately 567,013 shares of
common stock will be entitled to rights with respect to the registration of
these shares under the Securities Act of 1933. Under the terms of the agreements
between us and the holders of those registrable shares, upon the request of the
holders of certain amounts of these shares as set forth in the agreements, we
are required to file a registration statement under the Securities Act with
respect to their shares of common stock. The holders of these registration
rights have waived their rights with respect to this offering. Also, if we
propose to register any of our securities under the Securities Act, other than
in connection with demand registrations and registrations on Form S-8, the
foregoing holders are entitled to notice of and to include in the registration
shares of common stock owned by them. All of these registration rights are
subject to various conditions and limitations, among them certain rights of the
underwriters of an offering to limit the number of shares included in a
registration. We will bear all of the expenses incurred in connection with all
exercises of these registration rights.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the common stock, and a
liquid trading market for the common stock may not develop or be sustained after
this offering. Future sales of substantial amounts of common stock, including
shares issued upon exercise of outstanding options and warrants, in the public
market after this offering or the anticipation of those sales could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through sales of our equity securities.

After the closing of this offering, Genaissance will have outstanding
21,584,191 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, the shares sold in this offering will be freely tradable without
restriction under the Securities Act unless purchased by "affiliates" of
Genaissance as that term is defined in Rule 144 under the Securities Act. Of the
remaining 15,584,191 shares of common stock outstanding, 15,370,419 restricted
shares held by existing stockholders are subject to various lock-up agreements
providing that, with limited exceptions, the stockholder will not offer, sell,
contract to sell, grant an option to purchase, effect a short sale or otherwise
dispose of or engage in any hedging or other transaction that is designed or
reasonably expected to lead to a disposition of any shares of common stock or
any option to purchase common stock or any securities exchangeable for or
convertible into common stock for a period of 180 days after the date of this
prospectus. Though these shares may be eligible for earlier sale under the
provisions of the Securities Act, none of these shares will be saleable until
181 days after the date of this prospectus as a result of these lock-up
agreements. Beginning 181 days after the date of this prospectus, 5,178,691
restricted shares will be eligible for sale in the United States public market,
subject to volume and other limitations. Ninety days after the date of this
prospectus, 106,500 restricted shares will be eligible for resale. The remainder
of the 10,299,000 shares of common stock outstanding will become eligible for
sale at various times over a period of approximately two years. In addition, as
of March 31, 2000, there were outstanding options to purchase 1,050,475 shares
of common stock and warrants to purchase 607,013 shares of common stock.
Substantially all of the shares issued upon exercise will be subject to lock-up
agreements.

In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned restricted shares for at least
one year is entitled to sell within any three-month period up to that number of
shares that does not exceed the greater of: (1) 1% of the number of shares of
common stock then outstanding, which immediately following this offering is
expected to be approximately 215,822 shares, or (2) the average weekly trading
volume of the common stock during the four calendar weeks preceding the filing
of a Form 144 with respect to the sale. Sales under Rule 144 are also subject to
certain "manner of sale" provisions and notice requirements and to the
requirement that current public information about itself be available. Under
Rule 144(k), a person who is not deemed to have been an affiliate of the issuer
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, including the
holding period of any prior owner except an affiliate, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.

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<PAGE>
Rule 701 under the Securities Act permits resales of qualified shares held by
some affiliates in reliance upon Rule 144 but without compliance with some
restrictions, including the holding period requirement, of Rule 144. Any
employee, officer or director of or consultant to Genaissance who purchased his
or her shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 further provides
that non-affiliates may sell shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701 shares of common stock are
required to wait until 90 days after the date of this prospectus before selling
shares. However, all shares issued pursuant to Rule 701 are subject to lock-up
agreements and will only become eligible for sale at the earlier of the
expiration of the 180-day lock-up.

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<PAGE>
UNDERWRITING

Subject to certain terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Deutsche Bank
Securities Inc., Bear, Stearns & Co. Inc., Salomon Smith Barney, Inc., and UBS
Warburg LLC, have severally agreed to purchase from us the following number of
shares of common stock at a public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus set
forth opposite their names below:

<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ -----------
<S> <C>
Deutsche Bank Securities Inc................................ 2,380,000
Bear, Stearns & Co. Inc..................................... 952,000
Salomon Smith Barney, Inc................................... 1,190,000
UBS Warburg LLC............................................. 238,000
Banc of America Securities LLC.............................. 80,000
Chase H&Q................................................... 80,000
ING Barings................................................. 80,000
Lehman Brothers Inc......................................... 80,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 80,000
Morgan Stanley & Co. Incorporated........................... 80,000
Prudential Securities Incorporated.......................... 80,000
FleetBoston Robertson Stephens, Inc......................... 80,000
Emerging Growth Equities, Ltd............................... 60,000
Fahnestock & Co. Inc........................................ 60,000
C.L. King & Associates, Inc................................. 60,000
William Blair & Company, L.L.C.............................. 60,000
Chatsworth Securities LLC................................... 60,000
First Security Van Kasper................................... 60,000
Gerard Klauer Mattison & Co., Inc........................... 60,000
Josephthal & Co. Inc........................................ 60,000
Parker/Hunter Incorporated.................................. 60,000
Tucker Anthony Cleary Gull.................................. 60,000
----------
Total................................................... 6,000,000
==========
</TABLE>

The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock offered hereby are subject to
certain conditions precedent and that the underwriters will purchase all shares
of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.

The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $0.55 per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession of not more than $0.10 per share to other dealers.
After the initial public offering, representatives of the underwriters may
change the offering price and other selling terms.

We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 900,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the

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<PAGE>
cover page of this prospectus. The underwriters may exercise this option only to
cover over-allotments made in connection with the sale of the common stock
offered by us. To the extent that the underwriters exercise this option, each of
the underwriters will become obligated, subject to conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to the total number of shares of common stock offered hereby. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the 6,000,000 shares are
being offered.

The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is 7% of the initial public offering price. We have
agreed to pay the underwriters the following fees, assuming either no exercise
or full exercise by the underwriters of the underwriters' overallotment option:

<TABLE>
<CAPTION>
Total Fees
---------------------------------------------
Without Exercise of With Full Exercise of
Fee Per Share Over-Allotment Option Over-Allotment Option
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by Genaissance............... $ 0.91 $ 5,460,000 $ 6,279,000
</TABLE>

In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $940,000.

We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make with respect to any of
these liabilities.

Each of our officers and directors, and substantially all our stockholders
and holders of options and warrants to purchase our stock, have agreed not to
offer, sell, contract to sell, or otherwise dispose of, or enter into any
transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock or
derivatives of our common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held by these persons
for a period of 180 days after the date of the prospectus without the prior
written consent of Deutsche Bank Securities Inc. Deutsche Bank Securities Inc.
may give consent at any time without public notice. We have entered into a
similar agreement with the representatives of the underwriters, except that we
may grant options and sell shares pursuant to our stock option plan and our
employee stock purchase plan without such consent. There are no agreements
between the representatives and any of our stockholders or affiliates releasing
them from these lock-up agreements prior to the expiration of the 180-day
period.

The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.

In order to facilitate the offering of our common stock, the underwriters may
engage in transactions that stabilize, maintain, or otherwise affect the market
price of our common stock. Specifically, the underwriters may over-allot shares
of our common stock in connection with this offering, thus creating a short
sales position in our common stock for their own account. A short sales position
results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. A short sales position may involve

72
<PAGE>
either "covered" short sales or "naked" short sales. Covered short sales are
sales made for an amount not greater than the underwriters' overallotment option
to purchase additional shares in the offering described above. The underwriters
may close out any covered short position by either exercising their
overallotment option or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the underwriters will
consider, among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares through
the overallotment option. Naked short sales are sales in excess of the
overallotment option. The underwriters will have to close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering.

Accordingly, to cover these short sales positions or to stabilize the market
price of our common stock, the underwriters may bid for, and purchase, shares of
our common stock in the open market. These transactions may be effected on the
Nasdaq National Market or otherwise. Additionally, the representatives, on
behalf of the underwriters, may also reclaim selling concessions allowed to an
underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Similar to other purchase
transactions, the underwriters' purchases to cover the syndicate short sales or
to stabilize the market price of our common stock may have the effect of raising
or maintaining the market price of our common stock or preventing or mitigating
a decline in the market price of our common stock. As a result, the price of the
shares of our common stock may be higher than the price that might otherwise
exist in the open market. The underwriters are not required to engage in these
activities and, if commenced, may end any of these activities at any time.

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 300,000 shares for our vendors, employees, family
members of employees, customers, and other third parties. The number of shares
of our common stock available for sale to the general public will be reduced to
the extent these reserved shares are purchased. Any reserved shares that are not
purchased by these persons will be offered by the underwriters to the general
public on the same basis as the other shares in this offering.

Pricing of this Offering

Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock has been
determined by negotiation among us and the representatives of the underwriters.
Among the primary factors considered in determining the public offering price
were:

- prevailing market conditions;

- our results of operations in recent periods;

- the present stage of our development;

- the market capitalization and stage of development of other companies that
we and the representatives of the underwriters believe to be comparable to
our business; and

- estimates of our business potential.

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<PAGE>
LEGAL MATTERS

The validity of the common stock offered by this prospectus will be passed
upon for us by Palmer & Dodge LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Ropes & Gray, Boston, Massachusetts.

EXPERTS

The audited financial statements as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.

ADDITIONAL INFORMATION

We have filed a registration statement on Form S-1 with the SEC for the stock
we are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits for additional information. While we
have disclosed the material terms of any of our contracts, agreements or other
documents referenced in this prospectus, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC.

