MEDICHEM LIFE SCIENCES INC
S-1, 2000-06-16
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<PAGE>

     As filed with the Securities and Exchange Commission on June 16, 2000
                                                 Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933

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

                          MediChem Life Sciences, Inc.
             (Exact Name of Registrant as Specified in Its Charter)

         Delaware                     8731                      36-3518660
     (State or other      (Primary Standard Industrial       (I.R.S. Employer
     jurisdiction of      Classification Code Number)    Identification Number)
     incorporation or
      organization)





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

                             12305 South New Avenue
                             Lemont, Illinois 60439
                                 (630) 257-1500
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

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

                            Michael T. Flavin, Ph.D.
                      Chairman and Chief Executive Officer
                          MediChem Life Sciences, Inc.
                             12305 South New Avenue
                             Lemont, Illinois 60439
                                 (630) 257-1500
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)

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

                                   Copies to:
         R. Cabell Morris, Jr.                    Richard B. Romney
           Winston & Strawn                     Dewey Ballantine LLP
         35 West Wacker Drive                1301 Avenue of the Americas
        Chicago, Illinois 60601              New York, New York 10019-6
            (312) 558-5600                         (212) 259-8000

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

        Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

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

  If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]

  If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended check the following box. [_]

  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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

                        CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
                                                            Proposed
                                             Proposed       maximum
  Title of each class of       Amount        maximum       aggregate      Amount of
     securities to be          to be      offering price offering price  registration
        registered         registered (1)   per share         (2)            fee
-------------------------------------------------------------------------------------
 <S>                       <C>            <C>            <C>            <C>
 Common Stock, par value
  $0.01 per share........                                 $50,000,000      $13,200
</TABLE>
(1) Includes                shares that the Underwriters may purchase to cover
    over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
    to Rule 457(a) under the Securities Act.
                                --------------
  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

PRELIMINARY PROSPECTUS                                             June 16, 2000
                             Subject to completion

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the     +
+Securities and Exchange Commission is effective. This prospectus is not an    +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted.             +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
             Shares


MEDICHEM LIFE SCIENCES, INC.

Common Stock
--------------------------------------------------------------------------------

This is our initial public offering of shares of our common stock. No public
market currently exists for our common stock. We expect the public offering
price to be between $      and $      per share.

We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "MCLS."

Before buying any shares you should read the discussion of material risks of
investing in our common stock in "Risk Factors" beginning on page 10.

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>
                                             Per
                                           Share    Total
---------------------------------------------------------
<S>                                     <C>      <C>
Public offering price                   $        $
---------------------------------------------------------
Underwriting discount and commissions   $        $
---------------------------------------------------------
Proceeds, before expenses, to MediChem  $        $
---------------------------------------------------------
</TABLE>

The underwriters may also purchase up to            shares of common stock from
us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. This option may
be exercised only to cover over-allotments, if any. If the underwriters
exercise the option in full, the total underwriting discounts and commissions
will be $     , and the total proceeds, before expenses, to MediChem will be
$     .

The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about             ,
2000.

UBS Warburg LLC
                  Chase H&Q
                                                         William Blair & Company

               The date of this prospectus is             , 2000
<PAGE>


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

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.

Until            , 2000 (25 days after the date of this prospectus), all
dealers selling shares of our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.

TABLE OF CONTENTS

--------------------------------------------------------------------------------
<TABLE>
<S>                                   <C>
Prospectus summary..................    3
The offering........................    6
Summary financial data..............    7
Risk factors........................   10
Forward looking information.........   20
Use of proceeds.....................   21
Dividend policy.....................   21
Capitalization......................   22
Dilution............................   25
Selected financial data.............   27
Unaudited pro forma condensed
  combined financial information ...   29
Management's discussion and analysis
  of financial condition and results
  of operations.....................   37
</TABLE>
<TABLE>
<S>                                <C>
Business.........................   45
Management.......................   70
Related party transactions;
  relationship with ALS..........   79
Corporate reorganization.........   82
Principal stockholders...........   83
Description of capital stock.....   86
Shares eligible for future sale..   89
Underwriting.....................   91
Legal matters....................   93
Experts..........................   93
Where you can find more
  information....................   93
Index to financial statements....  F-1
</TABLE>

ABOUT THIS PROSPECTUS

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

"MediChem", the MediChem logo, AutoOptimize, ChiralSelect, BlockBuilder, Clover
Plates, Crystal Growth Matrices, Crystal Monitor, High Throughput
Crystallization, GMPure, MediCertified, RapidScan, RapidScreen, ThermoCat,
ThermoGenetic, ThermoFusion, TrueSubstrate and QuickScreen are trademarks of
MediChem Life Sciences, Inc.'s operating subsidiaries. Other trademarks and
trade names appearing in this prospectus are the property of their holders.

Immediately before the closing of this offering, we will effect a corporate
reorganization in order to amend our holding company structure. As part of this
transaction, our current holding company, MCR Holdings, Inc., an Illinois
corporation, will merge with and into an indirect wholly-owned subsidiary,
MediChem Life Sciences, Inc., a Delaware corporation, to become the holding
company of our

<PAGE>


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

operating companies, MediChem Research, Inc., ThermoGen, Inc. and Emerald
BioStructures, Inc. We more fully describe the merger and related transactions
in this prospectus under "Corporate Reorganization." References in this
prospectus to Class A common stock, Class B common stock, Class C common stock,
Class A convertible preferred stock, Class B redeemable preferred stock, Class
C preferred stock and Class D preferred stock refer to such classes of stock of
MCR Holdings before the merger and subsequent offering. References in this
prospectus to common stock refer to common stock of MediChem Life Sciences
after the merger. Unless the context indicates otherwise, the information in
this prospectus assumes that the corporate reorganization transactions have
been completed. References in this prospectus to "MediChem," "we," "our" and
"us" refer to MCR Holdings, Inc. and its subsidiaries, before the merger, and
to MediChem Life Sciences, Inc. and its subsidiaries after the merger.

<PAGE>

Prospectus summary

This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the risks of investing
in our common stock discussed under "Risk Factors." Our principal executive
offices are located at 12305 South New Avenue, Lemont, Illinois 60439. Our
telephone number is (630) 257-1500. Our web site is http://www.medichem.com. We
do not intend the information found on our web site to be part of this
prospectus and our web site may not contain all of the information that is
important to you.

OUR BUSINESS

We are a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and
biotechnology companies. Recent advances in genomics have resulted in
exponential growth in the number of biological targets that can be exploited
for new drug discovery. The explosion in genomic information creates a
significant gap between the capabilities companies have to identify new drug
targets and the chemistry resources necessary to develop novel drug compounds.
We bridge this gap by offering chemistry services that span the entire drug
development spectrum, from early stage discovery technologies and services in
proteomics and medicinal chemistry to synthesis and scale up. We provide drug
discovery technology and services in the following seven areas:

 .proteomics;

 .combinatorial and computational chemistry;

 .medicinal chemistry;

 .biocatalysis;

 .chemical process development;

 .analytical and separations chemistry; and

 .chemical synthesis and scale up.

Our technology and services are designed to enable our pharmaceutical and
biotechnology customers to reduce overall development time and cost and to
pursue, simultaneously, a greater number of discovery and development
opportunities.

We have developed proprietary platform technologies in the areas of proteomics,
biocatalysis, chiral chemistry and automated process research. These
technologies utilize automation and optimization to compress the drug discovery
process timeline. Our proprietary platform technologies complement our
traditional chemistry services and associated revenues with opportunities for
up-front licensing fees and milestone and royalty payments. Our integrated drug
development service capabilities and proprietary technologies also enable us to
effectively develop our clients' lead compounds through our strategic drug
development program.

                                                                               3
<PAGE>


CHALLENGES IN DRUG DISCOVERY AND DEVELOPMENT

In order to maintain historical growth rates and replace blockbuster drugs that
are coming off patent, pharmaceutical and biotechnology companies must
accelerate the pace of drug discovery and development. These companies are
capitalizing on advances in disciplines such as molecular biology, genomics and
proteomics that are fueling opportunities to develop therapeutics for
previously unmet or undermet medical needs. These opportunities, however, have
also created challenges for pharmaceutical and biotechnology companies in both
the biology and chemistry phases of drug discovery and development. Over the
coming years, pharmaceutical and biotechnology companies must:

 .address the explosion of genomics information;

 .expedite lead discovery and development;

 .produce chirally pure compounds;

 .develop environmentally cleaner chemical synthesis techniques; and

 .recruit high quality scientific talent.

In order to effectively address these challenges, pharmaceutical and
biotechnology companies will need to turn to companies that offer specialized
technologies and services in both the biology and chemistry phases of drug
discovery and development.

OUR SOLUTION

Founded in 1987, we believe we were the first independent chemistry company to
offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. Our development of strong
relationships with pharmaceutical companies, by initially providing basic
medicinal chemistry services, helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include chemical process development, analytical and
separations chemistry and chemical synthesis and scale up.

In conjunction with the recent advances in genomics, we have broadened our
technology and service offerings in order to assist our pharmaceutical and
biotechnology customers in the early stages of the drug discovery and
development process. Our offerings in proteomics, combinatorial chemistry and
biocatalysis provide our clients with the sophisticated technology and
expertise that helps streamline their early-stage discovery and development
efforts.

Today, we are well positioned as a drug discovery technology and services
provider to the life sciences and pharmaceutical and biotechnology industries,
capable of assisting our clients through a broad array of chemistry service and
technology offerings. The following areas of expertise represent our solutions
to the needs and challenges currently facing our pharmaceutical and
biotechnology clients:

 .Proteomics. Through our Emerald BioStructures subsidiary, we provide
 proteomics services in the areas of protein expression, protein
 crystallization and three-dimensional structural determination. The protein
 structures determined using our advanced proteomics services can serve as a
 map for computational and combinatorial chemists in the design and discovery
 of novel lead compounds.

4
<PAGE>


 .Combinatorial and Computational Chemistry. We create customized libraries of
 compounds, based upon our clients' specifications and the unique designs
 arising from our computational chemistry capabilities, in order to assist our
 clients in screening for potential lead candidates. Multiple automated
 technology platforms are utilized in library production, that carefully match
 the scale and throughput needs of each unique project.

 .Medicinal Chemistry. We offer a broad spectrum of medicinal chemistry services
 to our clients. These services range from early-stage lead optimization that
 culminates in candidate selection for development, to the identification of
 viable synthetic routes required to produce materials for both pre-clinical
 and clinical studies.

 .Biocatalysis. Through our ThermoGen subsidiary, we offer an enzyme-based
 technology platform that can be applied to perform difficult chemical
 reactions with stable, easy-to-use biocatalysts. Our biocatalysts act as
 environmentally friendly and cost effective reagents, which can be customized
 through enzymatic engineering and protein shuffling to meet the unique
 synthesis needs of our clients. In addition, by using biocatalysis to produce
 chirally pure compounds, we enable our clients to meet the stringent
 specifications of the FDA in an economical and efficient manner.

 .Chemical Process Development. We have developed expertise and technologies
 that allow our clients to identify the best chemical processes for use in
 synthesis and scale up. By combining robotics and statistical analysis, we
 employ patented technologies, such as AutoOptimize(TM), that enable our
 chemists to rapidly identify the best chemical processes for scale up,
 significantly shortening our clients' lead compound development timeframe.

 .Experienced Chemistry Project Teams. We have built teams of highly qualified
 scientists that are frequently accessed by our pharmaceutical and
 biotechnology customers to satisfy their growing needs for scientific
 expertise in their drug discovery and development efforts. Our chemistry teams
 communicate frequently with our customers to assure the timely and on-budget
 completion of complex chemistry projects.

OUR STRATEGY

Our strategy is to further develop and expand our chemistry services and
platform technologies to leverage opportunities that exist in drug discovery
and development. We intend to leverage our expertise by seeking royalty and
milestone opportunities through expanding our drug discovery platform
technologies and by entering into collaborations through our strategic drug
development program. Our internal growth strategy focuses on expanding services
offered to current customers, developing new customer relationships in the
pharmaceutical, biotechnology and other industries and expanding our scientific
and physical resources. We also intend to grow our business externally through
acquisitions to expand our customer base, platform technologies, chemistry
services offerings and geographic reach.

                                                                               5
<PAGE>

The offering

<TABLE>
<S>                                         <C>
Common stock we are offering...............              shares

Common stock to be outstanding after the
  offering.................................              shares

Proposed Nasdaq National Market symbol..... MCLS

Use of proceeds............................ General corporate purposes and working
                                            capital, including funding expansion of our
                                            operations, hiring additional personnel,
                                            platform technologies R&D, and potential
                                            acquisitions, as well as repayment of
                                            indebtedness, redemption of existing capital
                                            stock and warrants, and investment in ALS.
                                            See "Use of proceeds."
</TABLE>

Except as otherwise indicated, information in this prospectus, including the
number of shares to be outstanding after this offering assumes the following:

 .the automatic conversion of all outstanding shares of Class A preferred stock
 into:

 .340,441 shares of our common stock; and

 .1,000 shares of our Class B redeemable preferred stock and simultaneous
  automatic redemption of all 1,000 outstanding shares of Class B redeemable
  preferred stock for $7.5 million out of the net proceeds from this offering
  upon the closing of this offering;

 .the automatic conversion of all outstanding shares of Class C preferred stock
 into          shares of our Class A common stock and simultaneous automatic
 redemption of such shares of Class A common stock for $4.0 million out of the
 net proceeds from this offering upon the closing of this offering;

 .the conversion of all outstanding shares of Class D preferred stock into
          shares of our common stock;

 .the issuance of 269,598.27 shares of our common stock in connection with the
 acquisitions of ThermoGen and Emerald BioStructures;

 .a       for one split of our common stock to be effected prior to the closing
 of this offering; and

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

The information in this prospectus, unless otherwise indicated, does not assume
inclusion of the following:

 .88,061 shares of common stock issuable upon exercise of stock options
 outstanding as of
 May 31, 2000 at a weighted average exercise price of $         per share;

 .           shares of common stock available for issuance under our 2000
 Incentive Compensation Plan; and

 .net exercise of warrants to purchase 8,458 shares of our common stock at an
 exercise price of $      per share.

The number of shares of common stock outstanding after the offering is based on
shares outstanding as of March 31, 2000, based on the assumptions above. See
"Capitalization."

6
<PAGE>

Summary financial data

The following table summarizes the financial data for our business during the
periods indicated. You should read the data set forth below in conjunction with
"Management's discussion and analysis of financial condition and results of
operations" and our consolidated financial statements and related notes thereto
included elsewhere in this prospectus.

The pro forma consolidated statement of operations data for the year ended
December 31, 1999 and the three months ended March 31, 2000 is presented as if,
on January 1, 1999:

 .the acquisitions of ThermoGen and Emerald BioStructures had been completed
  resulting in the issuance of 269,598.27 shares of our common stock; and

 .this offering had been consummated and the net proceeds therefrom had been
  applied to reduce indebtedness, resulting in the elimination of interest
  expense.

The pro forma consolidated balance sheet data as of March 31, 2000 reflects:

 .the acquisitions of ThermoGen and Emerald BioStructures through the issuance
  of 269,598.27 shares of our common stock and the preliminary allocation of
  the respective purchase prices thereof.

The pro forma as adjusted consolidated balance sheet data as of March 31, 2000
adjusts the pro forma balance sheet data to reflect the consummation of this
offering and the application of a portion of the net proceeds to:

 .the automatic conversion of all outstanding shares of our Class A preferred
  stock into 340,441 shares of our common stock and 1,000 shares of our Class
  B redeemable preferred stock and the simultaneous automatic redemption of
  all 1,000 outstanding shares of Class B redeemable preferred stock for $7.5
  million; the automatic conversion of all outstanding shares of our Class C
  preferred stock into            shares of our Class A common stock and the
  simultaneous automatic redemption of such shares of Class A common stock for
  $4.0 million; and the conversion of all outstanding shares of our Class D
  preferred stock into            shares of our common stock;

 .the repayment of approximately $6.0 million of outstanding indebtedness
  under our credit facility;

 .the redemption of the warrant to purchase 16,916 shares of our common stock
  for $   million; and

 .the purchase of $5.0 million of convertible preferred stock of ALS.

                                                                               7
<PAGE>

<TABLE>
<CAPTION>
                                      Year Ended December 31,                   Three Months Ended March 31,
Consolidated statement of                                         Pro Forma                             Pro Forma
operations data                  1997        1998         1999         1999        1999         2000         2000
------------------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>         <C>          <C>          <C>         <C>          <C>
Contract revenues:
 Contract revenue.......   $4,339,991  $7,122,461  $11,255,534  $13,868,513  $2,105,754  $ 3,434,073  $ 4,139,206
 Contract revenue--
   related party........    1,205,948   1,497,055    2,302,801    2,302,801     462,160      707,709      707,709
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
  Total contract
    revenues............    5,545,939   8,619,516   13,558,335   16,171,314   2,567,914    4,141,782    4,846,915
Contract service costs:
 Contract service
   costs................    1,869,760   3,414,818    5,263,963    6,799,128   1,084,943    1,788,834    2,352,463
 Contract service
   costs--related
   party................      449,552     466,893      778,432      778,432     123,759      303,800      303,800
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
  Total contract service
    costs...............    2,319,312   3,881,711    6,042,395    7,577,560   1,208,702    2,092,634    2,656,263
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
Gross profit............    3,226,627   4,737,805    7,515,940    8,593,754   1,359,212    2,049,148    2,190,652
Milestones and
  intellectual property
  revenue--related
  party.................          --          --     1,787,612    1,787,612         --       350,000      350,000
Operating expenses:
 Selling, general and
   administrative.......    2,417,752   3,400,599    6,005,993    7,029,721   1,317,513    1,901,375    2,473,006
 Depreciation and
   amortization.........      317,913     458,722      787,810    5,122,873     137,483      260,228    1,350,475
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
 Total operating
   expenses.............    2,735,665   3,859,321    6,793,803   12,152,594   1,454,996    2,161,603    3,823,481
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
Income (loss) from
  operations............      490,962     878,484    2,509,749   (1,771,228)    (95,784)     237,545   (1,282,829)
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
Other expense, net:
 Interest expense.......      101,561     124,818      587,672          --       34,347      180,409          --
 Interest income........          --       (1,350)    (175,209)    (175,209)       (377)     (39,324)     (39,324)
 Other..................      (98,539)    (48,068)         --           --          --           --           --
 Increase in value of
   redeemable warrant...          --          --           --           --          --     1,905,487    1,905,487
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
 Total other expense,
   net..................        3,022      75,400      412,463     (175,209)     33,970    2,046,572    1,866,163
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
 Income (loss) from
   continuing operations
   before income taxes..      487,940     803,084    2,097,286   (1,596,019)   (129,754)  (1,809,027)   3,148,992
 Income taxes...........      166,772     310,012      931,817    1,056,123     (57,617)      38,102      (69,548)
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
 Income (loss) from
   continuing
   operations...........      321,168     493,072    1,165,469   (2,652,142)    (72,137)  (1,847,129)  (3,079,444)
Discontinued operations
  - loss from operations
  of ALS, net of tax ...      (54,203)   (173,423)     (95,109)         --          (13)         --           --
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
  Net income (loss).....      266,965     319,649    1,070,360   (2,652,142)    (72,150)  (1,847,129)  (3,079,444)
 Less:
  Allocation of income
    to participating
    securities..........     (103,983)   (124,503)    (282,512)         --          --           --           --
  Accretion to
    redemption value of
    preferred stock.....          --          --      (623,498)    (623,498)        --      (323,220)    (323,220)
                           ----------  ----------  -----------  -----------  ----------  -----------  -----------
Net income (loss)
  available to common
  stockholders..........   $  162,982  $  195,146  $   164,350  $(3,275,640) $  (72,150) $(2,170,349) $(3,402,664)
                           ==========  ==========  ===========  ===========  ==========  ===========  ===========
</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
                              Year Ended December 31,          Three Months Ended March 31,
Consolidated statement                              Pro Forma                         Pro Forma
of operations data          1997     1998     1999       1999      1999       2000         2000
-------------------------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>      <C>        <C>        <C>        <C>
Per share data:
Basic earnings (loss)
  per common share:
 Income (loss) from
   continuing
   operations..........  $  0.35  $  0.59  $  0.65    $ (4.89) $   (0.18) $   (5.43)   $   (5.08)
 Loss from discontinued
   operations, net of
   tax.................    (0.09)   (0.28)   (0.24)       --         --         --           --
 Net income (loss)
   available to common
   stockholders........  $  0.26  $  0.31  $  0.41    $ (4.89) $   (0.18) $   (5.43)   $   (5.08)
                         =======  =======  =======    =======  =========  =========    =========
Weighted average number
  of common shares
  outstanding - basic..  626,960  626,960  400,000    669,598    400,000    400,000      669,598
</TABLE>

<TABLE>
<CAPTION>
                                                 As of March 31, 2000
                                                                     Pro Forma
Consolidated balance sheet data                Actual    Pro Forma As Adjusted
------------------------------------------------------------------------------
<S>                                      <C>           <C>         <C>
Cash and cash equivalents............... $  2,663,407  $ 2,241,219 $
Working capital.........................    2,599,791    1,267,021
Total assets............................   14,780,440   71,618,106
Long-term obligations, less current
  maturities, and redeemable preferred
  stock.................................   21,829,887    8,316,416
Total stockholders' equity (deficit)....  (10,730,126)  30,669,224
</TABLE>




                                                                               9
<PAGE>


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

Risk factors

You should carefully consider the risks described below, together with all of
the other information included in this prospectus, before deciding whether to
invest in our common stock. If any of the following risks actually occurs,
there could be a material adverse effect on our business, financial condition
or results of operations. In this case, the trading price of our common stock
could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

We are dependent on pharmaceutical and biotechnology industries.

We have benefited to date from the increasing trend of pharmaceutical and
biotechnology companies outsourcing chemical R&D projects. A reversal or
slowing of this trend could have a material adverse effect on our business. Our
operations could be materially adversely affected by general economic downturns
in our clients' industries, the impact of the current trend toward mergers and
consolidation in the pharmaceutical industry, which would reduce the number of
our potential customers, or any decrease in R&D expenditures.

Our revenues are concentrated with a limited number of pharmaceutical clients.

Historically, a substantial portion of our revenue has been derived from
contracts with a limited number of significant customers. Our ten largest
customers have accounted for approximately 94%, 90% and 87% of total contract
revenues for the years ended December 31, 1997, 1998 and 1999, respectively. In
addition, our top three customers for the year ended December 31, 1999,
accounted for approximately 45% of total contract revenues as contract revenue
from ALS, together with ALS's joint venture subsidiary, Sarawak MediChem
Pharmaceuticals, Inc., accounted for 17%, contract revenue from Pfizer, Inc.
accounted for 17%, and contract revenue from AstraZeneca accounted for 11%, of
total contract revenues, respectively.

Failure to attract, retain and motivate skilled personnel may delay our
research efforts and programs.

Our future success will depend to a significant extent on our ability to
attract, retain and motivate highly skilled chemists and other scientists. Our
ability to maintain, expand or renew existing engagements with our customers,
enter into new engagements and provide additional services to our existing
customers depends, in large part, on our ability to hire and retain scientists
with the skills necessary to keep pace with continuing changes in drug
discovery and development technologies. We believe that there is a shortage of,
and significant competition for, scientists with the skills and experience in
chemistry necessary to perform the services we offer. We compete with the
research departments of pharmaceutical companies, biotechnology companies,
chemistry research companies and research and academic institutions for new
personnel. The inability to hire additional qualified personnel may have a
material adverse effect on our future growth. In addition, our inability to
hire additional qualified scientists may require an increase in the level of
responsibility for both existing and new personnel. There can be no assurance
that we will be successful in attracting, retaining or motivating our
scientific personnel. Failure to attract, retain or motivate such personnel
could have a material adverse effect on our business.

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We are subject to risks associated with the unpredictability of patent
protection.

Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
when necessary and conduct our business without infringing upon the proprietary
rights of others. The patent positions of pharmaceutical, biotechnology and
chemistry services firms can be uncertain and involve complex legal and factual
questions. There can be no assurance that any patent applications will result
in the issuance of patents or, if any patents are issued, whether they will
provide significant proprietary protection or commercial advantage or will not
be circumvented by others. In the event a third party has also filed one or
more patent applications for inventions which conflict with ours, we may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office to determine priority of invention, which could result in
the loss of any opportunity to secure patent protection for the inventions and
the loss of any right to use the inventions. Even if the eventual outcome is
favorable to us, such proceedings could result in substantial cost to us. The
filing and prosecution of patent applications, litigation to establish the
validity and scope of patents, assertion of patent infringement claims against
others and the defense of patent infringement claims by others can be expensive
and time consuming. There can be no assurance that in the event that any claims
with respect to any of the patents we own or license are challenged by one or
more third parties, any court or patent authority ruling on such challenge will
determine that such patent claims are valid and enforceable. An adverse outcome
in such litigation could cause us to lose exclusivity afforded by the disputed
rights. If a third party is found to have rights covering products or processes
used by us, we could be forced to cease using the technologies covered by such
rights, be subject to significant liability to such third party, or be required
to license technologies from such third party. Furthermore, even if our patents
are determined to be valid, enforceable and broad in scope, there can be no
assurance that competitors will not be able to design around such patents and
compete with us and our licensees using the resulting alternative technology.

Our recent growth and expansion may be difficult to manage and these
difficulties could decrease our profits.

Our operations have grown rapidly and substantially in recent years. Such
growth has placed and will continue to place a significant strain on our
operational, human and financial resources. We recently acquired ThermoGen and
Emerald BioStructures in May 2000. We are in the process of integrating the
operations of these companies. Our ability to compete effectively will depend,
in large part, upon our ability to hire, train and assimilate additional
management, professional, scientific and technical operating personnel and our
ability to expand, improve, integrate and effectively utilize our operating,
management, marketing and financial systems to accommodate our expanded
operations and those of our recently acquired companies. The physical expansion
of our facilities to accommodate future growth may lead to significant costs
and divert management and business development resources. Our failure to
effectively anticipate, implement and manage the changes required to sustain
our growth and successfully integrate our recent acquisitions may have a
material adverse effect on our business.

There are risks associated with acquisitions.

We from time to time review other potential acquisition candidates in the
ordinary course of our business. No assurance can be given that acquisition
candidates will be available or will be available on terms and conditions
acceptable to us. There can be no assurance that the anticipated economic,
operational and other benefits of any of the completed or future potential
acquisitions will be achieved or that we will be able to successfully integrate
acquired businesses in a timely manner without substantial costs, delays or
other operational or financial problems. The difficulties of such integration
may initially be increased by the necessity of integrating personnel with
disparate business backgrounds

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and corporate cultures. In addition, acquisitions may involve the expenditure
of significant funds. Failure to effectively integrate the acquired companies
may adversely affect our ability to grow our business. Client dissatisfaction
or performance problems at a single acquired company could have an adverse
effect on our reputation as a whole, resulting in increased difficulty in
marketing our services or acquiring companies in the future. In addition, there
can be no assurance that the acquired companies will operate profitably.
Acquisitions also involve a number of additional risks, including diversion of
management attention, potential loss of key clients or personnel, risks
associated with unanticipated problems, liabilities or contingencies and risks
of entering markets in which we have limited or no direct expertise. The
occurrence of some or all of the events described in these risks could have a
material adverse effect on our business, operating results and financial
condition. We presently have no agreements or commitments with respect to any
future acquisition.

Competition in the biotechnology, pharmaceutical and chemistry services
industries may result in competing technologies and services that make our
technologies and services obsolete.

The pharmaceutical, biotechnology and chemistry services industries are
characterized by rapid technological change. Competition is intense among
industries that attempt to identify and optimize potential lead compounds and
identify and optimize chemical processes. Because we provide many types of
technologies and services, we compete in many areas, including, but not limited
to, proteomics, combinatorial and computational chemistry, medicinal chemistry,
biocatalysis and chemical process development. We face competition based on a
number of factors, including size, relative expertise and sophistication, speed
and costs of identifying and optimizing potential lead compounds and of
developing and optimizing chemical processes. We compete with the research
departments of pharmaceutical and biotechnology companies and other drug
discovery technology and service companies, as well as numerous academic and
research institutions. Many pharmaceutical and biotechnology companies, which
represent the greatest potential market for our services and technologies, have
developed or are developing technologies and services that we offer. Academic
and research institutions are or may be involved with various phases of
research in areas where we offer services. Many of these competitors may have
greater financial and other resources and more experience in R&D than we do.
Smaller companies may also prove to be significant competitors.

Our technologies and services may not result in the discovery and development
of drug products for our clients, and therefore we may not generate revenues
from milestones or royalties from the sale of proprietary services.

Some of our agreements with customers and technology licensees provide that we
may receive milestone payments or royalties based on future sales of drug
products discovered through the use of our proprietary services and
technologies. Use of our services or technologies may not result in the
discovery of potential drug candidates that will be safe or effective. If a
client successfully identifies a drug product for development and
commercialization, it will likely be subject to extensive government
regulation. Development and commercialization of potential drug candidates
depend not only on the achievement of research objectives by us and our
collaborators, but also on each client's own financial, competitive, marketing
and strategic considerations and regulation by the FDA and other governmental
entities in the U.S. and other countries, all of which are beyond our control.
If potential drug candidates are individually developed, integrated and used,
it is possible that previously unanticipated limitations or defects may emerge.
Pharmaceutical products developed by our clients will require lengthy and
costly pre-clinical and clinical trials and regulatory approval by governmental
agencies prior to commercialization. Approvals may not be granted despite the
substantial time and resources required to obtain approvals and comply with
appropriate statutes and regulations. If unforeseen

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complications arise in the development, delivery and operation of the potential
drug candidates by our clients, we may not realize milestone or royalty
payments as expected and this could have material adverse effects on our
business.

Because our services currently depend on certain technologies licensed from
third parties, should we breach any of the terms of these licenses, or should
any of our licensors lose their rights, it could result in our loss of access
to these technologies.

Some aspects of our technologies and services have been licensed from third
parties. In particular, our ChiralSelect(TM) technology is dependent in part on
a license from Regis Technologies, Inc. This license expires in August 2009. If
we fail to maintain the right to use these technologies it could have a
material adverse effect on our business.

We depend on key personnel for the success and continuation of our operations.

Our performance is highly dependent on the principal members of our senior
management and scientific staff. Although we have entered into agreements
containing non-competition restrictions and into employment agreements with our
senior scientific and management personnel, we do not have employment
agreements with all of our key personnel. No assurance can be given that we
will be able to retain such personnel. We maintain key person life insurance on
Dr. Michael Flavin. The loss of one or more members of our senior management or
scientific staff could have a material adverse effect on our business.

Our operations expose us to potential liability and risks.

We develop, test, and to a very limited extent, manufacture pharmaceutical
products intended for use in humans. Such activities could expose us to the
risk of liability for personal injury or death to persons using such products,
although we do not manufacture in bulk, market or sell such products. No
assurance can be given that we will not be required to pay damages or incur
defense costs in connection with any such claim.

All facilities and manufacturing techniques used in the manufacture of products
for clinical use or for sale in the U.S. must be operated in conformity with
current Good Manufacturing Practices, cGMP, guidelines as established by the
FDA. Our facilities are subject to scheduled periodic regulatory inspections to
ensure compliance with cGMP requirements. Failure on our part to comply with
applicable requirements could result in the termination of ongoing research or
the disqualification of data for submission to regulatory authorities. A
finding that we had materially violated cGMP requirements could result in
additional regulatory sanctions and, in severe cases, could result in a
mandated closing of our facilities which would materially and adversely affect
our business.

We and our customers are subject to substantial government regulation.

Our customers and collaborators, including ALS and SMP, are subject to
substantial regulation by governmental entities in the U.S. and other
countries. Moreover, to the extent that we act as project manager in providing
or arranging for FDA-regulated services for our customers, we also are subject
to these requirements. The nature and the extent to which such regulation may
apply to us or our customers will vary depending on the nature of any such
pharmaceutical products. Virtually all pharmaceutical products developed by our
customers will require regulatory approval by governmental agencies prior to
commercialization. Human pharmaceutical products are subject to rigorous pre-
clinical and clinical testing and other approval procedures by the FDA and by
foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence

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the manufacturing, safety, labeling, storage, record keeping and marketing of
such pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require the expenditure of substantial
resources.

If the FDA finds that we or our customers have failed to comply with applicable
regulatory requirements, the agency can institute a wide variety of enforcement
actions, including fines, injunctions and civil penalties; recall or seizure of
products; the issuance of public notices or warnings; operating restrictions,
partial suspension or total shutdown of production; termination of ongoing
research; refusal of requests for approval of INDs or NDAs; withdrawal of
approvals previously granted; and criminal prosecution. Our or our customers'
failure to comply with applicable requirements could lead to an FDA enforcement
action that may have a material adverse effect on our business.

As part of our strategic drug development program, we anticipate seeking
milestone and royalty revenues tied to the successful commercialization of drug
products developed by our customers. Our customers' success in developing new
drugs is dependent on obtaining necessary regulatory approvals, proving
demonstrative therapeutic value and ultimately, market acceptance. To the
extent our customers' fail to achieve any of the foregoing, we may not realize
related milestone or royalty revenues.

Our activities involve the use of hazardous materials, which subject us to
regulation, related costs and delays and potential liabilities for injuries or
violations of environmental laws.

Our business involves the controlled storage, use and disposal of hazardous
materials, including chemical and biological materials. Using such materials
presents the risk of accidental environmental contamination and physical
injury. We are subject to federal, state and local regulations governing the
use, manufacture, storage, handling and disposal of materials and waste
products. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by
law and regulation, we cannot completely eliminate the risk of accidental
contamination or injury from those hazardous materials. In the event of an
accident, we could be held liable for any damages that result, and any
liability could exceed the limits or fall outside the coverage of our
insurance. We may not be able to maintain insurance on acceptable terms, or at
all. We could incur significant costs or impairment of our business efforts in
order to comply with current or future environmental laws and regulations.

There is a risk of interruption of our operations.

Our results of operations are dependent upon the continued use of our highly
specialized laboratories and equipment. Our operations are primarily
concentrated in multiple facilities in Chicago, Illinois, Lemont, Illinois, Des
Plaines, Illinois and near Seattle, Washington. From August 1997 to April 1998
we were forced to discontinue operations in certain of our laboratories in our
Lemont, Illinois facility due to a fire caused during routine laboratory work.
The loss of revenue for this period of time was not substantial. A similar
accident such as this may happen again in the future and the loss of revenue as
a result of any such accident may be substantial. We maintain business
interruption insurance to cover lost revenues caused by such occurrences.
However, such insurance may not compensate us for the loss of opportunity and
potential adverse impact on relations with existing customers created by an
inability to complete our customer contracts in a timely manner. Although we
also have contingency plans in effect for certain natural disasters, as well as
other unforeseen events which could damage our laboratories or equipment, no
assurance can be given that any such events will not materially interrupt our
business.

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Because we have a limited number of suppliers, our technologies and services
could be delayed or have increased costs.

Certain key components of biological and chemical materials that we use in our
technologies and services are currently purchased from a limited number of
outside sources and may only be available through a few sources.

Our reliance on our suppliers exposes us to risks including:

 .the possibility that one or more of our suppliers could terminate their
 services at any time without penalty;

 .the potential inability of our suppliers to obtain required materials;

 .the potential delays and expenses of seeking alternative sources of supply;
 and

 .reduced control over pricing, quality and timely delivery due to the
 difficulties in switching to alternative suppliers.

Consequently, in the event that materials from our suppliers are delayed or
interrupted for any reason, our ability to provide our technologies and
services could be delayed or result in increased costs which could have a
material adverse effect on our business.

Our quarterly operating results are subject to variation.

Our results of operations may be subject to quarterly fluctuation. Quarterly
operating results can fluctuate as a result of a number of factors, including
the commencement, delay, cancellation or completion of contracts; risks
associated with fixed price contracts; the mix of services provided; seasonal
slowdowns; the timing of start-up expenses for new services and facilities; and
the timing and integration of acquisitions. We believe that quarterly
comparisons of our financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. In addition,
fluctuations in quarterly results could affect the market price of the common
stock in a manner unrelated to our longer term operating performance.