You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at
450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the operation of the public reference
facilities.

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<PAGE>
Genaissance Pharmaceuticals, Inc.

Index to Financial Statements

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

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

Statements of Operations for the Years Ended December 31,
1997, 1998, and 1999 and for the Three Months Ended
March 31, 1999 and 2000 (unaudited)....................... F-5

Statements of Stockholders' Deficit and Comprehensive Loss
for the Years Ended December 31, 1997, 1998, and 1999 and
for the three months ended March 31, 2000 (unaudited)..... F-6

Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and for the Three Months Ended
March 31, 1999 and 2000 (unaudited)....................... F-8

Notes to Financial Statements............................... F-9
</TABLE>

All schedules, except those set forth above, are omitted as the required
information either is not applicable or is included in the Financial Statements
or related notes.

F-1
<PAGE>
Report of Independent Public Accountants

To the Board of Directors and Stockholders of
Genaissance Pharmaceuticals, Inc.:

We have audited the accompanying balance sheets of Genaissance
Pharmaceuticals, Inc. (a Delaware corporation) as of December 31, 1999 and 1998,
and the related statements of operations, stockholders' deficit and
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with 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 Genaissance
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.

/s/ Arthur Andersen LLP

Hartford, Connecticut
March 10, 2000

F-2
<PAGE>
Genaissance Pharmaceuticals, Inc.
Balance Sheets

<TABLE>
<CAPTION>
December 31, March 31, 2000
-------------------------- ---------------------------
Pro Forma
1998 1999 Actual (Note 2)
----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ 4,189,284 $ 3,666,197 $ 42,983,429 $ 42,983,429
Marketable securities............. 3,229,285 -- 11,925,220 11,925,220
Other current assets.............. 89,446 205,446 362,184 362,184
----------- ------------ ------------ ------------
Total current assets.......... 7,508,015 3,871,643 55,270,833 55,270,833
----------- ------------ ------------ ------------
PROPERTY AND EQUIPMENT, net......... 1,321,542 7,224,008 11,454,024 11,454,024
----------- ------------ ------------ ------------
DEFERRED FINANCING COSTS, net of
accumulated amortization of
$51,538, $96,477 and $141,063 at
December 31, 1998 and 1999 and
March 31, 2000, respectively...... 97,807 251,031 435,561 435,561
----------- ------------ ------------ ------------
OTHER ASSETS........................ 18,370 167,150 194,411 194,411
----------- ------------ ------------ ------------
Total assets.................. $ 8,945,734 $ 11,513,832 $ 67,354,829 $ 67,354,829
=========== ============ ============ ============

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term
debt............................ $ 112,489 $ 1,019,550 $ 682,374 $ 682,374
Current portion of capital lease
obligations..................... 13,143 1,199,938 2,186,443 2,186,443
Accounts payable.................. 385,128 820,574 694,012 694,012
Accrued expenses.................. 196,348 481,580 1,144,759 1,144,759
Due to related parties............ 48,460 5,814 253,771 253,771
----------- ------------ ------------ ------------
Total current liabilities..... 755,568 3,527,456 4,961,359 4,961,359
----------- ------------ ------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, including amounts
due to related parties of
$950,000 and $1,245,084 at
December 31, 1999 and March 31,
2000, respectively, less current
portion......................... $ 792,051 $ 2,287,239 $ 2,303,384 $ 2,303,384
Capital lease obligations, less
current portion................. 11,498 3,842,643 6,786,455 6,786,455
Deferred revenue.................. 520,773 460,757 2,495,523 2,495,523
Royalty obligations............... 300,000 300,000 300,000 300,000
Leasehold improvements
obligations..................... 809,211 -- -- --
Convertible promissory notes...... -- 3,500,000 -- --
Accrued preferred stock
dividends....................... 275,671 1,055,671 1,697,684 1,158,750
Other............................. 159,800 -- -- --
----------- ------------ ------------ ------------
Total long-term liabilities... 2,869,004 11,446,310 13,583,046 13,044,112
----------- ------------ ------------ ------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-3
<PAGE>
Genaissance Pharmaceuticals, Inc.
Balance Sheets (Continued)

<TABLE>
<CAPTION>
December 31, March 31, 2000
-------------------------- ---------------------------
Pro Forma
1998 1999 Actual (Note 2)
----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT (Continued)
COMMITMENTS AND CONTINGENCIES (Note 12)
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
10,000,000 authorized shares at
December 31, 1999 and 30,000,000
authorized shares at March 31, 2000:
Series A and KBL
$.001 par value, 2,437,500 shares
issued and outstanding at
December 31, 1998 and 1999 and
March 31, 2000 and no shares pro
forma............................. 9,945,130 11,247,303 11,594,299 --
----------- ------------ ------------ ------------
Series B and KBH
$.001 par value, 8,727,273 shares
issued and outstanding at
March 31, 2000 and no shares pro
forma............................. -- -- 43,342,723 --
----------- ------------ ------------ ------------
Series C
$.001 par value, 1,539,393 shares
issued and outstanding at
March 31, 2000 and no shares pro
forma............................. -- -- 11,892,729 --
----------- ------------ ------------ ------------
PUTTABLE WARRANT........................ -- 124,564 408,386 --
----------- ------------ ------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, 10,000,000 authorized
shares at December 31, 1999 and
22,000,000 authorized shares at
March 31, 2000, $.001 par value,
2,481,658, 2,809,680, and 2,817,580
shares issued and outstanding at
December 31, 1998 and 1999, and
March 31, 2000, respectively and
15,584,191 shares pro forma......... 2,481 2,809 2,817 15,582
Additional paid-in capital............ 3,501,458 4,818,970 61,762,440 129,526,746
Accumulated deficit................... (8,122,300) (19,653,580) (80,091,387) (80,091,387)
Deferred offering costs............... -- -- (75,000) (75,000)
Net unrealized investment (losses).... (5,607) -- (26,583) (26,583)
----------- ------------ ------------ ------------
Total stockholders' deficit....... (4,623,968) (14,831,801) (18,427,713) 49,349,358
----------- ------------ ------------ ------------
Total liabilities and
stockholders' deficit........... $ 8,945,734 $ 11,513,832 $ 67,354,829 $ 67,354,829
=========== ============ ============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-4
<PAGE>
Genaissance Pharmaceuticals, Inc.
Statements of Operations

<TABLE>
<CAPTION>
For the Three Months
Ended
For the Years Ended December 31, March 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Grant research revenue.................................. $1,106,978 $ 1,206,250 $ 557,352 $ 274,721 $ --
License revenue......................................... 104,166 86,929 122,713 8,848 62,833
Other income............................................ 294,426 49,978 -- -- --
---------- ----------- ------------ ----------- ------------
1,505,570 1,343,157 680,065 283,569 62,833
---------- ----------- ------------ ----------- ------------
OPERATING EXPENSES:
Sublicense royalty fees................................. 18,750 68,113 20,337 -- 513,912
Research and development (1)............................ 1,643,101 3,017,543 6,258,664 1,106,642 2,991,047
Selling, general and administrative (1)................. 415,981 893,574 2,713,673 467,149 1,346,401
Stock based compensation................................ 105,976 472,692 766,500 57,238 3,631,487
---------- ----------- ------------ ----------- ------------
2,183,808 4,451,922 9,759,174 1,631,029 8,482,847
---------- ----------- ------------ ----------- ------------
Operating loss........................................ (678,238) (3,108,765) (9,079,109) (1,347,460) (8,420,014)

OTHER INCOME (EXPENSE):
Interest expense........................................ (129,649) (118,044) (636,594) (104,915) (556,608)
Interest income......................................... 5,178 88,284 266,596 143,833 327,727
Realized gains on investments........................... -- 259,106 -- -- --
---------- ----------- ------------ ----------- ------------
Net loss.............................................. (802,709) (2,879,419) (9,449,107) (1,308,542) (8,648,895)

PREFERRED STOCK DIVIDENDS AND ACCRETION................... -- (741,610) (2,082,173) (428,065) (1,608,912)
BENEFICIAL CONVERSION FEATURE OF SERIES B, KBH AND
C PREFERRED STOCK....................................... -- -- -- -- (50,180,000)
---------- ----------- ------------ ----------- ------------

Net loss applicable to common shareholders............ $ (802,709) $(3,621,029) $(11,531,280) $(1,736,607) $(60,437,807)
========== =========== ============ =========== ============
Net loss per common share, basic and diluted
(Note 2)............................................. $ (0.40) $ (1.67) $ (4.24) $ (0.67) $ (21.49)
---------- ----------- ------------ ----------- ------------
Shares used in computing basic and diluted net loss
per common share (Note 2)............................ 1,983,340 2,164,974 2,719,302 2,599,258 2,811,758
========== =========== ============ =========== ============
Pro forma net loss per common share, basic and diluted
(Note 2)............................................. $ (1.79) $ (6.37)
============ ============
Shares used in computing basic and diluted pro forma
net loss per common share (Note 2)................... 5,202,304 9,191,567
============ ============
</TABLE>