Other methods of protecting our trade secrets and other intellectual property,
including confidentiality agreements with employees and others, may not
adequately prevent disclosure of proprietary information.

In addition to patent protection, we rely on a combination of copyright and
trademark laws, trade secrets, know-how and other contractual provisions and
technical measures to protect our intellectual property rights. In an effort to
maintain the confidentiality and ownership of trade secrets and proprietary
information, we require employees, consultants and collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with us. These measures may not provide meaningful protection for
our trade secrets or other confidential information and technology. If these
measures do not protect our rights, third parties could use our technology and
our ability to compete in our markets would be harmed. In the event of
unauthorized use or disclosure of our confidential and proprietary information,
we may not have adequate remedies. Despite our efforts, third parties may
independently discover trade secrets and proprietary information. Costly and
time-consuming litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain and maintain trade secret
protection could adversely affect our competitive position.

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Our success will depend partly on our ability to operate without infringing on
or misappropriating the proprietary rights of others.

We may be sued for infringing on the patent rights of others. We may have to
pay substantial damages, including treble damages, for past infringement if it
is ultimately determined that our products infringe a third party's proprietary
rights. Because we produce and provide many different technologies and
services, there is the potential for patent infringement suits by a wide-range
of companies that control patents for certain technologies and services. The
drug discovery industry has a history of patent litigation and will likely
continue to have patent litigation suits concerning drug discovery
technologies. A number of patents have been issued and may be issued on certain
technologies that could prevent us and our collaborators from developing
processes using such technologies, or relate to certain other aspects of
technology that we use or expect to use. From time to time we attempt to obtain
from third parties licenses if they are compatible with our business
objectives. We may not be able to obtain any licenses on acceptable terms, if
at all. Our inability to obtain or maintain patent protection or necessary
licenses could have a material adverse effect on our business, financial
condition or results of operations.

Potential pharmaceutical and health care reform may adversely impact us.

We expect that a substantial portion of our contract revenues in the
foreseeable future will be derived from services provided to the pharmaceutical
and biotechnology industries. Accordingly, our future success is directly
dependent upon the success of the companies within those industries and their
continued demand for our services. The levels of revenues and profitability of
pharmaceutical and biotechnology companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce the costs
of health care through various means and the initiatives of third party payors
with respect to the availability of reimbursement. For example, in certain
foreign markets pricing or profitability of pharmaceuticals is subject to
government control. In the U.S., there have been, and we expect that there will
continue to be, a number of federal and state proposals to implement similar
government control. It is uncertain what legislative proposals may be adopted
or what actions federal, state or private third party payors for health care
goods or services may take in response to any health care reform proposals or
legislation. To the extent that such proposals or reforms have a material
adverse effect on the businesses, financial condition, results of operations
and profitability of pharmaceutical and biotechnology companies that are actual
or prospective customers for our services, our business could be materially and
adversely affected.

Our contracts are subject to standard industry termination risks and risks of
cost overruns associated with fixed price contracts.

Additionally, our contracts are terminable by the customer with 10 to 90 days'
notice. Our contracts may be terminated for a number of reasons, many of which
may be beyond our control, such as reduction or reallocation of a customer's
R&D budget or change in a customer's overall financial condition. The loss of a
large contract or multiple smaller contracts, or a significant decrease in
revenue derived from such contracts, could have a material adverse effect on
our business. Certain of our contracts for the provision of our services have a
fixed price or are subject to a maximum fee. As a result, we bear the risk of
cost overruns with respect to such contracts. There can be no assurance that we
will be able to perform our obligations with respect to any such contracts
within the prescribed fixed fees or applicable maximum fees. Significant cost
overruns with respect to such contracts could have a material adverse effect on
our business.

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RISKS RELATED TO THIS OFFERING

We have broad discretion to use the proceeds from this offering and our use of
these proceeds may not yield a favorable return.

We have not identified specific uses for a significant portion of the net
proceeds of the offering. Accordingly, our management will have significant
flexibility in applying the remaining net proceeds of the offering. Although we
have no plans, commitments or agreements with respect to any material
acquisitions as of the date of this prospectus, we may seek acquisitions of
businesses or technologies that are complementary to ours, and a portion of the
net proceeds may be used for such acquisitions.

Our principal stockholders, directors and executive officers will own
approximately   % of our common stock, which may limit new investors from
influencing corporate decisions.

After giving effect to the sale of the shares of common stock offered hereby,
               will beneficially own in the aggregate approximately      % of
the outstanding common stock. As a result, these stockholders will be able to
exert significant influence over the outcome of fundamental corporate
transactions requiring stockholder approval, including, but not limited to,
mergers and sales of assets and the election of the members of our board of
directors. This concentration of ownership may have the effect of delaying or
preventing a change in control.

Our stock price may be particularly volatile because of the industry in which
we operate.

The market prices for securities of comparable technology companies,
particularly life science companies, have been highly volatile and the market
has experienced significant price and volume fluctuations that are often
unrelated to the operating performance of particular companies. Factors that
could have a significant impact on the market price of our common stock
include:

 .actual or anticipated variation in quarterly operating results;

 .failure to achieve, or changes in, financial estimates by securities analysts;

 .announcements of technological innovations or services by us or our
 competitors;

 .disputes or other developments concerning proprietary rights, including
 patents and litigation matters and the ability to patent our technologies;

 .conditions or trends in the pharmaceutical and biotechnology industries;

 .additions or departures of key personnel;

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

 .regulatory developments in both the U.S. and foreign countries;

 .public concern as to the efficacy of new technologies; and

 .general market conditions.

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In particular, the realization of any of the risks described in these "Risk
Factors" could have a dramatic and materially adverse impact on the market
price of our common stock. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted. This type of litigation could result in substantial
costs and a diversion of management's attention and resources, which could
materially affect our business, financial condition or results of operations.

Future sales of our common stock may depress our stock price.

Sales of substantial amounts of common stock in the public market after this
offering could adversely affect the market price of the common stock. In
addition to the         shares of common stock offered hereby, up to
approximately        shares of common stock owned by our current stockholders
will be eligible for sale in the public market pursuant to Rule 144 under the
Securities Act of 1933, as amended, at various times beginning 90 days after
the date of this prospectus. Executive officers, directors and stockholders who
in the aggregate hold         shares of common stock and options to purchase
         shares of common stock have agreed, pursuant to certain Lock-up
Agreements (the "Lock-up Agreements"), that until 180 days after the date of
this prospectus, they will not, directly or indirectly, offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase, make a
distribution of, or otherwise dispose of, any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock, other
than:

 .as a bona fide gift or gifts, provided that the donee or donees thereof agree
 in writing as a condition precedent to such gift or gifts to be bound by the
 terms of the Lock-up Agreements; or

 .with the prior written consent of UBS Warburg LLC. However, UBS Warburg LLC
 may, in its sole discretion, release all or any portion of the common stock
 from the restrictions of the lock-up agreements.

Sales of substantial amounts of common stock (including shares issued in
connection with future acquisitions that may be issued with registration
rights), or the availability of such shares for sale, may adversely affect the
prevailing market price for the common stock and could impair our ability to
obtain additional capital through an offering of our equity securities.

There are risks due to an absence of a public trading market, our offering
price and the possible volatility of our future stock price.

Prior to this offering, there has been no public market for our common stock,
and there can be no assurance that an active market will develop or be
sustained following the consummation of this offering. Consequently, the
offering price of the common stock will be determined by negotiation between us
and the representatives of the several Underwriters based on several factors
and will not necessarily reflect the market price of the common stock after
this offering or the price at which the common stock may be sold in the public
market after this offering. See "Underwriting" for a description of the factors
to be considered in determining the initial public offering price. Following
the completion of this offering, the trading price of the common stock could be
subject to wide fluctuations in response to quarter-to-quarter variations in
our operating results, changes in earnings estimates by analysts, material
announcements by us or our competitors, governmental regulatory action, or
other events or factors, many of which are beyond our control. The stock market
has experienced extreme price and volume fluctuations which have affected
market prices of smaller capitalization companies and which often have been
unrelated to the operating performance of such companies. In addition, our

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operating results in future quarters may be below the expectations of
securities analysts and investors. In such event, the price of the common stock
would likely decline, perhaps substantially.

You will incur immediate and substantial dilution and may incur dilution in the
future.

Purchasers of the common stock in this offering will incur immediate dilution
in the pro forma net tangible book value of our common stock of $      per
share. Moreover, there can be no assurance that we will not require additional
funds to support our working capital requirements or for other purposes, in
which case we may seek to raise such additional funds through public or private
equity financing or from other sources. Also, we may acquire other companies or
technologies or finance strategic alliances by issuing equity. Any such
transaction may result in additional dilution to our stockholders.

Because it is unlikely that we will ever pay dividends, you will only be able
to benefit from holding our stock if the stock price appreciates.

We have never paid cash dividends on our capital stock and do not anticipate
paying any cash dividends in the foreseeable future.

Anti-takeover provisions in our charter and bylaws and Delaware law could make
a third-party acquisition of us difficult.

Our certificate of incorporation and bylaws contain provisions that could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
We are also subject to certain provisions of Delaware law that could delay,
deter or prevent a change in control of us.

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Forward looking information

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.

Some of the statements under the captions "Prospectus summary," "Risk factors,"
"Use of proceeds," "Management's discussion and analysis of financial condition
and results of operations" and "Business" and elsewhere in this prospectus are
forward-looking statements. These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should," "will" or "would" or the negative of these terms or
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk factors."

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Use of proceeds

We estimate that the net proceeds from the sale of the           shares of
common stock that we are offering will be approximately $      million, or
approximately $     million if the underwriters' over-allotment option is
exercised in full, based upon an assumed initial public offering price of
$      per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.

We intend to use the majority of the net proceeds from this offering for
general corporate purposes and working capital, including the following:

 .expansion of our operations including, $5.0 million in facilities expansion
 not funded through mortgage financing to meet the needs of our growing
 business;

 .hiring additional sales and customer support personnel;

 .R&D to develop additional platform technologies; and

 .potential acquisitions of companies or technologies.

In addition, we intend to use the remaining portion of the net proceeds from
this offering for the following specific purposes:

 .$11.5 million for the mandatory redemption of our outstanding preferred stock,
 including

 .$7.5 million for the redemption of our Class B redeemable preferred stock;
  and

 .$4.0 million for the redemption of      shares of our Class A common stock
  as a result of the automatic conversion of all outstanding shares of our
  Class C preferred stock;

 .$    million for the redemption of the warrant to purchase 16,916 shares of
 our common stock;

 .$7.0 million to repay amounts outstanding under our credit facility, of which
 approximately $5.0 million under the term loan bears interest at a current
 annual rate of 11.89% and approximately $2.0 million under the revolving line
 bears interest at a current annual rate of 10.64%. The credit facility
 terminates on June 14, 2001 for acquisition loans and June 1, 2005 for working
 capital loans; and

 .$5.0 million to purchase convertible preferred stock of ALS, representing
 approximately 15.4% of ALS's equity capitalization.

We have no current agreements or commitments for acquisitions of complementary
businesses or technologies. Pending these uses, we will invest the net proceeds
of this offering in short-term, investment grade and interest-bearing
securities.

Dividend policy

We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends. Any payment of
dividends will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.

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

                                                                              21
<PAGE>


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

Capitalization

The following table sets forth our capitalization as of March 31, 2000:

 .On an actual basis without any adjustments to reflect subsequent or
 anticipated events; and

 .On a pro forma basis to give effect to:

 .the issuance of 269,598.27 shares of our common stock in connection with the
  acquisitions of ThermoGen and Emerald BioStructures.

 .On a pro forma as adjusted basis to give further effect to:

 .the automatic conversion of all outstanding shares of our Class A preferred
  stock into:

  .340,441 shares of our common stock;

  .1,000 shares of our Class B redeemable preferred stock and simultaneous
   automatic redemption of 1,000 shares of our Class B redeemable preferred
   stock for $7.5 million out of the net proceeds from this offering;

 .the automatic conversion of all outstanding shares of our Class C preferred
  stock into        shares of our Class A common stock upon the closing of
  this offering and the simultaneous automatic redemption of such shares of
  our Class A common stock for $4.0 million out of the net proceeds from this
  offering;

 .the conversion of all outstanding shares of our Class D preferred stock into
           shares of our common stock;

 .our receipt of the estimated net proceeds from our sale of          shares
  of our common stock in this offering at an assumed initial offering price of
  $     and, after deducting the underwriting discounts and commissions and
  estimated offering expenses, and the application of $7.0 million of the net
  proceeds of this offering to repay certain outstanding indebtedness and
  redemption of the redeemable warrant;

 .the     for one split of our common stock to be effected prior to the
  closing of this offering; and

 .our reincorporation in Delaware and the effectiveness of our new equity
  capitalization.

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

22
<PAGE>

Capitalization

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                             As of
                                                    March 31, 2000
                                                         Pro Forma    Pro Forma
                                            Actual  (in thousands)  As Adjusted
-------------------------------------------------------------------------------
<S>                                       <C>       <C>             <C>
Debt, including current maturities......  $  7,373         $ 7,460
Redeemable stock warrant................     2,400           2,400
Redeemable preferred stock:
 Class A convertible preferred stock,
    par value $0.01
  Authorized shares--340,441 actual and
     pro forma and none pro forma as
     adjusted
  Issued and outstanding shares--340,441
     actual and pro forma and none pro
     forma as adjusted
  Redemption value--$22,499,458 actual
     and pro forma and none pro forma as
     adjusted...........................    13,553          13,553
 Class B 5% redeemable preferred stock,
    par value $0.01
  Authorized shares--1,000 actual and
     pro forma and none pro forma as
     adjusted
  Issued and outstanding shares--none
     actual and pro forma and none pro
     forma as adjusted..................        --              --
 Class C preferred stock, par value $0.01
  Authorized shares--440,000 actual and
     pro forma and none pro forma as
     adjusted
  Issued and outstanding shares--400,000
     actual and pro forma and none pro
     forma adjusted.....................         4               4
Stockholder's equity (deficit):
 Class D preferred stock, par value
    $0.01
  Authorized shares--440,000 actual and
     pro forma and none pro forma as adjusted
  Issued and outstanding shares--400,000
     actual and pro forma and none pro
     forma as adjusted..................         4               4
 Class A common stock, par value $0.01
  Authorized shares--1,000,000 actual
     and pro forma and none pro forma as
     adjusted
  Issued and outstanding shares--400,000
     actual, 669,598 pro forma and none
     pro forma as adjusted..............         4               7
 Class B common stock, par value $0.01
  Authorized shares--88,458 actual and
     pro forma and none pro forma as
     adjusted
  Issued and outstanding--none actual,
     none pro forma and none pro forma
     as adjusted........................        --              --
 Class C common stock, par value $0.01;
  Authorized shares--16,916 actual and
     pro forma and none pro forma as
     adjusted
  Issued and outstanding shares--none
     actual, none pro forma and none pro
     forma as adjusted..................        --              --
 Common stock, par value $0.01;
  Authorized shares--none actual, none
     pro forma and 100,000,000 pro forma
     as adjusted
  Issued and outstanding--none actual,
     none pro forma and         pro
     forma as adjusted..................
 Preferred stock, par value $0.01;
  Authorized shares--none actual, none
     pro forma and 10,000,000 pro forma
     as adjusted
  Issued and outstanding shares--none
     actual, pro forma and none pro
     forma as adjusted..................
 Additional paid-in capital.............        22          41,418
                                          --------         -------
 Accumulated deficit....................   (10,760)        (10,760)
                                          --------         -------
  Total stockholders' equity (deficit)..   (10,730)         30,669
                                          --------         -------
  Total capitalization..................  $ 12,600         $54,086
                                          ========         =======
</TABLE>
--------------------------------------------------------------------------------

                                                                              23
<PAGE>

Capitalization

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


The table above does not include:

 .88,061 shares of our common stock issuable upon exercise of stock options
 outstanding as of May 31, 2000 at a weighted average exercise price of $
 per share;

 .          shares of common stock available for issuance under our 2000
 Incentive Compensation Plan; and

 .net exercise of outstanding warrants to purchase 8,458 shares of our common
 stock at an exercise price of $      per share.

To the extent that these options and warrants are exercised, there will be
further dilution to new investors. Please see "Management-Employee Benefit
Plans," and Notes 10 and 13 of "Notes to Consolidated Financial Statements" for
further information regarding our stock option plans and outstanding warrants.

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

24
<PAGE>


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

Dilution

Our historical net tangible book value as of March 31, 2000 was approximately
$(10.7) million, or $(26.83) per share of our Class A common stock, based on
the number of common shares outstanding as of March 31, 2000. Historical net
tangible book value per share is equal to the amount of our total tangible
assets less total liabilities and redeemable preferred stock, divided by the
number of shares of common stock outstanding as of March 31, 2000.

Our pro forma net tangible book value, as of March 31, 2000, was $     million,
or $      per share based on the pro forma number of shares outstanding as of
March 31, 2000 of         , calculated after giving affect to:

 .the automatic conversion of all shares of our Class A preferred stock into
 shares of our common stock on a one-for-one basis;

 .the conversion of all outstanding shares of our Class D preferred stock into
          shares of our common stock; and

 .the issuance of 269,598.27 shares of our common stock in connection with the
 acquisitions of ThermoGen and Emerald BioStructures.

Pro forma net tangible book value represents the amount of total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding after considering the conversion of all outstanding preferred stock
into common stock. After giving effect to our sale of common stock offered
hereby at an initial public offering price of $      per share, and our receipt
of the estimated net proceeds form the offering, our pro forma net tangible
book value as of           would have been approximately $      million, or
$     per share. This represents an immediate increase in net tangible book
value of $     per share to existing stockholders and an immediate dilution of
$      per share to new investors. The following table illustrates this per
share dilution:

<TABLE>
<S>                                                            <C>        <C>
Initial public offering price per share.......................            $
 Historical net tangible book value per share as of March 31,
    2000...................................................... $
 Decrease per share attributed to the conversion of Class A
    preferred stock to common stock, the conversion of Class D
    preferred stock to common stock and the acquisitions of
    ThermoGen and Emerald BioStructures as of March 31, 2000..
                                                               ----------
 Pro forma net tangible book value per share as of March 31,
    2000......................................................
                                                               ----------
 Increase per share attributable to this offering.............
                                                               ----------
 Pro forma net tangible book value per share after this
    offering..................................................
                                                                          ------
Dilution per share to new investors...........................            $
                                                                          ======
</TABLE>

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

                                                                              25
<PAGE>

Dilution

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


The following table summarizes, on a pro forma basis as of March 31, 2000, the
differences between existing stockholders and the new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid before deducting the underwriting
discounts and commissions and our estimated offering expenses.

<TABLE>
<CAPTION>
                             Shares purchased  Total consideration Average price
                                Number Percent      Amount Percent     per share
                             --------- ------- ----------- ------- -------------
<S>                          <C>       <C>     <C>         <C>     <C>
Existing stockholders.......                 % $                 %        $
New public investors........                 %                   %        $
                             ---------   ----- -----------  ------        ------
Total.......................                 % $                 %
                             =========   ===== ===========  ======        ======
</TABLE>

The tables and calculations above assume no exercise of outstanding options or
warrants. At May  31, 2000, there were:

 .88,061 shares of our common stock issuable upon the exercise of options
 outstanding at a weighted average exercise price of $         per share;

 .8,458 shares of our common stock issuable upon the exercise of an outstanding
 warrant at an exercise price of $         per share; and

 .         additional shares of our common stock available for future grants
 under our 2000 incentive compensation plan to be adopted at the close of this
 offering. For a description of our stock option and stock purchase plans,
 please see "Management-Employee benefit plans."

To the extent that these options or warrants are exercised, there will be
further dilution to new investors. Please see "Management-Employee benefit
plans" for further information regarding our stock option plan and stock
purchase plan.

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

 .the number of shares of our common stock held by existing stockholders will
 decrease to approximately      % of the total number of shares of our common
 stock outstanding after this offering;

 .the number of shares of our common stock held by new public investors will
 increase to         , or approximately      % of the total number of shares of
 our common stock outstanding after this offering; and

 .an increase in pro forma net tangible book value to $      per share to
 existing stockholders and an immediate dilution in pro forma net tangible book
 value of $      per share to new investors.

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

26
<PAGE>


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

Selected financial data

The following selected financial data should be read in conjunction with the
consolidated financial statements and the notes to such statements and
"Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus. The statement of operations
data for the year ended December 31, 1995, 1996, 1997, 1998 and 1999 and the
three months ended March 31, 1999 and 2000, the balance sheet data as of
December 31, 1995, 1996, 1997, 1998 and 1999 and the three months ended March
31, 1999 and 2000 are derived from our financial statements. Consolidated
financial statements as of December 31, 1998 and 1999 and for the years ended
December 31, 1997, 1998 and 1999, which have been audited by KPMG LLP,
independent certified public accountants, are included elsewhere in this
prospectus. Unaudited financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 are also included elsewhere in this
prospectus. Historical results are not necessarily indicative of the results to
be expected in the future.

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                        March 31,
                                          Year Ended December 31,                      (unaudited)
Statement of operations
data                         1995       1996       1997       1998       1999        1999       2000
-------------------------------------------------------------------------------------------------------
<S>                       <C>        <C>        <C>        <C>        <C>         <C>        <C>
Contract revenues:
 Contract revenue.......  $2,717,484 $3,614,696 $4,339,991 $7,122,461 $11,255,534 $2,105,754 $3,434,073
 Contract revenue--
   related party........          --    380,000  1,205,948  1,497,055   2,302,801    462,160    707,709
                          ---------- ---------- ---------- ---------- ----------- ---------- ----------
  Total contract
    revenues............   2,717,484  3,994,696  5,545,939  8,619,516  13,558,335  2,567,914  4,141,782
Contract service costs:
 Contract service
   costs................     785,000  1,370,886  1,869,760  3,414,818   5,263,963  1,084,943  1,788,834
 Contract service
   costs--related
   party................          --    380,776    449,552    466,893     778,432    123,759    303,800
                          ---------- ---------- ---------- ---------- ----------- ---------- ----------
  Total contract service
    costs...............     785,000  1,751,662  2,319,312  3,881,711   6,042,395  1,208,702  2,092,634
                          ---------- ---------- ---------- ---------- ----------- ---------- ----------
Gross profit............   1,932,484  2,243,034  3,226,627  4,737,805   7,515,940  1,359,212  2,049,148
 Milestones and
   intellectual property
   revenue--related
   party................          --         --         --         --   1,787,612         --    350,000
Operating expenses:
 Selling, general and
   administrative.......   1,405,053  1,188,804  2,417,752  3,400,599   6,005,993  1,317,513  1,901,375
 Depreciation and
   amortization.........     144,052    291,000    317,913    458,722     787,810    137,483    260,228
                          ---------- ---------- ---------- ---------- ----------- ---------- ----------
  Total operating
    expenses............   1,549,105  1,479,804  2,735,665  3,859,321   6,793,803  1,454,996  2,161,603
                          ---------- ---------- ---------- ---------- ----------- ---------- ----------
</TABLE>

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

                                                                              27
<PAGE>

Selected financial data

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

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                        March 31,
                                         Year Ended December 31,                       (unaudited)
Statement of operations data    1995       1996      1997      1998      1999       1999        2000
---------------------------------------------------------------------------------------------------------
<S>                           <C>        <C>       <C>       <C>       <C>        <C>        <C>
Income (loss) from
  operations.............       383,379   763,230   490,962   878,484  2,509,749    (95,784)     237,545
                              ---------  --------  --------  --------  ---------  ---------  -----------
Other expense, net:
 Interest expense........        33,931    66,666   101,561   124,818    587,672     34,347      180,409
 Interest income.........       (15,105)      112        --    (1,350)  (175,209)      (377)     (39,324)
 Other...................            --        --   (98,539)  (48,068)        --         --           --
 Increase in value of
   redeemable warrant....            --        --        --        --         --         --    1,905,487
                              ---------  --------  --------  --------  ---------  ---------  -----------
Total other expense,
  net....................        18,826    66,778     3,022    75,400    412,463     33,970    2,046,572
                              ---------  --------  --------  --------  ---------  ---------  -----------
Income (loss) from
  continuing operations
  before income taxes....       364,553   696,452   487,940   803,084  2,097,286   (129,754)  (1,809,027)
 Income taxes............       180,098   330,318   166,772   310,012    931,817    (57,617)      38,102
                              ---------  --------  --------  --------  ---------  ---------  -----------
 Income (loss) from
   continuing
   operations............       184,455   366,134   321,168   493,072  1,165,469    (72,137)  (1,847,129)
Discontinued operations--
  loss from operations of
  ALS, net of tax........      (158,176) (210,602)  (54,203) (173,423)   (95,109)       (13)          --
                              ---------  --------  --------  --------  ---------  ---------  -----------
 Net income (loss).......        26,279   155,532   266,965   319,649  1,070,360    (72,150)  (1,847,129)
 Less:
  Allocation of income to
    participating
    securities...........       (10,236)  (60,580) (103,983) (124,503)  (282,512)        --           --
  Accretion to redemption
    value of preferred
    stock................            --        --        --        --   (623,498)        --     (323,220)
                              ---------  --------  --------  --------  ---------  ---------  -----------
 Net income (loss)
   available to common
   stockholders..........     $  16,043  $ 94,952  $162,982  $195,146  $ 164,350  $ (72,150) $(2,170,349)
                              ---------  --------  --------  --------  ---------  ---------  -----------
Per share data:
Basic earnings (loss) per
  common share:
 Income (loss) from
   continuing
   operations............     $    0.28  $   0.49  $   0.35  $   0.59  $    0.65  $   (0.18) $     (5.43)
 Loss from discontinued
   operations, net of
   tax...................         (0.25)    (0.34)    (0.09)    (0.28)     (0.24)        --           --
 Net income (loss)
   available to common
   stockholders..........     $    0.03  $   0.15  $   0.26  $   0.31  $    0.41  $   (0.18) $     (5.43)
                              =========  ========  ========  ========  =========  =========  ===========
Diluted earnings (loss)
  per common share:
 Income (loss) from
   continuing
   operations............     $    0.28  $   0.49  $   0.34  $   0.57  $    0.62  $   (0.18) $     (5.43)
 Loss from discontinued
   operations, net of
   tax...................         (0.25)    (0.34)    (0.09)    (0.27)     (0.23)       --           --
 Net income (loss)
   available to common
   stockholders..........     $    0.03  $   0.15  $   0.25  $   0.30  $    0.39  $   (0.18) $     (5.43)
                              =========  ========  ========  ========  =========  =========  ===========
Weighted average number
  of common shares
  outstanding--basic.....       626,960   626,960   626,960   626,960    400,000    400,000      400,000
Weighted average number
  of common shares
  outstanding--diluted...       626,960   626,960   626,960   636,795    421,376    400,000      400,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                              As of
                                           As of December 31,                        March 31, 2000
Balance sheet data         1995        1996        1997        1998        1999         (unaudited)
----------------------------------------------------------------------------------------------------
<S>                      <C>        <C>         <C>         <C>         <C>          <C>
Cash and cash
  equivalents........... $  16,429  $   36,961  $  237,981  $  171,462  $ 8,164,730    $  2,663,407
Working capital.........  (292,689)   (309,967)   (208,900)   (373,289)   3,392,080       2,599,791
Total assets............   989,222   2,165,396   2,355,861   3,959,662   17,939,980      14,780,440
Long-term obligations,
  less current
  maturities, and
  redeemable preferred
  stock.................   179,963     466,499     592,458     555,669   18,642,910      21,829,887
Total stockholders'
  equity (deficit)......   212,367     367,899     634,864     957,678   (8,559,777)    (10,730,126)
</TABLE>

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

28
<PAGE>


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

Unaudited pro forma condensed combined financial information


On May 31, 2000 the Company acquired all of the outstanding common stock of
ThermoGen, Inc. and Emerald BioStructures, Inc. The unaudited pro forma
condensed combined balance sheet as of March 31, 2000 reflects these
acquisitions as if they occurred on that date.

The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1999 and the three-month period ended March 31, 2000
reflects these acquisitions as if they occurred on January 1, 1999.

Since the pro forma financial information is based upon the financial condition
and operating results of the acquired entities during periods when they were
not under the control, influence or management of the Company, the information
presented may not be indicative of the results which would have actually been
obtained had the acquisitions been completed as of the respective periods
presented, nor are they indicative of future financial or operating results.
The unaudited pro forma condensed combined statement of operations does not
give effect to any synergies that may occur due to the integration of the
Company with its acquired entities nor does it give effect to any incremental
costs which may be incurred to achieve such integration. The unaudited pro
forma condensed combined financial statements should be read in conjunction
with the historical audited financial statements of the Company and notes
thereto as well as the audited historical financial statements of ThermoGen and
Emerald BioStructures and notes thereto included elsewhere in this prospectus.

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

                                                                              29
<PAGE>

Unaudited pro forma condensed combined financial information

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


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 31, 2000

<TABLE>
<CAPTION>
                                  MCR
                            Holdings,                             Emerald   Pro Forma         Pro Forma
                                 Inc. ThermoGen, Inc. BioStructures, Inc. adjustments          combined
-------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>             <C>                 <C>               <C>
Assets:
Current assets:
 Cash...................  $ 2,663,407      $       --            $ 28,389 $  (450,577)(d,e) $ 2,241,219
 Accounts receivable,
    net of allowance....    2,787,620          84,212              97,432                     2,969,264
 Accounts receivable--
    related party.......      562,042              --               8,820                       570,862
 Grants receivable......           --          21,519                  --                        21,519
 Inventories............           --              --              13,043                        13,043
 Prepaid assets.........      116,834              --                  --                       116,834
 Other current assets...       78,334              --                  --                        78,334
                          -----------      ----------            -------- -----------       -----------
  Total current assets..    6,208,237         105,731             147,684    (450,577)        6,011,075
Property and equipment,
   net..................    8,100,038          49,310             158,263                     8,307,611
Goodwill and other
   intangible assets,
   net..................           --              --              37,277  40,449,493 (a,c)  56,744,365
                                                                           16,257,595 (b,c)
Other assets............      472,165          10,899              71,991                       555,055
                          -----------      ----------            -------- -----------       -----------
  Total assets..........  $14,780,440      $  165,940            $415,215 $56,256,511       $71,618,106
                          ===========      ==========            ======== ===========       ===========
Liabilities and
   stockholders' equity:
Current liabilities:
 Note payable to
    shareholder.........  $        --      $  351,155            $ 17,095 $  (350,577)(d)   $    17,673
 Current portion of debt
    and capital lease
    obligations.........    1,954,305         150,442              25,594     (75,000)(a)     2,055,341
 Bank overdraft.........           --          10,409                  --                        10,409
 Accounts payable.......      501,714         486,843              35,198                     1,023,755
 Accrued expenses.......      538,467         299,058             115,553     (57,904)(a)       895,174
 Taxes payable..........      165,460              --                  --                       165,460
 Unearned revenue.......      448,500          40,000              87,742                       576,242
                          -----------      ----------            -------- -----------       -----------
  Total current
     liabilities            3,608,446       1,337,907             281,182    (483,481)        4,744,054
Debt....................    4,615,492              --               7,681                     4,623,173
Revolving line of
   credit...............    1,000,000              --                  --                     1,000,000
Capital lease
   obligations..........      257,393              --              36,068                       293,461
Redeemable stock
   warrant..............    2,399,782              --                  --                     2,399,782
Other...................       72,233              --                  --  14,258,959 (c)    14,331,192
                          -----------      ----------            -------- -----------       -----------
  Total liabilities.....  $11,953,346      $1,337,907            $324,931 $13,775,478       $27,391,662
</TABLE>


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

30
<PAGE>

Unaudited pro forma condensed combined financial information

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

<TABLE>
<CAPTION>
                                   MCR
                             Holdings,                               Emerald    Pro Forma         Pro Forma
                                  Inc.  ThermoGen, Inc.  BioStructures, Inc.  adjustments          combined
------------------------------------------------------------------------------------------------------------
<S>                       <C>           <C>              <C>                  <C>               <C>
Redeemable preferred
   stock:
 Class A convertible
    preferred stock.....    13,553,220               --                   --                     13,553,220
 Class B 5% redeemable
    preferred stock.....            --               --                   --                             --
 Class C preferred
    stock...............         4,000               --                   --                          4,000
                          ------------       ----------             --------                    -----------
  Total redeemable
     preferred stock....    13,557,220               --                   --                     13,557,220
Stockholders equity:
 Class D preferred
    stock...............         4,000               --                   --                          4,000
 Common stock, no par
    value...............            --            4,000              110,500       (4,000)(e)            --
                                                                                 (110,500)(f)
 Class A common stock...         4,000               --                   --        1,850 (e)         6,696
                                                                                      846 (f)
 Class B common stock...            --               --                   --
 Class C common stock...            --               --                   --                             --
 Additional paid-in
    capital.............        21,542            3,850                4,551   29,203,790 (e)    41,418,196
                                                                               12,184,463 (f)
 Accumulated deficit....   (10,759,668)      (1,179,817)             (24,767)   1,204,584 (e,f) (10,759,668)
                          ------------       ----------             --------  -----------       -----------
Total stockholders'
   equity (deficit).....   (10,730,126)      (1,171,967)              90,284   42,481,033        30,669,224
                          ------------       ----------             --------  -----------       -----------
Total liabilities and
   stockholders' equity
   (deficit)............  $ 14,780,440       $  165,940             $415,215  $56,256,511       $71,618,106
                          ============       ==========             ========  ===========       ===========
</TABLE>





See accompanying notes to unaudited pro forma condensed combined financial
statements.

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

                                                                              31
<PAGE>

Unaudited pro forma condensed combined financial information

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

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
                                  MCR                     Emerald
                            Holdings,  ThermoGen,  BioStructures,   Pro Forma       Pro Forma
                                 Inc.        Inc.            Inc. adjustments        combined
----------------------------------------------------------------------------------------------
<S>                       <C>          <C>         <C>            <C>             <C>
Contract revenues:
 Contract revenue.......  $11,255,534  $2,067,332        $545,647                 $13,868,513
 Contract revenue--
    related party.......    2,302,801          --              --                   2,302,801
                          -----------  ----------        -------- -----------     -----------
  Total contract
     revenues...........   13,558,335   2,067,332         545,647                  16,171,314
Contract service costs:
 Contract service
    costs...............    5,263,963   1,195,941         339,224                   6,799,128
 Contract service
    costs--related
    party...............      778,432          --              --                     778,432
                          -----------  ----------        -------- -----------     -----------
  Total contract service
     costs..............    6,042,395   1,195,941         339,224                   7,577,560
                          -----------  ----------        -------- -----------     -----------
Gross profit............    7,515,940     871,391         206,423                   8,593,754
Milestones and
   intellectual property
   revenues--related
   party................    1,787,612          --              --                   1,787,612
Operating expenses:
 Selling, general and
    administrative......    6,005,993     916,189         107,539                   7,029,721
 Depreciation and
    amortization........      787,810      17,760          47,554 $ 3,281,425(g)    5,122,873
                                                                      988,324(h)
                          -----------  ----------        -------- -----------     -----------
  Total operating
     expenses...........    6,793,803     933,949         155,093   4,269,749      12,152,594
                          -----------  ----------        -------- -----------     -----------
Income (loss) from
   operations...........    2,509,749     (62,558)         51,330  (4,269,749)     (1,771,228)
                          -----------  ----------        -------- -----------     -----------
Other expense, net:
 Interest expense.......      587,672      57,524          18,914     (15,348)(i)     608,402
                                                                      (40,360)(j)
 Interest income........     (175,209)         --              --                    (175,209)
                          -----------  ----------        -------- -----------     -----------
  Total other expense,
     net................      412,463      57,524          18,914     (55,708)        433,193
                          -----------  ----------        -------- -----------     -----------
Income (loss) from
   continuing operations
   before income taxes..    2,097,286    (120,082)         32,416  (4,214,041)     (2,204,421)
Income taxes............      931,817          --              --    (116,013)(k)     815,804
                          -----------  ----------        -------- -----------     -----------
Income (loss) from
   continuing
   operations...........    1,165,469    (120,082)         32,416  (4,098,028)     (3,020,225)
Allocation of income to
   participating
   securities...........     (282,512)         --              --     282,512              --
Accretion to redemption
   value of preferred
   stock................     (623,498)         --              --                    (623,498)
                          -----------  ----------        -------- -----------     -----------
Income (loss) from
   continuing operations
   available to common
   stockholders.........  $   259,459  $ (120,082)       $ 32,416 $(3,815,516)    $(3,643,723)
                          ===========  ==========        ======== ===========     ===========
Per share data:
 Income (loss) from
    continuing
    operations available
    to common
    stockholders........                                                          $     (5.44)
                                                                                  ===========
 Weighted average number
    of shares
    outstanding--basic..                                                              669,598
                                                                                  ===========
</TABLE>

See accompanying notes to unaudited pro forma condensed combined financial
statements.