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

<TABLE>
<S> <C> <C> <C> <C> <C>
(1) Excludes non-cash, stock-based compensation expense as
follows:
Research and development............................... $ 63,586 $ 426,504 $ 498,871 $ 51,645 $ 1,574,787
Selling, general and administrative.................... 42,390 46,188 267,629 5,593 2,056,700
---------- ----------- ------------ ----------- -----------
$ 105,976 472,692 766,500 57,238 3,631,487
========== =========== ============ =========== ===========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-5
<PAGE>
Genaissance Pharmaceuticals, Inc.
Statements of Stockholders' Deficit and Comprehensive Loss
<TABLE>
<CAPTION>
Redeemable
Common Stock Common Stock Additional Deferred
--------------------- -------------------- Paid-in Accumulated Offering
Shares Amount Shares Amount Capital Deficit Costs
-------- ---------- --------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ 244,350 $ 561,920 2,112,410 $2,112 $1,854,342 $(3,645,130) $ --

Proceeds from sale of common
stock.......................... -- -- 7,580 8 23,492 -- --
Compensation related to issuance
of options to purchase common
stock.......................... -- -- -- -- 105,976 -- --
Accretion in carrying value of
redeemable common stock........ -- 53,432 -- -- -- (53,432) --
Purchase of treasury stock...... -- -- -- -- -- -- --
Net change in unrealized
investment loss................ -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- (802,709) --
Total comprehensive loss........
-------- --------- --------- ------ ---------- ----------- ----
Balance at December 31, 1997...... 244,350 615,352 2,119,990 2,120 1,983,810 (4,501,271) --

Issuance of common stock........ -- -- 260,000 260 324,740 -- --
Conversion of note payable and
accrued interest into common
stock.......................... -- -- 228,332 228 570,602 -- --
Termination of redemption
feature on redeemable common
stock.......................... (244,350) (615,352) 244,350 244 615,108 -- --
Compensation related to issuance
of options and warrants to
purchase common stock.......... -- -- -- -- 171,193 -- --
Warrant issued in connection
with debt financing............ -- -- -- -- 25,725 -- --
Accretion in carrying value of
redeemable preferred stock..... -- -- 9,986 10 39,935 (741,610) --
Retirement of treasury stock.... -- -- (381,000) (381) (229,655) -- --
Net change in unrealized
investment gain................ -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- (2,879,419) --
Total comprehensive loss........
-------- --------- --------- ------ ---------- ----------- ----

<CAPTION>
Net Unrealized Total
Investment Common Other
(Losses) Treasury Stockholders' Comprehensive
Gains Stock Deficit Loss
-------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........ $ (21,875) $ (24,786) $(1,273,417)
Proceeds from sale of common
stock.......................... -- -- 23,500
Compensation related to issuance
of options to purchase common
stock.......................... -- -- 105,976
Accretion in carrying value of
redeemable common stock........ -- -- --
Purchase of treasury stock...... -- (205,250) (205,250)
Net change in unrealized
investment loss................ 360,805 -- 360,805 $ 360,805
Net loss........................ -- -- (802,709) (802,709)
-----------
Total comprehensive loss........ $ (441,904)
--------- --------- ----------- ===========
Balance at December 31, 1997...... 338,930 (230,036) (1,791,095)
Issuance of common stock........ -- -- 325,000
Conversion of note payable and
accrued interest into common
stock.......................... -- -- 570,830
Termination of redemption
feature on redeemable common
stock.......................... -- -- --
Compensation related to issuance
of options and warrants to
purchase common stock.......... -- -- 171,193
Warrant issued in connection
with debt financing............ -- -- 25,725
Accretion in carrying value of
redeemable preferred stock..... -- -- (701,665)
Retirement of treasury stock.... -- 230,036 --
Net change in unrealized
investment gain................ (344,537) -- (344,537) $ (344,537)
Net loss........................ -- -- (2,879,419) (2,879,419)
-----------
Total comprehensive loss........ $(3,223,956)
--------- --------- ----------- ===========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-6
<PAGE>
Genaissance Pharmaceuticals, Inc.
Statements of Stockholders' Deficit and Comprehensive Loss
<TABLE>
<CAPTION>
Redeemable
Common Stock Common Stock Additional Deferred
-------------------- -------------------- Paid-in Accumulated Offering
Shares Amount Shares Amount Capital Deficit Costs
--------- -------- --------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998...... -- $ -- 2,481,658 $2,481 $ 3,501,458 $ (8,122,300) $ --

Issuance of common stock in
settlement of obligation...... -- -- 71,022 71 159,729 -- --
Issuance of common stock from
exercise of stock options and
warrants...................... -- -- 257,000 257 264,283 -- --
Compensation related to issuance
of options to purchase common
stock......................... -- -- -- -- 766,500 -- --
Warrants issued in connection
with debt financing........... -- -- -- -- 127,000 -- --
Accretion in carrying value of
redeemable preferred stock.... -- -- -- -- -- (2,082,173) --
Net change in unrealized
investment loss............... -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- (9,449,107) --
Total comprehensive loss..........
--------- ------ --------- ------ ----------- ------------ --------
Balance at December 31, 1999...... -- -- 2,809,680 2,809 4,818,970 (19,653,580) --

Issuance of common stock from
exercise of stock options
(unaudited)................... -- -- 7,900 8 23,692 -- --
Compensation related to issuance
of options to purchase common
stock (unaudited)............. -- -- -- -- 3,631,487 -- --
Warrants issued in connection
with debt financing and
preferred stock offering
(unaudited)................... -- -- -- -- 3,108,291 -- --
Accretion in carrying value of
redeemable preferred stock
(unaudited)................... -- -- -- -- -- (1,608,912) --
Beneficial conversion feature of
Series B, KBH and C preferred
stock (unaudited)............. -- -- -- -- 50,180,000 (50,180,000) --
Deferred offering costs
(unaudited)................... -- -- -- -- -- -- (75,000)
Net change in unrealized
investment loss (unaudited)... -- -- -- -- -- -- --
Net loss (unaudited)............ -- -- -- -- -- (8,648,895) --
Total comprehensive loss
(unaudited).....................
--------- ------ --------- ------ ----------- ------------ --------

Balance, March 31, 2000
(unaudited)..................... -- $ -- 2,817,580 $2,817 $61,762,440 $(80,091,387) $(75,000)
========= ====== ========= ====== =========== ============ ========

<CAPTION>
Net Unrealized Total
Investment Common Other
(Losses) Treasury Stockholders' Comprehensive
Gains Stock Deficit Loss
-------------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998...... $ (5,607) $ -- $ (4,623,968)
Issuance of common stock in
settlement of obligation...... -- -- 159,800
Issuance of common stock from
exercise of stock options and
warrants...................... -- -- 264,540
Compensation related to issuance
of options to purchase common
stock......................... -- -- 766,500
Warrants issued in connection
with debt financing........... -- -- 127,000
Accretion in carrying value of
redeemable preferred stock.... -- -- (2,082,173)
Net change in unrealized
investment loss............... 5,607 -- 5,607 $ 5,607
Net loss........................ -- -- (9,449,107) (9,449,107)
-----------
Total comprehensive loss.......... $(9,443,500)
-------- -------- ------------ ===========
Balance at December 31, 1999...... -- -- (14,831,801)
Issuance of common stock from
exercise of stock options
(unaudited)................... -- -- 23,700
Compensation related to issuance
of options to purchase common
stock (unaudited)............. -- -- 3,631,487
Warrants issued in connection
with debt financing and
preferred stock offering
(unaudited)................... -- -- 3,108,291
Accretion in carrying value of
redeemable preferred stock
(unaudited)................... -- -- (1,608,912)
Beneficial conversion feature of
Series B, KBH and C preferred
stock (unaudited)............. -- -- --
Deferred offering costs
(unaudited)................... -- -- (75,000)
Net change in unrealized
investment loss (unaudited)... (26,583) -- (26,583) $ (26,583)
Net loss (unaudited)............ -- -- (8,648,895) (8,648,895)
-----------
Total comprehensive loss
(unaudited)..................... $(8,675,478)
-------- -------- ------------ ===========
Balance, March 31, 2000
(unaudited)..................... $(26,583) $ -- $(18,427,713)
======== ======== ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-7
<PAGE>
Genaissance Pharmaceuticals, Inc.
Statements of Cash Flows

<TABLE>
<CAPTION>
For the Three Months Ended
For the Years Ended December 31, March 31,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (802,709) $(2,879,419) $(9,449,107) $(1,308,542) $ (8,648,895)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 76,282 117,702 816,202 86,580 456,378
Loss on disposal of equipment.......................... -- -- -- -- 55,103
Non-cash license revenue............................... (90,000) -- -- -- --
Realized securities gains.............................. -- (259,106) -- -- --
Stock based compensation............................... 105,976 472,692 766,500 57,238 3,631,487
Non-cash interest expense.............................. -- -- 124,564 82,764 283,822
Warrants issued in exchange for services............... -- 23,500 -- -- 14,123
Changes in assets and liabilities--
Other current assets................................. (67,407) 37,939 (116,000) (88,354) (156,738)
Other assets......................................... (44,127) (7,746) (148,780) (38,026) (27,261)
Accounts payable..................................... 72,741 95,502 435,446 322,114 (126,562)
Accrued expenses..................................... 189,751 33,808 285,232 36,193 724,550
Deferred revenue..................................... (29,166) (5,131) (60,016) (33,473) 2,034,766
Due to related party................................. 30,460 (42,646) (42,646) (46,510) 247,957
---------- ----------- ----------- ----------- ------------
Net cash used in operating activities...................... (558,199) (2,412,905) (7,388,605) (930,016) (1,511,270)
---------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (108,452) (1,121,849) (1,048,988) (570,687) (171,671)
(Investment in) proceeds from marketable securities...... -- (2,722,060) 3,234,892 (389,671) (11,951,803)
---------- ----------- ----------- ----------- ------------
Net cash (used in) provided by investing activities........ (108,452) (3,843,909) 2,185,904 (960,358) (12,123,474)
---------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock............ 750,000 8,769,136 -- -- 53,946,178
Net proceeds from issuance of common stock............... 23,500 -- 264,540 257,040 23,700
Proceeds from (repayment of) long-term debt, net......... 452,255 280,582 1,452,249 934,835 (616,115)
Proceeds from long-term debt due to related parties...... -- -- 950,000 -- 295,084
Proceeds from convertible promissory notes............... -- -- 3,500,000 -- --
Amounts payable under long term obligation............... -- 809,211 (809,211) (809,211) --
Financing costs.......................................... -- (48,420) (113,521) -- --
Payable to stockholder................................... 180,000 (180,000) -- -- --
Repayment of capital leases.............................. (11,089) (11,624) (564,443) (8,384) (621,871)
Deferred offering costs.................................. -- -- -- -- (75,000)
Acquisition of treasury stock............................ (205,250) -- -- -- --
Stock subscription receivable............................ -- -- -- (257,040) --
---------- ----------- ----------- ----------- ------------
Net cash provided by financing activities.................. 1,189,416 9,618,885 4,679,614 117,240 52,951,976
---------- ----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 522,765 3,362,071 (523,087) (1,773,134) 39,317,232
CASH AND CASH EQUIVALENTS, beginning of period............. 304,448 827,213 4,189,284 4,189,284 3,666,197
---------- ----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period................... $ 827,213 $ 4,189,284 $ 3,666,197 $ 2,416,150 $ 42,983,429
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest................................... $ -- $ 117,944 $ 499,571 $ 22,151 $ 210,161
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Conversion of liabilities into common or preferred
stock.................................................. $ -- $ 570,830 $ 159,800 $ -- $ 3,561,371
Acquisition of equipment pursuant to capital lease
obligations............................................ -- -- 5,582,383 707,838 4,552,188
Issuance of warrants in connection with financing
agreements............................................. -- 25,275 127,000 -- 3,108,291
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-8
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements

(including data applicable to unaudited periods)

(1) Organization and Operations

Organization and business activities

Genaissance Pharmaceuticals, Inc. (the Company) is a leader in developing
technology for applying population genomics and informatics to improve the
development, marketing and prescribing of drugs. The Company applies population
genomics, the analysis of genomic variation within diverse groups of people, to
discover proprietary markers that are predictive of which patients will respond
effectively to a drug. Currently, the Company is marketing its technology to the
pharmaceutical industry as a complete solution for developing "smarter" clinical
trials and for improving the sales of approved drugs. The Company has funded its
operations, including its research and development activities, through revenue
derived from licensing and research agreements, U.S. Federal grants and the
proceeds from equity and debt offerings.

During 1998, the Company raised approximately $8.8 million, net of issuance
costs, in a private placement of Series A and KBL Redeemable Convertible
Preferred Stock. In February and March of 2000, the Company raised approximately
$53.9 million, net of cash issuance costs and the conversion of $3.5 million of
promissory notes issued in 1999 (Note 7), in private placements of Series B, KBH
and C Redeemable Convertible Preferred Stock (Note 8). In addition, in April
2000, the Company filed a registration statement to sell additional shares of
common stock.

In addition to the normal risks associated with a business venture, there can
be no assurance that the Company's technologies will be successfully completed,
that the Company will obtain adequate patent protection for its technologies and
that any products will be commercially viable. In addition, the Company operates
in an environment of rapid change in technology and has substantial competition
from companies developing genomic related technologies. The Company expects to
incur substantial expenditures in the foreseeable future for its research and
development and commercialization of its products. The Company's management
believes, based upon its current business plans, available cash, and its fiscal
2000 preferred stock financings, that it will have the ability to fund its
operations for at least 24 months.

(2) Summary of Significant Accounting Policies

Interim financial statements

The unaudited interim financial statements as of March 31, 2000 and for the
three months ended March 31, 2000 and 1999 are unaudited and include all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for such
interim periods. The results of operations for the three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the entire
year.

F-9
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(2) Summary of Significant Accounting Policies (continued)
Unaudited Pro Forma Presentation

The unaudited pro forma balance sheet as of March 31, 2000 reflects the
automatic conversion of all outstanding shares of redeemable convertible
preferred stock into an aggregate of 12,704,166 shares of common stock and
reflects the exercise of certain warrants (which require exercise upon an
initial public offering) into 62,445 shares of common stock, both of which will
occur upon the closing of the Company's initial public offering (see Note 1).

Revenue recognition

The Company recognizes grant research revenue as the related expenses for
development activities are incurred and the related work is performed under the
terms of the grants.

The Company entered into a sublicense agreement of U.S. Patent No. 5,427,911
(Patent) to a third party (the Licensor) under a license agreement dated
November 21, 1996 (Original License). The Original License provided the Licensor
with the right to use the inventions claimed in the patent in a defined field of
use until the expiration of the patent in June 2012 (License Term).

In consideration of the Original License, the Company received $300,000,
equipment with a fair value of $50,000 and 12,500 shares of Licensor common
stock with a fair value of $103,750 (aggregate proceeds of $453,750).
Concurrently, the Company also received an additional 12,500 shares of Licensor
common stock (valued at $103,750) that was placed in escrow. Per a term of the
Original License, if within two years the Licensor failed to bring Licensed
Product to market, as defined, the Company could exercise its right to convert
the original license from an exclusive agreement to a non-exclusive agreement in
exchange for the 12,500 shares held in escrow. The shares were released from
escrow in 1998, as the Company elected to maintain the original license as an
exclusive license. The Original License also provided for royalties on licensed
product sales.

On March 16, 2000, the Company amended the Original License (License
Amendment) to expand the field of use, and to reduce the royalty rate on all
Licensed Product sales. In consideration of such License Amendment, the Licensor
paid the Company a nonrefundable fee of $2,050,000.

The Company is recognizing the payments from the Original License and License
Amendment ($453,750, $103,750 and $2,050,000 in 1996, 1998 and 2000,
respectively) by amortizing such payments into revenue, on a straight-line
basis, over the License Term. The Company recognizes the royalties received on
Licensed Product as revenue when earned.

In connection with the Company's initial license of the Patent from a
University, the Company is obligated to pay both the University and the inventor
of the technology a sublicense royalty fee. The inventor of the technology
subsequently joined the Company and is currently the chief executive officer of
the Company. The Company has elected to recognize this expense as incurred.
Accordingly, included in the accompanying March 31, 2000 balance sheet is
approximately $301,000 and $254,000, respectively, of sublicense fees payable to
the

F-10
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(2) Summary of Significant Accounting Policies (continued)
University and to the inventor resulting from the License Amendment. Future
royalty payments from the Licensor, if any, will also be subject to a sublicense
royalty fee. Included in the accompanying statements of operations for the years
ended December 31, 1997, 1998 and 1999 and the three months ended March 31, 1999
and 2000, is approximately $19,000, $68,000, $20,000, $0 and $514,000,
respectively, of sublicensing fees resulting from the Original License and
License Amendment (of which approximately $9,000, $34,000, $9,000, $0, and
$248,000, respectively, are related to sublicensing fees due to the inventor).

Research and development

Expenditures for research and development are charged to expense as incurred.

Cash and cash equivalents

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.

Software Development Costs

The Company evaluates the establishment of technological feasibility of its
products in accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LICENSED OR
OTHERWISE MARKETED. The Company is developing (but has not yet licensed or sold)
a product for a market that is subject to rapid technological change, new
product development, and changing customer needs. In addition, the ability to
market the product is contingent upon the Company's ability to successfully
populate the database. The Company has concluded that technological feasibility
is established when a product design and working model of the software product
has been completed and the completeness of the working model and its consistency
with the product design has been confirmed by testing. The time period during
which costs could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's financial position or results of operations. Therefore, the Company
has charged all such costs to research and development in the period incurred.

Long-lived assets

The Company accounts for internal use software in accordance with Statement
of Position 98-1 (SOP 98-1), ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires the capitalization of
direct costs incurred in connection with developing or obtaining software for
internal use, including external direct costs of materials and services and
payroll and payroll-related costs for employees who are directly associated with
and devote time to an internal use software development project. The Company's
policy

F-11
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(2) Summary of Significant Accounting Policies (continued)
is to capitalize all such costs and to amortize such costs over the estimated
useful life of the software. Capitalized costs associated with this software
were approximately $227,000 and $317,000 as of December 31, 1999 and March 31,
2000, respectively.

The Company accounts for its investments in long-lived assets in accordance
with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 121 requires a company to review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company has reviewed its long-lived assets and has determined that no
impairments currently exist.

Patent and licensed technology costs

The Company expenses the costs of obtaining patents and licensed technology
until such point that the realization of the carrying value of these costs is
reasonably assured.

Royalty obligations

Included in the accompanying balance sheets is a $300,000 royalty obligation.
In 1993, the Company received the $300,000 grant from the Department of Economic
and Community Development of the State of Connecticut (DECD). Under the terms of
the agreement, the Company is required to make royalty payments based upon the
greater of 2% of net product revenue, as defined, or $1,550 per month. The
royalties will be satisfied when total payments equal the original amount of the
grant plus interest calculated at 6.2% per annum. During 1998 and 1999, the
Company made royalty payments of approximately $18,600, which satisfied the 6.2%
per annum interest.

Segment reporting

SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers. The Company has determined that
it operates in only one segment. In addition, all revenues are generated from
U.S. and Canadian entities, and all long-lived assets are maintained in the
United States. Accordingly, the adoption of SFAS No. 131 has had no impact on
the Company's financial statements.