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

32
<PAGE>

Unaudited pro forma condensed combined financial information

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

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE-
MONTH PERIOD ENDED MARCH 31, 2000

<TABLE>
<CAPTION>
                                  MCR                     Emerald
                            Holdings,  ThermoGen,  BioStructures,   Pro Forma       Pro Forma
                                 Inc.        Inc.            Inc. adjustments        combined
----------------------------------------------------------------------------------------------
<S>                       <C>          <C>         <C>            <C>             <C>
Contract revenues:
 Contract revenue.......  $ 3,434,073    $438,183        $266,950                  $4,139,206
 Contract revenue--
    related party.......      707,709                                                 707,709
                          -----------   ---------        --------  ----------     -----------
  Total contract
     revenues...........    4,141,782     438,183         266,950                   4,846,915
Contract service costs:
 Contract service
    costs...............    1,788,834     393,010         170,619                   2,352,463
 Contract service
    costs--related
    party...............      303,800                                                 303,800
                          -----------   ---------        --------  ----------     -----------
  Total contract service
     costs..............    2,092,634     393,010         170,619                   2,656,263
                          -----------   ---------        --------  ----------     -----------
Gross profit............    2,049,148      45,173          96,331                   2,190,652
Milestones and
   intellectual property
   revenues--related
   party................      350,000                                                 350,000
Operating expenses:
 Selling, general and
    administrative......    1,901,375     510,918          60,713                   2,473,006
 Depreciation and
    amortization........      260,228       4,411          18,401  $  820,354 (l)   1,350,475
                                                                      247,081 (m)
                          -----------   ---------        --------  ----------     -----------
  Total operating
     expenses...........    2,161,603     515,329          79,114   1,067,435       3,823,481
                          -----------   ---------        --------  ----------     -----------
Income (loss) from
   operations...........      237,545    (470,156)         17,217  (1,067,435)     (1,282,829)
                          -----------   ---------        --------  ----------     -----------
Other expense, net:
 Interest expense.......      180,409      13,928           4,638      (3,837)(n)     185,048
                                                                      (10,090)(o)
 Interest income........      (39,324)         --              --                     (39,324)
 Increase in value of
    redeemable warrant..    1,905,487          --              --                   1,905,487
                          -----------   ---------        --------  ----------     -----------
  Total other expense,
     net................    2,046,572      13,928           4,638     (13,927)      2,051,211
                          -----------   ---------        --------  ----------     -----------
Income (loss) from
   continuing operations
   before income taxes..   (1,809,027)   (484,084)         12,579  (1,053,508)     (3,334,040)
Income taxes............       38,102          --              --    (180,744)(p)    (142,642)
                          -----------   ---------        --------  ----------     -----------
Income (loss) from
   continuing
   operations...........   (1,847,129)   (484,084)         12,579    (872,764)     (3,199,398)
Accretion to redemption
   value of preferred
   stock................     (323,220)         --              --                    (323,220)
                          -----------   ---------        --------  ----------     -----------
Income (loss) from
   continuing operations
   available to common
   stockholders.........  $(2,170,349)  $(484,084)       $ 12,579  $ (872,764)    $(3,514,618)
                          ===========   =========        ========  ==========     ===========
Per share data:
 Income (loss) from
    continuing
    operations available
    to common
    stockholders........                                                          $     (5.25)
                                                                                  ===========
 Weighted average number
    of shares
    outstanding--basic..                                                              669,598
                                                                                  ===========
</TABLE>

See accompanying notes to unaudited pro forma condensed combined financial
statements.

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

                                                                              33
<PAGE>

Unaudited pro forma condensed combined financial information

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

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Pro Forma Balance Sheet Adjustments

The pro forma balance sheet adjustments as of March 31, 2000 consist of:

  (a) To reflect the excess of purchase price over the fair value of the
      acquired net liabilities related to the acquisition of ThermoGen as
      follows:

<TABLE>
      <S>                                                           <C>
      Purchase price paid as:
       Issuance of 185,087.27 shares of Class A common stock......  $26,258,000
       Conversion of ThermoGen options into options to purchase
          25,486 shares of MCR Holdings Class B common stock......    3,107,000
       Cash.......................................................      100,000
       Estimated transaction costs................................      200,000
                                                                    -----------
        Total purchase price......................................  $29,665,000
      Allocation of purchase price paid:
       Fair value of tangible net liabilities.....................     (683,553)
                                                                    -----------
      Excess of purchase price paid over recorded values of net
         liabilities..............................................  $30,348,553
                                                                    ===========
      Allocation of purchase price paid over recorded values :
       Intangible assets..........................................  $25,572,000
       Goodwill...................................................    4,776,553
                                                                    -----------
        Total.....................................................  $30,348,553
                                                                    ===========
</TABLE>

  Additional information about the purchase price and its allocation:

  .Shares to be issued by MCR Holdings were valued at $141.87 per share,
   based on an assessment of fair value negotiated between MCR Holdings and
   ThermoGen.

  .The accrual of estimated transaction costs is primarily attributable to
   costs associated with legal, accounting and other advisory fees and
   expenses directly associated with the transaction.

  .As stipulated in the purchase agreement, $132,904 in notes payable and
   accrued interest were converted to 17,900 shares of ThermoGen common stock
   prior to the acquisition.

  The effect of the acquisition has been presented using the purchase method
  of accounting and, accordingly, the purchase price has been allocated to
  the assets acquired, liabilities assumed and certain indentifiable
  intangible assets based upon management's best preliminary estimate of fair
  value with any excess purchase price being allocated to goodwill. The pro
  forma adjustments related to the purchase price allocation of the
  acquisition represent management's best estimate of the effects of the
  acquisition.

  (b) To reflect the excess of purchase price over the fair value of the
      acquired net assets related to the acquisition of Emerald BioStructures
      as follows:

<TABLE>
      <S>                                                            <C>
      Purchase price paid as:
       Issuance of 84,511 shares of Class A common stock...........  $11,989,576
       Estimated transaction costs.................................      200,000
                                                                     -----------
        Total purchase price.......................................  $12,189,576
      Allocation of purchase price paid:
       Fair value of tangible net assets...........................       90,000
                                                                     -----------
      Excess of purchase price paid over recorded values of net
         assets....................................................  $12,099,576
                                                                     ===========
      Allocation of purchase price paid over recorded values--
         Intangible assets and goodwill............................  $12,099,576
                                                                     ===========
</TABLE>

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

34
<PAGE>

Unaudited pro forma condensed combined financial information

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

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)

  Additional information about the acquisition costs:

  .Shares to be issued by MCR Holdings were valued at $141.87 per share,
   based on an assessment of fair value negotiated between MCR Holdings and
   Emerald BioStructures.

  .The accrual of estimated transaction costs is primarily attributable costs
   associated with legal, accounting and other advisory fees and expenses
   directly associated with the transaction.

  The effect of the acquisition has been presented using the purchase method
  of accounting and, accordingly, the purchase price has been allocated to
  the assets acquired, liabilities assumed and certain indentifiable
  intangible assets based upon management's best preliminary estimate of fair
  value with any excess purchase price being allocated to goodwill. The pro
  forma adjustments related to the purchase price allocation of the
  acquisition represent management's best estimate of the effects of the
  acquisition.

  (c) To reflect estimated net deferred tax liabilities of $14,258,959
      arising from the acquisitions.

  (d) To record payment of notes payable to shareholders in the amount of
      $350,577 including accrued interest, as provided in the purchase
      agreement.

  (e) To reflect the elimination of the stockholders' equity accounts of
      ThermoGen and issuance of MCR Holdings' Class A common stock, $100,000
      cash and conversion of outstanding stock options as consideration for
      the acquisition.

  (f) To reflect the elimination of the stockholders' equity accounts of
      Emerald BioStructures and issuance of MCR Holding Class A common stock
      as consideration for the acquisition.

2. Pro Forma Statement of Operations Adjustments

The pro forma statement of operations adjustments for the year ended December
31, 1999 consist of:

  (g) To reflect the increase in depreciation and amortization expense due to
      the amortization of goodwill and other intangible assets from the
      acquistion of ThermoGen over estimated useful lives of 8-20 years.

  (h) To reflect the increase in depreciation and amortization expense due to
      the amortization of goodwill and other intangible assets from the
      acquisition of Emerald BioStructures over estimated useful lives of 8-
      20 years.

  (i) To reflect a reduction in interest expense as a result of the $132,904
      note payable conversion to common stock.

  (j) To reflect the reduction in interest expense on the notes payable to
      shareholders of $350,577 for ThermoGen as a result of their repayment.

  (k) To reflect the income tax effect of considering ThermoGen and Emerald
      BioStructures as taxable C-corporations, the increase in nondeductible
      amortization expense and decrease in interest expense at an estimated
      statutory tax rate of 39.5%. MCR Holdings expects its effective tax
      rate to be higher in the future because a significant portion of the
      purchase price will be non-deductible for tax purposes.

The pro forma statement of operations adjustments for the three-month period
ended March 31, 2000 consist of:

  (l) To reflect the increase in depreciation and amortization expense due to
      the amortization of goodwill and other intangible assets from the
      acquistion of ThermoGen over estimated useful lives of 8-20 years.


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

                                                                              35
<PAGE>

Unaudited pro forma condensed combined financial information

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

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Continued)

  (m) To reflect the increase in depreciation and amortization expense due to
      the amortization of goodwill and other intangible assets from the
      acquisition of Emerald BioStructures over estimated useful lives of 8-
      20 years.

  (n) To reflect a reduction in interest expense as a result of the $132,904
      note payable conversion to common stock.

  (o) To reflect the reduction in interest expense on the notes payable to
      shareholders of $350,577 for ThermoGen as a result of their repayment.

  (p) To reflect the income tax effect of considering ThermoGen and Emerald
      BioStructures as taxable C-corporations, the increase in nondeductible
      amortization expense and decrease in interest expense at an estimated
      statutory tax rate of 39.5%. MCR Holdings expects its effective tax
      rate to be higher in the future because a significant portion of the
      purchase price will be non-deductible for tax purposes.

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

36
<PAGE>


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

Management's discussion and analysis of financial condition and results of
operations

The following discussion and analysis should be read with "Selected financial
and operating data" and our financial statements and notes included elsewhere
in this prospectus. The discussion in this prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this prospectus should be read as applying to all related forward-looking
statements wherever they appear in this prospectus. Our actual results could
differ materially from those discussed here. Factors that could cause or
contribute to these differences include those discussed in "Risk Factors," as
well as those discussed elsewhere in this prospectus.

OVERVIEW

Founded in 1987, we believe we were the first independent chemistry company to
offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. From a company focused exclusively
on medicinal chemistry services, we have evolved into a full-service drug
discovery technology and services company. Our development of strong
relationships with pharmaceutical companies by initially providing basic
medicinal chemistry services helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include process development, analytical and separations
chemistry and chemical synthesis and scale up. To capitalize on recent advances
in genomics, we have developed technology and services in early-stage
proteomics, combinatorial chemistry and biocatalysis.

Recent acquisitions
ThermoGen. On May 31, 2000, we acquired ThermoGen, in exchange for 185,087.27
shares of our common stock and the assumption of options to purchase 25,486
shares of our common stock. ThermoGen, based in Chicago, Illinois, is a leading
provider of biocatalysis services and products through the use of proprietary
technologies that expand our technology and chemistry service offerings.
ThermoGen's proprietary technologies permit our customers to perform difficult
chemical reactions with stable, easy-to-use biocatalysts that are
environmentally friendly and cost effective. ThermoGen develops and sells
proprietary biocatalysis products and process research services to the
pharmaceutical, agricultural chemical and food industries. We believe that by
integrating ThermoGen's biocatalysis technology, we provide our clients with
chemical processes that are more efficient and shorten the chemical process
development timeframe. Our acquisition of ThermoGen allows us to provide
biocatalysis services and products to our existing customers and provides
opportunities to market our broad range of chemistry services to new clients.
We also believe that ThermoGen's technology and intellectual property will
enhance our current service and product offerings, thereby improving our
efficiency.

ThermoGen was founded in 1988 and had revenues of $2.1 million for the year
ended December 31, 1999 and a staff of over 20 professionals. ThermoGen has
been recognized for its leading biocatalysis technology, having been awarded
more than a dozen Small Business Innovation Research, SBIR, grants from the
National Institutes of Health, NIH, totaling over $4.0 million for technology
development. ThermoGen was also awarded the 1999 Tibbets Award from the U.S.
Small Business Administration for its excellence in developing and
commercializing its proprietary biocatalysis platform technologies.

Emerald BioStructures. On May 31, 2000, we acquired Emerald BioStructures,
Inc., in exchange for 84,511 shares of our common stock. Emerald BioStructures,
based near Seattle, Washington, is a

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

                                                                              37
<PAGE>

Management's discussion and analysis of financial condition and results of
operations

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

leading provider of research products and services in protein structure
determination to the pharmaceutical and biotechnology industries. We believe
Emerald BioStructures is well positioned to benefit from the bottleneck
resulting from the explosion in genomic information. Emerald BioStructures'
proteomics services help bridge the gap between the genomic information and the
chemistry services necessary to identify new lead compounds. Emerald
BioStructures offers an integrated platform of technologies in proteomics that
enables more efficient determination of protein structure and function. Our
acquisition of Emerald BioStructures allows us to provide proteomics services
to our existing customers and provides opportunities to market our broad range
of chemistry services to new clients. We believe Emerald BioStructures'
proteomics platform technologies improve the efficiency of our current service
and product offerings.

Emerald BioStructures was founded in 1997 and had revenues of $546,000 for the
year ended December 31, 1999 and a staff of 5 professionals. Emerald
BioStructures has been recognized for its leading proteomics technologies,
having been awarded five SBIR grants from the NIH totaling over $850,000 for
technology development.

Contract revenue
Our contract revenue consists primarily of fees earned under contracts with
third-party customers. In general, we provide services to our customers on the
following bases:

 .a full-time equivalent basis that establishes the number of full-time
 equivalents contracted for a project, the duration of the contract period, and
 the fixed price per full-time equivalent, plus materials and out-of-pocket
 expenses; and

 .to a lesser extent, a fixed price basis.

Our full-time equivalent contracts generally range from three to twelve month
periods. Fixed price contracts are entered into for much shorter periods of
time, generally two to three months. We estimate that fixed price contracts
represent less than 10% of our annual revenues. Because our fixed price
contracts relate to projects that are generally defined in scope, of short
duration and involve services and processes that we have substantial experience
with, we have not historically experienced any material cost overruns under
these contracts. Generally, our contracts may be terminated by the customer
upon 90 days or less prior notice. We recognize contract revenue on a per diem
basis or percentage-of-completion basis. Cost of revenue consists primarily of
compensation and associated fringe benefits for employees and other direct
project-related costs, such as laboratory supplies, chemicals and other costs
reimbursed by our customers.

Milestone and intellectual property revenue--related party
Milestone and intellectual property revenue represents revenues derived from
achieving milestones in connection with customer collaborations and licensing
fees related to our proprietary drug discovery platform technologies. Milestone
revenue is earned upon the successful completion or attainment of specific
project objectives and is unique to the individual project. Intellectual
property revenue is derived through the sale or licensing of intellectual
property rights that we have developed. Milestone and intellectual property
revenues have minimal associated costs. Our operating strategy emphasizes
entering contracts for drug discovery services that contain provisions for
licensing, milestone and royalty payments should our proprietary technology
lead to the discovery of new processes or products that reach certain
milestones and market approval. To date, substantially all of our milestone and
royalty revenues have been received from ALS.


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

38
<PAGE>

Management's discussion and analysis of financial condition and results of
operations

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

Operating expenses
Operating expenses include selling, general and administrative expense and
depreciation and amortization. Selling, general and administrative expense
consists of compensation and related fringe benefits for marketing and
administrative employees, professional services, marketing costs and costs
related to facilities and information services. Depreciation expense reflects
the depreciation of our facilities and equipment. Following the acquisition of
ThermoGen and Emerald BioStructures, we will record significant amortization
expenses related to goodwill and other acquired intangible assets. We currently
estimate that annual amortization resulting from these acquisitions to be
approximately $4.3 million. In addition, following this offering we expect to
incur R&D expense as we further develop platform technologies.

Redeemable stock warrant
In connection with obtaining our credit facility in June 1999, we issued to our
lender a warrant to purchase 16,916 shares of our Class C common stock at an
exercise price of $0.01 per share. Because the holder of this warrant can
require us to redeem the warrant for the fair market value of the underlying
common stock upon the occurrence of certain events, applicable accounting rules
require us to reflect this redemption obligation in our financial statements as
a liability. Furthermore, the liability must be adjusted to reflect subsequent
changes in fair market value, with a corresponding charge to earnings. As of
March 31, 2000, an increase in our estimated fair market value resulted in a
$1.9 million increase in our redeemable warrant liability and a corresponding
expense reflected in other expenses. We plan to redeem the warrant with a
portion of the net offering proceeds, thereby eliminating the liability, but
resulting in a further expense representing the increase in fair market value
from March 31, 2000 until the consummation of our initial public offering. This
expense is estimated to be approximately $     million on a pre-tax basis and
will be incurred in the period in which we consummate this offering.

Related party; discontinued operations
As part of our June 1999 venture capital funding transaction, we spun-off ALS.
At the time of the spin-off, we exchanged our 100% common stock interest for
non-voting preferred stock. Our chairman and chief executive officer, Dr.
Michael T. Flavin, who was our sole stockholder prior to the venture capital
investment, became the sole common stockholder of ALS. As a result of the spin-
off, ALS's historical results of operations for all periods prior to the spin-
off are reflected in our financial statements as discontinued operations.
Applicable accounting rules require that all transactions with ALS following
the spin-off be reflected in our financial statements as related party
transactions. In addition, we plan to make a $5.0 million convertible preferred
stock investment in ALS with a portion of the net proceeds from this offering
in exchange for approximately a 15.4% equity stake in ALS. Related party
contract revenue and contract service costs for the periods commencing January
1, 1996 are exclusively related to ALS's joint venture subsidiary, SMP, until
the June 1999 spin-off of ALS. For all periods thereafter, related party
revenues and costs comprised of transactions with both ALS and SMP.

RESULTS OF OPERATIONS

Three months ended March 31, 2000 compared with three months ended March 31,
1999

Contract revenue
Total contract revenue increased 61% to $4.1 million for the three months ended
March 31, 2000, from $2.6 million for the three months ended March 31, 1999.
Contract revenue increased 63% to $3.4 million for the three months ended March
31, 2000, from $2.1 million for the three months ended March 31, 1999.
Increased contract revenue was achieved across all lines of service offerings,

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

                                                                              39
<PAGE>

Management's discussion and analysis of financial condition and results of
operations

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

with the largest increases realized in medicinal chemistry and analytical and
separations chemistry. Contract revenue--related party increased 53% to
$707,000 for the three months ended March 31, 2000, from $462,000 for the three
months ended March 31, 1999. The increase in contract revenue--related party is
due to services that were provided to ALS, primarily to support a Phase II SBIR
grant.

Gross profit
Gross profit from total contract revenue increased 51% to $2.0 million for the
three months ended March 31, 2000, from $1.4 million for the three months ended
March 31, 1999. Contract revenue gross profit increased 61% to $1.6 million for
the three months ended March 31, 2000, from $1.0 million for the three months
ended March 31, 1999. Contract revenue--related party gross profit increased
19% to $404,000 for the three months ended March 31, 2000, from $338,000 for
the three months ended March 31, 1999.

Gross profit as a percent of total contract revenue decreased to 49% for the
three months ended March 31, 2000, from 53% for the three months ended March
31, 1999. Contract revenue gross profit remained relatively constant as a
percentage of contract services revenue reflecting the fairly consistent mix of
the types of services provided during the two periods. Contract revenue--
related party gross margin remained strong at 57% of contract revenue for the
three months ended March 31, 2000, however decreased from 73% for the three
months ended March 31, 1999. This decline resulted from an increase in services
provided in connection with SBIR grants, which typically have lower margins
than other services provided.

Milestone and intellectual property revenue--related party
In the three months ended March 31, 2000, we derived $350,000 of milestone and
intellectual property revenue. In the three months ended March 31, 1999, we
derived no milestone and intellectual property revenue. The majority of this
revenue, $300,000, was related party, and resulted from the achievement of a
contract milestone with ALS that provided for demonstrating the commercial
feasibility of our ChiralSelectTM technology. The remaining revenue, $50,000,
was earned as a result of fulfilling a third party project completion milestone
in connection with our strategic drug development program.

Operating expenses
Selling, general and administrative expenses increased 44% to $1.9 million for
the three months ended March 31, 2000, from $1.3 million for the three months
ended March 31, 1999. As a percentage of total contract revenues, selling,
general and administrative expenses declined to 46% for the three months ended
March 31, 2000, from 51% for the three months ended March 31, 1999. The
increase in selling, general and administrative expenses was due primarily to a
general increase in administrative and marketing personnel to support our
expanding market base and an increase in facility costs associated with
facilities expansion.

Depreciation and amortization expenses increased to $260,000 for the three
months ended March 31, 2000, from $137,000 for the three months ended March 31,
1999. The increase was due to higher depreciation expenses associated with
facilities expansion.

Other expenses, net
Other expenses, net increased to $2.0 million for the three months ended March
31, 2000, from $34,000 for the three months ended March 31, 1999. This increase
was a result of an increase in interest expense on additional borrowings that
were entered into by us for the purchase of land in Woodridge, Illinois and
from a term loan note from the private placement. Other expense, net for the
three months ended March 31, 2000 also included a charge of $1.9 million
representing an increase in our redeemable warrant liability as of March 31,
2000 due to an increase in the estimated fair value of the Class A common stock
underlying the warrant.

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

40
<PAGE>

Management's discussion and analysis of financial condition and results of
operations

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


Interest income increased to $39,000 in the three months ended March 31, 2000,
from essentially none in the three months ended March 31, 1999, as available
cash balances rose from the sale of preferred shares, and the issuance of term
debt.

Income taxes
Income taxes increased to $38,000 in the three months ended March 31, 2000,
from none in the three months ended March 31, 1999, when we incurred a pretax
loss. Our effective tax rate for the three months ended March 31, 2000 differs
from the statutory rate of 39.5% primarily due to the $1.9 million charge to
earnings related to an increase in the value of our redeemable warrants which
is not deductible for tax purposes.

Year ended December 31, 1999 compared with year ended December 31, 1998

Contract revenue
Total contract revenue increased 57% to $13.6 million in 1999, from $8.6
million in 1998. Contract revenue increased 58% to $11.3 million in 1999, from
$7.1 million in 1998. Increased contract revenue was achieved from higher
volume in all of our service offerings, with notable increases attributable to
combinatorial chemistry, chemical process development, chemical synthesis and
scale up. Contract revenue--related party increased 54% to $2.4 million in
1999, from $1.5 million in 1998. The increase in contract revenue--related
party was achieved from higher volume in medicinal chemistry services,
analytical and separations chemistry and chemical synthesis.

Gross profit from contract revenue
Gross profit from total contract revenue increased 59% to $7.5 million in 1999,
from $4.7 million in 1998, which corresponds directly with the 1999 over 1998
increase in total contract services revenue. Contract services gross profit
increased 62% to $6.0 million in 1999, from $3.7 million in 1998. Contract
services--related party gross profit increased 48% to $1.5 million in 1999,
from $1.0 million in 1998.

Gross profit as a percent of total contract revenue for 1999 remained at 55%,
the same level that was achieved in 1998. Contract services gross profit
remained relatively constant as a percentage of contract revenue, reflecting a
fairly consistent mix of the types of services provided during the two years.
Contract services--related party gross profit declined to 66% of contract
revenue in 1999, from 69% in 1998. This decline resulted from an increased mix
of relatively lower margin SBIR services.

Milestone and intellectual property revenue--related party
During 1999, we derived milestone and intellectual property revenue of $1.8
million. We derived no milestone and intellectual property revenue in 1998. For
the twelve months ended December 31, 1999, milestone revenue and intellectual
property revenue were $1.4 million, and $400,000, respectively. Of our 1999
milestone revenue, $1.0 million, resulted from the achievement of contract
milestones with ALS upon demonstrating the commercial feasability and patent
approval of our AutoOptimizeTM technology. In addition, a $400,000 milestone
payment was received from ALS as a result of a patent issued to ALS related to
its robustaflavone compound. $400,000 of intellectual property revenue was
received from ALS as a result of the sale of our patented PMEA synthesis
process to ALS.

Operating expenses
Selling, general and administrative expenses increased 77% to $6.0 million in
1999, from $3.4 million in 1998. As a percentage of total contract revenue,
selling, general and administrative expenses increased to 44% in 1999, from 39%
in 1998. The increase was due primarily to a general increase in administration
and marketing personnel to support our expanding market base and an increase in
facility costs associated with facility expansion.


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Depreciation and amortization expenses increased to $788,000 in 1999, from
$459,000 in 1998. The increase was due to higher depreciation expense
associated with facilities expansion.

Other expenses, net
Other expenses, net increased to $412,000 in 1999, from $75,000 in 1998. Other
expenses, net increased as a result of increased interest expense on additional
borrowings that were entered into by us for the purchase of land in Woodridge,
Illinois and from a term loan note from the private placement.

Interest income increased to $175,000 in 1999, from $1,000 in 1998. Interest
income increased as a result of increased cash balances from the sale of
preferred stock and the issuance of term debt. Other income of $48,000 in 1998
was the result of a gain from insurance proceeds in excess of book value for
fixed assets involuntarily converted from a lab fire that occurred in 1997.
There were no insurance proceeds received in 1999.

Income tax expense
Income tax expense increased 201% to $932,000 in 1999, from $310,000 in 1998.
The effective tax rates for 1999 and 1998 were 44%, and 38%, respectively. The
effective tax rate increase for 1999 is primarily due to additional taxes
resulting from our expansion into multiple states.

Year ended December 31, 1998 compared with year ended December 31, 1997

Contract revenue
Total contract revenue increased 55% to $8.6 million in 1998, from $5.5 million
in 1997. Contract revenue increased 64% to $7.1 million in 1998, from $4.3
million in 1997. The increase in contract revenue was due to an overall
increase in our customers' demand for medicinal chemistry services. This demand
translated into strong sales from our newly formed combinatorial chemistry and
chemical process development services, and provided the impetus for our Des
Plaines, Illinois laboratory expansion. Contract revenue--related party
increased 24% to $1.5 million in 1998, from $1.2 million in 1997. The increase
in contract revenue--related party was driven by an increase in chemical
process development services as well as an increase in contract pricing
consistent with standard third party rates.

Gross profit from contract revenue
Gross profit from total contract revenue increased 47% to $4.7 million in 1998,
from $3.2 million in 1997. Contract services gross profit increased 50% to $3.7
million in 1998, from $2.5 million in 1997. Contract services--related party
gross profit increased 36% to $1.0 million in 1998, from $756,000 in 1997.

Gross profit as a percentage of total contract revenues decreased to 55% in
1998, from 58% in 1997. Contract services gross profit decreased to 52% of
contract revenue in 1998, from 57% in 1997. The decrease resulted from our
aggressive recruiting efforts to staff the new Des Plaines, Illinois facility.
Contract services--related party gross profit increased to 69% of contract
revenue in 1998, from 63% in 1997. The increase is due primarily to higher
contract pricing consistent with standard third-party rates.

Operating expenses
Selling, general and administrative expenses increased 41% to $3.4 million in
1998, from $2.4 million in 1997. As a percentage of total contract revenues,
selling, general and administrative expenses declined to 39% in 1998, from 44%
in 1997. The increase in selling, general and administrative expenses was
principally due to an increase in the number of administrative and marketing
personnel necessary to support our expanding market base, increased advertising
costs associated with a new advertising campaign and higher lease charges
associated with the opening of our new Des Plaines, Illinois facility.

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Depreciation and amortization expenses increased to $459,000 in 1998, from
$318,000 in 1997. The increase was due to higher depreciation expense resulting
from higher capital spending associated with facilities expansion.

Other expenses, net
Other expenses, net increased to $75,000 in 1998, from $3,000 in 1997. This
increase was a result of increased interest expense on additional borrowings
that were entered into by us to fund general working capital purposes.

Interest income increased to $1,000 in 1998, from none in 1997. Interest income
increased as a result of higher on-hand cash balances. Other income of $48,000
in 1998 and $99,000 in 1997 was the result of insurance proceeds in excess of
fixed asset book value for a lab fire that occurred in 1997.

Income taxes
Income taxes increased 86% to $310,000 in 1998, from $167,000 in 1997. The
effective tax rates for 1998 and 1997 were 39% and 34%, respectively. The
resulting increase in income taxes and the effective tax rate for 1998 was
driven by the elimination of a U.S. Federal income tax rate benefit that was
realized from the use of graduated federal rates in 1997.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our business through cash flows from operations and proceeds
from borrowings and the issuance of preferred stock. During the three months
ended March 31, 2000 and the years ended December 31, 1999, 1998 and 1997, we
generated (used) ($1.1) million, $1.6 million, $320,000 and $943,000,
respectively, in cash flows from operations and raised $10.0 million in 1999
through borrowings and the issuance of preferred stock.

During the three months ended March 31, 2000 and the years ended December 31,
1999, 1998 and 1997, total capital expenditures were $2.3 million, $4.2
million, $726,000 and $667,000, respectively. Capital expenditures were
incurred predominantly in connection with our expansion of service offerings,
including analytical and separations chemistry, chemical synthesis and scale up
and with our facilities expansions in 1999. In April 1999, we began to develop
a 14-acre site in Woodridge, Illinois for the construction of a new 100,000
square foot headquarters and discovery laboratories center, phase I. The
offices and laboratories have the capability of being expanded an additional
100,000 square feet, phase II. Our phase I expansion is estimated to cost $17.2
million for construction and an additional $3.0 million for the purpose of
laboratory instrumentation, software and equipment upgrades. A total of $4.3
million for the phase I expansion had been incurred through March 31, 2000. In
May 2000, we received an 18-month construction commitment for an additional
$12.0 million to finance the phase I construction project. Upon completion of
the project, we anticipate entering into a mortgage loan as a more permanent
form of financing for our facility. The phase I expansion is anticipated to be
operational by the first quarter of 2001.

Working capital was $2.6 million at March 31, 2000, compared to $3.4 million at
December 31, 1999, and ($373,000) at December 31, 1998. The decrease in working
capital for the three months ended March 31, 2000 was primarily due to a $3.0
million cash payment that was made on March 24, 2000, to repay a promissory
note to Dr. Michael T. Flavin, our chief executive officer and president, in
connection with the issuance of preferred stock in June 1999. The increase in
working capital at December 31, 1999 as compared to December 31, 1998, was
attributable primarily to the proceeds from borrowings and the issuance of
preferred stock.


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We have available a credit facility to supplement our liquidity needs. The
credit facility provides for revolving credit loans in the amount of $15.0
million. Loans for working capital purposes are limited to $7.5 million and
loans for acquisitions are limited to the amounts available under the facility
less outstanding loans for working capital purposes. Loans for acquisitions are
subject to mandatory repayment schedules, generally five years. The credit
facility commitment terminates on June 14, 2001 for acquisition loans and June
1, 2005 for working capital loans. As of March 31, 2000, we had drawn an
aggregate of $1.0 million under the credit facility. All loans under this
credit facility bear interest at the floating LIBOR rate plus 4.0%. The
interest rate on such indebtedness at May 31, 2000 was 10.64% per annum. The
credit facility restricts or prohibits us from incurring additional
indebtedness, incurring liens, disposing of assets and requires us to maintain
certain financial ratios on an ongoing basis. The credit facility is secured by
a lien on substantially all of our assets. We intend to use a portion of the
net proceeds from this offering to repay in full and terminate the credit
facility.

We believe that the net proceeds from this offering, together with cash
generated from operations and borrowings under the mortgage loan, will be
sufficient to fund our anticipated working capital needs and capital
expenditures, other than financing necessary to complete future acquisitions,
if any, for at least the next 24 months. Future acquisitions, if any, could be
funded with cash from operations, the net proceeds of this offering and/or the
issuance of debt or equity securities. There can be no assurance that
attractive acquisition opportunities will be available to us or will be
available at prices and upon such other terms that are attractive to us. We
regularly evaluate potential acquisitions of other businesses, products and
product lines and may hold discussions regarding such potential acquisitions.
As a general rule, we will publicly announce such acquisitions only after a
definitive purchase agreement has been signed. In addition, in order to meet
our long-term liquidity needs or consummate future acquisitions, we may incur
additional indebtedness or issue additional equity and debt securities, subject
to market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to us or at all. Our failure to
raise the funds necessary to finance our future cash requirements or consummate
future acquisitions could adversely affect our ability to pursue our strategy
and could negatively affect our operations in future periods.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our activities
without increasing risk. Some of the securities that we invest in may have
market risk. This means that a change in prevailing interest rates may cause
the fair value of the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the prevailing rate and the prevailing rate later rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
government and non-government debt securities and money market funds. The
average duration of all our investments has generally been less than one year.
Due to the short-term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.

We intend to repay the term loan note and line of credit from the proceeds of
this offering. Should we not repay those obligations, we may incur additional
interest expense. Our term loan note bears interest at a rate of LIBOR plus
5.25% and our line of credit bears interest at a rate of LIBOR plus 4.00%. A
one percentage point increase in our rate of interest for these borrowings at
March 31, 2000 would cause us to pay an additional $60,000 annually in
interest.

We have operated primarily in the United States and all funding activities with
our collaborators to date have been made in U.S. dollars. Accordingly, we have
not had any exposure to foreign currency rate fluctuations.

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Business

OVERVIEW

We are a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and
biotechnology companies. Recent advances in genomics have resulted in
exponential growth in the number of biological targets that can be exploited
for new drug development. The explosion in genomic information creates a
significant gap between the capabilities companies have to identify new drug
targets and the chemistry resources necessary to develop novel drug compounds.
We bridge this gap by offering chemistry services that span the entire drug
development spectrum, from early stage discovery technologies and services in
proteomics and medicinal chemistry to synthesis and scale up. We provide drug
discovery technology and services in the following seven areas:

 .proteomics;

 .combinatorial and computational chemistry;

 .medicinal chemistry;

 .biocatalysis;

 .chemical process development;

 .analytical and separations chemistry; and

 .chemical synthesis and scale up.

Our technology and services are designed to enable our pharmaceutical and
biotechnology customers to reduce overall development time and cost and to
pursue, simultaneously, a greater number of discovery and development
opportunities.

Founded in 1987, we believe we were the first independent chemistry company to
offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. From a company focused exclusively
on medicinal chemistry services, we have evolved into a full-service drug
discovery technology and services company. Our development of strong
relationships with pharmaceutical companies by initially providing basic
medicinal chemistry services helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include chemical process development, analytical and
separations chemistry and chemical synthesis and scale up. To capitalize on
recent advances in genomics, we have developed technology and services in
early-stage proteomics, combinatorial chemistry and biocatalysis.

We have developed proprietary platform technologies in the areas of proteomics,
biocatalysis, chiral chemistry and automated process research. These
technologies utilize automation and optimization to compress the drug discovery
process timeline. Our proprietary platform technologies complement our
traditional chemistry services and associated revenues with opportunities for
up-front licensing fees and milestone and royalty payments.

We have grown our drug discovery technology and services revenue at a compound
annual growth rate of 49.5% over the past five years. Since 1987, we have
provided chemistry services on over 490 projects for more than 75 clients,
including 15 of the top 25 pharmaceutical companies and many well-known
biotechnology companies. In 1999, over 75% of our revenues were earned from
existing customers, as our largest customers either increased project levels or
added additional work along the drug discovery and development pathway.

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In May 2000, we expanded our technology and service offerings by acquiring
ThermoGen, Inc. and Emerald BioStructures, Inc. ThermoGen is a leading provider
of biocatalysis services and products through the use of proprietary
technologies which allow its customers to perform difficult chemical reactions
with stable, easy-to-use biocatalysts that are environmentally friendly and
cost effective. Emerald BioStructures is a leading provider of proteomics
products and services that bridge the gap between the genomic information and
chemistry services necessary to identify new lead compounds.

Our integrated drug development service capabilities and proprietary
technologies also enable us to effectively develop our clients' lead compounds
internally through our strategic drug development program. This program
provides "virtual" pharmaceutical companies who discover or in-license
promising lead compounds with the necessary infrastructure to develop these
compounds. We have the capability to take a client's lead compound from lead
discovery through early-stage clinical development. Through our strategic drug
development program we offer two types of services: direct services, including
our lead discovery through chemical synthesis and scale up capacities, and
indirect services which we arrange for through our project management
expertise, including pre-clinical testing and clinical trials of product
candidates.

Our successful relationship with Advanced Life Sciences, Inc., ALS, and its
advanced drug development pipeline is an example of the benefits of our
strategic drug development program. We plan to aggressively market our
integrated drug discovery and development capabilities to our customers in
order to generate incremental service revenues, enhance our market reputation
and create opportunities to earn milestone and royalty revenues.

A portion of the net proceeds of this offering will be used to make a minority
investment in ALS, a drug discovery company with promising therapeutic products
in clinical and pre-clinical development. We work closely with ALS by providing
a broad range of chemistry services for its drug discovery and development
needs.

Our headcount, following the ThermoGen and Emerald BioStructures acquisitions,
has increased significantly to 195 employees as of May 31, 2000 from 81 at the
end of 1997. As of May 31, 2000, we employed 149 chemists, biochemists and
molecular biologists of whom 65 hold Ph.D. degrees. This compares to 64
chemists and 17 with Ph.D.s who we employed at the end of 1997. We are in the
process of expanding our infrastructure to accommodate growth by developing of
a 100,000 square foot headquarters and discovery laboratories center in
Woodridge, Illinois.

INDUSTRY BACKGROUND

The pace of drug discovery has accelerated significantly in recent years.
Advances in disciplines such as molecular biology, genomics and high throughput
synthesis and screening are fueling opportunities to develop therapeutics for
previously unmet or undermet medical needs. Of these advances, genomics is
having the greatest impact on the pace of the biological discovery process. In
addition, pharmaceutical and biotechnology companies are under increasing
pressure to deliver new drugs to market and reduce the time and cost required
for drug development, while meeting ever-increasing requirements for
environmentally cleaner chemistry processes.

In order to take advantage of these opportunities and to respond to these
pressures, many pharmaceutical companies are increasingly augmenting their
internal R&D capacity by outsourcing to independent chemistry research
companies. In addition, many biotechnology companies have limited physical
infrastructure and are electing to outsource rather than develop certain R&D
functions in-house.

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Rapid advances in genomics and proteomics
Recent advances in the study of the human genome have resulted in an
exponential increase in the number of new drug targets. It has been estimated
that the human genome could contain as many as 140,000 genes, of which
approximately 10,000 have been identified as potentially important
pharmaceutical targets in the treatment of disease. This compares to less than
500 gene targets that have been available to the pharmaceutical industry over
the past 50 years. As the identification of the entire human genome nears
completion, a vast number of important gene targets will be identified for
development, creating a massive bottleneck of targets.

We believe that companies positioned in the proteomics sector will be direct
beneficiaries of the explosion in genomics. As genomics is the large scale
study of genes, proteomics is the large scale study of proteins. Genes contain
the information necessary to create proteins, the molecules that carry out a
cell's biological function. Humans may produce one million or more distinct
proteins. Most diseases result from abnormalities in the presence, expression
or performance of proteins within cells. Consequently, the pharmaceutical and
biotechnology industries are focusing on the role genes and proteins play in
disease processes, which can facilitate more efficient and predictable drug
discovery and development.

With the recently announced completion of a rough draft of the human genome,
the next hurdle will be determining the role that the large number of
therapeutically relevant genes play in human disease. In the coming years, the
identification and three-dimensional structure determination of therapeutically
relevant protein drug targets arising from these genes will represent a
challenge to pharmaceutical and biotechnology companies and a tremendous
opportunity for chemistry service providers.

Chemistry's role in drug development
The drug discovery and development process typically involves biologists and
chemists working together to prepare and deliver new chemical substances,
develop laboratory models of disease and test compounds to identify agents that
demonstrate the desired activity, all with a goal of creating a marketable
drug. The drug discovery and development process includes the following stages:

 .drug discovery and development -- the identification of a compound that may be
 developed into a new drug and the modification of its structure to optimize
 its therapeutic properties;

 .pre-clinical testing -- the testing of the compound in increasingly complex
 animal models;

 .clinical trials -- the multi-phase testing of the compound for safety and
 effectiveness in humans; and

 .product commercialization -- the manufacture, marketing and sale of commercial
 quantities of the approved drug.


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Chemistry is an important element of the drug discovery and development
process. Chemistry technologies and services are provided in the following
stages:

    [Table illustrating chemistry stages and the services offered therewith]

 .Lead Discovery represents the first major hurdle in drug discovery and
 involves the identification of one or more lead compounds that interact with a
 biological target, such as an enzyme, receptor or other protein, that may be
 associated with a disease. Determining the chemical structure of the
 biological target through proteomics provides a molecular map. Computational
 chemistry utilizes these protein structure maps in computer-aided studies of
 the interaction between three-dimensional molecular structures of the
 potential drug compounds and biological targets. Using medicinal chemistry,
 potential leads can be identified through synthetic processes or through the
 isolation and extraction of biologically active materials from natural
 products, a process known as natural product isolation. Combinatorial
 chemistry automates the lead discovery process, generating libraries of
 potential lead compounds by systematically combining a small number of
 chemical reagents in a variety of combinations defined by a given reaction
 scheme. A biological test or assay based on the target is developed and used
 to test or "screen" chemical compounds. The objective of lead discovery is to
 identify a lead compound for further advancement in the development process.

 .Lead Optimization refers to the process which follows the screening of large
 batches of new compounds, during which several may appear to act upon the
 desired biological target. At this point, medicinal chemistry becomes an
 iterative process, as chemists synthesize analogous compounds that share
 beneficial features to the lead but may vary slightly in chemical structure.
 After observing

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 which compound achieves the optimal action upon the target, the compound is
 moved toward the development phase. However, the compound may need additional
 modifications to its chemical structure to improve its bioavailability or
 toxicity profile. In this case, medicinal chemists will select modifications
 to optimize the lead compound and its pharmacological effects. As the product
 is moved into pre-clinical development, medicinal chemists will continue to
 synthesize analogs of the lead compound to improve efficacy or safety profiles
 and broaden patent coverage.

 .Chemical Process Development refers to the synthesis processes required in the
 scale up of chemical production as compounds progress through the drug
 discovery and development process into pre-clinical and early clinical trials.
 Chemical process development covers the range of services that strive to
 optimize the efficiency, safety and cost effectiveness of synthetic pathways
 and other processes in the small-to-moderate manufacture of intermediates and
 final drug compounds. Process optimization and development includes the
 improvement or modification of existing chemical processes, or the innovation
 of alternative routes to existing compounds that may use different
 intermediates or otherwise improve upon the original production pathway.

 .Chemical Synthesis and Scale up refers to the production of larger quantities
 of chemicals that are required for further pre-clinical and clinical
 development. Larger scale techniques are utilized in conjunction with larger
 scale equipment. The synthetic process that was identified during the chemical
 development phase is utilized to produce kilogram quantities of material to be
 used in pre-clinical and clinical studies. Typically the compound will be
 studied in late stage pre-clinical testing and human clinical trials, in which
 case the synthetic process must be implemented under current good
 manufacturing conditions, cGMP, as outlined by the U.S. Food and Drug
 Administration. cGMP chemists and quality assurance specialists follow strict
 regulatory guidelines that certify the purity of active drug compounds being
 produced.

Chemistry R&D outsourcing
Total R&D spending by the U.S. pharmaceutical industry has grown at a compound
annual rate of approximately 13% from 1980 to 1999. According to estimates by
Pharmaceutical Research and Manufacturers of America, PhRMA, U.S.
pharmaceutical companies spent over $24 billion on R&D in 1999, up nearly 14%
from 1998. U.S. pharmaceutical companies spent approximately $5.3 billion on
chemistry services in 1998, which represents approximately 30% of total R&D
spending by such companies. Chemistry spending growth by U.S. pharmaceutical
companies has outpaced that of manufacturing, drug development and sales and
marketing at 13% from 1993 through 1998 according to PhRMA. We believe multiple
factors exist that are driving pharmaceutical and biotechnology companies to
increasingly rely on outsourcing for their chemistry requirements.

The vast amount of both public and private investment in the areas of
biological drug discovery is evidence of the upcoming demand surge for
chemistry related services. Since January 2000, over $10 billion has been
raised in the public equity markets by companies offering services in the early
stages of biological drug discovery. In addition, the U.S. government has spent
approximately $3 billion on the Human Genome Project. Finally, with patent
expirations and controlled reimbursement increasing demand for new compounds,
companies are expanding their total investment in the earliest phases of R&D
and exhausting their in-house capacity.

Challenges in drug discovery and development
The pharmaceutical and biotechnology industries today are under significant
pressure to maintain historical revenue growth rates by replacing the number of
blockbuster drugs imminently coming off patent and taking advantage of emerging
technologies to develop new therapeutic agents. This central challenge provides
a number of secondary challenges for pharmaceutical and biotechnology
companies, which include the following:

 .Address the Explosion of Genomic Information. The explosion of genomic
 information is both a benefit and challenge to pharmaceutical and
 biotechnology companies. The industry has moved from

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 having fewer than 500 gene targets in its potential therapeutic portfolio, to
 an estimated 10,000 targets, as the mapping of the human genome is completed.
 Given these greatly broadened possibilities, pharmaceutical and biotechnology
 companies will need additional capacity for lead compound discovery and
 optimization.

 .Expedite Lead Discovery and Development. Greatly expanded available targets
 translate into an increased pressure to evaluate potential drug candidates as
 quickly and efficiently as possible. Building on this, the industry must seek
 ways to rationalize the process of both developing leads and moving them
 forward, thereby reducing the risk of spending large amounts of time and money
 on the development of drug candidates that ultimately prove to be
 unsuccessful.

 .Produce Chirally Pure Compounds. Recent changes in FDA regulations have placed
 increasing pressure on pharmaceutical companies to develop chirally pure
 compounds. Chiral compounds are molecules that are chemically identical but
 have mirror images. Often one chiral compound of a chemical structure is the
 most active and best affects the desired biological function; others are often
 inactive or less effective and may needlessly contribute to drug side effects.
 Because of these potential side effects, the FDA is now requiring data on each
 chiral compound, significantly increasing the effort and cost needed for
 approval. Therefore, pharmaceutical companies have become intent on developing
 single-isomer chiral pharmaceuticals, but have found that doing so using
 traditional chemistry approaches is difficult, expensive or simply impossible.

 .Employ Environmentally Cleaner Chemical Synthesis Techniques. The EPA and OSHA
 are placing increasing regulatory pressure on drug developers to employ more
 environmentally friendly biological scale up techniques, such as biocatalysis,
 as opposed to utilizing traditional chemical reagents and catalysts, which
 often involve hazardous substances. Pharmaceutical companies are increasingly
 looking to outside providers for more environmentally friendly scale up
 techniques.

 .Recruit High Quality Scientific Talent. Pharmaceutical companies have found it
 increasingly difficult to recruit high quality scientists for their chemistry
 R&D departments. With an estimated 2,300 chemistry Ph.D.s awarded in 1998, the
 number of graduates is still growing, but at an increasingly slower rate and
 significantly slower than demand. Annual growth in the number of chemistry
 doctorates awarded, for example, has slowed to 3% in 1998 from 7% in 1990.
 Pharmaceutical companies have found it difficult to satisfy their own internal
 needs and have turned to independent chemistry research companies.

OUR SOLUTIONS

As a drug discovery technology and services provider to the life sciences
industry, we are well positioned to help pharmaceutical companies address the
challenges they are currently facing. The following represent areas of
expertise that we offer to address the pharmaceutical industry's current
challenges:

 .Proteomics. We believe that there will be an increasing demand for proteomics
 services since most diseases result from abnormalities in the presence,
 expression or performance of proteins within cells. The considerable resources
 currently directed at genomics are shifting to proteomics as identification of
 the human genome nears completion. Through our Emerald BioStructures
 subsidiary, we provide proteomics services in the areas of protein expression,
 protein crystallization and three-dimensional structural determination. The
 protein structures determined using our advanced proteomics services can serve
 as a map for computational and combinatorial chemists in the design and
 discovery of novel lead compounds.

 .Combinatorial and Computational Chemistry. We believe that combinatorial and
 computational chemistry are powerful chemical synthesis and data
 interpretation tools that can dramatically speed

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 the drug discovery and development process. Our combinatorial synthesis group
 develops and validates chemical technologies used to produce focused lead
 compound libraries. We have extensive expertise in library purification using
 a variety of techniques. We create tailored libraries, using a broad range of
 reaction technologies, based both upon our clients' specifications and unique
 designs arising from our computational chemistry capabilities. Multiple
 technology platforms are used for library production that are carefully
 matched for the scale and throughput needs of each unique project.

 .Medicinal Chemistry. We believe that there will be increasing demand for high
 quality medicinal chemistry services as a large number of potential lead
 compounds must be developed and optimized using traditional medicinal
 chemistry procedures. As implied by our name, MediChem, we were founded with
 the focus of providing medicinal chemistry services to the pharmaceutical and
 biotechnology industries. We offer a broad spectrum of medicinal chemistry
 services for clients. These services range from early-stage lead optimization
 that culminates in candidate selection for development to the identification
 of viable synthetic routes required to produce materials for both pre-
 clinical and clinical studies.

 .Chemical Process Development. We believe there is an increasing need for the
 development and optimization of chemical processes once a lead compound has
 been selected as a drug candidate. We have developed expertise and
 technologies which allow our clients to identify the best chemical process
 for scale up. Specifically, through the combined use of robotics and
 statistical analysis, our patented AutoOptimize(TM) technology enables the
 chemist to rapidly identify the best chemical process for scale up,
 significantly shortening our clients' lead compound development timeframe.

 .Biocatalysis. Biocatalysis relies on enzymes, which are proteins that can
 enable and accelerate desired chemical reactions. This technology has
 applications across the breadth of the drug discovery and development
 process. Biocatalysis can be used in combinatorial chemistry to develop
 unique molecular libraries. In lead optimization, biocatalysis is used to
 modify specific portions of a molecule while maintaining the principal
 integrity of the chemical structure. Finally, in chemical process development
 and scale up, biocatalysis is used to facilitate and optimize reaction
 conditions.

 Through our ThermoGen subsidiary, we offer an enzyme-based technology
 platform which can be applied to perform difficult chemical reactions with
 stable, easy-to-use biocatalysts that are environmentally friendly and cost
 effective. In addition, we use biocatalysis to produce chiral compounds.

 .Experienced Chemistry Project Teams. We have built teams of highly qualified
 scientists that are frequently accessed by our pharmaceutical and
 biotechnology customers to satisfy their growing needs for scientific
 expertise in drug discovery and development. To more efficiently serve our
 customers, our scientists are organized into teams focused on specialized
 chemistry service and technology offerings. Each team is headed by a
 scientist experienced in complex chemistry project management who frequently
 communicates with our customers to assure timely and on-budget completion of
 chemistry-related projects. Our scientific staff currently consists of 149
 degreed chemistry, biochemistry and molecular biology professionals, which
 include 65 Ph.D.s, after giving effect to our recent ThermoGen and Emerald
 BioStructures acquisitions. We believe we effectively attract high quality
 scientific and business professionals through our entrepreneurial culture and
 innovation incentives.

BUSINESS STRATEGY

Leverage and expand technology platform
We will invest in drug discovery platform technologies to leverage our
scientific talent base and increase revenues. Proprietary technologies such as
Crystal Monitor(TM), ThermoCat(TM) libraries, ThermoFusion(TM),

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ChiralSelect(TM) and AutoOptimize(TM) will be applied to client programs in the
early stages of drug discovery. We intend to leverage these technologies to
generate revenues from upfront licensing fees, milestone and royalty payments
and through our integrated chemistry research services. These proprietary
technologies will also be applied to our strategic drug development program.

Expand service offerings
We have expanded our service offerings beyond traditional medicinal chemistry
to keep pace with the needs of our customers. In 1997, we began offering
combinatorial chemistry as a natural extension of our medicinal chemistry
capabilities. We have more recently increased our cGMP synthesis and our
analytical chemistry capabilities. As evidenced by our recent acquisitions of
ThermoGen and Emerald BioStructures, we have further expanded our capabilities
in the early stages of drug discovery and intend to continue this expansion. In
addition, we intend to further expand and develop our chemical process
development and scale up capabilities.

Expand customer relationships
We seek to expand the number of service offerings used by each of our customers
by providing chemistry-related services across many phases of drug discovery
and development prior to bulk manufacturing. In 1999, six of our ten largest
customers utilized more than one of our service offerings. Our recent expansion
into proteomics and biocatalysis provides us with an opportunity to pull
customers from these service offerings into our later-stage services as well as
to expand our current relationships into earlier stages of drug discovery. We
believe that our existing customer base also provides us with an excellent
source of referrals.

Enter collaborations through our strategic drug development program
Recent advances in biotechnology have fueled the emergence of "virtual"
pharmaceutical companies who discover or in-license lead compounds. These
companies have undertaken aggressive efforts to discover promising lead
compounds, but do not have the in-house infrastructure or experience to develop
them. Our integrated chemistry service and technology offerings provide an
alternative for customers that historically had to sell a significant portion
of their proprietary technology to gain access to the development capabilities
of a large strategic partner. Our successful relationship with ALS and its
advanced drug development pipeline is an example of the benefits of our
strategic drug development program. We intend to aggressively market our
capabilities to third-party customers in order to generate incremental service
revenues, enhance our market reputation and create opportunities to obtain
milestone and royalty revenues.

Increase customer base
We are seeking to increase our customer base in both domestic and international
markets. We believe there are significant opportunities for growth in
geographic areas in which we have not conducted significant marketing efforts
to date. Accordingly, we plan to expand our U.S. and international marketing
efforts beyond our existing presence in Illinois, California and Connecticut by
opening sales offices in other pharmaceutical and biotechnology markets. Our
acquisition of Emerald BioStructures provides us access to a key emerging
biotechnology market in Seattle, Washington. We also believe international
markets represent an opportunity. The international market is under-served by
chemistry services companies, with minimal penetration from U.S.-based
companies. To access this market, we presently engage consultants based in
important geographical regions and are exploring opportunities to open sales
offices in key international markets. In addition, we generate business from
other industries, such as agricultural chemicals, food and personal care, that
have a need for chemistry R&D services and we intend to expand these customer
segments in the future.

Increase capacity
We will seek to support our future growth by increasing capacity both in terms
of the number of scientists employed and the size of our facilities within each
of our service offerings. We have

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significantly increased our scientific staff, and continually seek to recruit
and hire additional experienced scientists. We have recently increased research
capacity at our Lemont, Illinois facility by adding 8,000 square feet of
laboratory space. In addition, we are developing a 14 acre site in Woodridge,
Illinois for the construction of a new 100,000 square foot headquarters and
discovery laboratories center. This new facility is expected to be operational
in the first quarter of 2001 and will accommodate up to 200 employees.

Growth through acquisition
A key element of our growth strategy is to expand through the acquisition of
selected drug discovery and technology companies. We believe that selected
acquisitions offer the opportunity to grow in the following ways:

 .expand customer base;

 .expand drug discovery platform technologies;

 .expand breadth and scale of drug discovery service offerings;

 .expand geographic reach of market presence; and

 .increase process development and scale up technologies.

We believe that numerous suitable acquisition candidates with these
capabilities are available.

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SERVICE AND PLATFORM TECHNOLOGY OFFERINGS

We are a drug discovery technology and services company that offers a broad
range of integrated chemistry R&D capabilities to pharmaceutical and
biotechnology companies. Our service and platform technology offerings span the
drug discovery process and include:

[Table illustrating stages of drug discovery and development, and the
corresponding MediChem service and technology offerings]

Service offerings
 .Proteomics. Protein structures identified through our proteomics services,
 patented technologies and collaborations can be the basis for the discovery of
 novel drug targets. Through our expertise in computational chemistry and small
 molecule design, we help our clients utilize drug targets to design and
 identify lead compounds with the most desirable action on the drug target. Our
 proteomics offerings are a key component in our strategy to bridge the gap
 between the genomic information and chemistry services necessary to identify
 new lead compounds. We believe that early involvement in the drug discovery
 process presents follow-on chemistry service opportunities throughout the drug
 development cycle as well as opportunities to earn royalty and milestone
 revenues.


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 Through our Emerald BioStructures subsidiary, we offer a fully integrated set
 of proteomics services and proprietary technologies aimed at determining the
 three-dimensional structure of our clients' protein targets. These services
 include protein expression, purification, crystallization and structure
 determination. The structural information gathered from these services
 enables our scientists to use our powerful computational chemistry tools to
 assist our customers in the design of novel compounds. Emerald BioStructures'
 patented technologies and the expertise of their molecular biologists and
 crystallographers combined with our unique collaborations provide our clients
 with the structural data necessary to more efficiently and economically
 design potential lead candidates.

 Through our collaboration with the Argonne National Laboratory's Structural
 Biology Center, we provide ready access to the Advanced Photon Source, APS.
 By using the high brilliance APS X-ray beam, one of only three in the world,
 Emerald BioStructures identifies protein structures faster and with a greater
 degree of resolution than conventional facilities can provide. The APS can
 provide important information on the molecular structure and mechanisms
 governing the biological functions of proteins, information that helps
 Emerald BioStructures' scientists understand and control protein behavior in
 disease processes.

 .Combinatorial and Computational Chemistry. Combinatorial chemistry is a
 powerful chemical synthesis tool that can dramatically speed the drug
 discovery and development process. Combinatorial chemistry allows chemists to
 prepare libraries of relatively large numbers of chemical analogs in a short
 period of time, using robotic synthesizers and high throughput purification
 equipment. Many companies prepare chemical libraries consisting of extremely
 large numbers of individual compounds, numbering in the tens of thousands to
 hundreds of thousands. We specialize in high-quality focused libraries,
 numbering from three to five thousand compounds, that are carefully designed
 through the use of computational chemistry. We can prepare these focused
 libraries more rapidly and, because they are designed using computer-aided
 methods, we believe they contain more relevant potential therapeutic agents.

 In collaboration with our clients, we design chemical libraries that will act
 upon a particular biological target using both generally available scientific
 data and our clients' proprietary data. Our computational chemistry team can
 build vast "virtual libraries" around multiple sets of chemical templates,
 then condense the large virtual library into more focused libraries that can
 then be physically synthesized. These libraries are intended to rapidly
 generate rich structure-activity relationships, SARs, allowing for the
 selection of therapeutic lead molecules in a greatly shortened timeframe.

 Our combinatorial synthesis group develops and validates chemistries used to
 produce chemical libraries, including method development for analyses of
 final library purity. We create tailored libraries, using a broad range of
 reaction technologies, based both upon our clients' specifications and unique
 designs arising from our computational chemistry capabilities. Our
 combinatorial group has extensive expertise in library purification using a
 variety of techniques. All final products from each library are analyzed for
 purity to meet customer specifications. Final libraries are delivered to our
 clients in a format of their choosing, along with electronic database files
 that are easily incorporated into their own internal databases.

 In addition to the preparation of chemical libraries, we apply combinatorial
 approaches to problems in chemical process development using our patented
 AutoOptimize(TM) technology, which is described under Proprietary Drug
 Discovery Platform Technologies.

 .Medicinal Chemistry. As implied by our name, MediChem, we were founded with
 the focus of providing medicinal chemistry services to the pharmaceutical and
 biotechnology industries. Our in-

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 house chemistry-focused resources, combined with our network of external
 collaborators, provides a framework for managing an entire medicinal
 chemistry program from lead discovery through early-stage human clinical
 trials. Our scientific staff possesses a wealth of expertise in medicinal
 chemistry research, obtained through academic training, prior industry
 experience and our relationship with ALS. Our medicinal chemistry management
 team applies the requisite tools to conduct full-scale medicinal chemistry
 programs for our clients.

 We offer our clients a broad spectrum of medicinal chemistry services. These
 services range from early-stage lead optimization studies that culminate in
 candidate selection for development to the identification of viable synthetic
 routes required to produce materials for both pre-clinical and clinical
 studies. Our lead optimization programs include analog synthesis and focused
 compound libraries obtained from combinatorial chemistry, the collection and
 analysis of SAR data and computer-assisted drug design. Success in these
 programs is defined by the improved biological activity and safety profile of
 lead compounds.

 .Biocatalysis. Our services in the field of biocatalysis allow clients to
 efficiently develop economical, efficient chemical process methods utilizing
 the power of enzyme-catalyzed reactions. When coupled with proteomics,
 combinatorial chemistry, lead optimization and chemical process development,
 biocatalysis is an integral part of a multidisciplinary service approach to a
 drug discovery program. Three of the most important applications of
 biocatalysis are the production of chiral chemical compounds, the
 optimization of chemical processes and the application of protein shuffling
 to streamline chemical syntheses.

 Through our ThermoGen subsidiary, we offer an enzyme-based technology
 platform that can be applied to perform difficult chemical reactions with
 stable, easy-to-use biocatalysts that are environmentally friendly and cost
 effective. ThermoGen's tailored biosynthetic processes are designed to
 streamline our clients' chemical processes and reduce overall drug
 development time and cost. We offer customers valuable enzyme-catalyzed
 reactions at both the process development and scale up stages of chemical
 processing. Once an enzyme capable of conducting a desired chemical reaction
 is identified, the reaction can be scaled up using our synthetic chemistry
 resources. In this manner, synthetic chemical and biocatalytic processes are
 coupled to produce an efficient and economical process for production of lead
 compounds. Our integrated approach represents a value-added opportunity to
 accelerate our customers' drug development timeline.

 .Chemical Process Development. Once a lead compound has been selected for
 development as a potential drug candidate, a viable manufacturing method must
 be identified. Although an initial synthetic route has been designed, that
 initial method may be inappropriate for large-scale manufacturing. Thus,
 chemical process research is conducted to identify a synthesis process that
 is efficient, economical and safe.

 Our scientists utilize a variety of tools in conducting chemical process
 development. Molecular modeling enables our scientists to predict the
 behavior of reactants in a proposed synthetic transformation, allowing them
 to avoid reaction pathways that could pose safety hazards. Our scientists
 combine robotics and statistical analysis to rapidly optimize discrete
 chemical transformations. Our biocatalysis technology can be applied to
 identify a safe, efficient solution to a chemical transformation problem that
 could not be readily solved through the use of traditional chemistry methods.
 Following initial computational reaction design and automated reaction
 optimization, the process is then subject to large-scale validation. By
 employing computational chemistry, automation and biocatalysis, our approach
 to chemical process research adds tremendous value to our clients in the form
 of decreased development times and production costs, and

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 dramatically expands the range of underlying research data that can be used
 to strengthen patent applications and ultimately broaden patent coverage.

 .Analytical and Separations Chemistry. Our analytical and separations services
 utilize a broad range of spectroscopic and chromatographic techniques to
 assist clients in validating and purifying chemical compounds. Spectroscopic
 services, such as nuclear magnetic resonance spectroscopy and mass
 spectrometry, are used to identify and verify chemical structures.
 Chromatographic services include the use of high-performance liquid
 chromatography, HPLC, technologies to separate extremely complex mixtures and
 isolate chemical impurities. The compounds produced by chemical synthesis,
 including intermediate and final products, are validated using chromatographic
 techniques. These analytical validations form the basis of the Chemistry,
 Manufacturing and Control section when our clients file an Investigational New
 Drug, IND, application with the FDA.

 Because the U.S. Food and Drug Administration and the European Committee for
 Proprietary Medicinal Products have required manufacturers to research and
 characterize each chiral version of a drug proposed to be marketed, obtaining
 pure compounds containing one chiral version has become an essential
 requirement in the pharmaceutical industry. Through the experience of our
 highly qualified scientists as well as our technologies, such as
 ChiralSelect(TM), we enable our customers to perform complex separations and
 purifications of chiral chemical compounds.

 .Chemical Synthesis and Scale Up. Once an optimal method of chemical synthesis
 has been identified through chemical process development, our scientists then
 scale up the desired compound on the scale appropriate to the compound's stage
 of development, ranging from grams to multiple kilograms. The synthesis of
 compounds is conducted under Good Laboratory Practices, GLP, guidelines or, if
 the compound is undergoing early-stage clinical studies, under current Good
 Manufacturing Practices, cGMP, guidelines. We have the capacity to produce
 multiple-kilogram quantities of compounds under either GLP or cGMP guidelines.
 In addition, when larger quantities are required, we contract with large-scale
 chemical manufacturers to meet these requirements.


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DRUG DISCOVERY PLATFORM TECHNOLOGIES

Proteomics platform technologies
Our proteomics subsidiary, Emerald BioStructures, offers drug discovery tools
and technologies to pharmaceutical and biotechnology companies aimed at
determining the three-dimensional X-ray crystal structure of our clients'
protein targets. These tools and technologies include the following:

 .High Throughput Crystallization(TM), a system for screening large numbers of
 potential crystallization conditions for pharmaceutically relevant protein
 drug targets;

 .Crystal Monitor(TM), a powerful relational database software tool for the
 capture and analysis of protein crystallization trial information;

 .Clover Plates(TM), specialized plates that allow for multiple independent
 protein crystallization experiments; and

 .Crystal Growth Matrices(TM), novel formulations that decrease the time and
 cost required to design protein crystallization arrays and increase
 reproductibility of crystallization conditions.

Biocatalysis platform technologies
Our subsidiary, ThermoGen, has developed a broad technology platform for rapid
enzyme discovery, enzyme engineering, protein shuffling, process development
and scale up. ThermoGen's proprietary technologies include the following:

 .ThermoCat(R) enzyme products are stable biocatalysts for chemical synthesis
 applications. ThermoGen's proprietary collections of enzymes, organisms and
 gene libraries are rich sources of biocatalysts. These biocatalysts have been
 developed to target the growing need for catalysts and can economically
 produce chiral stereoisomers and other complex compounds. Using ThermoGen's
 core technology base, over 25 new biocatalysts have been commercialized. The
 ThermoCat(R) biocatalysts are being sold in three forms: QuickScreen(R) kits,
 bulk biocatalysts and immobilized biocatalysts.

 .The ThermoGenetic(TM) Stabilization System helps develop genetically
 stabilized proteins. By inserting a gene of interest into a thermophilic
 microorganism, our technology allows the generation of modified proteins that
 function at high temperatures.

 .ThermoFusion(TM) allows the construction of new enzymes by shuffling sections
 of proteins. The enzymes that result from this process can combine multiple
 enzymatic processes into a single enzyme. In addition, ThermoGen's protein
 technology enables the production of novel enzymes that will catalyze with
 enzymatic properties not available through natural means.

 .RapidScreen(TM) and TrueSubstrate(TM) methods allow rapid qualitative or
 quantitative comparison of enzyme properties for use in a variety of screening
 applications, including process optimization. Utilizing this technology,
 ThermoGen can compare large libraries of enzymes against libraries of
 substrates or process conditions rapidly and effectively.

ChiralSelect(TM)
A persistent problem in drug development is the identification of methods to
isolate pure drug candidates. Other than the development of a synthetic route,
which provides only one desired chiral version, chiral HPLC is the most rapid
and efficient method for the large-scale isolation of pure chiral compounds.

Despite the commercial availability of a variety of chiral stationary phases,
CSPs, challenging separations problem still persist, emphasizing the continuing
need to develop new and improved CSPs

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for certain drug candidates. Our ChiralSelect(TM) technology is a novel
approach to discover the optimal HPLC separation method that provides a large-
scale cost-effective means to separate a chemical mixture. ChiralSelect(TM)
involves the rational design and synthesis of diverse libraries of novel CSPs
for screening our clients' chemical mixtures to facilitate the determination of
the most efficient CSP for chiral separation requirements. We developed our
ChiralSelect(TM) technology as part of our relationship with ALS and Regis
Technologies and use the technology pursuant to exclusive, unlimited licenses
from ALS and Regis Technologies. The ChiralSelect(TM) license agreements with
ALS and Regis Technologies require us to pay each of them 4% of contract
revenue derived from the ChiralSelect(TM) platform technology. In the event
that the ChiralSelect(TM) technology is patented, our royalty obligation to
Regis Technologies will increase to 6%. The license with Regis Technologies
expires in August 2009 and cannot be terminated prior to that time without our
consent. Our license with ALS is perpetual. See "Business--Patents and
Proprietary Rights--Platform Technologies Licensed from ALS."

AutoOptimize(TM)
In many instances, the identification of a reliable and economical synthetic
method for large-scale production of a therapeutic agent becomes a critical
bottleneck in the development of new drugs. Our patented AutoOptimize(TM)
technology is an efficient method for rapidly optimizing chemical processes
that couples robotics and statistical analysis. Our automated techniques
generate "libraries" of hundreds of unique reaction conditions that combine
multiple reaction variables, such as solvent, temperature, reagent ratios and
catalyst selection. Using an iterative process, we conduct statistically-
designed experiments that allow the identification of critical reaction
variables, then perform multiple cycles of the design/reaction/analysis
sequence until the optimal set of reaction variables is determined. Our method
is far more efficient than traditional, time-consuming bench-scale reaction
optimization, which requires a chemist to manually and frequently change one
variable at a time, often missing subtle, but critical, cross-variable effects.
Our AutoOptimize(TM) technology platform provides our clients with a rapid and
cost effective alternative to traditional process optimization. We developed
our AutoOptimize(TM) as part of our relationship with ALS and use the
technology pursuant to an exclusive unlimited license from ALS that can only be
cancelled with our consent and that requires us to pay ALS 8% of our contract
revenue relating to the use of the AutoOptimize(TM) technology. See "Business--
Patents and Proprietary Rights--Platform Technologies Licensed from ALS."

BlockBuilder(TM)
Our BlockBuilder(TM) program is a service offering that utilizes our synthesis
technologies to efficiently produce unique combinatorial chemistry building
blocks and scaffolds. The program fills an important and growing need in the
chemical discovery research marketplace. This need is driven by the widespread
and growing popularity of combinatorial chemistry as a technique for
discovering new chemical entities. Because research organizations are investing
heavily in automated chemical synthesis to achieve discovery objectives, the
need for greater numbers of customized building block compounds has become more
pronounced. Our program is designed to provide a high throughput, cost-
effective source of custom synthesized unique combinatorial building blocks and
scaffolds on an exclusive basis to our clients.

MediCertified(TM)
Our MediCertified(TM) program utilizes our chemical synthesis and analytical
technologies to provide a "one-stop-shop" approach to the chemical synthesis
and validation of analytical reference standards. This certification is used in
generating the documentation required in FDA filings in connection with the
manufacture of drug substances. We use our MediCertified(TM) program to
discover and develop synthetic processes to produce drug impurities and
metabolites, develop a method for validating the chemical structure and purity
of each impurity or metabolite and utilize these compounds and associated data
to support our clients' FDA filings.


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STRATEGIC DRUG DEVELOPMENT PROGRAM

In conjunction with our drug discovery technology and integrated chemistry
research services, our strategic drug development program provides our
customers with a continuum of drug discovery and development services and
technologies. We are focused on serving the growing number of biotechnology and
"virtual" pharmaceutical companies who discover or in-license promising lead
compounds with therapeutic potential but may not have the in-house
infrastructure or experience to develop them. Our development program provides
these customers with an alternative to selling a significant portion of their
proprietary technology to gain access to the development capabilities of a
large strategic partner. Although focused on the biotechnology and "virtual"
pharmaceutical sector, our development program also has the potential to serve
fully integrated pharmaceutical firms who need additional development capacity.
Many of these companies have promising lead compounds that fall below internal
market size thresholds but still represent substantial opportunities for
companies focused on "middle market" therapeutic areas.