Fair value of financial instruments

Financial instruments, including cash and cash equivalents, current
liabilities and long-term liabilities are carried at cost, which management
believes approximates fair value.

F-12
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(2) Summary of Significant Accounting Policies (continued)
Other comprehensive income (loss)

The Company presents its financial statements in accordance with SFAS
No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for the
reporting and displaying of comprehensive income and its components in a full
set of general purpose financial statements. Accordingly, the Company has
included this presentation as a component of the statements of stockholders'
deficit and comprehensive loss. The objective of the statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners
("comprehensive income"). This statement requires that financial statements
report unrealized gains on investments as a component of other comprehensive
income or loss.

The components of other comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
Year Ended December 31, Three Months
--------------------------------- Ended March 31,
1997 1998 1999 2000
--------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Net appreciation (depreciation) of marketable
securities during the period................ $360,805 $ (85,431) $5,607 $(26,583)

Gains recognized in income during the period.. -- (259,106) -- --
-------- --------- ------ --------
Other comprehensive income (loss)............. $360,805 $(344,537) $5,607 $(26,583)
======== ========= ====== ========
</TABLE>

Net loss per common share

The Company computes and presents net loss per common share in accordance
with SFAS No. 128, EARNINGS PER SHARE. There is no difference in basic and
diluted net loss per common share as the effect of convertible preferred stock,
stock options and warrants would be anti-dilutive for all periods presented. The
outstanding convertible preferred stock, stock options and warrants (prior to
application of the treasury stock method) would entitle holders to acquire
1,075,700, 3,372,950, 3,678,095 and 14,375,315 shares of common stock at
December 31, 1997, 1998, 1999 and March 31, 2000, respectively. In accordance
with the SEC Staff Accounting Bulletin No. 98, EARNINGS PER SHARE IN AN INITIAL
PUBLIC OFFERING, the Company determined that there were no nominal issuances of
the Company's common stock prior to their planned initial public offering.

If the Company's initial public offering is consummated, all of the preferred
stock outstanding will automatically be converted into common stock and certain
of the outstanding common stock warrants will be automatically exercised. The
pro forma net loss per share reflects the shares issuable upon the conversion of
outstanding shares of preferred stock (using the as if method) and the automatic
exercise of such warrants (using the treasury stock method) from their original
date of issuance.

F-13
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(2) Summary of Significant Accounting Policies (continued)
The following table sets forth the computation of basic and dilutive, and pro
forma basic and dilutive, net loss per share as follows:

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------ ------------
<S> <C> <C>
Numerator--
Net loss applicable to common shareholders................ $(11,531,280) $(60,437,807)
Preferred stock dividends and accretion................... 2,082,173 1,608,912
Puttable warrant interest expense......................... 124,564 283,822
------------ ------------
Pro forma net loss applicable to common shareholders...... $ (9,324,543) $(58,545,073)
============ ============

Denominator--
Weighted average common shares............................ 2,719,302 2,811,758
Weighted average effect of pro forma securities--
Series A and KBL........................................ 2,437,500 2,437,500
Series B and KBH........................................ -- 3,546,908
Series C................................................ -- 355,245
Warrants................................................ 45,502 40,156
------------ ------------
Denominator for pro forma basic and diluted calculation..... 5,202,304 9,191,567
============ ============

Net loss per share--
Basic and diluted......................................... $ (4.24) $ (21.49)
Pro forma basic and diluted............................... (1.79) (6.37)
</TABLE>

Recently issued accounting pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND FOR HEDGING ACTIVITIES which
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS No. 133 is effective for
fiscal years beginning after January 1, 2001. The adoption of SFAS No. 133 did
not have an impact on the Company's results of operations or financial condition
as the Company holds no derivative financial instruments and does not currently
engage in hedging activities.

Use of estimates in the preparation of financial statements

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

F-14
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(2) Summary of Significant Accounting Policies (continued)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

(3) Marketable Securities and Equity Investments

The Company accounts for its investments in accordance with SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Pursuant to
this Statement, the Company has historically classified its marketable
securities as "available for sale" and, accordingly, carried these investments
at their aggregate fair value. Unrealized gains or losses on these investments
are included as a separate component of stockholders' deficit and comprehensive
loss (Note 2). The Company's marketable securities as of December 31, 1998 and
March 31, 2000 consisted of corporate bonds. As of March 31, 2000, these
securities had a maximum maturity of 18 months or less and carried a weighted
average interest rate of approximately 6.85%. The amortized cost of these
securities differed by their fair values by $5,607 and $26,583, as of
December 31, 1998 and March 31, 2000, respectively.

The Company had an investment in common stock which was sold during 1998. In
conjunction therewith, the Company realized a gain on the sale of $259,106 which
is reflected in the accompanying 1998 statement of operations.

(4) Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
Equipment, computers and software.................... $ 614,154 $ 992,436 $ 1,117,347
Equipment under capital lease........................ 52,732 5,642,732 9,814,669
Leasehold improvements and office equipment.......... 913,431 1,576,520 1,900,559
---------- ---------- -----------
1,580,317 8,211,688 12,832,575
Less--accumulated depreciation and amortization...... (258,775) (987,680) (1,378,551)
---------- ---------- -----------
Total property and equipment, net.................. $1,321,542 $7,224,008 $11,454,024
========== ========== ===========
</TABLE>

These assets are stated at cost and are being depreciated and amortized over
the shorter of their lease term or their estimated useful lives on a
straight-line basis as follows:

<TABLE>
<S> <C>
Equipment, computers and software........................... 3-4 years
Office equipment............................................ 5 years
Leasehold improvements...................................... 10 years
Equipment under capital lease............................... 3-5 years
</TABLE>

F-15
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(4) Property and Equipment (continued)
Accumulated depreciation related to equipment under capital leases was
approximately $42,000, $489,000 and $800,000 at December 31, 1998 and 1999 and
March 31, 2000. Expenditures for maintenance and repairs, which do not improve
or extend the useful lives of the respective assets, are expensed as incurred.

(5) Financing Arrangements

Long-term debt

Long-term debt consists of the following:

<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1998 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Notes payable to Connecticut Innovations, Inc. (CII)
bearing interest at 6.5%, payments of interest only
for two years and monthly payments of principal and
interest thereafter.................................. $ -- $ 950,000 $1,245,084
Note payable to TransAmerica Business Corp. (TBCC)
bearing interest at 12.98%, monthly payments of
principal and interest of $72,388 are payable through
August 2002.......................................... -- 1,897,940 1,740,674
Note payable to DECD, bearing interest at 5%, monthly
payments of principal and interest of $4,233 through
April 2008. Repaid in March 2000..................... 350,000 348,771 --
Note payable to bank, bearing interest at a variable
rate of prime plus 2.75%. Repaid during 1999......... 416,159 -- --
Other.................................................. 138,381 110,078 --
--------- ----------- ----------
Total long-term debt................................. 904,540 3,306,789 2,985,758
Less--current portion................................ (112,489) (1,019,550) (682,374)
--------- ----------- ----------
Total long-term debt, less current portion........... $ 792,051 $ 2,287,239 $2,303,384
========= =========== ==========
</TABLE>

During 1999 and 2000, the Company entered into agreements with Connecticut
Innovations, Inc. (CII), who is a stockholder of the Company, to finance certain
leasehold improvements and other costs associated with the Company's facility
expansion. In April 1999, the Company entered into a promissory note with CII in
the amount of $950,000 (CII Promissory Note). In December 1999, the Company
obtained a commitment from CII to provide an additional $2,720,000 of funding
for the continued expansion of the Company's facility (CII Commitment). In the
fiscal quarter ended March 31, 2000 the Company borrowed approximately $295,000
under this CII Commitment. Both the CII Promissory Note and the CII Commitment
provide for interest only for the first two years with principal payments
thereafter, based on a 120 month amortization period, with final balloon
payments due in April 2007 and July 2008, respectively. There were no
outstanding borrowings under the CII

F-16
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(5) Financing Arrangements (continued)
Commitment as of December 31, 1999 and additional borrowings of $2,425,000 were
available under the CII Commitment as of March 31, 2000. Borrowings under the
CII Promissory Note and CII Commitment are secured by the related leasehold
improvements.

In April 1999, the Company entered into a $2,000,000 promissory note payable
to TBCC to refinance approximately $400,000 of existing debt, acquire additional
equipment, and provide additional working capital. The note is callable by the
lender in connection with a material adverse change to the Company or a change
in ownership, as defined. The loan is collateralized by substantially all assets
of the Company. In connection with this loan, during 1999 the Company issued a
warrant to TBCC, which is exercisable through April 2006, to purchase 50,000
shares of common stock at $4.00 per share (Note 10). An original issue discount
of $80,000, which approximated the fair value of the warrant at date of
issuance, is being amortized into interest expense over the term of the loan.

In April 1998, the Company entered into an agreement to receive a $350,000
loan from DECD to finance the purchase of certain equipment. The note was
payable in monthly installments through April 2008, commencing April 1999. The
Company recognized interest on this note at its stated interest rate of 5%. The
note was repaid in March 2000.