We are one of very few chemistry service companies that have the breadth of
service offerings needed to take a customer's lead compound through lead
optimization, chemical process development and chemical synthesis and scale up.
In addition, our drug discovery platform technologies enable us to provide our
customers with proprietary techniques to enhance the speed and efficiency of
their discovery and development efforts.

Through our strategic drug development program we offer two types of services:
direct services, including our lead discovery through chemical synthesis and
scale up capacities, and indirect services which we arrange for through our
project management expertise, including pre-clinical testing and clinical
trials of product candidates. We contract with third parties for services
relating to the pre-clinical research, clinical trials and chemical
manufacturing stages of drug development. Projects in our strategic drug
development program are longer term in nature, beginning in lead discovery and
moving through clinical development to potential commercialization. Through
this program we are building relationships with our customers and establishing
a recurring revenue base. We generate revenues from this program in the form of
chemistry service revenues, milestone fees and royalty payments.

Overall, our development program provides customers with access to fully-
integrated chemistry discovery and development services from lead discovery
through clinical development. Through our collaborations with ALS, we have
performed chemistry research services and engaged strategic partners to advance
calanolide A, an anti-HIV drug, from early optimization work through synthetic
route development, pre-clinical studies, IND filing and into human clinical
trials performed under our management by a contract research organization.
Calanolide A is currently in Phase I clinical trials. In addition, we have
implemented process research and scale up chemistry services in connection with
Immtech International, Inc.'s lead compound. We are also providing project
management services to Immtech as we work closely with strategic partners in
connection with the production of scale up information and preparation of
chemical and analytical regulatory data associated with Immtech's IND filing.
Having successfully taken a lead compound into the clinical trial stage of
development, we are positioned to replicate our successful strategy for other
clients although we have not yet prepared and filed an IND submission or
managed clinical trials for any client other than SMP.

RELATIONSHIP WITH ADVANCED LIFE SCIENCES, INC.

Overview

In late 1998, we made a strategic decision to operate our proprietary drug
development and chemistry services businesses as separate entities. Our
management believed that the objectives of these businesses

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were better pursued independently, given their distinct business models and
funding requirements. To accomplish our objectives, on January 1, 1999, we
contributed all of our proprietary drug development and certain platform
technology assets to a wholly-owned subsidiary, ALS. The assets we contributed
to ALS included ownership rights to all patented compounds in various stages of
drug development and our 50% joint venture interest in Sarawak MediChem
Pharmaceuticals, Inc., SMP.

We further implemented our strategy by spinning-off ALS immediately prior to
our June 1999 venture capital funding transaction. At the time of the spin-off,
we exchanged our 100% common stock interest for non-voting preferred stock with
an aggregate par value of $2.5 million with a 7% cumulative preferred dividend.
Our chairman and chief executive officer, Dr. Michael T. Flavin, who was our
sole stockholder prior to the venture capital investment, became the sole
common stockholder of ALS. As a result of the spin-off, ALS's historical
results of operations for all periods prior to the spin-off are reflected in
our financial statements as discontinued operations. Applicable accounting
rules require that all transactions with ALS following the spin-off be
reflected in our financial statements as a related party. Transactions with
ALS's joint-venture subsidiary, SMP, are reflected in our financial statements
as related party since SMP's inception in 1996.

ALS was founded to discover and develop patented drug compounds. Like many
"virtual" pharmaceutical companies, ALS has no employees and conducts its
operations through a master service agreement with us pursuant to which we
provide comprehensive project management services. All chemistry and laboratory
services provided by us to ALS or SMP are billed at our standard rates and
collected in the ordinary course consistent with any third-party customer. In
addition, as a chemistry research service provider to ALS, we developed the
AutoOptimize(TM) and ChiralSelect(TM) technologies and received milestone
payments related to their successful commercialization and issued patents. We
have the exclusive right to use the AutoOptimize(TM) and ChiralSelect(TM)
technologies pursuant to an unlimited license from ALS in exchange for the
payment of a royalty to ALS. See "Business--Patents and Proprietary Rights--
Platform Technologies Licensed from ALS." To date, ALS's principal funding
sources have been SBIR grant awards and equity investments from Dr. Flavin, its
sole stockholder. SMP has been funded by investments from the Government of
Malaysia.

SMP is a development stage pharmaceutical company with a current portfolio of
proprietary anti-viral drugs in various stages of clinical and pre-clinical
development. SMP represents a 50:50 joint venture between ALS and the
Government of Malaysia. SMP's products arose from a family of naturally
occurring anti-HIV compounds, collectively known as the calanolides, which were
discovered in the tropical rainforest of Sarawak, Malaysia, which is located on
the island of Borneo.

ALS's success is an example of the benefits we are now offering "virtual"
pharmaceutical and biotechnology customers through our strategic drug
development program. Utilizing our drug discovery and development services,
platform technologies and project management services, ALS has several
promising drug compounds in development. For example, ALS has developed a
promising anti-HIV compound through its SMP joint venture that is currently in
Phase I clinical trials. In addition, ALS has developed an anti-inflammatory
treatment, currently in pre-clinical development; an anti-cancer compound in
pre-clinical co-development with the National Cancer Institute, NCI, and two
early stage pre-clinical products with cancer and viral applications.

Our relationship with ALS is an example of our strategy to establish
collaborations with emerging "virtual" pharmaceutical and biotechnology
companies. We believe that our relationship with ALS provides incremental
service revenue opportunities, enhances our market reputation as a manager of
drug development programs and provides opportunities to obtain future milestone
and royalty revenues.

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Investment in ALS
With a portion of the net proceeds from this offering, we will invest $5.0
million in ALS in the form of convertible preferred stock, which will represent
approximately 15.4% of ALS's equity capitalization. This investment will be in
addition to our current ownership of the outstanding ALS preferred stock. Our
investment is an opportunity to formalize our collaborative relationship in a
manner that provides significant potential upside in ALS's promising drug
development pipeline. ALS intends to use the proceeds from our investment,
together with its other resources, to advance the development of its current
drug portfolio.

ALS's Drug Development Pipeline
ALS has a portfolio of drug compounds in various stages of pre-clinical and
clinical development. As an approximately 15.4% minority owner, we will have
the opportunity to participate in the significant upside potential of the
following drug compounds:

 .Calanolide Family of Compounds. SMP's leading drug candidate, calanolide A,
 demonstrates the most potent in vitro activity towards HIV within the
 calanolide family of naturally-occurring and semi-synthetic compounds.
 Assuming FDA approval, SMP plans to commence Phase II clinical trials in the
 second quarter of 2000. Calanolide A is also active against Mycobacterium
 tuberculosis. No other anti-HIV agent, either in development or on the market,
 possesses this dual therapeutic capability. Since patients with HIV have
 weakened immune systems and are more susceptible to contracting tuberculosis
 compared to healthy individuals, the dual therapeutic properties of calanolide
 A make it a valuable drug to this patient group and will help to distinguish
 it from other agents in its class. The rights to this patent have been
 exclusively licensed to SMP by the NIH. Additional patents are owned by SMP
 and cover manufacturing processes and other therapeutic applications of
 calanolide analogs.

 In addition to calanolide A, SMP possesses a portfolio of proprietary drug
 candidates that stem from the calanolide family of compounds and that are in
 pre-clinical development. Oxacalanolide and its enantiomers are semi-
 synthetic compounds that demonstrate both in vitro anti-HIV and anti-
 cytomegalovirus, CMV, activities. Co-infection with CMV is a major
 complication in individuals with late-stage HIV infection and can lead to
 blindness. Calanolide B is a naturally-occurring compound that can be
 isolated in high yield and purity directly from the natural source and it
 also demonstrates potent in vitro anti-HIV activity, as well as activities
 against tuberculosis and CMV.

 .Robustaflavone. Robustaflavone is a novel anti-hepatitis B virus
 chemotherapeutic agent derived from natural sources that is in pre-clinical
 development. Robustaflavone is the first non-nucleoside analogue reported to
 be active against hepatitis B, and its unique molecular structure is expected
 to possess a different resistance profile than drugs that are currently
 available. Robustaflavone has been found to act synergistically with
 nucleoside analogs, which makes it an attractive drug candidate in combination
 therapy against hepatitis B.

 .2,3-DABA. The combination of 2,3-diacetoxybenzoic acid, 2,3-DABA, and
 ibuprofen constitutes a novel combination therapy for the treatment of Adult
 Respiratory Distress Syndrome, ARDS, and potentially other inflammatory
 disease conditions. 2,3-DABA is in late pre-clinical development. An important
 use of this drug combination is to block disease processes in acute lung
 injury associated with ARDS. Animal toxicology studies have demonstrated an
 absence of toxicity, even at high doses.

 .MCR-47. MCR-47 is a novel anti-cancer agent discovered by scientists at ALS
 under the support of Phase I and Phase II SBIR grants from NIH and is
 currently in pre-clinical development. MCR-47 has been found to be a potent
 inhibitor of topoisomerase I, an attractive therapeutic target for the
 development of anti-cancer agents. This lead compound has demonstrated potent
 activity against colon, ovarian and prostate cancer, both in vitro and in
 vivo.

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 .Betulinic Acid. ALS has an exclusive worldwide license to develop and
 commercialize the compound betulinic acid for the treatment of malignant
 melanoma. This compound was discovered and its use patented by scientists at
 the University of Illinois at Chicago. The compound is being co-developed by
 ALS and NCI and is currently in pre-clinical development.

 .PMEA. In addition to its drug development portfolio, ALS has the exclusive
 right to the patented synthesis process, PMEA. PMEA is an efficient process
 for the development of a class of compounds termed Purine Acyclic Nucleotides.
 This class of compounds exhibits potent antiviral activity including activity
 against HIV and hepatitis B. ALS is further refining the PMEA process for
 marketing to pharmaceutical companies who are developing Purine Acyclic
 Nucleotide compounds for antiviral treatment.

INSTITUTIONAL COLLABORATIONS

Through our relationship as the preferred project manager of ALS's drug
development program, we provide services and technologies on a number of
collaborations that ALS has with prominent research institutions that provide
services or possess technology complementary to those we provide or possess. In
addition to incremental service revenues, these collaborations provide
significant benefits to us in terms of experience in performing services on
advanced projects, access to possible new technologies which enhance our
ability to market our services to third-party customers and potential to obtain
future milestone payments. Examples of collaborations that we have fully
serviced include the following cooperative R&D agreements, CRADAs:

 .NCI CRADA. ALS and the NCI have established a CRADA to identify and capitalize
 on the therapeutic value of the calanolide class of anti-HIV agents. The
 objective of this alliance is to combine our chemical research experience with
 the biological expertise of NCI to advance the calanolide compounds to
 commercialization.

 .Argonne CRADA. ALS has also established a CRADA with Argonne National
 Laboratory. This CRADA was established to combine our synthesis and medicinal
 chemistry expertise with the computational chemistry and structural biology
 strengths of Argonne. The aim of this collaboration is to further the
 discovery and development of new drug candidates that inhibit amyloid fibril
 formation, which is suspected to be a cause of Alzheimer's disease.

 .Southern Research Institute CRADA. ALS and Southern Research Institute have
 established a research collaboration to discover and develop novel anti-viral
 agents. The goal of this collaboration is to bring together our expertise in
 combinatorial synthesis and medicinal chemistry and the high throughput anti-
 viral screening capabilities of Southern Research Institute to discover and
 develop new anti-viral drug candidates.

 .Walter Reed Army Hospital CRADA. ALS and Walter Reed Army Hospital have
 established a CRADA to discover and develop novel anti-malaria agents. This
 collaboration is focused on coupling our expertise in combinatorial synthesis
 and medicinal chemistry and the high throughput anti-malaria screening
 capabilities of Walter Reed to discover and develop new anti-malaria drug
 candidates.

ACQUISITION OF THERMOGEN

On May 31, 2000, we acquired ThermoGen in exchange for 185,087.27 shares of our
common stock and the assumption of options to purchase 25,486 shares of our
common stock. ThermoGen, based in Chicago, Illinois, is a leading provider of
biocatalysis services and products through the use of proprietary technologies
that expand our technology and chemistry service offerings. ThermoGen's
proprietary technologies permit our customers to perform difficult chemical
reactions with stable, easy-to-use biocatalysts that are environmentally
friendly and cost effective. ThermoGen develops and sells proprietary
biocatalyst products and process research services to the pharmaceutical,
agricultural

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chemical and food industries. We believe that by integrating ThermoGen's
biocatalysis technology, we provide our clients with chemical processes that
are more efficient and shorten the chemical process development timeframe. Our
acquisition of ThermoGen allows us to provide biocatalysis services and
products to our existing customers and provides opportunities to market our
broad range of chemistry services to new clients. We also believe that
ThermoGen's technology and intellectual property will enhance our current
service and product offerings, thereby improving our efficiency.

ThermoGen was founded in 1988 and had revenues of $2.1 million for the year
ended December 31, 1999 and a staff of over 20 professionals. ThermoGen has
been recognized for its leading biocatalysis technology, having been awarded
more than a dozen SBIR grants from the NIH totaling over $4 million for
technology development. ThermoGen was awarded the 1999 Tibbets Award from the
U.S. Small Business Administration for its excellence in developing and
commercializing its proprietary biocatalysis platform technologies.

ACQUISITION OF EMERALD BIOSTRUCTURES

On May 31, 2000, we acquired Emerald BioStructures, Inc., in exchange for
84,511 shares of our common stock. Emerald BioStructures, based near Seattle,
Washington, is a leading provider of research products and services in protein
structure determination to the pharmaceutical and biotechnology industries. We
believe Emerald BioStructures is well-positioned to benefit from the bottleneck
resulting from the explosion in genomic information. Emerald Biostructures'
proteomics services help bridge the gap between genomic information and the
chemistry services necessary to identify new lead compounds. Emerald
BioStructures offers an integrated platform of technologies in proteomics that
enables more efficient determination of protein structure and function. Our
acquisition of Emerald BioStructures allows us to provide proteomics services
to our existing customers and provides opportunities to market our broad range
of chemistry services to new clients. We believe Emerald BioStructures'
proteomics platform technologies improve the efficiency of our current service
and product offerings.

Emerald BioStructures was founded in 1997 and had revenues of $0.5 million for
the year ended December 31, 1999 and a staff of 5 professionals. Emerald
BioStructures has been recognized for its leading proteomics technologies,
having been awarded three SBIR grants from the NIH totaling over $0.8 million
for technology development.

MARKETING

We market the majority of our services directly to pharmaceutical and other
life science companies. Since our inception, our senior management and business
development groups have marketed our services. Our business development
professionals possess the requisite technical and business backgrounds to
communicate effectively with prospective clients and their R&D professionals.
An important component of our strategy is to pursue long-term collaborative
relationships with selected clients.

We market our services directly to clients through meetings with senior
management of pharmaceutical and biotechnology companies, participation in
scientific symposia and trade shows, media relations and public relations,
targeted mailings, maintenance of an extensive internet website and selected
advertisements in scientific and trade journals. An independent marketing
communication agency has been retained to assist with brochure design,
advertising and media relations. In addition, our scientists and senior
management present technical papers at scientific symposia on a regular basis.

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Historically, we have focused our marketing efforts in the United States from
our business development and client communication offices in Chicago, Illinois,
San Francisco, California and New London, Connecticut. In the past several
years, we have expanded our efforts to include Western Europe, Japan and the
Far East. Such efforts include increased presence at international trade shows,
advertising in trade publications, visits by business development professionals
and senior management to potential clients and the retention of independent
marketing consultants. We are currently exploring opportunities to open sales
offices in international locations.

CUSTOMERS

Since our inception, we have conducted over 490 projects for more than 75
customers. Our customers include pharmaceutical companies, biotechnology
companies, personal care companies, agricultural chemical companies and
specialty chemical manufacturers. Contract revenue from pharmaceutical
companies accounted for 71% and contract revenue from biotechnology companies
accounted for 29% of our aggregate contract revenue, including licensing fees,
milestones and royalties for the year ended December 31, 1999. Our ten largest
customers have accounted for approximately 94%, 90% and 87% of total contract
revenues for the years ended December 31, 1997, 1998 and 1999, respectively.
Contract revenue from ALS, together with SMP, accounted for 17%, contract
revenue from Pfizer accounted for 17%, and contract revenue from AstraZeneca
accounted for 11% of total contract revenue, respectively, for the year ended
December 31, 1999. Dr. Michael T. Flavin, our chairman and chief executive
officer, was the sole shareholder of ALS as of March 31, 2000. No other
customers accounted for more than 10% of our total revenues during this period.
For the three months ended March 31, 2000, contract revenue from our three
largest customers represented approximately 37% of total contract revenue.

COMPETITORS

We face competition based on a number of factors, including size, relative
expertise and sophistication, speed and costs of identifying and optimizing
potential lead compounds and of developing and optimizing chemical processes.
We compete with the research departments of pharmaceutical companies,
biotechnology companies, contract research companies and research and academic
institutions. Many of these competitors have greater financial and other
resources and more experience in R&D than we do.

Historically, pharmaceutical companies have maintained close control over their
R&D activities, including the synthesis, screening and optimization of chemical
compounds and the development of chemical processes. Many of these companies,
which represent a significant potential market for our products and services,
are developing or already possess in-house technologies and services offered by
us. Academic institutions, governmental agencies and other research
organizations are also conducting research in areas in which we provide
services, either on their own or through collaborative efforts.

We anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies become available. Our
services and expertise may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or
more of our competitors. The existing approaches of our competitors or new
approaches or technologies developed by our competitors may be more effective
than those developed by us. There can be no assurance that our competitors will
not develop more effective or more affordable technologies or services, thus
rendering our technologies and/or services obsolete, uncompetitive or
uneconomical.

We believe that the successful recruitment and retention of qualified Ph.D.,
M.S. and B.S.--level scientists and business professionals is a key element in
achieving our strategic goals. We believe that as

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competitive pressures in the pharmaceutical industry to produce lead compounds
increase, the recruitment and retention of chemists and seasoned business
professionals will become increasingly competitive. In order to meet this
challenge, we actively recruit at colleges and universities, through third-
party recruitment firms and through the contacts of our employees.

PATENTS AND PROPRIETARY RIGHTS

Platform technologies licensed from ALS
An original purpose of our spin-off of ALS was to highlight the distinct
business models of MediChem and ALS by concentrating chemistry service revenues
at MediChem and R&D expenditures associated with drug and platform technology
development at ALS. Since the time of the spin-off, ALS has expended
significant R&D capital to develop two platform technologies that have
successfully been commercialized, AutoOptimize(TM) and ChiralSelect(TM).
Following the offering, MediChem will incur R&D expenditures to develop our
platform technologies.

We use AutoOptimize(TM) technology in our business pursuant to an exclusive,
unlimited license agreement with ALS, which is terminable only upon our mutual
agreement with ALS. The AutoOptimize(TM) license agreement requires us to pay
ALS 8% of all contract revenue derived from this platform technology. We use
ChiralSelect(TM) technology in our business pursuant to exclusive, unlimited
license agreements with ALS and Regis Technologies, Inc. The ChiralSelect(TM)
license agreements with ALS and Regis Technologies requires us to pay each of
them 4% of all contract revenue derived from the ChiralSelect(TM) platform
technology. In the event that the ChiralSelect(TM) technology is patented, our
royalty obligation to Regis Technologies will increase to 6%. The ALS license
agreement is perpetual and the Regis Technologies license agreement terminates
in August 2009 unless terminated previously with our mutual consent.

Under our license agreements, ALS is obligated to pay us certain milestone
payments for our role in developing the AutoOptimize(TM) and ChiralSelect(TM)
technologies. The milestone payments are due upon demonstrating commercial use,
the issuance of a United States patent and for each publication relating to the
platform technology in a peer-reviewed journal. Through the date of this
prospectus, we have fully realized $1.4 million of the total milestone payments
payable from ALS due to the commercialization and issued patent on
AutoOptimize(TM) and $0.3 million of the total milestone payments payable from
ALS due to the commercialization of ChiralSelect(TM). The possibility of
receiving future peer-reviewed publication milestone rights from ALS continues.
The possibility of receiving future milestones from ALS due to ChiralSelect(TM)
being patented continues.

General
While it is important to our growth that we obtain and enforce patents, protect
trade secrets and obtain licenses to technology owned by third parties wherever
required, there can be no assurance that any patent applications will result in
the issuance of patents. In addition, if any patents are issued, we cannot be
sure whether they will provide significant proprietary protection or commercial
advantage, or will not be circumvented by others.

Our plan is to conduct our business without infringing upon the proprietary
rights of others. However, in the event a third party has also filed one or
more patent applications for inventions which conflict with those we own, we
may have to participate in interference proceedings declared by the Patent and
Trademark Office to determine priority of invention, which could result in the
loss of any opportunity to secure patent protection for the inventions and the
loss of any right to use the inventions. The patent positions of chemical,
pharmaceutical, medical products, personal care products and biotechnology

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firms can be uncertain and involve complex legal and factual questions. Even if
the eventual outcome is favorable to us, such proceedings could result in
substantial cost to us.

The filing and prosecution of patent applications, litigation to establish the
validity and scope of patents, assertion of patent infringement claims against
others and the defense of patent infringement claims by others can be expensive
and time consuming. There can be no assurance that in the event that any claims
with respect to any of our patents, if issued, are challenged by one or more
third parties, that any court or patent authority ruling on such challenge will
determine that such patent claims are valid and enforceable. An adverse outcome
in such litigation could cause us to lose exclusivity afforded by the disputed
rights. If a third party is found to have rights covering products or processes
we use, we could be forced to cease using the technologies covered by such
rights, could be subject to significant liability to such third party and could
be required to license technologies from such third party. Furthermore, even if
the patents we own or license are determined to be valid, enforceable and broad
in scope, there can be no assurance that competitors will not be able to design
around such patents and compete with us and our licensees using the resulting
alternative technology.

We seek patent protection with respect to products and processes developed in
the course of our activities when we believe such protection is in our best
interest and when the cost of seeking such protection is in line with potential
benefits. However, no assurance can be given that any patent application will
be filed, that any filed applications will result in issued patents or that any
issued patents will provide us with a competitive advantage or will not be
successfully challenged by third parties. The protections afforded by patents
will depend upon their scope and validity, and others may be able to design
around our patents.

From time to time, we may also enter into collaborations or other arrangements
with our customers whereby we retain certain ownership rights or may be
entitled to receive milestones and royalties with respect to proprietary
technology we developed during the contract period. However, many of our
contracts provide that our customers maintain ownership of proprietary
technology that is developed in the course of work performed under the
contract.

We also rely upon trade secrets and proprietary know-how for certain unpatented
aspects of our technology. To protect such information, we require all
employees, consultants and licensees to enter into confidentiality agreements
limiting the disclosure and use of such information. There can be no assurance
that these agreements provide meaningful protection or that they will not be
breached, that we would have adequate remedies for any such breach or that our
trade secrets, proprietary know-how and technological advances will not
otherwise become known to others. In addition, there can be no assurance that,
despite precautions taken by us, others have not and will not obtain access to
our proprietary technology. Further, there can be no assurance that third
parties will not independently develop substantially equivalent or better
technology.

Potential liability and insurance
In connection with our services provided to SMP, we attempt to manage our risk
of liability for personal injury to or death of clinical trial participants
from administration of products under study through a specific insurance policy
for that purpose. We also attempt to manage our risk of liability in connection
with services provided to other clients through measures such as contractual
indemnification provisions with clients and through insurance maintained by
clients. The contractual indemnifications generally do not protect us against
certain of our own actions, such as negligence. The contractual arrangements
are subject to negotiation with clients and the terms and scope of such
indemnification vary from client to client and from trial to trial. Although
most of our clients are large, well-capitalized

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companies, the financial performance of these indemnities is not secured.
Therefore, we bear the risk that an indemnifying party may not have the
financial ability to fulfill its indemnification obligations. We could be
materially adversely affected if we were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance coverage
maintained by the client or where the indemnifying party does not fulfill its
indemnification obligations. Other than our policy in connection with SMP, we
do not currently maintain liability insurance with respect to these risks.

Government Regulation
Our customers and collaborators, including ALS and SMP, are subject to
substantial regulation by governmental entities in the U.S. and other
countries. Moreover, to the extent that we act as project manager in providing
or arranging for FDA-regulated services for our customers, we also are subject
to these requirements. The nature and the extent to which such regulation may
apply to our customers will vary depending on the nature of any such
pharmaceutical products. Virtually all pharmaceutical products developed by our
customers will require regulatory approval by governmental agencies prior to
commercialization. Human pharmaceutical products are subject to rigorous pre-
clinical and clinical testing and other approval procedures by the FDA and by
foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such pharmaceutical
products. The process of obtaining these approvals and the subsequent
compliance with appropriate federal and foreign statutes and regulations are
time consuming and require the expenditure of substantial resources.

Generally, in order to gain FDA approval, a company first must conduct pre-
clinical studies in the laboratory and in animal models to gain preliminary
information on a compound's efficacy and to identify any safety problems. The
results of these studies are submitted as a part of an IND that the FDA must
review before human clinical trials of an investigational drug can start. In
order to commercialize any products, we or our customer will be required to
sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety and efficacy that are necessary
to obtain FDA approval of any such products. Clinical trials are normally done
in three phases and generally take two to five years to complete. After
completion of clinical trials of a new product, FDA and foreign regulatory
authority marketing approval must be obtained. If the product is classified as
a new drug, we or our customer will be required to file an NDA and receive
approval before commercial marketing of the drug. The testing and approval
processes require substantial time, effort and expense and there can be no
assurance that any approval will be granted on a timely basis, if at all. NDAs
submitted to the FDA can take several years to obtain approval. Even if FDA
regulatory clearances are obtained, a marketed product is subject to continual
review, and later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market as well as
possible civil or criminal sanctions. For marketing outside the U.S., we will
also be subject to foreign regulatory requirements governing human clinical
trials and marketing approvals for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.

All facilities and manufacturing techniques used in the manufacture of products
for clinical use or for sale in the U.S. must be operated in conformity with
cGMP guidelines as established by the FDA. Our facilities are subject to
scheduled periodic regulatory inspections to ensure compliance with cGMP
requirements. If the FDA finds that we have failed to comply with these
requirements or that we or our customers have failed to comply with any
applicable regulatory requirements, the agency can institute a wide variety of
enforcement actions. Our or our customers' failure to comply with applicable

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requirements could lead to an FDA enforcement action that may have a material
adverse effect on our business. See "Risk factors--We and our customers are
subject to substantial government regulation."

Our R&D processes involve the controlled use of hazardous materials. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although we believe that our activities currently comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of such an accident, we could be held liable for any damages that result and
any such liability could exceed our resources. In addition, there can be no
assurance that we will not be required to incur significant costs to comply
with environmental laws and regulations in the future.

EMPLOYEES

As of May 31, 2000, after giving effect to the ThermoGen and Emerald
BioStructures acquisitions, we had 195 employees, 149 of whom hold degrees in
chemistry, biochemistry or molecular biology broken down by degree level as
follows: 65 Ph.D., 32 M.S. and 52 B.S. The majority of our employees are
working scientists, with approximately 16 individuals working in our business
development, client communications and administration groups. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.

PROPERTIES

Our principal executive offices and laboratories are located in Lemont,
Illinois, and encompass approximately 50,000 square feet of leased space,
pursuant to a lease agreement expiring in September 2003, with an option to
purchase the facility or enter into a four-year lease agreement. We also occupy
15,000 square feet of additional laboratory space in Des Plaines, Illinois. Our
lease runs through October 2000, with an option to lease on a year-to-year
basis. Two satellite business development offices are being leased in San
Francisco, California, for 1,460 square feet, and in New London, Connecticut,
for 1,630 square feet. ThermoGen operates from a 10,000 square foot leased
facility located in Chicago, Illinois. Emerald BioStructures operates from a
3,700 square foot leased facility located near Seattle, Washington.

We are developing a 14 acre site in Woodridge, Illinois for the construction of
a new 100,000 square foot headquarters and discovery laboratories center. This
new facility is expected to be operational in the first quarter of 2001. The
offices and laboratories have the capability of expanding to 200,000 square
feet.

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 the name, age, position and a brief account of the business
experience of each of our executive officers, directors and key employees.

<TABLE>
<CAPTION>
 Name                          Age Position
-------------------------------------------------------------------------------
 <C>                           <C> <S>
 Michael T. Flavin, Ph.D.....   44 Chairman of the Board of Directors,
                                   President and Chief Executive Officer
 John L. Flavin..............   31 Executive Vice President and Chief Operating
                                   Officer--MediChem; Chief Executive Officer--
                                   ThermoGen and Emerald BioStructures;
                                   Director
 R. Richard Wieland II.......   55 Executive Vice President and Chief Financial
                                   Officer
 Jeffrey A. Whitnell.........   44 Vice President of Finance and Treasurer
 Shirley A. Pine.............   46 Vice President of Administration
 David E. Zembower, Ph.D.....   36 Vice President of Operations
 Vernon O. Sebby.............   42 Vice President of Business Development and
                                   Client Communications
 Ze-Qi Xu, Ph.D..............   38 Vice President of Strategic Drug Development
 David C. Demirjian, Ph.D....   38 Vice President of Technology Strategy--
                                   MediChem; President--ThermoGen; Director
 Lance Stewart, Ph.D.........   35 President--Emerald BioStructures
 Hidong Kim, Ph.D............   34 Vice President of Operations--Emerald
                                   BioStructures
 Darsh T. Wasan, Ph.D........   60 Director
 Robert D. Weist (2).........   59 Director
 Brother James Gaffney, FSC..   57 Director
 Peter R. Gates (1)(2).......   48 Director
 Damion E. Wicker, M.D. (1)..   39 Director
 W. Brett Ingersoll (2)......   35 Director
 Larry C. Hansen, Ph.D. (1)..   55 Director
</TABLE>
--------

(1) Member of the compensation committee
(2) Member of the audit committee

Michael T. Flavin, Ph.D. Dr. Michael Flavin founded MediChem in 1987 and has
been chairman of the board of directors, president and chief executive officer
since that time. Dr. Flavin holds a B.S. degree in chemistry from the
University of Notre Dame and a Ph.D. in medicinal chemistry from the
University of Illinois at Chicago. He performed his postdoctoral research
fellowship at Harvard University, specializing in carbohydrate chemistry.
Prior to founding MediChem, Dr. Flavin was a senior research scientist at
Baxter International. Dr. Flavin is the brother of John L. Flavin.

John L. Flavin Mr. Flavin joined us in 1991 and served as our director of
financial operations from 1991 until 1996. In 1996, Mr. Flavin was appointed
our vice president of operations. Mr. Flavin was appointed as our executive
vice president and chief operating officer in May 2000. In connection with our
May 31, 2000 acquisitions of ThermoGen and Emerald BioStructures, Mr. Flavin
was appointed chief executive officer of both subsidiaries. He is also a
member of our board of directors. He holds a B.S. in business administration
from Marquette University and a M.B.A. in finance from the Lewis University
Graduate School of Management. Mr. Flavin is the brother of Dr. Michael T.
Flavin.

R. Richard Wieland II Mr. Wieland was appointed executive vice president and
chief financial officer in May 2000. Mr. Wieland joined SMP in November 1999
as chief financial officer. Prior to joining us, he was an independent
consultant from October 1998 to October 1999 and he was senior vice

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president and chief financial officer at BioGenex Laboratories from December
1996 to August 1998. From March 1996 to November 1996, Mr. Wieland was an
independent consultant, and he was president and acting chief financial officer
of Option Care Inc. from October 1993 to February 1995. Mr. Wieland obtained
his M.B.A. in finance from Washington University and his B.A. in accounting and
economics from Monmouth College.

Jeffrey A. Whitnell Mr. Whitnell was appointed vice president of finance and
treasurer in May 2000. Mr. Whitnell joined us in 1997 as chief financial
officer. Prior to that time he worked for ten years with Akzo Nobel as a
controller. Mr. Whitnell earned his C.P.A. after graduating from the University
of Illinois with a B.S. in accounting. He also holds a M.B.A. in finance from
the University of Chicago Graduate School of Business.

Shirley A. Pine Ms. Pine was appointed as our vice president of administration
in May 2000. Ms. Pine joined us in 1993 as manager of human resources. In 1995,
she was promoted to director of human resources. Ms. Pine earned a B.A. in
education from Valparaiso University.

David E. Zembower, Ph.D. Dr. Zembower joined us in March 1995 as senior
research scientist. In November 1996, he was promoted to director of
combinatorial chemistry. In March 2000, he was appointed vice president of
operations. Dr. Zembower holds a B.S. degree in chemistry from the University
of Central Florida and earned his Ph.D. in organic chemistry from the Georgia
Institute of Technology. He completed his postdoctoral fellowship at the Mayo
Clinic under a National Cancer Institute training grant.

Vernon O. Sebby Mr. Sebby joined us in October 1999 as vice president of
business development and client communications. Prior to joining us, Mr. Sebby
was vice president of strategy and support for Metals USA from February 1998 to
October 1999 and general manager of sales and marketing from November 1993 to
February 1998. Mr. Sebby received his B.A. in communications from Lewis
University.

Ze-Qi Xu, Ph.D. Dr. Xu was appointed vice president of strategic drug
development in May 2000. Dr. Xu joined us in 1994 as senior research scientist.
Dr. Xu has been the project leader for the calanolide A program and continues
to direct the clinical development of this investigational anti-HIV compound.
Dr. Xu holds a B.S. degree in chemistry from Jiangxi Normal University (China),
a M.S. degree in organic chemistry from Shanghai Medical University (China) and
a Ph.D. in organic chemistry from the Shanghai Institute of organic chemistry
(China). He performed his postdoctoral fellowships at Clemson University and
the Michigan Cancer Foundation.

David C. Demirjian, Ph.D. Dr. Demirjian joined us in May 2000 as vice president
of technology strategy at MediChem, president of our ThermoGen subsidiary and a
member of our board of directors. Dr. Demirjian founded ThermoGen in 1988 and
served as its president since that date. Dr. Demirjian received a B.S.A. in
cellular and molecular biology from the University of Michigan and a Ph.D. in
genetics from the University of Chicago.

Lance Stewart, Ph.D. Dr. Stewart joined us in May 2000 as president of our
Emerald BioStructures subsidiary. From January 1998 to May 2000, Dr. Stewart
was president and chief executive officer of Emerald BioStructures. From
January 1996 to December 1997 he was a research assistant professor in the
department of biological structure at University of Washington. Prior to that
time, Dr. Stewart was a postdoctoral fellow in the department of microbiology
at the University of Washington. Dr. Stewart earned his Ph.D. in biochemistry
and virology from Cornell University and holds a B.Sc. with honors in biology
from McMaster University.

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Hidong Kim, Ph.D. Dr. Kim joined us in May 2000, as vice president of
operations for our Emerald BioStructures subsidiary. From August 1997 to May
2000, Dr. Kim served as vice president of Emerald BioStructures. From August
1994 to July 1997, Dr. Kim was a postdoctoral fellow in the Howard Hughes
Medical Institute at the University of Washington. Dr. Kim earned a Ph.D. and
M.A. in physical chemistry from Harvard University and holds a B.A. with
highest honors in chemistry from Oberlin College.

Darsh T. Wasan, Ph.D. Dr. Wasan joined our board in March 1999 and is currently
vice president for international affairs and Motorola Chair in chemical
engineering at Illinois Institute of Technology. From 1991 to 1995 he served as
provost and vice president of IIT, and in 1995 was appointed vice president for
international affairs and Motorola Chair in chemical engineering. Dr. Wasan
obtained a B.S. degree in chemical engineering in 1960 from the University of
Illinois at Urbana and a Ph.D. in chemical engineering from the University of
California at Berkeley in 1965.

Robert D. Weist Mr. Weist joined our board in March 1999. He has served as vice
chairman of the board of directors of HYSEQ, Inc. since March 1994, and served
as the president and a director of HYSEQ from May 1993 until March 1994. Mr.
Weist has also been President of Weist Associates, a management consulting
firm, since April 1992. Prior to that, Mr. Weist was senior vice president,
general counsel and secretary of Amgen, Inc. Mr. Weist holds a B.S. in chemical
engineering from Purdue University, a J.D. from New York University and an
M.B.A. from the University of Chicago Graduate School of Business.