Aggregate future maturities under notes payable is as follows:

<TABLE>
<CAPTION>
Year Ended
December 31
-----------
<S> <C>
2000........................................................ $1,019,550
2001........................................................ 803,635
2002........................................................ 658,711
2003........................................................ 78,126
2004........................................................ 83,359
2005........................................................ --
Thereafter.................................................. 663,408
----------
$3,306,789
==========
</TABLE>

F-17
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(6) Capital Leases

Capital lease obligations related to equipment consist of the following:

<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1998 1999 2000
-------- ----------- -----------
<S> <C> <C> <C>
Capital lease obligations to Finova Capital Credit Corp.
payable in varying installments through March 2004,
bearing interest from 8.46% to 9.62%, secured by the
related equipment...................................... $ -- $1,237,950 $4,479,223
Capital lease obligations to Newcourt Financial USA, Inc.
payable in varying installments through August 2003,
bearing interest at 10.5%, secured by the related
equipment.............................................. -- 1,891,581 1,858,001
Capital lease obligations to Oxford Venture Finance LLC
payable in varying installments through September 2003,
bearing interest from 10.76% to 12.05%, secured by the
related equipment...................................... -- 1,722,849 2,462,316
Capital lease obligations to Steelcase Financing Corp.
payable in varying installments through October 2002,
bearing interest at 13%, secured by the related
equipment.............................................. -- 166,760 153,579
Other.................................................... 24,641 23,441 19,779
------- ---------- ----------
Total capital lease obligations........................ $24,641 $5,042,581 $8,972,898
======= ========== ==========
</TABLE>

Aggregate future maturities under these capital leases are as follows:

<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
2000........................................................ $ 1,670,935
2001........................................................ 1,660,187
2002........................................................ 1,629,723
2003........................................................ 1,138,168
2004........................................................ --
-----------
6,099,013
Less--amount representing interest.......................... (1,056,432)
-----------
Total capital lease obligations......................... 5,042,581
Less--current portion....................................... (1,199,938)
-----------
Total capital lease obligations, less current portion... $ 3,842,643
===========
</TABLE>

F-18
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(6) Capital Leases (continued)

During 1998, in connection with one of the capital lease arrangements, the
Company issued a warrant (which is exercisable through November 2003) to
purchase 26,250 shares of common stock at $4.00 per share (Note 10). Deferred
financing costs of $25,725, which approximated the fair value of the warrants at
the date of issuance, are being amortized into interest expense over the term of
the lease.

During 1999, in connection with one of the capital lease arrangements, the
Company issued a warrant (which is exercisable through June 2006) to purchase
18,043 shares of common stock at $4.00 per share (Note 10). Deferred financing
costs of $25,000, which approximated the fair value of the warrant at date of
issuance, are being amortized into interest expense over the term of the lease.

During the three months ended March 31, 2000, the Company financed additional
equipment purchases of approximately $3.2 million pursuant to certain lease
arrangements. In connection therewith, the Company issued warrants (which are
exercisable through March 2005) to purchase 21,636 shares of common stock at
$5.50 per share (Note 10). Deferred financing costs of $62,000, which
approximated the fair value of these warrants at the date of issuance, are being
amortized into interest expense over the term of the related lease.

During the three months ended March 31, 2000, the Company entered into an
agreement to provide for an additional $6,000,000 of capital lease financing for
equipment purchases. As of March 31, 2000, the Company has approximately
$5.2 million available under the agreement. In connection with entering into the
leasing arrangement, the Company granted the lessor a warrant (which is
exercisable through March 2005) to purchase 21,818 shares of common stock at an
exercise price of $8.25 per share. Deferred financing costs of $140,000, which
approximated the fair value of the warrant at the date of issuance, will be
amortized over the term of the related lease.

The Company's capital lease arrangements allow it to purchase the related
equipment at the completion of the lease term as defined in the agreement.

(7) Convertible Promissory Note

In November 1999, the Company borrowed $3,500,000 under convertible
promissory notes which bore interest at 8% per annum. In connection therewith,
the Company granted warrants (which are exercisable through November 2004) to
purchase 12,727 common shares at $5.50 per share (Note 10). The original issue
discount of $22,000, which approximated the fair value of the warrants at date
of grant, was amortized into interest expense through the February 2000 maturity
date of the convertible promissory notes. The convertible promissory notes were
converted into preferred stock subsequent to year-end in connection with the
issuance of the Series B and KBH preferred stock (Note 8) based upon the fair
value of the preferred stock at the time of conversion.

F-19
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(8) Preferred Stock

As of December 31, 1999, the Company has authorized 10,000,000 shares of
preferred stock. Subsequent to year-end, the board of directors increased the
authorized shares of preferred stock to 30,000,000. As of March 31, 2000, the
following amounts have been authorized and are outstanding:

<TABLE>
<CAPTION>
Series Shares Authorized Shared Outstanding
------ ----------------- ------------------
<S> <C> <C>
A........................................ 2,437,500 2,107,000
KBL...................................... 330,500 330,500
B........................................ 8,543,524 8,543,524
KBH...................................... 550,000 183,749
C........................................ 2,242,245 1,539,393
</TABLE>

During 1997, the Company sold 187,500 shares of Series A Redeemable
Convertible Preferred Stock for $4.00 per share resulting in aggregate proceeds
of $750,000. During 1998, the Company sold an additional 1,919,500 shares of
Series A and 330,500 shares of Series KBL (2,250,000 shares in aggregate,
collectively Series A) for $4.00 per share resulting in aggregate 1998 proceeds
of approximately $8,769,000, net of issuance expenses of approximately $231,000.

In February and March 2000, the Company sold 8,543,524 shares of Series B and
183,749 shares of Series KBH (8,727,273 shares in aggregate, collectively
Series B) for $5.50 per share resulting in proceeds of approximately
$42,063,000, net of cash issuance costs of approximately $2,375,000 and net of
the conversion of $3,500,000 of convertible promissory notes, and related
interest, which were issued in 1999 (Note 7) and which were converted into
636,364 shares of Series B based upon a per share conversion price of $5.50 per
share. In connection with this offering, the investment banker was issued a
warrant (which is exercisable through February 2005) to purchase 400,000 shares
of common stock at $6.05 per share (Note 10). Issuance costs of $2,892,000,
which approximates the fair value of the warrant at the date of issuance, are in
addition to the $2,375,000 of cash issuance expenses noted above.

In March 2000, the Company sold 1,539,393 shares of Series C Redeemable
Convertible Preferred Stock at $8.25 per share resulting in proceeds of
$11,883,000, net of issuance expenses of approximately $817,000 (Series C).

Preferred stock terms and conditions

The significant terms of the Series A, KBL, B, KBH and C are as follows:

Voting--The Series A, B and C shares have voting rights and the Series KBL
and KBH shares do not have voting rights.

Dividends--All series outstanding earn cumulative dividends at 8% per annum.
Accordingly, included in the accretion of the carrying value of preferred
stock in the accompanying statements of stockholders' deficit and
comprehensive loss for the years

F-20
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(8) Preferred Stock (continued)
ended December 31, 1998 and 1999 and the quarter ended March 31, 2000 is
$315,616, $780,000 and $642,013, respectively, of accrued dividends. Through
February 2003, the Company has the option to pay dividends in either cash or
common stock based on the then current conversion price, as defined.
Subsequent to February 2003, the holder can elect to have the accrued but
unpaid dividends paid in either cash or common stock. Accrued but unpaid
dividends of $275,671, $1,055,671 and $1,697,684, are classified as a
component of long-term liabilities in the accompanying balance sheets as of
December 31, 1998 and 1999 and March 31, 2000, respectively.

Dividends that accrue subsequent to the Series B, KBH and C issuance
dates will not be paid if the Company consummates an initial public offering
with proceeds of at least $40 million before February 2003 with a per share
price of not less than $8.25 per share (Qualified IPO). Accrued dividends of
$1,158,750, which were earned on the Series A prior to the issuance of the
Series B and C, are payable even if the Company does consummate a Qualified
IPO.

In connection with the sale of Series B, KBH and C preferred stock during
the three months ended March 31, 2000, the Company recorded a charge to
accumulated deficit of $50,180,000. This amount represents the beneficial
conversion feature of this stock. This amount has been accounted for as a
dividend to these preferred stockholders and as a result, increased the
Company's paid in capital, net loss applicable to common shareholders and the
related net loss per share.

Redemption requirement--The holders of all of the Series A, Series B and
Series C Preferred can require that the Company repurchase their shares in
three annual installments, as follows:

<TABLE>
<CAPTION>
Date Redemption
---- ----------------------------------------------
<S> <C>
February 11, 2005........... 1/3 of shares outstanding
February 11, 2006........... 1/3 of shares outstanding on February 11, 2005
February 11, 2007........... Balance
</TABLE>

Through February 17, 2000, the Series A was redeemable at its original
purchase price plus all accrued but unpaid dividends, plus a 12% cumulative
annual return on the original purchase price and all accrued but unpaid
dividends. In connection therewith, during 1998, 1999 and the first quarter
of 2000, $410,603, $1,256,000 and $176,750, respectively, was accreted
through a charge to retained earnings and added to the carrying value of the
Series A to appropriately reflect the 12% premium.

Effective February 17, 2000, the Series A was amended to change the
redemption value to be the greater of (a) the original purchase price plus
all accrued but unpaid dividends or (b) fair value, as defined. The Series B
and Series C also have a redemption value equal to the greater of (a) the
original purchase price plus all accrued but unpaid dividends or (b) fair
value, as defined. As of March 31, 2000, the fair value of the Series A and
Series B exceeded the original purchase price plus accrued but unpaid
dividends. The

F-21
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(8) Preferred Stock (continued)
excess of the fair value is being accreted through additional charges to
retained earnings, using the effective interest rate method, from the date of
issuance for the Series B and from February 17, 2000 for the Series A,
through the earliest redemption date. Accordingly, included in the accretion
of the carrying value of preferred stock in the accompanying statements of
stockholders' deficit and comprehensive loss for the quarter ended March 31,
2000 is $158,704 and $525,000 ($683,704 in aggregate) of additional charges
to retained earnings to reflect the accretion of the Series A and Series B,
respectively, to their fair value.