Brother James Gaffney, FSC Brother Gaffney joined our board in March 1999 and
is the president of Lewis University. In 1988, Brother Gaffney was appointed
the twelfth president of Lewis University in Romeoville, Illinois. Brother
Gaffney obtained a B.A. degree in religious studies and a M.Ed. degree in
education from Saint Mary's University of Minnesota. He received an M.A. degree
in theology from Manhattan College in New York and obtained a D.Min. degree in
theology from the University of Saint Mary of the Lake in Mundelein, Illinois.

Peter R. Gates Mr. Gates joined our board in August 1999 and is currently
managing director of MedEquity Investors, L.L.C. He has held that position
since June 1998. Mr. Gates served as an independent consultant from September
1997 to June 1998. Prior to that time, Mr. Gates was senior vice president of
Concentra Managed Care from August 1996 to September 1997 and was a vice
president of Mercer Management Consulting from January 1995 to August 1996. He
is a graduate of Princeton University and the Harvard Business School. Mr.
Gates currently serves as a director of Microelectronic Modules Corporation.

Damion E. Wicker, M.D. Dr. Wicker joined our board in August 1999 and has been
a general partner with Chase Capital Partners since January 1996. Dr. Wicker
was a principal at Chase Capital Partners from April 1993 to January 1996. Dr.
Wicker received a B.S. with honors from MIT in biomedical engineering, an M.D.
from Johns Hopkins, and an M.B.A. from the Wharton School of the University of
Pennsylvania. Dr. Wicker currently is a director of Praecis Pharmaceuticals,
Genomic Solutions, VI Technologies and several privately held companies.

W. Brett Ingersoll Mr. Ingersoll joined our board in August 1999 and currently
heads Chase Capital Partners's investment practice in Health Care Services. He
has been an employee of Chase Capital Partners for the past 5 years. He
received his B.A. from Brigham Young University in economics and an M.B.A. from
the Harvard Business School. Mr. Ingersoll currently serves as a director of
HealthMarket, Inc., CB Technologies, Tricordia Health, LLC, SMG, Inc. and
HealthNet.


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

72
<PAGE>

Management

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

Larry C. Hansen, Ph.D. Dr. Hansen joined our board in May 1999 and currently is
senior vice president, global pre-clinical development at G.D. Searle, a
position he has held since August 1994. In 1993, Dr. Hansen was named vice
president, pre-clinical development of Searle. Dr. Hansen received his B.S.
degree in chemistry from Texas Tech University and his M.S. and Ph.D. degrees
in analytical chemistry from the University of Cincinnati. He completed a
postdoctoral fellowship through the NIH National Research Council at Wright-
Patterson Air Force Base in 1973.

BOARD COMPOSITION

We currently have ten authorized directors. In accordance with the terms of our
certificate of incorporation, the terms of office of the directors are divided
into three classes:

 .Class I, whose term will expire at the annual meeting of stockholders to be
 held in 2001;

 .Class II, whose term will expire at the annual meeting of stockholders to be
 held in 2002; and

 .Class III, whose term will expire at the annual meeting of stockholders to be
 held in 2003.

The Class I directors are Larry C. Hansen, PhD, W. Brett Ingersoll and Robert
D. Weist, the Class II directors are Brother James Gaffney, FSC, Darsh T.
Wasan, PhD and Damion E. Wicker, MD, and the Class III directors are Michael T.
Flavin, PhD, John L. Flavin, Peter R. Gates and David C. Demirjian, PhD. At
each annual meeting of stockholders after the initial classification or special
meeting in lieu thereof, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election or special meeting held in
lieu thereof. The authorized number of directors may be changed only by
resolution of the board of directors or a super-majority vote of the
stockholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of MediChem.

BOARD COMMITTEES

The compensation committee of the board of directors reviews and makes
recommendations to the board regarding all forms of compensation provided to
our executive officers and directors, including stock compensation and loans.
In addition, the compensation committee reviews and makes recommendations on
bonus and stock compensation arrangements for all of our employees. As part of
these responsibilities, the compensation committee also administers our
Incentive Compensation Plan. The current members of the compensation committee
are Mr. Gates and Drs. Hansen and Wicker.

The audit committee of the board of directors reviews and monitors our
corporate financial reporting and our external audits, the results and scope of
the annual audit and other services provided by our independent auditors and
our compliance with legal matters that have a significant impact on our
financial reports. The audit committee also consults with management and our
independent auditors before the presentation of financial statements to
shareholders and, as appropriate, initiates inquiries into aspects of our
financial affairs. In addition, the audit committee has the responsibility to
consider and recommend the appointment of, and to review fee arrangements with,
our independent auditors. The current members of the audit committee are
Messrs. Gates, Ingersoll and Weist.


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

                                                                              73
<PAGE>

Management

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

DIRECTOR COMPENSATION

Non-employee, non-significant shareholder directors will receive $1,500 for
each board or board committee meeting attended. All of our non-employee
directors will be eligible to receive equity incentives in the form of stock
option grants under our 2000 Non-Employee Directors Stock Option Plan. On
January 1, 1998, directors Darsh Wasan, Robert Weist and Larry Hansen were each
granted stock options for 500 shares at $9.80. The directors will vest in one-
third of the shares subject to their options on January 1, 2001, one-third on
January 1, 2002 and the remaining third on January 1, 2003.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our compensation committee currently consists of Mr. Gates and Drs. Hansen and
Wicker. 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. Prior to the formation of the compensation committee in
March 1999, the board of directors as a whole made decisions relating to
compensation of our executive officers.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our certificate of incorporation and our bylaws provide that our directors and
officers shall be indemnified by us to the fullest extent authorized by
Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with their service
for or on our behalf. In addition, the certificate of incorporation provides
that our directors will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they violated their duty
of loyalty to us or to our stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions or
derived an improper personal benefit from their action as directors. We have
obtained insurance which insures our directors and officers against specified
losses and which insures us against specific obligations to indemnify our
directors and officers.

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74
<PAGE>

Management

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

EXECUTIVE COMPENSATION

Summary of cash and other compensation

The following table shows all compensation received during the year ended
December 31, 1999 by our Chief Executive Officer and our four other highest-
paid executive officers, collectively referred to as the Named Executive
Officers. Other compensation consists of matching payments made under our
401(k) employee savings plan.

Summary compensation
<TABLE>
----------------------------------------------------------------------------------------
<CAPTION>
                                Annual compensation  Long-term compensation awards
                                                       Number of shares
                                                             underlying        Other
Name and principal position         Salary    Bonus options granted (#) Compensation
----------------------------------------------------------------------------------------
<S>                             <C>        <C>      <C>                 <C>          <C>
Michael T. Flavin, Ph.D.,
 Chairman of the Board of
 Directors, President and Chief
 Executive Officer.............   $160,000 $     --                  --       $1,600
Jeffrey A. Whitnell,
 Vice President of Finance and
 Treasurer.....................    117,116   25,347               8,000        1,709
John L. Flavin,
 Executive Vice President and
 Chief Operating Officer--
 MediChem; Chief Executive
 Officer--ThermoGen and
 Director......................    114,135       --              11,600        1,370
David E. Zembower, Ph.D.,
 Vice President of Operations..     84,981   16,600               1,500        1,212
Ze-Qi Xu, Ph.D.,
 Vice President of Strategic
 Drug Development..............     98,308    1,000               1,500        1,004
</TABLE>

Options

The following table shows information regarding options granted to the
executive officers listed in the summary compensation table above during the
fiscal year ended December 31, 1999. We have not granted any stock appreciation
rights.

Each option represents the right to purchase one share of our common stock. The
options generally vest by one-third on the third, fourth and fifth
anniversaries of the grant. The exercise price for options granted is equal to
the fair market value of a share of common stock on the date of grant. The fair
market value of our common stock on a given date is the conversion price for
the convertible preferred stock sold in our most recent issuance. For stock
options granted after this time, in accordance with applicable accounting
standards, we have determined the fair market value of our common stock based
on the estimated initial public offering price. As a result, we will record a
deferred stock compensation expense for such options in an amount equal to the
difference between the estimated fair market value on the date of grant and the
initial public offering price. See "Management--Employee benefit plans" for
more details regarding these options.

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                                                                              75
<PAGE>

Management

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


The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
required by rules of the SEC and do not represent our estimate or projection of
our future common stock prices. These amounts represent assumed rates of
appreciation in the value of our common stock from the exercise price per
share, representing the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of
our common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.

Option grants In last fiscal year
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                      Individual Grants
                                                                   Potential
                                                                Realized Value
                                     % of                      at Assumed Annual
                      Number of     total                       Rates of Stock
                     securities   options  Exercise                  Price
                     underlying   granted     price              Appreciation
                        options        to       per Expiration  for Option Term
Name                    granted employees     share       date       5%      10%
--------------------------------------------------------------------------------
<S>                  <C>        <C>        <C>      <C>        <C>      <C>
Michael T. Flavin..          --        --%   $   --         -- $     -- $     --
Jeffrey A.
   Whitnell........       8,000     19.74     44.06 06/30/2009  221,673  561,762
John L. Flavin.....      11,600     28.63     44.06 06/30/2009  321,426  814,555
David E. Zembower..       1,500      3.70     44.06 06/30/2009   41,564  105,330
Ze-Qi Xu...........       1,500      3.70     44.06 06/30/2009   41,564  105,330
</TABLE>

The following table shows information as of December 31, 1999 concerning the
number and value of unexercised options held by each of the executive officers
listed in the summary compensation table above. There are currently no
outstanding options that are exercisable. There was no public trading market
for the common stock as of December 31, 1999. Accordingly, the value of
unexercised in-the-money options listed below has been calculated on the basis
of an assumed initial public offering price of $      per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying such options.

Aggregated option exercises in the year ended December 31, 1999 and year-end
option values
<TABLE>
----------------------------------------------------------------------------------------------------------------
<CAPTION>
                           Shares              Number of securities                      Value of unexercised
                         acquired             underlying unexercised                     in-the-money options
                             upon    Value options at December 31, 1999                  at December 31, 1999
Name                     exercise realized   Exercisable          Unexercisable        Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>      <C>                  <C>                    <C>         <C>
Michael T. Flavin.......       --     $ --                   --                  1,673        $ --         $
Jeffrey A. Whitnell.....       --       --                   --                  9,109          --
John L. Flavin..........       --       --                   --                 12,934          --
David E. Zembower.......       --       --                   --                  2,601          --
Ze-Qi Xu................       --       --                   --                  2,699          --
</TABLE>

EMPLOYMENT AGREEMENTS

We have entered into employment agreements with each of our executive officers.
The executive officers have agreed not to compete with us during their term of
employment and for one year after resignation or termination. The agreements
provide for the payment of salary for a maximum of 12 months after any
resignation or termination if the executive fails to attain other employment as
a result of the non-compete provisions.

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76
<PAGE>

Management

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


Each of the executives has further agreed not to disclose confidential
information or use such information for personal benefit, either during or
after employment with us. The agreements give us full rights to any inventions
of the executives made during or within 120 days after employment with us,
unless the particular invention does not relate directly to our business and
was not produced during company time or with company resources.

EMPLOYEE BENEFIT PLANS

1998 Incentive Compensation Plan

Our MediChem Research, Inc. Incentive Compensation Plan was approved by our
board of directors and became effective on January 1, 1998. We subsequently
amended the plan on December 30, 1998, January 23, 1999, and November 8, 1999,
with the third such amendment changing the name of the plan to the MCR
Holdings, Inc. Incentive Compensation Plan. The maximum combined number of
shares of Class B non-voting common stock for which options may be granted
under the 1998 Incentive Compensation Plan is 80,000, which shares may be
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 or nonqualified stock options. The 1998 Incentive
Compensation Plan also authorizes options up to a maximum of 40,000 shares of
Class C preferred stock and 40,000 shares of Class D preferred stock.

As of May 31, 2000, we had 88,061 options to purchase shares of Class B common
stock, 24,564 options to purchase shares of Class C preferred stock and 24,564
options to purchase shares of Class D preferred stock outstanding to employees,
directors and consultants under the plan. There will be no further options
issued under this 1998 Incentive Compensation Plan. The compensation committee
of our board administers the incentive plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operations
of our incentive plan. The committee has the discretion to determine who will
receive an award, what type of award it will be, how many shares will be
covered by the award, what the vesting requirements will be, if any, and what
the other features and conditions of each award will be.

2000 Incentive Compensation Plan

In June 2000, the board of directors adopted the 2000 Incentive Compensation
Plan. The 2000 Incentive Compensation Plan is designed to enhance our long-term
profitability and stockholder value by aligning the interests of selected
directors, officers, employees and consultants with our performance targets.

The 2000 Incentive Compensation Plan is administered by the board of directors,
which has exclusive authority to grant awards under the 2000 Incentive
Compensation Plan and to make all interpretations and determinations affecting
the 2000 Incentive Compensation Plan. The board of directors has the sole
discretion, for example, to determine the individuals to be granted options,
the number of shares of common stock to be subject to each option granted, the
exercise price of each option, the conditions with respect to vesting and
exercisability of options and all other conditions of any grant of options
under the 2000 Incentive Compensation Plan. The board of directors may delegate
all or any portion of the authority granted to it under the 2000 Incentive
Compensation Plan to a committee appointed by the board of directors. The board
of directors has delegated all such authority to the compensation committee of
the board of directors. Following this offering, the 2000 Incentive
Compensation Plan provides that it will be administered by a committee
consisting of at least two "disinterested persons" within the meaning of Rule
16b-3 under the Exchange Act.

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                                                                              77
<PAGE>

Management

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


Participation in the 2000 Incentive Compensation Plan is limited to our
directors, officers, employees and consultants who are selected from time to
time by the board of directors or by a committee appointed by the board of
directors. Awards under the 2000 Incentive Compensation Plan may be in the form
of incentive stock options meeting the requirements of Section 422 of the
Internal Revenue Code of 1986 or non-qualified stock options which are not
intended to meet the requirements of Section 422 of the Internal Revenue Code.

We have reserved an aggregate of            shares of our common stock for
issuance under the 2000 Incentive Compensation Plan. As of May 31, 2000, no
options have been granted under such plan.

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

78
<PAGE>


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

Related party transactions; relationship with ALS

General

Prior to the consummation of this offering, we owned all of the existing
preferred stock of ALS which had an aggregate par value of $2.5 million with a
7% cumulative preferred dividend. Our chairman and chief executive officer, Dr.
Michael T. Flavin, is the sole common stockholder of ALS. In the ordinary
course of business, we have routinely provided chemistry research and other
project management services to ALS. See "Business--Relationship with Advanced
Life Sciences, Inc.--Overview" and "Management's discussion and analysis of
financial condition and results of operations--Related party; discontinued
operations."

ALS was founded to discover and develop patented drug compounds. Like many
"virtual" pharmaceutical companies, ALS has no employees and conducts its
operations through a master service agreement with us pursuant to which we
provide comprehensive project management services. The master service agreement
resulted from an "arm's-length" negotiation and is on terms that are at least
as favorable as the terms that could be obtained by us in comparable
negotiations made on an arm's-length transaction between unaffiliated parties.
All chemistry and laboratory services provided by us to ALS or SMP are billed
at our standard rates and collected in the ordinary course consistent with any
third-party customer.

Upon consummation of this offering, we will invest $5.0 million of the net
proceeds from this offering in ALS, which will represent approximately 15.4% of
ALS's equity capitalization. This investment will be in addition to our current
ownership of the outstanding ALS preferred stock. Our investment is an
opportunity to formalize our collaborative relationship in a manner that
provides significant potential upside in ALS's promising drug development
pipeline.

SMP SERVICES

ALS has a 50% joint venture interest in SMP. SMP is a development stage
pharmaceutical company with a current portfolio of proprietary anti-viral drugs
in various stages of clinical and pre-clinical development. We provide
chemistry research and various project management services to SMP that are
reimbursed based upon negotiated contractual rates and are recorded as contract
revenue-related party. Contract revenue from SMP was $30,403 and $114,166 for
the years ended December 31, 1998 and 1999, respectively. See "Business--
Relationship with Advanced Life Sciences, Inc.--Overview" and "Management's
discussion and analysis of financial condition and results of operations--
Results of operations."

ALS SERVICES

We entered into a master laboratory agreement with ALS in March 1999. Pursuant
to the agreement, we provide certain laboratory design, laboratory analysis,
and/or data management services as requested by ALS from time to time during
the term of the agreement. The specific details of each assignment or task are
separately negotiated in arm's-length negotiations and are on terms that are at
least as favorable as the terms that could be obtained by us in comparable
negotiations made on an arm's-length transaction between unaffiliated parties.
Such amounts billed under the agreement are recorded as contract revenue-
related party. Contract revenue from ALS in connection with the agreement was
$506,723 for the year ended December 31, 1999. The agreement can be terminated
upon 90 days' notice by either party. See "Management's discussion and analysis
of financial condition and results of operations--Results of operations."


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

                                                                              79
<PAGE>

Related party transactions; relationship with ALS

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

LICENSE AGREEMENTS

In addition, as a chemistry research service provider to ALS, we developed the
AutoOptimize(TM) and ChiralSelect(TM) technologies and received milestone
payments related to their successful commercialization and the patent issued
for AutoOptimize(TM). Milestone payments received from ALS totaled $1.4 million
and $0.3 million for the year ended December 31, 1999 and the three month
period ended March 31, 2000, respectively. We have the exclusive rights to use
the AutoOptimize(TM) and ChiralSelect(TM) technologies pursuant to an unlimited
license from ALS in exchange for the payment of a royalty to ALS. Our royalty
payments to ALS totaled $12,387 and $0 for the year ended December 31, 1999 and
the three-month period ended March 31, 2000, respectively. See "Patents and
proprietary rights--Platform technologies licensed from ALS" and "Management's
discussion and analysis of financial condition and results of operations--
Results of operations" and "Business--Drug discovery platform technologies."

SERIES D PREFERRED STOCK

As of May 31, 2000, we had 400,000 shares of Class D preferred stock issued and
outstanding, all of which were held by Dr. Michael Flavin, our chairman,
president and chief executive officer. Our Class D preferred stock serves as a
"tracking" stock tied to the performance of our non-voting $2.5 million par
value, preferred stock investment in ALS. Pursuant to our articles of
incorporation, upon an initial public offering all of the outstanding Class D
preferred stock would be redeemed in exchange for all of our preferred stock
investment in ALS.

Instead of distributing our ALS preferred stock to Dr. Flavin, in June 2000 we
agreed with Dr. Flavin to amend our articles of incorporation so that the
outstanding Class D preferred stock would be converted into the right to
receive $1.5 million of our common stock upon the consummation of this
offering. The number of shares of common stock will be determined by dividing
$1.5 million, the net after-tax value of the ALS preferred stock, by the
initial public offering price. As a result of our agreement with Dr. Flavin,
the outstanding Class D preferred stock will be terminated as part of this
offering and we will retain our $2.5 million preferred stock ownership interest
in ALS.

SALE OF PMEA PATENT

In October 1999, we sold our patented PMEA synthesis process to ALS for
$400,000. PMEA is an efficient chemical process for the development of a class
of compounds termed Purine Acyclic Nucleotides. This class of compounds
exhibits potent antiviral activity, including activity against HIV and
hepatitis B. ALS purchased PMEA to supplement its drug development portfolio
and this technology is being further refined for marketing to pharmaceutical
companies who are developing Purine Acyclic Nucleotide compounds for antiviral
treatment. The sale of PMEA resulted from an arm's-length negotiation and was
on terms that were at least as favorable as the terms that could have been
obtained by us in comparable negotiations made with an unaffiliated party.

CONVERTED EMPLOYEE OPTIONS

As of May 31, 2000, of the 88,061 outstanding options to purchase shares of our
common stock, 24,564 of these also have a corresponding right to purchase
24,564 shares of each of our Class C preferred stock and Class D preferred
stock. In connection with this offering and our related corporate
reorganization, our Class C preferred stock and Class D preferred stock will
automatically convert into the right to receive $4.0 million in cash and $1.5
million of our common stock, respectively. The 24,564 options outstanding
against the Class C and D preferred stock will convert into the right to
receive a proportionate, or 5.8% in the aggregate, share in the $4.0 million
cash and $1.5 million common stock conversion consideration. The 24,564 options
to purchase our common stock will continue to remain outstanding following this
offering.

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80
<PAGE>

Related party transactions; relationship with ALS

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


LOANS FROM DR. FLAVIN

On June 14, 1999, we issued a $3.0 million promissory note to Dr. Michael T.
Flavin, our chairman, chief executive officer and president, in connection with
the venture capital investment and our issuance of preferred stock. We repaid
the promissory note on March 24, 2000.

In March 2000, we obtained an 18-month bank construction commitment for a $12.0
million construction loan to be used for the development of our new
headquarters and discovery laboratories in Woodridge, Illinois. At the earlier
of 18 months from the date of the loan or completion of construction, the loan
will be refinanced through a $12.0 million commercial mortgage loan. Dr.
Michael T. Flavin, our chairman, chief executive officer and president, has
personally guaranteed $3.0 million of each of the mortgage loan facility and
the construction commitment.

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

                                                                              81
<PAGE>


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

Corporate reorganization

GENERAL

We are offering shares of our common stock pursuant to this prospectus. We have
granted the underwriters the right to purchase up to an additional
shares of our common stock to cover over-allotments, if any. Our net proceeds
from this offering will be about $        . This offering is conditioned upon
completion of the merger described below. The purpose of the merger is to
enable MediChem Life Sciences, Inc. to become our holding company and continue
as a Delaware corporation.

THE MERGER

Before this offering, MediChem Life Sciences, will be a wholly-owned subsidiary
of MCR Holdings, Inc., an Illinois corporation. Immediately prior to this
offering, MCR Holdings will merge with and into MediChem Life Sciences.
MediChem Life Sciences shall survive as a Delaware corporation. Following the
merger, the separate corporate existence of MCR Holdings shall cease, and
MediChem Life Sciences shall succeed to all the rights and obligations of MCR
Holdings. At the effective time of such merger, each outstanding share of
common stock of MCR Holdings automatically will convert into           shares
of common stock of MediChem Life Sciences and each outstanding share of common
stock of MediChem Life Sciences held by MCR Holdings shall be cancelled. As a
result of all these actions, existing MCR Holdings' stockholders automatically
will become MediChem Life Sciences stockholders, and MediChem Life Sciences
then will own all of the outstanding common stock of MediChem Research, Inc.,
ThermoGen, Inc. and Emerald BioStructurers, Inc.

Each outstanding option to purchase Class A common stock, Class B common stock
or Class C common stock of MCR Holdings, including options assumed in
connection with the acquisition of ThermoGen, shall be assumed by MediChem Life
Sciences and shall be deemed to constitute an option to acquire, on the same
terms and conditions applicable under any such option, the same number of
shares of common stock of MediChem Life Sciences as the holder of such option
would have been entitled to receive had such holder exercised such option in
full immediately prior to the merger at a price per share equal to the
aggregate exercise price for the shares subject to such option divided by the
number of full shares of common stock of MediChem Life Sciences deemed to be
purchasable pursuant to such option. In addition all options converted into the
right to purchase shares of MediChem Life Services common stock will retain
their original vesting schedules.

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

82
<PAGE>


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

Principal stockholders

The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 31, 2000 and as adjusted to reflect the
sale of the shares of common stock offered hereby under this prospectus by:

 .each person or group of affiliated persons who is known by us to own
 beneficially five percent or more of the outstanding shares of common stock;

 .each of our directors;

 .each executive officer listed in the "Summary Compensation" table above; and

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

Except as indicated in the footnotes to this table and subject to community
property laws where applicable, the persons named in the table have sole voting
and investment power with respect to all shares of our common stock shown as
beneficially owned by them. Beneficial ownership and percentage ownership are
determined in accordance with the rules of the SEC. The table below includes
the number of shares underlying options and warrants which are exercisable
within 60 days from May 31, 2000 and assumes:

 .the automatic conversion of all outstanding shares of our Class A preferred
 stock into 340,441 shares of our common stock upon the closing of this
 offering;

 .the conversion of all outstanding shares of our Class D preferred stock into
          shares of our common stock upon the closing of this offering;

 .the acquisitions of ThermoGen and Emerald BioStructures and the issuance of
 269,598.27 shares of our common stock in connection with such acquisitions;
 and

 .the underwriters' over allotment is not exercised.

It is therefore based on            shares of our Class A common stock
outstanding prior to this offering and            shares of our common stock
outstanding immediately after this offering.

<TABLE>
<CAPTION>
                               Shares beneficially
                           owned prior to this offering          Shares beneficially
                                       (1)                  owned after this offering (1)
                                        Number of
                                           shares                        Number of
                            Number of  underlying             Number of     shares
                               shares  options or                shares underlying
Beneficial Owner          outstanding    warrants Percent   outstanding    options Percent
-------------------------------------------------------------------------------------------
<S>                       <C>          <C>        <C>       <C>         <C>        <C>
Five percent
   shareholders
Michael T. Flavin, Ph.D.
   (2)(3)...............  [400,000.00]         --  [38.63]%                               %

 MediChem Life Sciences,
 Inc.
 12305 South New Avenue
 Lemont, IL 60439
ChaseMedichem Partners,
   LLC (4)(5) (6)(7)....   195,183.18          --   18.85
 c/o Chase Capital
 Partners
 Attn: Robert W. Daly
 36 Washington Street,
 Suite 170
 Wellesley Hills, MA
 02481-1904
</TABLE>

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

                                                                              83
<PAGE>

Principal stockholders

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

<TABLE>
<CAPTION>
                               Shares beneficially
                           owned prior to this offering        Shares beneficially
                                       (1)                owned after this offering (1)
                                       Number of
                                          shares                       Number of
                            Number of underlying            Number of     shares
                               shares options or               shares underlying
Beneficial Owner          outstanding   warrants Percent  outstanding    options Percent
-----------------------------------------------------------------------------------------
<S>                       <C>         <C>        <C>      <C>         <C>        <C>
Peachtree Medichem
   Partners, LLC
   (4)(6)...............   113,388.28         --   10.95%                               %
 Attn: Robert W. Daly
 36 Washington Street,
 Suite 170
 Wellesley Hills, MA
 02481-1904

MedEquity Investors
   Partners, LLC
   (4)(6)...............    20,521.51         --    1.98
 Attn: Robert W. Daly
 36 Washington Street,
 Suite 170
 Wellesley Hills, MA
 02481-1904

Malcolm Casadaban, Ph.D.
   (8)..................    84,706.93         --    8.18
 c/o ThermoGen, Inc.
 2225 West Harrison
 Street
 Chicago, IL 60615

David C. Demirjian,
   Ph.D. (8)............    99,438.57         --    9.60
 c/o ThermoGen, Inc.
 2225 West Harrison
 Street
 Chicago, IL 60612

Directors and Named
   Executive Officers
John L. Flavin..........           --         --      --
Darsh T. Wasan, Ph.D....           --         --      --
Robert D. Weist.........           --         --      --
Bro. James Gaffney,
   FSC..................           --         --      --
Peter R. Gates (4)......   329,092.97         --   31.78
Damion E. Wicker, M.D.
   (5)..................   195,183.18         --   18.85
W. Brett Ingersoll (5)..   195,183.18         --   18.85
Larry C. Hansen, Ph.D...           --         --      --
Jeffrey A. Whitnell.....           --         --      --
David E. Zembower,
   Ph.D.................           --         --      --
Ze-Qi Xu, Ph.D..........           --         --      --
All directors and named
   executive officers as
   a group
   (12 persons).........   729,092.97         --   70.42
</TABLE>

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

84
<PAGE>

Principal stockholders

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

--------
(1) "Beneficial ownership" generally means any person who, directly or
    indirectly, has or shares voting or investment power with respect to a
    security or has the right to acquire such power within 60 days. Unless
    otherwise indicated, we believe that each holder has sole voting and
    investment power with regard to the equity interests listed as beneficially
    owned. Holders of options under our 1998 Incentive Compensation Plan are
    not deemed to be beneficial owners because of the vesting requirements
    under the plan. Such holders will not have the right to acquire voting or
    investment power within 60 days of the date hereof.

(2) Includes 400,000 shares held by the Michael Flavin Revocable Trust of which
    Dr. Flavin serves as the trustee. By virtue of his position as trustee, Dr.
    Flavin may be deemed to be the beneficial owner of all shares held by such
    trust.

(3) The beneficial ownership of shares by Dr. Flavin includes         shares of
    our common stock estimated to be received as a result of the conversion of
    our Class D preferred stock owned by Dr. Flavin. The actual number of
    shares of our common stock to be received by Dr. Flavin as a result of such
    conversion will be determined by dividing $1.5 million by the initial
    public offering price.

(4) Mr. Gates is affiliated with ChaseMedichem Partners, LLC, Peachtree
    Medichem Partners, LLC and MedEquity Investors Partners, LLC which
    following the offering are expected to beneficially own      %,      % and
         %, respectively, of the common stock of MediChem. Mr. Gates may be
    deemed to share indirect voting or investment power and as such,
    beneficially own all of the shares of common stock held by such entities.
    Mr. Gates disclaims beneficial ownership of such shares, except to the
    extent of his pecuniary interest.

(5) Dr. Wicker and Mr. Ingersoll are affiliated with ChaseMedichem Partners,
    LLC, which following the offering is expected to beneficially own   % of
    the common stock of MediChem. Dr. Wicker and Mr. Ingersoll may be deemed to
    share indirect voting or investment power and as such, beneficially own all
    of the shares of common stock of ChaseMedichem Partners. Dr. Wicker and Mr.
    Ingersoll disclaim beneficial ownership of such shares, except to the
    extent of their pecuniary interest.

(6) MedEquity Investors, L.L.C. is the managing member of each of ChaseMedichem
    Partners LLC, Peachtree Medichem Partners, LLC and MedEquity Investors
    Partners, LLC. Mr. Robert W. Daly is the sole manager of MedEquity
    Investors, L.L.C. and as such may be deemed to share voting and investment
    power with respect to shares owned by such entities. Mr. Daly disclaims
    beneficial ownership of such shares, except to the extent of his pecuniary
    interest.

(7) Chase Medichem is a single purpose limited liability company formed by
    Chase Capital Partners for its investment in MediChem.

(8) Includes 19,016.43 shares owned by Dr. Demirjian and 16,198.32 shares owned
    by Dr. Casadaban which are held in escrow under our merger agreement with
    ThermoGen. During the two-year indemnification period in connection with
    the merger, Drs. Demirjian and Casadaban are entitled to vote such shares
    and receive dividends thereon, but may not transfer or encumber such
    shares.

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

                                                                              85
<PAGE>


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

Description of capital stock

The following information describes our common stock and preferred stock, as
well as options and warrants to purchase our common stock, and provisions of
our certificate of incorporation and our bylaws, all as will be in effect upon
the closing of this offering. This description is only a summary. You should
also refer to the certificate and bylaws which have been filed with the SEC as
exhibits to our registration statement, of which this prospectus forms a part.
The description of the common stock and preferred stock, as well as options and
warrants to purchase our common stock, reflect changes to our capital structure
that will occur upon the closing of this offering in accordance with the terms
of the certificate.

Upon completion of this offering, our authorized capital stock will consist of
100,000,000 shares of our common stock, par value $0.01 per share, and
10,000,000 shares of preferred stock, par value $0.01 per share.

COMMON STOCK

As of May 31, 2000, there were        shares of our common stock outstanding
and held of record by     stockholders after giving effect to:

 .the automatic conversion of all outstanding shares of our Class A preferred
 stock into 340,441 shares of our common stock;

 .the conversion of all outstanding shares of our Class D preferred stock into
      shares of our common stock;

 .the issuance of 269,598.27 shares of our Class A common stock in connection
 with the ThermoGen and Emerald BioStructures acquisitions; and

 .the      for one split of our common stock.

There will be           shares of common stock outstanding upon the closing of
this offering, which gives effect to the issuance of            shares of
common stock offered by us under this prospectus.

Each share of common stock will have identical rights and privileges in every
respect upon the closing of this offering. The holders of our common stock are
entitled to vote upon all matters submitted to a vote of our stockholders and
are entitled to one vote for each share of common stock held. Subject to the
prior rights and preferences, if any, applicable to shares of our preferred
stock, the holders of common stock are entitled to receive such dividends,
payable in cash, stock or otherwise, as may be declared by our board out of any
funds legally available for the payment of dividends. If we voluntarily or
involuntarily liquidate, dissolve or wind-up, the holders of common stock will
be entitled to receive after distribution in full of the preferential amounts,
if any, to be distributed to the holders of preferred stock or any series of
preferred stock, all of the remaining assets available for distribution ratably
in proportion to the number of shares of common stock held by them. Holders of
common stock have no preferences or any preemptive conversion or exchange
rights.

PREFERRED STOCK

Our certificate of incorporation authorizes the issuance of 10,000,000 shares
of preferred stock. Our board is authorized to provide for the issuance of
shares of preferred stock in one or more series, and to fix for each series
voting rights, if any, designation, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions as provided in a resolution or resolutions adopted by the board.
The board may authorize the issuance of shares of preferred stock

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

86
<PAGE>

Description of capital stock

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

with terms and conditions which could discourage a takeover or other
transaction that holders of some or a majority of shares of common stock might
believe to be in their best interests or in which holders of common stock might
receive a premium for their shares over the then market price.

OPTIONS

As of May 31, 2000, options to purchase a total of 88,061 shares of our common
stock were outstanding at a weighted average exercise price of $         .
Options to purchase an additional total of           shares of common stock may
be granted under our 2000 Incentive Compensation Plan. Please see "Management--
Employee benefit plans."

WARRANTS

As of March 31, 2000, a warrant to purchase a total of 16,916 shares of our
common stock, at an exercise price of $0.01 per share, and a warrant to
purchase a total of 8,458 shares of our common stock, at an exercise price of
$48.47 per share, were outstanding. The warrants expire June 14, 2009 and June
14, 2004, respectively. The warrants contain anti-dilution provisions providing
for adjustments of the exercise price and the number of shares underlying the
warrants upon the occurrence of certain events, including any recapitalization,
reclassifications, stock dividend, stock split, stock combination or similar
transaction. The holders of the warrants are entitled to registration rights
with respect to the common stock issuable upon their exercise, which are
described below. All of the warrants are currently exercisable.

The warrant covering 16,916 shares of our common stock was issued to our lender
in connection with our June 1999 credit facility. This warrant's terms provide
the lender with the right to require us to redeem the warrant upon the
occurrence of certain events. Similarly, we have the right to redeem the
warrant upon certain events. The redemption price is the fair market value per
share of common stock at the time of redemption. We plan to redeem these
warrant with a portion of the net offering proceeds at an estimated cost of
approximately $     million.

REGISTRATION RIGHTS

At any time six months following the effective date of this offering, the
holders of a warrant to purchase 8,458 shares of our common stock will be
entitled to demand, under certain circumstances, the registration of their
shares under the Securities Act of 1933. We are not required to effect more
than two registrations for such holders pursuant to these demand registration
rights, under certain circumstances. In addition, after the closing of this
offering these holders will be entitled to piggyback registration rights with
respect to the registration of their shares of common stock. If we propose to
register any shares of common stock either for our account or for the account
of other security holders, the holders of shares having piggyback rights are
entitled to receive notice of the registration and are entitled to include
their shares in the registration, subject to some limitations. These
registration rights are subject to conditions and limitations, among which is
the right of the underwriters of an offering to limit the number of shares of
common stock held by security holders with registration rights to be included
in such registration. We are generally required to bear all of the expenses of
all these registrations, including the reasonable fees of a single counsel
acting on behalf of all selling stockholders, except underwriting discounts and
selling commissions. Registration of any of the shares of our common stock held
by security holders with registration rights would result in such shares
becoming freely tradable without restriction under the Securities Act
immediately upon effectiveness of such registration.

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

                                                                              87
<PAGE>

Description of capital stock

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


ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

We are subject to Section 203 of the Delaware General Corporation Law, or DGCL
Section 203, which regulates corporate acquisitions. DGCL Section 203 prevents
certain Delaware corporations, including those whose securities are listed for
trading on the Nasdaq National Market, from engaging, under certain
circumstances in a "business combination" with any "interested stockholder" for
three years following the date that such stockholder became an interested
stockholder. For purposes of DGCL Section 203, a "business combination"
includes, among other things, a merger or consolidation involving us and the
interested stockholder and the sale of more than ten percent (10%) of our
assets. In general, DGCL Section 203 defines an "interested stockholder" as any
entity or person beneficially owing 15% or more of our outstanding voting stock
and any entity or person affiliated with or controlling or controlled by such
entity or person. A Delaware corporation may "opt out" of DGCL Section 203 with
an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of DGCL
Section 203.

Our certificate of incorporation provides that the board of directors is
divided into three classes of directors, with each class serving a three year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain
control of us and may maintain the incumbency of the board of directors, as the
classification of the board of directors generally increases the difficulty of
replacing a majority of the directors. The certificate of incorporation also
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. Further, certain provisions of our certificate
of incorporation provide that the stockholders may amend the bylaws or certain
provisions of the certificate of incorporation only by the affirmative vote of
67% of our capital stock. These provisions of the certificate of incorporation
and bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of us. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of MediChem. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal. The provisions
also are intended to discourage certain tactics that may be used in proxy
fights. However, such provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of our shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect
of preventing changes in our management.

Our bylaws provide that any action required or permitted to be taken by our
stockholders at an annual meeting of stockholders may only be taken if each
stockholder is given proper advance notice of the action. The bylaws further
provide that special meetings of stockholders may only be called by a majority
of our board of directors or our president. The foregoing provisions could have
the effect of delaying until the next stockholders meeting stockholder actions
which are favored by the holders of a majority of our outstanding voting
securities.

TRANSFER AGENT AND REGISTRAR

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

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

88
<PAGE>


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

Shares eligible for future sale

Prior to this offering, there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Furthermore, since no shares
will be available for sale shortly after this offering because of contractual
and legal restrictions on resale as described below, sales of substantial
amounts of our common stock in the public market after these restrictions lapse
could adversely affect the prevailing market price and our ability to raise
equity capital in the future.

Upon completion of this offering, we will have outstanding an aggregate of
            shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants after
December 31, 1999. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates. The remaining
          shares of common stock held by existing stockholders are restricted
securities. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration described
below under Rules 144, 144(k) or 701 promulgated under the Securities Act.

As a result of the contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:

 .no shares will be eligible for sale upon completion of this offering; and

 .          shares will be eligible for sale upon the expiration of the lock-up
 agreements, described below, beginning 180 days after the date of this
 prospectus.

LOCK-UP AGREEMENTS

All of our officers, directors and some of our stockholders and option holders
have agreed not to transfer or dispose of, directly or indirectly, any shares
of our common stock or any securities convertible into shares or exercisable or
exchangeable for shares of our common stock, for a period of at least 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
only with the prior written consent of UBS Warburg LLC.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus a person or persons whose shares are aggregated, who
has beneficially owned restricted securities for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:

 .1% of the number of shares of our common stock then outstanding, which will
 equal approximately          shares immediately after this offering; or

 .the average weekly trading volume of our common stock on the Nasdaq National
 Market during the four calendar weeks preceding the filing of a notice on Form
 144 with respect to the sale.

Sales under Rule 144 are also subject to matter of sale provisions and notice
requirements and to the availability of current public information about
MediChem.

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

                                                                              89
<PAGE>

Shares eligible for future sale

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


RULE 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days 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 these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
shares of our common stock will qualify as "144(k) shares" within 180 days
after the date of this prospectus.

RULE 701

In general, under Rule 701 of the Securities Act as currently in effect, any of
our employees, consultants or advisors, other than affiliates, who purchases or
receives shares from us in connection with a compensatory stock purchase plan
or option plan or other written agreement will be eligible to resell their
shares beginning 90 days after the date of this prospectus, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its holding period requirements.

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

90
<PAGE>


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

Underwriting

MediChem and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC, Chase Securities Inc.
and William Blair & Company, L.L.C. are the representatives of the
underwriters.

<TABLE>
<CAPTION>
                                                                          Number
                                                                              of
Underwriters                                                              Shares
--------------------------------------------------------------------------------
<S>                                                                     <C>
UBS Warburg LLC.......................................................
Chase Securities Inc..................................................
William Blair & Company, L.L.C. ......................................
                                                                        --------
  Total...............................................................
                                                                        ========
</TABLE>

If the underwriters sell more than the total number of shares set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional                shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.

The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase up
to an additional            shares.

<TABLE>
<CAPTION>
                                                       No Exercise Full Exercise
--------------------------------------------------------------------------------
<S>                                                    <C>         <C>
Per share............................................    $            $
  Total..............................................    $            $
</TABLE>

We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $               .

Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $          per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $         per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.

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

MediChem, our directors, officers and certain of our stockholders have agreed
with the underwriters not to offer, contract to sell, hedge or otherwise
dispose of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any of our common stock or
securities

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

                                                                              91
<PAGE>

Underwriting

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

convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, without the prior written consent of UBS Warburg LLC.

The underwriters have reserved for sale, at the initial public offering price,
up to             shares of our common stock being offered for sale to our
customers and business partners. At the discretion of our management, other
parties, including our employees, may participate in the reserve shares
program. The number of shares available for sale to the general public in the
offering will be reduced to the extent these persons purchase reserved shares.
Any reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares in this offering.

Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be negotiated by us and the
representatives. The principal factors to be considered in determining the
initial public offering price include:

 .the information set forth in this prospectus and otherwise available to the
 representatives;

 .the history and the prospects for the industry in which we compete;

 .the ability of our management;

 .our prospects for future earnings, the present state of our development, and
 our current financial position;

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

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

In connection with the offering, the underwriters may purchase and sell shares
of common stock in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.

The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.

These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act and to contribute to payments
that the underwriters may be required to make in respect thereof.

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

92
<PAGE>


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


Legal matters

The validity of the shares of common stock offered hereby will be passed upon
for MediChem by Winston & Strawn, Chicago, Illinois. Dewey Ballantine LLP, New
York, New York, is acting as counsel for the underwriters in connection with
various legal matters relating to the shares of common stock offered by this
prospectus.

Experts

The consolidated financial statements of MCR Holdings, Inc. and subsidiary as
of December 31, 1998 and 1999, and for each of the years in the three-year
period ended December 31, 1999, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.

The financial statements of ThermoGen, Inc. as of December 31, 1998 and 1999,
and for the years then ended, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.

The financial statements of Emerald BioStructures, Inc. as of December 31, 1998
and 1999, and for the years then ended, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accounts, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.

Where you can find more information

We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act of 1933 with
respect to the shares of common stock to be sold in this offering. This
prospectus does not contain all the information set forth in the registration
statement. For further information with respect to us and the shares of common
stock to be sold in this offering, reference is made to the registration
statement. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
Whenever a reference is made in this prospectus to any contract or other
document of ours, the reference may not be complete, and you should refer to
the exhibits that are a part of the registration statement for a copy of the
contract or document.

You may read and copy all or any portion of the registration statement or any
other information MediChem files at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's web site (http://www.sec.gov).


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

                                                                              93
<PAGE>

Where you can find more information

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

As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.

This prospectus includes statistical data that were obtained from industry
publications. These industry publications generally indicate that the authors
of these publications have obtained information from sources believed to be
reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data.

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

94
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                            Page
--------------------------------------------------------------------------------
MCR HOLDINGS, INC. AND SUBSIDIARY
<S>                                                                         <C>
  Independent Auditors' Report.............................................  F-2
  Consolidated Balance Sheets..............................................  F-3
  Consolidated Statements of Operations....................................  F-4
  Consolidated Statements of Stockholders' Equity (Deficit)................  F-5
  Consolidated Statements of Cash Flows....................................  F-6
  Notes to Consolidated Financial Statements...............................  F-7
THERMOGEN, INC.
  Independent Auditors' Report............................................. F-25
  Balance Sheets........................................................... F-26
  Statements of Operations................................................. F-27
  Statements of Shareholders' Deficit...................................... F-28
  Statements of Cash Flows................................................. F-29
  Notes to Financial Statements............................................ F-30
EMERALD BIOSTRUCTURES, INC.
  Independent Auditors' Report............................................. F-36
  Balance Sheets........................................................... F-37
  Statement of Operations.................................................. F-38
  Statements of Stockholders' Equity (Deficit)............................. F-39
  Statements of Cash Flows................................................. F-40
  Notes to Financial Statements............................................ F-41
</TABLE>

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

                                                                             F-1
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors
MCR Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of MCR Holdings,
Inc. and subsidiary (Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MCR Holdings, Inc.
and subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.

                                          /s/ KPMG LLP
February 3, 2000
Chicago, Illinois

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

F-2
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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


CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999 and March 31, 2000 (unaudited)

<TABLE>
<CAPTION>
                                               December 31,          March 31,
                                                1998        1999          2000
-------------------------------------------------------------------------------
                                                                   (unaudited)
<S>                                       <C>        <C>          <C>
Assets
Current assets:
 Cash...................................  $  171,462 $ 8,164,730  $  2,663,407
 Accounts receivable, net of allowance
  for doubtful accounts of $0 at
  December 31, 1998, $13,980 at December
  31, 1999, and $3,365 at March 31,
  2000..................................   1,738,453   2,225,706     2,787,620
 Accounts receivable--related party.....      30,403     620,889       562,042
 Prepaid assets.........................      46,226      98,447       116,834
 Other current assets...................      11,201      68,567        78,334
                                          ---------- -----------  ------------
 Total current assets...................   1,997,745  11,178,339     6,208,237
Property and equipment, net.............   1,778,023   6,376,881     8,100,038
Other assets............................     183,894     384,760       472,165
                                          ---------- -----------  ------------
 Total assets...........................  $3,959,662 $17,939,980  $ 14,780,440
                                          ========== ===========  ============
Liabilities and Stockholders' Equity
 (Deficit)
Current liabilities:
 Revolving line of credit...............  $  580,000 $        --  $         --
 Note payable to shareholder............          --   3,000,000            --
 Current portion of debt and capital
  lease obligations.....................     359,246   1,954,209     1,954,305
 Accounts payable.......................     278,650     607,711       501,714
 Accrued expenses.......................     415,519   1,162,512       538,467
 Taxes payable..........................      51,393     665,827       165,460
 Unearned revenue.......................     686,226     396,000       448,500
                                          ---------- -----------  ------------
 Total current liabilities..............   2,371,034   7,786,259     3,608,446
Debt....................................     429,748   4,607,053     4,615,492
Revolving line of credit................          --         --      1,000,000
Capital lease obligations...............     125,921     307,562       257,393
Redeemable stock warrants...............          --     494,295     2,399,782
Other...................................      75,281      70,588        72,233
                                          ---------- -----------  ------------
 Total liabilities......................   3,001,984  13,265,757    11,953,346
Redeemable preferred stock:
 Class A convertible preferred stock,
  $.01 par value, none authorized issued
  and outstanding at December 31, 1998;
  340,441 shares authorized, issued and
  outstanding at December 31, 1999 and
  March 31, 2000 (unaudited), redemption
  value $22,499,458;....................          --  13,230,000    13,553,220
 Class B 5% redeemable preferred stock,
  $.01 par value, none authorized,
  issued and outstanding at December 31,
  1998; 1,000 authorized, none issued
  and outstanding at December 31, 1999
  and March 31, 2000 (unaudited)........          --          --            --
 Class C convertible preferred stock,
  $.01 par value, none authorized,
  issued and outstanding at December 31,
  1998; 440,000 shares authorized,
  400,000 shares issued and outstanding
  at December 31, 1999 and March 31,
  2000 (unaudited)......................          --       4,000         4,000
                                          ---------- -----------  ------------
 Total redeemable preferred stock.......          --  13,234,000    13,557,220
Stockholders' equity (deficit):
 Class D preferred stock, $.01 par
  value, none authorized, issued and
  outstanding at December 31, 1998;
  440,000 shares authorized, 400,000
  shares issued and outstanding at
  December 31, 1999 and March 31, 2000
  (unaudited)...........................          --       4,000         4,000
 Common stock, no par value, 400,000
  shares issued and outstanding at
  December 31, 1998; retired in 1999....       1,000          --            --
 Class A common stock, $.01 par value,
  none authorized, issued and
  outstanding at December 31, 1998;
  1,000,000 shares authorized, 400,000
  shares issued and outstanding at
  December 31, 1999 and March 31, 2000
  (unaudited)...........................          --       4,000         4,000
 Class B common stock, $.01 par value,
  none authorized issued and outstanding
  at December 31, 1998; 88,458 shares
  authorized, none issued and
  outstanding at December 31, 1999 and
  March 31, 2000 (unaudited)............          --          --            --
 Class C common stock, $.01 par value,
  none authorized, issued and
  outstanding at December 31, 1998;
  16,916 shares authorized, none issued
  and outstanding at December 31, 1999
  and March 31, 2000 (unaudited)........          --          --            --
 Additional paid-in capital.............       3,165      21,542        21,542
 Retained earnings (accumulated
  deficit)..............................     953,513  (8,589,319)  (10,759,668)
                                          ---------- -----------  ------------
 Total stockholders' equity (deficit)...     957,678  (8,559,777)  (10,730,126)
                                          ---------- -----------  ------------
 Total liabilities and stockholders'
  equity (deficit)......................  $3,959,662 $17,939,980  $ 14,780,440
                                          ========== ===========  ============
</TABLE>

See accompanying notes to consolidated financial statements.

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

                                                                             F-3
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  Three-month period
                                Year ended December 31,             ended March 31,
                                 1997        1998         1999         1999         2000
-----------------------------------------------------------------------------------------
                                                                (unaudited)  (unaudited)
<S>                        <C>         <C>         <C>          <C>          <C>
Contract revenues:
 Contract revenue........  $4,339,991  $7,122,461  $11,255,534   $2,105,754  $ 3,434,073
 Contract revenue--
  related party..........   1,205,948   1,497,055    2,302,801      462,160      707,709
                           ----------  ----------  -----------   ----------  -----------
 Total contract
  revenues...............   5,545,939   8,619,516   13,558,335    2,567,914    4,141,782
Contract service costs:
 Contract service costs..   1,869,760   3,414,818    5,263,963    1,084,943    1,788,834
 Contract service costs--
  related party..........     449,552     466,893      778,432      123,759      303,800
                           ----------  ----------  -----------   ----------  -----------
 Total contract service
  costs..................   2,319,312   3,881,711    6,042,395    1,208,702    2,092,634
                           ----------  ----------  -----------   ----------  -----------
 Gross profit............   3,226,627   4,737,805    7,515,940    1,359,212    2,049,148
Milestones and
 intellectual property
 revenue--related party..          --          --    1,787,612           --      350,000
Operating expenses:
 Selling, general and
  administrative.........   2,417,752   3,400,599    6,005,993    1,317,513    1,901,375
 Depreciation and
  amortization...........     317,913     458,722      787,810      137,483      260,228
                           ----------  ----------  -----------   ----------  -----------
 Total operating
  expenses...............   2,735,665   3,859,321    6,793,803    1,454,996    2,161,603
                           ----------  ----------  -----------   ----------  -----------
 Income (loss) from
  operations.............     490,962     878,484    2,509,749      (95,784)     237,545
                           ----------  ----------  -----------   ----------  -----------
Other expense, net
 Interest expense........     101,561     124,818      587,672       34,347      180,409
 Interest income.........          --      (1,350)    (175,209)        (377)     (39,324)
 Other...................     (98,539)    (48,068)          --           --           --
 Increase in value of
  redeemable stock
  warrant................          --          --           --           --    1,905,487
                           ----------  ----------  -----------   ----------  -----------
 Total other expense,
  net....................       3,022      75,400      412,463       33,970    2,046,572
                           ----------  ----------  -----------   ----------  -----------
 Income (loss) from
  continuing operations
  before income taxes....     487,940     803,084    2,097,286     (129,754)  (1,809,027)
Income taxes.............     166,772     310,012      931,817     (57,617)       38,102
                           ----------  ----------  -----------   ----------  -----------
 Income (loss) from
  continuing operations..     321,168     493,072    1,165,469      (72,137)  (1,847,129)
Discontinued operations--
 loss from operations of
 ALS (net of tax benefits
 of $34,390, $109,025 and
 $60,532, and $0, and $0
 respectively)...........     (54,203)   (173,423)     (95,109)        (13)           --
                           ----------  ----------  -----------   ----------  -----------
 Net income (loss).......     266,965     319,649    1,070,360      (72,150)  (1,847,129)
 Less:
  Allocation of income to
   participating
   securities............    (103,983)   (124,503)    (282,512)          --           --
  Accretion to redemption
   value of preferred
   stock.................          --          --     (623,498)          --     (323,220)
                           ----------  ----------  -----------   ----------  -----------
 Net income (loss)
  available to common
  stockholders...........  $  162,982  $  195,146  $   164,350   $  (72,150) $(2,170,349)
                           ==========  ==========  ===========   ==========  ===========
Per share data:
 Basic earnings (loss)
  per common share:
 Income (loss) from
  continuing operations..  $     0.35  $     0.59  $      0.65   $    (0.18) $     (5.43)
 Loss from discontinued
  operations, net of
  tax....................       (0.09)      (0.28)       (0.24)          --           --
 Net income (loss)
  available to common
  stockholders...........  $     0.26  $     0.31  $      0.41   $    (0.18) $     (5.43)
                           ==========  ==========  ===========  ==========   ===========
 Diluted earnings (loss)
  per common share:
 Income (loss) from
  continuing operations..  $     0.34  $     0.57  $      0.62   $    (0.18) $     (5.43)
 Loss from discontinued
  operations, net of
  tax....................       (0.09)      (0.27)       (0.23)          --           --
 Net income (loss)
  available to common
  stockholders...........  $     0.25  $     0.30  $      0.39   $    (0.18) $     (5.43)
                           ==========  ==========  ===========  ==========   ===========
 Weighted average number
  of common shares
  outstanding--basic.....     626,960     626,960      400,000      400,000      400,000
 Weighted average number
  of common shares
  outstanding--diluted...     626,960     636,795      421,376      400,000      400,000
</TABLE>

See accompanying notes to consolidated financial statements.

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

F-4
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997, 1998 and 1999 and the three-month period ended
March 31, 2000 (unaudited)

<TABLE>
<CAPTION>
                                             Class  Class  Class                 Retained          Total
                            Class D              A      B      C Additional      earnings  stockholders'
                          Preferred Common  common common common    paid-in  (accumulated         equity
                              Stock  stock   stock  stock  stock    capital      deficit)      (deficit)
---------------------------------------------------------------------------------------------------------
<S>                       <C>       <C>     <C>    <C>    <C>    <C>         <C>           <C>
Balance at December 31,
 1996...................     $   -- $1,000  $   --    $--    $--    $    --  $    366,899   $    367,899
Net income..............         --     --      --     --     --         --       266,965        266,965
                             ------ ------  ------    ---    ---    -------  ------------   ------------
Balance at December 31,
 1997...................         --  1,000      --     --     --         --       633,864        634,864
Stock options granted to
 consultant.............         --     --      --     --     --      3,165            --          3,165
Net income..............         --     --      --     --     --         --       319,649        319,649
                             ------ ------  ------    ---    ---    -------  ------------   ------------
Balance at December 31,
 1998...................         --  1,000      --     --     --      3,165       953,513        957,678
Exchange of shares under
 recapitalization of
 company................      4,000 (1,000)  4,000     --     --     (3,165)  (10,007,835)   (10,004,000)
Spin-off of Advanced
 Life Sciences..........         --     --      --     --     --         --        18,141         18,141
Stock options granted to
 consultant.............         --     --      --     --     --     21,542           --          21,542
Accrection of preferred
 stock..................         --     --      --     --     --         --      (623,498)      (623,498)
Net income..............         --     --      --     --     --         --     1,070,360      1,070,360
                             ------ ------  ------    ---    ---    -------  ------------   ------------
Balance at December 31,
 1999...................      4,000     --   4,000     --     --     21,542    (8,589,319)    (8,559,777)
Accrection of preferred
 stock (unaudited)......         --     --      --     --     --         --      (323,220)      (323,220)
Net loss (unaudited)....         --     --      --     --     --         --    (1,847,129)    (1,847,129)
                             ------ ------  ------    ---    ---    -------  ------------   ------------
Balance at March 31,
 2000 (unaudited).......     $4,000 $   --  $4,000    $--    $--    $21,542  $(10,759,668)  $(10,730,126)
                             ====== ======  ======    ===    ===    =======  ============   ============
</TABLE>

See accompanying notes to consolidated financial statements.

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

                                                                             F-5
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              Three-month period
                             Year ended December 31,            ended March 31,
                              1997        1998        1999     1999         2000
-------------------------------------------------------------------------------------
                                                             (unaudited)  (unaudited)
<S>                      <C>        <C>         <C>         <C>          <C>
Cash flows from
   operating
   activities:
 Net income (loss).....  $ 266,965  $  319,649  $1,070,360  $   (72,150) $(1,847,129)
 Add loss from
    discontinued
    operations.........     54,203     173,423      95,109           13           --
                         ---------  ----------  ----------  -----------  -----------
     Income (loss) from
        continuing
        operations         321,168     493,072   1,165,469      (72,137)  (1,847,129)
 Adjustments to
    reconcile net
    income (loss) to
    net cash provided
    by (used in)
    continuing
    operating
    activities:
  Depreciation and
     amortization......    317,913     458,722     787,810      137,483      260,228
  Bad debt expense.....     23,887          --      47,707           --      (10,615)
  Non cash interest
     expenses..........         --          --      39,255           --       19,756
  Noncash compensation
     expenses..........         --       3,165      21,542           --           --
  Warrant
     appreciation......         --          --          --           --    1,905,487
  Changes in assets
     and liabilities:
   Accounts
      receivable.......    345,864  (1,241,827) (1,125,446)     476,371     (492,452)
   Prepaid assets......     (7,078)    (32,672)   (109,587)     (31,495)     (18,387)
   Other assets........     (3,158)   (114,827)     95,180     (180,683)    (112,423)
   Accounts payable....    (63,502)     (5,517)    310,920      155,364     (105,997)
   Accrued expenses....     14,742     494,867     670,189      (36,516)    (296,310)
   Other liabilities...     73,900     547,926    (197,699)    (198,944)    (446,222)
                         ---------  ----------  ----------  -----------  -----------
     Net cash provided
        by (used in)
        continuing
        operations.....  1,023,736     602,909   1,705,340      249,443   (1,144,064)
     Net cash used in
        discontinued
        operations.....    (80,338)   (282,448)   (137,500)         (13)          --
                         ---------  ----------  ----------  -----------  -----------
     Net cash provided
        by (used in)
        operating
        activities.....    943,398     320,461   1,567,840      249,430   (1,144,064)
                         ---------  ----------  ----------  -----------  -----------
     Net cash used in
        investing
        activities--
        capital
        expenditures...   (666,872)   (726,158) (4,224,589)    (264,225)  (2,295,869)
                         ---------  ----------  ----------  -----------  -----------
Cash flows from
   financing
   activities:
 Deferred financing
    costs..............         --          --    (330,428)          --           --
 Net borrowings
    (repayments) under
    revolving line of
    credit.............   (184,656)    380,000    (580,000)     315,000    1,000,000
 Proceeds from issuance
    of debt to
    shareholder........         --          --   3,000,000           --           --
 Proceeds from issuance
    of loans payable...    862,954     232,423   6,998,000           --           --
 Repayment of notes to
    stockholders.......    (63,777)         --          --           --   (3,000,000)
 Repayments under loans
    payable............   (667,291)   (226,036)   (688,537)      (9,563)     (10,478)
 Repayment of capital
    lease obligations..    (22,736)    (47,209)   (355,520)     (21,797)     (50,912)
 Proceeds from issuance
    of preferred stock,
    net of issuance
    costs..............         --          --   2,606,502           --           --
                         ---------  ----------  ----------  -----------  -----------
     Net cash provided
        by (used in)
        financing
        activities.....    (75,506)    339,178  10,650,017      283,640   (2,061,390)
                         ---------  ----------  ----------  -----------  -----------
     Net increase
        (decrease) in
        cash...........    201,020     (66,519)  7,993,268      268,845   (5,501,323)
Cash at beginning of
   period..............     36,961     237,981     171,462      171,462    8,164,730
                         ---------  ----------  ----------  -----------  -----------
Cash at end of period..  $ 237,981  $  171,462  $8,164,730  $   440,307  $ 2,663,407
                         =========  ==========  ==========  ===========  ===========
Supplemental disclosure
   of cash flow
   information:
 Interest paid.........  $ 101,561  $  111,511  $  485,426  $    34,872  $   206,600
 Income taxes..........     73,315      55,263     233,700           --           --
Supplemental disclosure
   of noncash investing
   and financing
   activities:
 Equipment acquired
    under capital
    lease..............         --     143,432     455,006       42,869           --
 Stock issued to
    shareholder under
    equity
    recapitalization...         --          --  10,012,000           --           --
</TABLE>
See accompanying notes to consolidated financial statements.

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

F-6
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization and Description of Business

Originally founded in 1987, MCR Holdings, Inc. and subsidiary (the Company),
provides contract chemistry research services specializing in chemical
synthesis for new drug discovery and development for the global pharmaceutical,
biotechnology, agricultural, chemical, and personal care industries. The
Company's operations are focused on providing Conventional Synthesis,
Combinatorial Chemistry, cGMP Synthesis, and Analytical Chemistry services
designed to enable its customers to reduce overall drug development time and
costs. The Company operates in one business segment and all of its assets are
located in the United States.

On December 31, 1997, the Company's Board of Directors and Stockholders
approved an amendment to the Articles of Incorporation to increase the total
number of authorized shares to 1,000,000 shares, no par value, and approved a
400 to 1 stock split of outstanding common stock. The accompanying consolidated
financial statements retroactively reflect the impact of the increase in the
number of authorized shares and the stock split.

On January 1, 1999, the Company contributed all the net assets of its contract
chemistry research services business to a wholly-owned subsidiary that assumed
the name MediChem Research, Inc. and all the net assets of its proprietary drug
development business, including the Company's 50% interest in Sarawak MediChem
Pharmaceuticals, Inc. (SMP) to a wholly-owned subsidiary, Advanced Life
Sciences, Inc. (ALS). In conjunction with this legal entity restructuring, the
Company changed its name from MediChem Research, Inc. to MCR Holdings, Inc.

On June 14, 1999, the Company exchanged its investment in 100% of the
outstanding common stock of ALS for nonvoting preferred stock issued by ALS
effecting a spin-off of ALS. The net assets of ALS are not material. The
historical operations of ALS through the date of spin-off are reflected as
discontinued operations in the consolidated statements of operations.

(2) Summary of Significant Accounting Policies

Basis of Presentation
The consolidated financial statements include the accounts of MCR Holdings,
Inc. and its wholly owned subsidiary MediChem Research, Inc. The historical
results of operations of ALS have been reflected as discontinued operations
through the date of spin-off of ALS. All intercompany balances and transactions
have been eliminated in consolidation.

During 1998, the Company changed its method of computing depreciation from the
double declining balance method to the straight-line method. Management
believes the straight-line method of depreciation better reflects a systematic
and rational method of allocating the cost of a tangible capital asset over its
useful life. As permitted by generally accepted accounting principles, the
Company has elected to present its consolidated financial statements on the
basis the Company had depreciated its assets using the straight-line method for
all periods presented.

Interim Financial Statements
The financial information as of March 31, 2000 and for the three-month periods
ended March 31, 1999 and 2000 is unaudited. These interim financial statements
have been prepared on substantially

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

                                                                             F-7
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

the same basis as the audited financial statements and, in the opinion of
management, contain all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the financial information
set forth therein

Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives using the straight-line method. Property and equipment
under capital leases are stated at the present value of the minimum lease
payments. Assets under capital leases and leasehold improvements are amortized
over the shorter of their estimated useful lives or the term of the respective
leases by use of the straight-line method. Maintenance and repair costs are
expensed as incurred.

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to future undiscounted net cash
flows, and an appropriate write down is recognized whenever the carrying
amount of an asset exceeds its fair value.

Deferred Financing Costs
The cost of obtaining financing through the issuance of long-term debt
obligations is being amortized on the straight-line method over the term of
the obligation, which is six years.

Revenue Recognition
The Company recognizes contract revenue from its negotiated rate contracts on
a per diem basis as services are rendered or on the percentage of completion
method based on the ratio of costs incurred to expected total costs for fixed
fee contracts. Any losses on contracts are provided for when they are
determinable and estimable. Included in revenue are billings to customers for
the cost of materials purchased for performance under the contract.

The Company recognizes milestone revenue upon confirmation of achievement of a
contract milestone with customers.

Intellectual property income represents revenue from the sale or licensing of
intellectual property developed and maintained by the Company. Revenue is
recognized based upon the legal transfer of intellectual property rights for
sales transactions and as earned for licensing arrangements.

Unbilled Services and Unearned Revenue
In general, prerequisites for billings are established by contractual
provisions including predetermined payment schedules, the achievement of
contract milestones, or submission of appropriate billing detail. Unbilled
services arise when services have been rendered but customers have not been
billed. Similarly, unearned revenue represents prebillings or cash receipts
for services that have not yet been rendered.

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

F-8
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unbilled services are included in accounts receivable. Unearned revenue is
recognized as revenue when services are rendered and in accordance with the
provisions of contractual arrangements.

Contract Service Costs
Contract service costs consist primarily of payroll and payroll related costs,
and direct material costs incurred to provide contractual services to
customers.

Research and Development
Research and development costs are expensed as incurred. Research and
development costs included in discontinued operations were approximately
$209,000, $266,000, and $255,000 in 1997, 1998, and 1999, respectively.

Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs
charged to operations were approximately $28,000, $80,000 and $243,000 in
1997, 1998 and 1999, respectively.

Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. This method
also requires the recognition of future tax benefits such as net operating
loss and credit carryforwards, to the extent that realization of such benefits
is more likely than not. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

Incentive Stock Plan
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.

Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, accrued expenses, debt and capital lease obligations. The
carrying amount of these instruments approximates their fair value.

Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for

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

                                                                            F-9
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

hedging activities. FAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (2) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (3) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.

As amended by FAS 137, FAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. At the date of initial application, an
entity shall choose to either (1) recognize as an asset or liability in the
statement of financial position all embedded derivative instruments that are
required to be separated from their host contracts or (2) select either January
1, 1998 or January 1, 1999 as a transition date for embedded derivatives. If
the entity chooses to select a transition date, it shall recognize as separate
assets and liabilities only those derivatives embedded in hybrid instruments
issued, acquired, or substantively modified by the entity on or after the
selected transition date. That choice is not permitted to be applied to only
some of an entity's individual hybrid instruments and must be applied on an
all-or-none basis.

The Company is currently evaluating the impact, if any, of adopting the
provisions of FAS 133. Management does not expect the adoption of the
provisions of FAS 133 (and the method of adoption) to have a material impact on
the financial position or results of operations of the Company.

In March 2000, FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation and interpretation of APB Opinion No. 25 (FIN 44),
was issued which provides clarification of the application of APB Opinion No.
25 for certain issues. Among other issues, FIN 44 clarifies (1) the definition
of an employee for purposes of applying APB Opinion No. 25, (2) the criteria
for determining whether a plan qualifies as a non-compensatory plan, (3) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (4) the accounting for an exchange of stock
compensation awards in a business combination.

FIN 44 is effective July 1, 2000, but certain items cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
FIN 44 covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying FIN 44 are recognized on a prospective basis from July 1, 2000.

The Company is currently evaluating the impact, if any, of adopting the
provisions of FIN 44. Management does not expect adoption of the provisions of
FIN 44 to have a material impact on the financial position or results of
operations of the Company.

On December 3, 1999 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), which summarizes certain of the SEC staff's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
In general, SAB 101 provides that if a transaction is within the scope of
specific authoritative literature that provides revenue recognition guidance,
that literature should be applied. However, in the absence of authoritative
literature addressing a specific arrangement or a specific

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

F-10
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

industry, the SEC staff will consider the existing authoritative accounting
standards as well as the broad revenue recognition criteria specified in the
FASB's conceptual framework that contain basic guidelines for revenue
recognition.

As amended by SAB 101A, the guidance contained in SAB 101 is effective for
calendar year-end companies no later than the second quarter of 2000. Changes
in the application of accounting principles resulting from the guidance
contained in SAB 101 are reported as accounting changes in interim financial
statements.

The Company is currently evaluating the impact, if any, of adopting the
provisions of SAB 101 on the financial position and results of operations of
the Company, which is not known at this time.

Earnings Per Share Information
A reconciliation of the numerators and the denominators of the basic and
diluted per-share computations for income from continuing operations follows:
<TABLE>
<CAPTION>
                                              For the year ended December 31,
                                                           1997
                                                 Income        Shares Per Share
                                            (Numerator) (Denominator)    Amount
-------------------------------------------------------------------------------
<S>                                         <C>         <C>           <C>
Income from continuing operations.........     $321,168
  Less allocation of income to
     participating securities.............      103,983
                                               --------
Common stock..............................                    400,000
  Add: conversion of participating class A
     preferred stock......................                    226,960
                                                              -------
Basic EPS
  Income available to common
     stockholders.........................      217,185       626,960     $0.35
                                                                          =====
Effect of Dilutive Securities
  Less dilutive effect of allocation of
     income to participating securities...        3,746
                                               --------
Diluted EPS
  Income available to common stockholders
     + asumed conversions.................      213,439       626,960     $0.34
                                                                          =====
<CAPTION>
                                              For the year ended December 31,
                                                           1998
                                                 Income        Shares Per Share
                                            (Numerator) (Denominator)    Amount
-------------------------------------------------------------------------------
<S>                                         <C>         <C>           <C>
Income from continuing operations.........     $493,072
  Less allocation of income to
     participating securities.............      124,503
                                               --------
Common stock..............................                    400,000
  Add conversion of participating class A
     preferred stock......................                    226,960
                                                              -------
Basic EPS
  Income available to common
     stockholders.........................     $368,569       626,960     $0.59
                                                                          =====
Effect of Dilutive Securities
  Less dilutive effect of allocation of
     income to participating securities...        3,290
                                               --------
  Class B common stock options............                      9,835
                                                              -------
Diluted EPS
  Income available to common stockholders
     + assumed conversions ...............      365,279       636,795     $0.57
                                                                          =====
</TABLE>

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

                                                                            F-11
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
                                              For the year ended December 31,
                                                           1999
                                                 Income        Shares Per Share
                                            (Numerator) (Denominator)    Amount
-------------------------------------------------------------------------------
<S>                                         <C>         <C>           <C>
Income from continuing operations..........  $1,165,469
  Less allocation of income to
     participating securities..............     282,512
  Less accretion to redemption value of
     preferred stock.......................     623,498
                                             ----------
Class A common stock.......................                   400,000
Basic EPS
  Income available to common
     stockholders..........................  $  259,459       400,000     $0.65
                                                                          =====
Effect of Dilutive Securities
  Add effect of allocation of income to
     participating securities..............       1,825
                                             ----------
  Class B common stock options.............                    12,339
  Class C common stock warrants............                     9,037
                                                              -------
Diluted EPS
  Income available to common stockholders
     + assumed conversions.................     261,284       421,376     $0.62
                                                                          =====
</TABLE>

Warrants to purchase 8,458 shares of Class B common stock at $48.47 per share
were outstanding during the second half of 1999, but were not included in the
computation of earnings per share because their effect is antidilutive. The
warrants, which expire on June 14, 2004, were still outstanding at December 31,
1999.

Options to purchase 38,050 shares of Class B common stock at $44.06 per share
were outstanding during the second half of 1999, but were not included in the
computation of earnings per share because their effect is antidilutive. The
options, which expire on July 1, 2009, were still outstanding at December 31,
1999.

(3) Business and Credit Concentrations

In 1997, the Company had contracts with three third-party customers for the
amounts exceeding 10% of total revenues. Contract revenue with these customers
was $1,244,000, $1,062,000, and $704,000 for the year ended December 31, 1997.

In 1998, the Company had contracts with two third-party customers for amounts
exceeding 10% of total contract revenues. Contract revenue with these customers
was $3,121,000 and $1,191,000 for the year ended December 31, 1998.

In 1999, the Company had contracts with two third-party customers for amounts
exceeding 10% of total contract revenues. Contract revenue with these customers
was $2,364,000 and $1,539,000 for the year ended December 31, 1999.

The Company's ten largest customers accounted for approximately 94%, 90% and
87% of total contract revenues in 1997, 1998 and 1999, respectively.