Liquidation--All preferred stock has liquidation rights equal to the original
purchase price plus all amounts due and payable upon a redemption. Series A
and KBL liquidation rights are subordinated to Series B, KBH and C.

Conversion--At the option of the holder, the preferred stock can be
immediately converted into common stock at the initial conversion price,
subject to adjustment, as defined. Upon a Qualified IPO, all preferred stock
shall be automatically converted into such number of common shares as is
determined by dividing the original purchase price by the conversion price
then in effect. If a Qualified IPO has not occurred prior to February 17,
2003, any conversions subsequent to such date will include any accrued but
unpaid dividends. A summary of initial conversion prices is as follows:

<TABLE>
<CAPTION>
Conversion Price
Series Per Share
------ ----------------
<S> <C>
A and KBL................................................... $4.00
B and KBH................................................... $5.50
C........................................................... $8.25
</TABLE>

Issuance expenses--The issuance expenses are recorded as a reduction in the
carrying value of the applicable preferred stock. As a result of the
redemption rights of the holders (see above), the difference in the stated
value and the carrying value resulting from the issuance costs will be
accreted to the earliest redemption date through a direct charge to
accumulated deficit. Accordingly, included in the accretion of the carrying
value of preferred stock in the accompanying statements of stockholders'
deficit and comprehensive loss for the years ended December 31, 1998 and
1999, and the three months ended March 31, 2000, is $15,391, $46,173 and
$106,445, respectively, related to amortization of these issuance costs.

Preemptive rights--Preferred holders shall have certain pre-emptive right to
purchase new securities sold by the Company.

CII owns 437,500 shares of the Series A and 365,230 shares of the Series B.
If the Company elects to move its primary facilities outside of the State of
Connecticut, CII has a right to put the shares they own back to the Company for
the higher of (1) an amount which would be equal to the fair value of the stock
or (2) an amount which would yield a minimum rate of return of 25%. This right
terminates upon the occurrence of a qualified IPO.

F-22
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(9) Common Stock

At December 31, 1999, the Company has authorized 10,000,000 shares of common
stock. Subsequent to year-end, the board of directors increased the authorized
shares of common stock to 22,000,000. As of March 31, 2000, 14,375,315 shares
have been reserved for issuance under outstanding redeemable convertible
preferred stock, stock options, and warrants (Notes 8 and 10).

At December 31, 1997, CII owned 244,350 shares of the Company's common stock
which, at CII's option, could be put back to the Company under certain
circumstances. In connection with the Company's sale of preferred stock in 1998
(Note 8), CII's right to put any stock back to the Company was terminated. If
the Company elects to move its facilities outside of Connecticut, CII has a
right to put the stock they own back to the Company. This right terminates upon
a qualified IPO.

In September 1998, CII converted a $570,830 note payable into 228,332 shares
of the Company's common stock based upon a conversion rate of $2.50 per common
share. CII's conversion rights were a condition of the original debt agreements
entered into by the Company and CII in 1996.

In August 1998, the CEO of the Company entered into an agreement with the
Company to purchase 260,000 shares of common stock of the Company. The purchase
of the shares was financed by the Company with a $325,000 promissory note
bearing interest at 6%, with the entire principal being payable August 2003. The
shares of the common stock are pledged as collateral for the loan. During 1998,
the Company recorded a reserve of $325,000 which has been offset against the
note receivable. The note will be formally forgiven upon a qualified IPO.

In August 1999, the Company issued 71,022 shares of common stock in full
satisfaction of a $159,800 outstanding obligation.

(10) Stock Options and Warrants

Stock option plan

In 1993, the Board of Directors and stockholders approved the Stock Option
Plan (the Plan) which provides for both incentive and nonqualified stock
options. As of December 31, 1999, under the terms of the Plan, stock options may
be granted for up to a maximum of 1,297,000 shares. Subsequent to year-end, the
board of directors increased the number of shares issuable under the Plan to
3,557,375. Options granted under the Plan are exercisable for a period
determined by the Company, but in no event longer than ten years from date of
grant. In the event of certain capital stock changes, the options are subject to
adjustment in accordance with anti-dilution provisions.

The Company has adopted the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. This pronouncement requires the measurement of the
fair value of stock options to be included in the statement of operations or
disclosed in the notes to financial

F-23
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(10) Stock Options and Warrants (continued)
statements. The Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles Board Opinion
No. 25 and elect the disclosure-only alternative under SFAS No. 123.

A summary of the status of the Company's stock options plan at December 31,
1997, 1998, 1999 and March 31, 2000 and changes during the periods then ended is
presented below:

<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding, January 1.............................. 428,000 $1.05 538,000 $1.34
Granted........................................... 170,000 2.03 293,000 2.01
Cancelled or expired.............................. (60,000) 1.25 (317,000) 0.78
Exercised......................................... -- -- -- --
------- ----- -------- -----
Outstanding, December 31............................ 538,000 $1.34 514,000 $2.07
======= ===== ======== =====
Options exercisable at December 31.................. 376,271 $1.08 117,054 $2.12
======= ===== ======== =====
Weighted average fair value of options granted
during the year................................... $1.78 $0.64
===== =====
</TABLE>

<TABLE>
<CAPTION>
1999 2000
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, January 1............................. 514,000 $2.07 990,375 $2.37
Granted.......................................... 541,875 2.80 73,000 4.60
Cancelled or expired............................. (60,500) 2.73 (5,000) 3.60
Exercised........................................ (5,000) 1.50 (7,900) 3.00
------- ----- --------- -----
Outstanding, December 31 and March 31,
respectively..................................... 990,375 $2.37 1,050,475 $2.52
======= ===== ========= =====
Options exercisable at December 31 and March 31,
respectively..................................... 268,497 $2.01 517,142 $2.21
======= ===== ========= =====
Weighted average fair value of options granted
during the year and three months ended,
respectively..................................... $1.70 $7.78
===== =====
</TABLE>

F-24
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(10) Stock Options and Warrants (continued)
The following table summarizes information about stock options at
December 31, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
--------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01-$1.50 337,500 8.1 $1.23 160,729 $1.36
$1.51-$3.00 604,875 8.8 2.88 96,393 2.85
$3.01-$4.00 48,000 8.9 4.00 11,375 4.00
------- --- ----- ------- -----
990,375 8.6 $2.37 268,497 $2.01
======= === ===== ======= =====
</TABLE>

During fiscal 1999, options to purchase 380,875 shares of common stock were
granted at a weighted average exercise price of $3.00 per share. The weighted
average fair value of these options at the date of grant, as prescribed by SFAS
No. 123, was $1.27 per option. In addition, options to purchase 161,000 shares
of common stock were granted at a weighted average exercise price of $2.32 per
share. The weighted average fair value of these options at the date of grant, as
prescribed by SFAS No. 123, was $2.73 per option.

The following table summarizes information about stock options at March 31,
2000:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
--------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .01-$1.50 337,500 7.8 $1.23 204,167 $1.14
$1.51-$3.00 594,975 8.6 2.88 276,025 2.74
$3.01-$5.50 118,000 9.2 4.37 36,950 4.20
--------- --- ----- ------- -----
1,050,475 8.4 $2.52 517,142 $2.21
========= === ===== ======= =====
</TABLE>

During the three months ended March 31, 2000, options to purchase 29,000
shares of common stock were granted at a weighted average exercise price of
$5.50 per share. The weighted average fair value of these options at the date of
grant, as prescribed by SFAS No. 123, was $7.19 per option. In addition, options
to purchase 44,000 shares of common stock were granted at a weighted average
exercise price of $4.00 per share. The weighted average fair value of these
options at the date of grant, as prescribed by SFAS No. 123, was $8.17 per
option.

Total compensation expense recorded in the accompanying statements of
operations associated with employee stock options is approximately $40,000,
$48,000, and $12,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and approximately $3,000 and $76,000 for the three months ended
March 31, 1999 and 2000, respectively.

F-25
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(10) Stock Options and Warrants (continued)
The Company accounts for options granted to consultants, which include
scientific advisory board members, using the Black-Scholes method prescribed by
SFAS No. 123 and in accordance with Emerging Issues Task Force Consensus
No. 96-18. During the three months ended March 31, 2000, the Company elected to
fully vest all unvested options previously granted to scientific advisory board
members. Accordingly, the Company recorded a compensation charge in the quarter
ended March 31, 2000 based upon the incremental fair value and previously
recognized compensation expense associated with these options at the time of
vesting. Total compensation expense recorded in the accompanying statements of
operations associated with these consultant options is approximately $66,000,
$99,500 and $434,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, and approximately $54,000 and $1,382,000 for the three months
ended March 31, 1999 and 2000, respectively.

In 1996, in connection with a change in management of the Company, the
Company's current Chief Executive Officer and Chief Financial Officer (the
Officers) entered into a stock purchase agreement (Officer Stock Purchase
Agreement) with an officer and major shareholder of the Company (Former CEO).
The Officer Stock Purchase Agreement permitted the Officers to purchase shares
of common stock from the Former CEO in exchange for notes payable aggregating
$320,000 (Officer Stock Notes). The notes were collateralized by the stock, and
were payable at the earlier of August 31, 2001 or an initial public offering or
change in control, as defined. The Company has recognized this transaction as a
compensatory arrangement between the Company and the officers and accordingly
has recognized a non-cash compensation expense of $320,000 and $2,173,000 in
1999 and the three months ended March 31, 2000, respectively (Note 12).

In the three months ended June 30, 2000, the Company granted an additional
1,175,780 options at a weighted average exercise price of $11.42 per share.

The Company has computed the pro forma disclosures required under SFAS
No. 123 for options granted to employees using the Black-Scholes option pricing
model. The weighted average assumptions used are as follows:

<TABLE>
<CAPTION>
1997 1998 1999 and 2000
-------- -------- -------------
<S> <C> <C> <C>
Risk free interest rate..................... 6.3% 5.3% 6.0%
Expected dividend yield..................... None None None
Expected lives.............................. 7 years 7 years 7 years
Expected volatility......................... None None None
</TABLE>

F-26
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(10) Stock Options and Warrants (continued)
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, the Company's pro forma net loss would have been
as follows:

<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net (loss) applicable to common
stockholders:
As reported...................... $(802,709) $(3,621,029) $(11,531,280) $(1,736,607) $(60,437,807)
Pro forma........................ (873,165) (3,675,273) (11,624,747) (1,759,974) (60,487,666)
Net (loss) per common share, basic
and diluted:
As reported...................... $ (0.40) $ (1.67) $ (4.24) $ (0.67) $ (21.49)
Pro forma........................ (0.44) (1.70) (4.27) (0.68) (21.51)
</TABLE>

Stock warrants

As of March 31, 2000, the Company had the following warrants outstanding to
purchase shares of common stock of the Company. Certain warrants include
anti-dilutive provisions, as defined.

<TABLE>
<CAPTION>
Per Share
Year Exercisable Exercise
Issued Through Number Price
--------------------- ---------------- --------- ---------
<S> <C> <C> <C>
1992................. December 2002 41,800 $1.02(a)(b)
1994................. March 2004 36,400 1.38
1995................. May 2005 20,000 .50
1998 (Note 6)........ November 2003 26,250 4.00
1998................. March 2004 40,000 4.00
1999 (Note 6)........ June 2006 18,043 4.00(a)
1999 (Note 5)........ April 2006 50,000 4.00
1999 (Note 7)........ November 2004 12,727 5.50
2000................. February 2003 5,000 4.00(a)
2000 (Note 8)........ February 2005 400,000 6.05
2000 (Note 6)........ March 2005 21,636 5.50
2000 (Note 6)........ March 2005 21,818 8.25(a)
--------
693,674(c)
========
</TABLE>

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

(a) These warrants become exercised in connection with a qualified initial
public offering, as defined.

(b) The warrant to purchase 41,800 shares of common stock is currently puttable
to the Company at fair value, as defined. Accordingly, the Company has
recorded this repurchase obligation based upon the estimated value of the
warrant through a charge to interest expense. For the year ended
December 31, 1999 and the quarter ended March 31, 2000, the Company has
recorded charges to interest expense of $124,564 and $283,822, respectively,
to accrete the warrant to fair value.

F-27
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(10) Stock Options and Warrants (continued)
During 1999, warrants to purchase 252,000 shares of common stock were
exercised for $1.02 per share, for aggregate proceeds of $257,000.

(11) Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. This statement requires the Company to recognize
deferred tax assets and liabilities for the expected future tax consequences of
events that have been previously recognized in the Company's financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and the tax bases of the assets and liabilities and the net
operating loss carryforwards available for tax reporting purposes, using
applicable tax rates for the years in which the differences are expected to
reverse.

The reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1997, 1998 and 1999,
is as follows:

<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory rate.................................. 34.0 % 34.0 % 34.0 %
State tax benefit, net of Federal taxes......... 4.5 13.2 4.8
Other........................................... (0.2) (0.6) (1.5)
Increase in deferred tax valuation allowance.... (38.3) (46.6) (37.3)
----- ----- -----
-- % -- % -- %
===== ===== =====
</TABLE>

The Company has available, at December 31, 1999, unused net operating loss
carryforwards of approximately $12.7 million and $12.5 million which may be
available to offset future Federal and state taxable income, respectively, if
any. The future utilization of these carryforwards may be limited on a permanent
basis due to changes within the Company's current and future ownership structure
as defined within the income tax code. These limitations would have no impact on
the Company's statement of operations as these carryforwards are fully reserved.
Federal carryforwards are scheduled to expire beginning in 2007 through 2019.
State carryforwards are scheduled to expire from 2000 through 2019.

F-28
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(11) Income Taxes (continued)
The components of deferred income tax assets as of December 31, 1998 and 1999
are as follows:

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 1,750,000 $ 5,250,000
Tax credit carryforwards........................ 340,000 340,000
Other........................................... 210,000 370,000
----------- -----------
Total deferred tax assets..................... 2,300,000 5,960,000
Less--valuation allowance for deferred tax
assets.......................................... (2,300,000) (5,960,000)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
</TABLE>

The Company has not yet achieved profitable operations. Accordingly,
management believes the tax benefits as of December 31, 1999 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire deferred tax asset.

(12) Commitments and Contingencies

401(k) retirement plan

The Company has a 401(k) defined contribution retirement plan covering
substantially all full-time employees. The Company matches 25% of employee
contributions up to 8% of employee compensation. The Company contributed
approximately $14,000, $6,000 and $25,000 to the plan during 1997, 1998 and
1999, respectively, and approximately $5,000 and $17,000 for the three months
ended March 31, 1999 and 2000, respectively.

Licensing and royalty commitments

The Company periodically enters into agreements with third parties to obtain
exclusive or non-exclusive licenses for certain technologies management believes
important to the Company's overall business strategy. The terms of these
agreements generally provide for the Company to pay future royalty payments
based on product sales or sublicense income generated from the applicable
technologies, if any. Additionally, certain agreements call for future payments
upon achievement of certain milestones. The aggregate annual minimum payments
(assuming non-termination of the above agreements) as of December 31, 1999
required over the next five years are $30,000 per year through fiscal 2003 and
$85,000 in fiscal 2004. The Company recorded expenses of approximately $202,000,
$120,000, and $57,000 during 1999, 1998 and 1997, respectively, and
approximately $35,000 and $46,000 for the three months ended March 31, 1999 and
2000, respectively, related to these agreements.

Operating leases

The Company leases its operating facilities located in New Haven,
Connecticut. The lease agreements require annual lease payments of approximately
$644,000 per year increasing to

F-29
<PAGE>
Genaissance Pharmaceuticals, Inc.

Notes to Financial Statements (Continued)

(including data applicable to unaudited periods)

(12) Commitments and Contingencies (continued)
$754,000 per year over five years terminating in February 2004. The Company has
two five-year renewal options to extend the lease beyond its initial term. The
Company is recording the expense associated with the lease on a straight line
basis over the expected ten-year minimum term of the lease.

In addition to the five year operating lease for the Company's current
facility, the Company also has operating leases for various office equipment.

Rental expense for all operating leases for the year ended December 31, 1999,
1998 and 1997 was approximately $213,000, $77,000 and $73,000, respectively.
Rental expense for all operating leases for the three months ended March 31,
1999 and 2000 was approximately $29,000 and $63,000, respectively.

Future minimum payments under all non-cancellable operating leases in effect
as of December 31, 1999 are as follows:

<TABLE>
<S> <C>
2000........................................................ $ 433,000
2001........................................................ 586,000
2002........................................................ 747,000
2003........................................................ 768,000
2004........................................................ 764,000
Thereafter.................................................. 3,141,000
</TABLE>

Officer Stock Notes

In April 2000, the Company's board of directors elected to assume the
$320,000 of Officer Stock Notes (see Note 10) in exchange for notes from the
Officers payable directly to the Company (Officer Notes), provided that the
Company successfully completes its initial public offering. In addition, the
board of directors provided that if the Officers were still employed by the
Company as of December 31, 2000, the Company would forgive the $320,000 of
Officer Notes. The Company will recognize the expense associated with this
commitment upon the successful completion of an initial public offering.

(13) Significant Customers and Foreign Based Revenues

For the years ended December 31, 1997, 1998 and 1999 and the three months
ended March 31, 1999 and 2000 approximately 74%, 90%, 82%, 97%, and 0%,
respectively, of the Company's revenues resulted from agreements with the
National Institutes of Health and the Department of Energy. Additionally,
substantially all of the Company's revenues earned during the three months ended
March 31, 2000 are related to one customer. For the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000
approximately 18%, 6%, 11%, 3%, and 24%, respectively, of the Company's revenues
resulted from Canadian based customers.

F-30
<PAGE>
You may rely only on the information contained in this prospectus. Genaissance
Pharmaceuticals has not authorized anyone to provide information different from
that contained in this prospectus. Neither the delivery of this prospectus nor
sale of common stock means that information contained in this prospectus is
correct after the date of this prospectus. This prospectus is not an offer to
sell or solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Statements Concerning Future
Performance......................... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Financial Data............... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 30
Management............................ 51
Certain Relationships and Related
Party Transactions.................. 61
Principal Stockholders................ 63
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 69
Underwriting.......................... 71
Legal Matters......................... 74
Experts............................... 74
Additional Information................ 74
Index to Financial Statements......... F-1
</TABLE>

Dealer Prospectus Delivery Obligation:

Until August 26, 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

[LOGO]

6,000,000 Shares
Common Stock

Deutsche Banc Alex. Brown
Bear, Stearns & Co. Inc.
Salomon Smith Barney
UBS Warburg LLC

Prospectus
August 1, 2000