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

F-12
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Conventional Synthesis services represented 66%, 68%, and 68% of the Company's
total contract revenues for the years 1997, 1998 and 1999, respectively.

Combinatorial Synthesis services represented 11%, 13%, and 18% of the Company's
total contract revenues for the years 1997, 1998, and 1999, respectively.

GMP Synthesis services represented 21%, 17%, and 6% of the Company's total
contract revenues for the years 1997, 1998, and 1999, respectively.

The Company's exposure to credit loss is equal to its outstanding billed
receivables and unbilled services balance. Management employs a specific
identification methodology to provide for doubtful accounts. Credit losses have
consistently been within management's expectations. Accounts receivable due
from an individual third-party customer of the Company was $753,298 and
$480,977 at December 31, 1998 and 1999, respectively.

(4) Related-party Transactions

The Company provides services to SMP that are reimbursed based upon negotiated
contractual rates. Amounts billed to SMP are recorded as contract revenue-
related party. Amounts due from SMP were $30,403 and $114,166 at December 31,
1998 and 1999, respectively.

Subsequent to its spin-off on June 14, 1999, the Company and ALS entered into a
master laboratory agreement under which the Company provides various services.
Amounts billed under the agreement are recorded as contract revenue-related
party. Amounts due from ALS were $506,723 at December 31, 1999.

At December 31, 1999, the Company owns 250,000 shares of ALS' preferred stock
with a recorded carrying amount of $-0-. At December 31, 1999, the common
shareholder of the Company owns 100% of the 400,000 outstanding shares of
common stock of ALS.

On June 14, 1999, the Company issued a $3,000,000 promissory note to the common
shareholder. The loan is due on January 31, 2000.

The common shareholder is a guarantor of the mortgage loan payable.

The Company has licensed technology from ALS, under which the Company is
committed to royalty payments ranging from 4-8% of contract revenues
incorporating the licensed technology.

(5) Accounts Receivable

Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                1998       1999
-------------------------------------------------------------------------------
<S>                                                       <C>        <C>
Billed receivables....................................... $1,722,924 $2,156,579
Unbilled services........................................     15,529     83,107
Less allowance for doubtful accounts.....................         --     13,980
                                                          ---------- ----------
Accounts receivable...................................... $1,738,453 $2,225,706
                                                          ========== ==========
</TABLE>

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

                                                                            F-13
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


(6) Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                        Depreciable life       1998       1999
------------------------------------------------------------------------------
<S>                                     <C>              <C>        <C>
Land...................................               -- $       -- $2,233,844
Building improvements..................   10 to 20 years    357,499    357,499
Furniture and fixtures.................          7 years     79,241    101,644
Leasehold improvements.................          5 years    441,741    818,242
Lab equipment and instruments..........          5 years  1,797,868  2,316,773
Equipment under capital lease..........          5 years    261,004    692,605
Computer equipment.....................          3 years    125,163    411,535
Construction in process................               --     12,900  1,480,372
                                          -------------- ---------- ----------
                                                          3,075,416  8,412,514
Less accumulated depreciation and
   amortization........................                   1,297,393  2,035,633
                                                         ---------- ----------
Property and equipment, net............                  $1,778,023 $6,376,881
                                                         ========== ==========
</TABLE>

(7) Debt

On June 14, 1999 the Company entered into a credit facility that provided for
revolving credit loans in the aggregate amount of $15,000,000. Loans under this
facility may be made for working capital purposes or acquisitions. Loans for
working capital purposes are limited to $7,500,000 and loans for acquisitions
are limited to the amount available under the facility less outstanding loans
for working capital purposes. Loans for acquisitions are subject to mandatory
repayment schedules, generally over five years. The facility commitment
terminates on June 14, 2001 for acquisition loans and on June 1, 2005 for
working capital loans. All loans under this facility bear interest at the
floating 30 day LIBOR rate plus 4.00%. The Company incurs an annual commitment
fee of 0.25% on the unused portion of the facility. There were no loans
outstanding under this facility at December 31, 1999.

On June 14, 1999, the Company entered into a $5,000,000 term loan note. The
note bears interest at the floating 30 day LIBOR rate plus 5.25%. Interest is
payable monthly. The note is secured by substantially all of the assets of the
Company and is due on June 1, 2005. In conjunction with the note, the Company
issued warrants to the note holder to purchase 16,916 shares of Class C common
stock. The warrants have an estimated fair value of $494,295, which has been
treated as a discount on the term loan note. The discount is being amortized
using the effective interest method over the life of the note.

On April 21, 1999, the Company entered into a mortgage loan to purchase land in
Woodridge, Illinois. The loan bears interest at the prime rate plus 0.50% and
is secured by the land. Principal payments are due in quarterly installments
and interest payments are due in monthly installments. The loan matures on
April 21, 2000.

The Company maintained a revolving credit agreement with a bank under which
there were outstanding borrowings of $580,000 at December 31, 1998. Outstanding
borrowings under this agreement bear interest at the prime rate (8.0% at
December 31, 1998).

The Company has entered into various installment promissory notes, which are
secured by the assets of the Company.

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

F-14
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


The following is a summary of debt obligations:

<TABLE>
<CAPTION>
                                                               December 31,
                                                                1998       1999
-------------------------------------------------------------------------------
<S>                                                         <C>      <C>
Term loan note payable due June 1, 2005, interest at
   monthly LIBOR + 5.25%; $5,000,000 face value; net of
   unamortized discount of $455,040.......................  $     -- $4,544,960
Mortgage loan payable, due April 2000; interest at prime;
   due in quarterly principal payments of $83,280,
   interest payable monthly...............................        --  1,714,920
Note payable with monthly payments of $9,841 through April
   2000; interest at 8.75%................................   146,945    104,176
Note payable with monthly payments of $1,439; through
   October 2001; interest at 6.44%........................    44,590         --
Note payable with monthly payments of $3,581 through
   November 2001; interest at 9.25%.......................    97,142         --
Notes payable with monthly payments ranging from $143 to
   $5,105; interest ranging from 8.06% to 8.50% with
   maturity dates through November 2002 (repaid in 1999)..   264,006         --
Notes payable with monthly payments ranging from $232 to
   $1,180: interest ranging from 7.00% to 7.95% with
   maturity dates through March 2003 (repaid in 1999).....   156,048         --
                                                            -------- ----------
                                                             708,731  6,364,056
Less:
Current portion of debt...................................   278,983  1,757,003
                                                            -------- ----------
Debt, less current portion................................  $429,748 $4,607,053
                                                            ======== ==========
</TABLE>

The agreements related to the term note payable and mortgage loan payable
contain various financial and non-financial covenants. At December 31, 1999,
the Company was in compliance with these debt covenants.

Annual maturities of debt are as follows:

<TABLE>
<CAPTION>
                                                                            Debt
--------------------------------------------------------------------------------
      <S>                                                             <C>
      2000..........................................................  $1,757,003
      2001..........................................................      45,578
      2002..........................................................      16,516
      2003..........................................................          --
      2004..........................................................          --
                                                                      ----------
        Total.......................................................  $1,819,097
                                                                      ==========
</TABLE>

(8) Redeemable Preferred Stock

Class A convertible preferred stock is voting, provides for non-cumulative
dividends at the same rate as the classes of common stock, and has a
liquidation preference upon the dissolution of the Company of a minimum of
$66.09 per share plus declared but unpaid dividends. The liquidation preference
is subordinated to the liquidation preference of the Class D preferred stock.
The Class A convertible preferred stock is redeemable at the election of its
holder for a minimum of $66.09 per share in three

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

                                                                            F-15
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

equal aggregate installments commencing June 14, 2005, or upon a merger, sale
of substantially all of the Company's assets, or in the event of a change in
control of the Company through the acquisition of a majority of the outstanding
voting classes of stock by a third party. The difference between the carrying
amount and the redemption amount is accreted using the effective interest
method with an interest rate of 9.69%. The Class A convertible preferred stock
is convertible into both Class A common stock and Class B 5% redeemable
preferred stock at any time upon the election of its holder, and is
automatically convertible into both Class A common stock and Class B 5%
redeemable preferred stock upon a qualifying public offering.

Class B 5% redeemable preferred stock is nonvoting and provides for cumulative
dividends of 5% on the liquidation preference amount of $7,500 per outstanding
share. Except for Class D preferred stock, dividend payments or distributions
may not be made on any other class of stock for the period during which Class B
5% redeemable preferred stock is outstanding. Subject to the liquidation
preference of the Class D preferred stock, the Class B 5% redeemable preferred
stock has a cash liquidation preference of $7,500 per share plus cumulative
dividends payable. The stock is automatically redeemable at the liquidation
preference amount of $7,500 per share plus cumulative dividends payable in the
event of a qualifying public offering, and is redeemable at the election of its
holders in three equal aggregate installments commencing June 14, 2005, or upon
a merger, sale of substantially all of the Company's assets, or in the event of
a change in control of the Company through the acquisition of a majority of the
outstanding voting classes of stock by a third party.

Class C preferred stock is nonvoting, provides for non-cumulative dividends at
the same rate as the classes of common stock, and is convertible to Class A
common stock upon dissolution of the Company, a qualifying public offering, a
merger, sale of substantially all of the Company's assets, or in the event of a
change in control of the Company through the acquisition of a majority of the
outstanding voting classes of stock by a third party. The number of Class A
shares to be received in conversion is determined by the internal rate of
return achieved by the holder of the Class A convertible preferred stock. In
the event of conversion to Class A common stock as a result of a qualifying
public offering, the Company shall redeem Class A common shares issued to the
Class C preferred stockholders at the initial qualifying public offering price.
In the event the Class C preferred stock is not converted to Class A common
stock prior to dissolution, the stock bears a liquidation preference of $1.

On December 27, 1999, the Company amended its Articles of Incorporation to
increase the authorized shares of Class C preferred stock to 440,000 shares
with a $.01 par value, and approved a 400 for 1 stock split for outstanding
Class C preferred shares. The accompanying consolidated financial statements
retroactively reflect the stock split.

(9) Stockholders' Equity

On June 14, 1999, the Company effected a recapitalization by retiring the
previously issued and outstanding common stock and issuing 226,960 shares of
Class A preferred stock, 1,000 shares of Class C preferred stock, 400,000
shares of Class D preferred stock, and 400,000 shares of Class A common stock
to its shareholder. Classes of newly authorized Company stock include: Class A
convertible preferred stock, Class B 5% redeemable preferred stock, Class C
preferred stock, Class D preferred stock, Class A common stock, Class B common
stock, and Class C common stock.

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

F-16
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Class D preferred stock is nonvoting, but provides for the right of approval
with respect to any action taken affecting the Company's investment in the
preferred stock of ALS and any amendment to the Articles of Incorporation that
would adversely or disproportionately affect the rights of the Class D
preferred stock. Non-cumulative dividends are paid only in the event of a
distribution or dividend on ALS preferred stock. In the event of sale or
disposition of the Company's investment in the preferred stock of ALS, the
Class D preferred stock is mandatorily redeemable for the net realizable value
of the ALS preferred stock. The Company may, at its option, redeem the Class D
preferred stock upon a public offering, merger, sale of substantially all of
the Company's assets, or in the event of a change in control of the Company
through the acquisition of a majority of the outstanding voting classes of
stock by a third party by distributing its investment in the preferred stock of
ALS, net of taxes. In the event of dissolution of the Company, the Class D
preferred stock has a liquidation preference equal to the net realizable value
of the Company's investment in the preferred stock of ALS.

Class A common stock is voting and provides for non-cumulative dividends.

Class B common stock is nonvoting, provides for non-cumulative dividends and is
automatically convertible into Class A common stock on a one-for-one basis at
the time of a public offering.

Class C common stock is nonvoting, provides for non-cumulative dividends and is
convertible into Class A common stock on a one-for-one basis any time at the
election of its holder.

With respect to Class A, B, and C common stock, the Board of Directors of the
Company may not discriminate among the classes of common stock with respect to
declaration of dividends and other distributions. Accordingly, all outstanding
shares of each class of common stock are treated in the same manner with
respect to dividend payments and other distributions.

On June 14, 1999, the Company effected a private placement of 113,481 shares of
Class A convertible preferred stock for $5,000,000 which bears a liquidation
preference and redemption value of $66.09 per share. Together with the 226,960
shares issued in the recapitalization, the aggregate redemption value of
outstanding Class A convertible preferred stock is $22,499,458. The difference
between the stock's initial carrying value and its redemption value will be
accreted over the period to redemption using the effective interest method such
that the carrying value of the Class A convertible preferred stock will be its
redemption value at June 14, 2005.

On June 14, 1999, the Company issued immediately exercisable warrants to a
financial institution to purchase 8,458 shares of Class B common stock at an
exercise price of $48.47 per share. In the event the Company sells shares of
Class A common stock in a public offering, the warrants are exercisable for
shares of Class A common stock. The warrants expire on June 14, 2004.

(10) Incentive Stock Plan

Effective January 1, 1998, the Company's Board of Directors and stockholders
adopted and approved the Company's Incentive Compensation Plan (the Plan). The
Plan provides for the grant of stock options and the award of restricted stock
to selected officers, directors, consultants, and employees of the Company and
other eligible persons. A total of 40,000 shares of common stock were reserved
for issuance under the Plan. Options are granted at estimated fair value as
determined by the Board of Directors and expire 10 years from the date of
grant. Vesting periods of option grants are determined

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

                                                                            F-17
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

by the Board of Directors at the time of grant. Awards of restricted stock are
subject to certain terms, conditions, restrictions, and limitations as
determined by the Board of Directors. Options granted through June 30, 1999
under the Plan provided for graduated vesting whereby options vest in 33%
increments on the third, fourth, and fifth anniversary of the date of grant.

Options outstanding at the recapitalization date were modified to maintain the
option holder's economic position after the recapitalization. Options on a
share of common stock were modified to represent the right to purchase one
share of Class B common stock, one share of Class C preferred stock, and one
share of Class D preferred stock. Exercise of the option on Class B common
stock and Class C preferred stock must be effected concurrently. Other than
proportionally modifying the exercise price to maintain the economic position
of the option holders, terms of the original grant remain the same. No
compensation expense was recorded by the Company as a result of the option
modifications.

Effective January 1, 1999, the Plan was amended to change its name to the MCR
Holdings, Inc. Incentive Compensation Plan, and on July 1, 1999, the Board of
Directors reserved an additional 40,000 shares of Class B common stock and
authorized the issuance of additional stock option grants to management,
employees, and directors and certain consultants under the provisions of the
Plan. Options were granted at their estimated fair value and expire ten years
from the date of grant. The options granted to management, directors, and
consultants provide for graduated vesting, whereby options vest in 33%
increments on the first, second, and third anniversary. The options granted to
employees provide for graduated vesting, whereby options vest in 33% increments
on the fourth, fifth and sixth anniversary of the date of grant.

At December 31, 1999, 80,000 shares have been reserved for issuance under the
Plan.

Stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                         average
                                                                        exercise
Options                                                          Shares    price
--------------------------------------------------------------------------------
<S>                                                              <C>    <C>
Outstanding at December 31, 1997...............................      --   $   --
  Granted......................................................  26,667     9.80
  Exercised....................................................      --       --
  Terminated...................................................   2,507     9.80
                                                                 ======   ======
Outstanding at December 31, 1998...............................  24,160     9.80
  Granted......................................................  40,522    42.05
  Exercised....................................................      --       --
  Terminated...................................................   1,827    11.47
                                                                 ======   ======
Outstanding at December 31, 1999...............................  62,855   $30.54
                                                                 ======   ======
</TABLE>

The weighted average minimum value of options granted during the years ended
December 31, 1998 and 1999 were $2.38 and $6.91, respectively.

The minimum value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model using the following assumptions:
no dividend yield, no volatility, risk-free interest rate of 4.64%, and
expected lives of 6 years for 1998 option grants and no dividend yield, no
volatility, risk-free interest rate of 5.93%, and expected lives of between 3
and 5 years for 1999 option grants.

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

F-18
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

<TABLE>
<CAPTION>
                       Options outstanding                    Options exercisable
               Number Weighted average                          Number
Exercise  outstanding        remaining Weighted average exercisable at Weighted average
prices    at 12/31/99 contractual life   exercise price       12/31/99   exercise price
---------------------------------------------------------------------------------------
<S>       <C>         <C>              <C>              <C>            <C>
$ 9.80         24,805        8.0 years            $9.80             --               --
 44.06         38,050        9.5 years            44.06             --               --
</TABLE>

Of the 24,805 options with an exercise price of $9.80, 24,160 options represent
the right to acquire Class B common stock, Class C preferred stock, and Class D
preferred stock. The exercise price of $9.80 represents the combined exercise
price for all classes of stock.

The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized for the Plan.

Had compensation cost for the Company's Plan been determined based on FASB
Statement No. 123, the Company's net income available to common stockholders
for the years ended December 31, 1998 and 1999 would have been the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                                  1998     1999
-------------------------------------------------------------------------------
<S>                                                           <C>      <C>
Net income available to common stockholders:
 As reported................................................. $195,146 $164,350
 Pro forma...................................................  183,086  100,435
Basic earnings per share:
 As reported................................................. $   0.59 $   0.65
 Pro forma................................................... $   0.57 $   0.49
Diluted earnings per share:
 As reported................................................. $   0.57 $   0.62
 Pro forma................................................... $   0.55 $   0.47
</TABLE>

(11) Income Taxes

The total income tax expense for years ended December 31, 1997, 1998 and 1999
was allocated as follows:

<TABLE>
<CAPTION>
                                                     1997       1998      1999
-------------------------------------------------------------------------------
<S>                                              <C>       <C>        <C>
Continuing operations........................... $166,772  $ 310,012  $931,817
Discontinued operations.........................  (34,390)  (109,025)  (60,532)
                                                 --------  ---------  --------
 Total.......................................... $132,382  $ 200,987  $871,285
                                                 ========  =========  ========
</TABLE>

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

                                                                            F-19
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Income tax expense attributable to income from continuing operations for the
years ended December 31, 1997, 1998 and 1999 consist of:

<TABLE>
<CAPTION>
                                                        1997     1998      1999
--------------------------------------------------------------------------------
<S>                                                 <C>      <C>       <C>
Current:
 Federal..........................................  $ 82,025 $277,349  $765,075
 State............................................    20,410   48,788   180,116
 Foreign..........................................       288       --        --
                                                    -------- --------  --------
                                                     102,723  326,137   945,191
                                                    -------- --------  --------
Deferred:
 Federal..........................................    52,071  (13,055)  (11,005)
 State............................................    11,978   (3,070)   (2,369)
                                                    -------- --------  --------
                                                      64,049  (16,125)  (13,374)
                                                    -------- --------  --------
  Total...........................................  $166,772 $310,012  $931,871
                                                    ======== ========  ========
</TABLE>

The difference between the U.S. Federal income tax rate of 34% for the years
ended December 31, 1997, 1998 and 1999 and the actual effective tax rates on
earnings from continuing operations for the same periods resulted from the
following:

<TABLE>
<CAPTION>
                                                               1997  1998  1999
--------------------------------------------------------------------------------
<S>                                                            <C>   <C>   <C>
U.S. Federal income tax rate.................................  34.0% 34.0% 34.0%
Increase (decrease) in income taxes resulting from:
 Nondeductible patent costs..................................   2.6    --    --
 State income taxes, net of U.S. Federal tax benefit.........   4.4   4.8   5.6
 Valuation of temporary differences..........................  (2.6) (4.0)   --
 Benefit from the use of graduated federal tax rates.........  (0.6)   --    --
 Other, net..................................................  (3.6)  3.8   4.8
                                                               ----  ----  ----
  Effective tax rate.........................................  34.2% 38.6% 44.4%
                                                               ====  ====  ====
</TABLE>

The tax effects of temporary differences attributable to continuing operations
that give rise to significant portions of the deferred tax assets and liability
as of December 31, are presented below:

<TABLE>
<CAPTION>
                                                                 1998      1999
--------------------------------------------------------------------------------
<S>                                                          <C>       <C>
Deferred tax assets:
 Foreign tax credit carryforwards........................... $ 63,263  $ 63,041
 Accrued vacation...........................................    3,364    12,045
                                                             --------  --------
                                                               66,627    75,086
Valuation allowance.........................................  (63,263)  (63,041)
                                                             --------  --------
Deferred tax assets.........................................    3,364    12,045
 Deferred tax liability--property and equipment.............  (75,281)  (70,588)
                                                             --------  --------
 Net deferred tax liability................................. $(71,917) $(58,543)
                                                             ========  ========
</TABLE>

The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was $63,263 and $63,041, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1999 was a
decrease of $21,091 and $222, respectively. The foreign tax credit

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

F-20
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

carryforwards expire through 2000. The tax benefit of these carryforwards may
be subject to limitations imposed by the Internal Revenue Code. Accordingly,
due to the uncertainty of the realization of these carryforwards, the Company
has established a corresponding valuation allowance.

Based on the Company's current and historical pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit
of the existing deferred tax assets at December 31, 1999. Management believes
the existing net deductible temporary differences will reverse during periods
in which the Company will generate taxable income, however, there can be no
assurances that the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning or other strategies
could be implemented, if necessary, to supplement income from operations to
fully realize recorded tax benefits.

(12) Benefit Plan

The Company sponsors a contributory savings and investment 401(k) plan in which
employees meeting minimum service requirements are eligible to participate.
Participants may contribute up to 15% of their compensation. For participant
contributions on the first 6% of compensation, the Company contributed an
amount equal to 10%, 20% and 20% of those contributions in 1997, 1998 and 1999,
respectively. The Company's contributions to the plan were $27,804, $42,709,
and $81,762 in 1997, 1998 and 1999, respectively.

(13) Commitments

(a) Leases
The Company leases facilities under four operating leases that expire at
various dates through September 2003. In addition, the Company is obligated
under various capital leases for certain equipment.

Minimum annual payments under operating leases and the present value of minimum
capital lease payments as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
                                                                         Capital
                                                                           lease
                                                    Operating Leases obligations
--------------------------------------------------------------------------------
<S>                                                 <C>              <C>
Year ending December 31,
 2000.............................................        $  547,110    $236,478
 2001.............................................           354,731     214,856
 2002.............................................           311,224     104,414
 2003.............................................           219,600      38,345
 2004.............................................                --       2,850
                                                          ----------    --------
  Total...........................................        $1,432,665     596,943
                                                          ==========
 Less amount representing interest................                        92,175
                                                                        --------
 Present value of net minimum lease payments......                      $504,768
                                                                        ========
</TABLE>

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

                                                                            F-21
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


Rent expense under operating leases amounted to $278,725, $348,390, and
$562,009 in 1997, 1998 and 1999, respectively.

The following is a summary of capital lease obligations.

<TABLE>
<CAPTION>
                                                                December 31,
                                                                  1998     1999
-------------------------------------------------------------------------------
<S>                                                           <C>      <C>
Capital lease obligation with monthly payments of $526
   through April 2002; imputed interest rate of 6%........... $     -- $  8,928
Capital lease obligation with monthly payments of $1,132
   through February 2004; imputed interest rate of 11%.......       --   24,287
Capital lease obligation with monthly payments of $917
   through February 2004; imputed interest rate of 9%........       --   38,501
Capital lease obligation with monthly payments of $6,836
   through June 2003; imputed interest rate of 9%............       --  231,363
Capital lease obligation with monthly payments of $2,864
   through April 2002; imputed interest rate of 11%..........       --   69,817
Capital lease obligation with monthly payments of $294
   through December 2002; imputed interest rate of 6%........       --    5,028
Capital lease obligation with monthly payments of $2,985
   through September 2001; imputed interest rate of 10.65%...   85,065   54,523
Capital lease obligation with monthly payments of $428
   through May 2000; imputed interest rate of 8.52%..........    6,456    1,666
Capital lease obligation with monthly payments of $481
   through June 2000; imputed interest rate of 13.44%........    7,802    2,360
Capital lease obligation with monthly payments of $572
   through July 2000; imputed interest rate of 13.32%........    9,753    3,344
Capital lease obligation with monthly payments of $3,026
   through June 2001; imputed interest rate of 11.00%........   78,832   54,571
Capital lease obligation with monthly payments of $486
   through August 2000; imputed interest rate of 21.00%......    8,144    3,233
Capital lease obligation with monthly payments of $361
   through November 2001; imputed interest rate of 15.00%....   10,132    7,147
                                                              -------- --------
                                                               206,184  504,768
Less:
 Current portion of capital leases...........................   80,263  197,206
                                                              -------- --------
 Capital lease obligations, less current portion............. $125,921 $307,562
                                                              ======== ========
</TABLE>

(b) Land and Building
On April 21, 1999, the Company purchased a 15-acre parcel in an industrial park
located in Woodridge, IL. The land will be used to construct a 100,000 square
foot facility that will house the Company's corporate offices and laboratories.
On September 3, 1999, the Company executed a letter of intent authorizing its
general contractor to excavate and prepare land for the construction.
Authorized expenditures under this letter total $1,063,000, of which $673,000
was incurred in 1999.

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

F-22
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


(c) Royalties
On July 1, 1999, the Company licensed certain technology from ALS. Under the
license, the Company is committed to royalty payments in the amount of 8% of
the Company's contract revenues incorporating the licensed technology. Royalty
payments under the license amounted to $12,387 for the year ended December 31,
1999 and are netted against milestone and intellectual property revenue in the
accompanying consolidated statement of operations.

On August 31, 1999, the Company sublicensed certain technology from a third
party and ALS. Under the license, the Company is committed to make royalty
payments in amounts ranging from 8-10% of the Company's contract revenues of
the licensed technology. No royalty payments were made under the license for
the year ended December 31, 1999.

(d) Redeemable Stock Warrants
In conjunction with debt financing, the Company issued immediately exercisable
warrants to a financial institution for the purchase of 16,916 shares of Class
C common stock at an exercise price of $.01 per share. The exercise price of
the warrants and the number of shares issuable under the warrants may be
adjusted from time to time in accordance with anti-dilution and adjustment
provisions of the warrant agreement. The holder of the warrants can require
their redemption after repayment of all amounts borrowed by the Company under
the term loan note and the line of credit facility, a public offering or at
anytime after June 14, 2004 at an amount equivalent to the per share fair value
of the Class C common stock less the exercise price at the date of redemption.
The Company may elect to redeem the warrants at the earliest of the following:
(1) June 14, 2005; (2) twelve months from the date all amounts borrowed under
the term loan note and the credit facility are repaid; or (3) the closing date
of a public offering in which shares are sold for a minimum of $3.00 per share
and the net proceeds from the offering exceeds $25,000,000. The redemption
price is 110% of the per share fair value of the Class C common stock less the
exercise price at the date of redemption except in the case of a redemption
upon a public offering, in which case the redemption price is 100% of the per
share fair value of the Class C common stock less the exercise price at the
date of redemption. At December 31, 1999, the fair value of the warrants issued
was estimated to be $494,295.

March 31, 2000 (unaudited)--For the three-month period ended March 31, 2000 the
Company recognized expense of $1,905,487 related to adjustment of its
redeemable stock warrants to their estimated fair value at March 31, 2000.

(14) Subsequent Events--(unaudited)

On March 9, 2000, the Company obtained a bank commitment for a $12,000,000
construction loan to be used for the construction of the Woodridge facility.
The Company is required to pay for the first $5,500,000 of construction costs
before it is eligible to draw on the construction loan. The loan bears a
commitment fee of $120,000 and interest is payable monthly at the floating
prime rate. At the earlier of eighteen months from the date of the loan or
completion of construction, the loan will be refinanced through a $12,000,000
commercial mortgage loan. The commercial mortgage loan bears a commitment fee
of $60,000 and will carry interest at the then prevailing rate plus 2.25%. The
term of the commercial mortgage loan is five years with monthly principal and
interest payments due; the last payment will include a balloon payment based
upon a 20-year amortization of the principal balance. Both the construction
loan and the commercial mortgage loan are subject to certain financial and
nonfinancial covenants. $3,000,000 of the construction loan is guaranteed by
the Company's Chief

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

                                                                            F-23
<PAGE>

MCR HOLDINGS, INC. AND SUBSIDIARY

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Executive Officer. $3,000,000 of the commercial mortgage loan will also be
guaranteed by the Company's Chief Executive Officer. This guarantee will be
reduced by $500,000 each year of the commercial mortgage loan is outstanding.

On May 31, 2000, the Company acquired all of the outstanding common stock of
ThermoGen, Inc. Under the terms of the merger agreement, the Company issued
185,087.27 shares of Class A common stock in exchange for the issued and
outstanding shares of ThermoGen Inc.'s common stock. As additional
consideration, outstanding stock options of ThermoGen, Inc. were converted into
options to purchase 25,486 shares of Class B common stock of the Company.

On May 31, 2000, the Company acquired all of the outstanding common stock of
Emerald BioStructures, Inc. Under the stock purchase agreement, the Company
issued 84,511 shares of Class A common stock in exchange for all of the
outstanding common stock of Emerald BioStructures, Inc.

On June 1, 2000, the board of directors authorized the reincorporation of the
Company in Delaware and the filing of a registration statement with the
Securities and Exchange Commission to register shares of common stock in
connection with a proposed initial public offering. If the offering
contemplated by this prospectus is consummated, the Company's redeemable stock
warrants, classes of redeemable preferred stock, preferred stock, and common
stock will be either redeemed with the proceeds from the offering or converted
into a single class of common stock.

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

F-24
<PAGE>

THERMOGEN, INC.

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

INDEPENDENT AUDITORS' REPORT

The Board of Directors
ThermoGen, Inc.:

We have audited the accompanying balance sheets of ThermoGen, Inc. (the
Company) as of December 31, 1998 and 1999, and the related statements of
operations, shareholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ThermoGen, Inc. as of December
31, 1998 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

                                          /s/ KPMG LLP

March 21, 2000
Chicago, Illinois

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

                                                                            F-25
<PAGE>

THERMOGEN, INC.

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

BALANCE SHEETS
December 31, 1998 and 1999 and March 31, 2000 (unaudited)

<TABLE>
<CAPTION>
                                                December 31,         March 31,
                                                  1998       1999         2000
-------------------------------------------------------------------------------
                                                                   (unaudited)
<S>                                          <C>        <C>        <C>
Assets
Current assets:
 Cash......................................  $      --  $  68,237  $        --
 Accounts receivable.......................     65,044      9,070       84,212
 Grants receivable.........................     56,549     54,818       21,519
 Inventory.................................      3,694         --           --
                                             ---------  ---------  -----------
  Total current assets.....................    125,287    132,125      105,731
Equipment, net.............................     67,832     52,321       49,310
                                             ---------  ---------  -----------
Other assets...............................     11,299     10,899       10,899
                                             ---------  ---------  -----------
  Total assets.............................  $ 204,418  $ 195,345  $   165,940
                                             =========  =========  ===========
Liabilities and Shareholders' Deficit
Current liabilities:
 Current installment of notes payable......  $  39,846  $  15,991  $   150,442
 Due to shareholders.......................         --         --      351,155
 Bank overdraft............................         --         --       10,409
 Accounts payable..........................    233,697    206,675      486,843
 Accrued payroll...........................     95,504     85,980      141,154
 Accrued interest..........................      2,802         --       57,904
 Contract advance..........................         --         --      100,000
 Deferred revenue..........................         --     40,000       40,000
                                             ---------  ---------  -----------
  Total current liabilities................    371,849    348,646    1,337,907
Accrued interest...........................     42,337     54,066           --
Due to shareholders........................    303,033    341,065           --
Notes payable..............................     75,000    139,451           --
                                             ---------  ---------  -----------
  Total liabilities........................    792,219    883,228    1,337,907
                                             ---------  ---------  -----------

Shareholders' deficit:
 Class A common stock; no par; 3,500,000
    shares authorized, issued, and
    outstanding at December 31, 1998 and
    1999 and March 31, 2000 (unaudited)....      4,000      4,000        4,000
 Class B, non-voting common stock; no par;
    500,000 shares authorized; none issued
    and outstanding at December 31, 1998
    and 1999 and March 31, 2000
    (unaudited)............................         --         --           --
 Additional paid-in capital................      3,850      3,850        3,850
 Accumulated deficit.......................   (595,651)  (695,733)  (1,179,817)
                                             ---------  ---------  -----------
  Total shareholders' deficit..............   (587,801)  (687,883)  (1,171,967)
                                             ---------  ---------  -----------
  Total liabilities and shareholders'
     deficit...............................  $ 204,418  $ 195,345  $   165,940
                                             =========  =========  ===========
</TABLE>

See accompanying notes to financial statements.

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

F-26
<PAGE>

THERMOGEN, INC.

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


STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                               Year ended December      Three-month period
                                       31,                ended March 31,
                                    1998        1999         1999         2000
-------------------------------------------------------------------------------
                                                      (unaudited)  (unaudited)
<S>                           <C>         <C>         <C>          <C>
Revenues and sales:
 SBIR grant revenue.........  $  435,872  $  430,925     $250,329    $  91,811
 STTR contract revenue......     276,924      64,489       81,826           --
 Contract revenue...........   1,016,939   1,520,792      367,385      343,268
 Product sales..............      29,974      51,126        4,503        3,104
                              ----------  ----------     --------    ---------
  Total revenues and sales..   1,759,709   2,067,332      704,043      438,183
                              ----------  ----------     --------    ---------
Operating costs:
 Costs reimbursed under SBIR
    grants..................     435,872     430,925      250,329       91,811
 Costs reimbursed under STTR
    contracts...............     276,924      64,489       81,826           --
 Professional compensation
    costs...................     388,058     584,439       65,722      272,054
 Material costs.............      38,595     116,088       19,445       29,145
 General and
    administrative..........     838,980     933,949      191,849      515,329
 Gain on disposal of
    equipment...............     (35,873)         --           --           --
                              ----------  ----------     --------    ---------
  Total operating costs.....   1,942,556   2,129,890      609,171      908,339
                              ----------  ----------     --------    ---------
  Income (loss) from
     operations.............    (182,847)    (62,558)      94,872     (470,156)
                              ----------  ----------     --------    ---------
Non operating expense--
   interest expense.........     (43,000)    (57,524)     (12,556)     (13,928)
                              ----------  ----------     --------    ---------
  Net loss before
     extraordinary item.....    (225,847)   (120,082)      82,316     (484,084)
                              ----------  ----------     --------    ---------
Extraordinary item--
   extinguishment of
   accounts payable.........          --      20,000       20,000           --
                              ----------  ----------     --------    ---------
  Net income (loss).........  $ (225,847) $ (100,082)    $102,316    $(484,084)
                              ==========  ==========     ========    =========
</TABLE>

See accompanying notes to financial statements.

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

                                                                            F-27
<PAGE>

THERMOGEN, INC.

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

STATEMENTS OF SHAREHOLDERS' DEFICIT
Years ended December 31, 1998 and 1999 and three-month period ended March 31,
2000 (unaudited)

<TABLE>
<CAPTION>
                             Class A         Class B    Additional                      Total
                           common stock   common stock     paid-in Accumulated  shareholders'
                          Shares   Amount Shares Amount    capital     deficit        deficit
----------------------------------------------------------------------------------------------
<S>                      <C>       <C>    <C>    <C>    <C>        <C>          <C>
Balance at December 31,
   1997................. 3,500,000 $4,000     --    $--     $3,850 $  (369,804)   $  (361,954)
Net loss................        --     --     --     --         --    (225,847)      (225,847)
                         --------- ------    ---    ---     ------ -----------    -----------
Balance at December 31,
   1998................. 3,500,000  4,000     --     --      3,850    (595,651)      (587,801)
Net loss................        --     --     --     --         --    (100,082)      (100,082)
                         --------- ------    ---    ---     ------ -----------    -----------
Balance at December 31,
   1999................. 3,500,000  4,000     --     --      3,850    (695,733)      (687,883)
Net loss (unaudited)....        --     --     --     --         --    (484,084)      (484,084)
                         --------- ------    ---    ---     ------ -----------    -----------
Balance at March 31,
   2000 (unaudited)..... 3,500,000 $4,000     --    $--     $3,850 $(1,179,817)   $(1,171,967)
                         ========= ======    ===    ===     ====== ===========    ===========
</TABLE>

See accompanying notes to financial statements.

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

F-28
<PAGE>

THERMOGEN, INC.

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

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                        Three-month period
                            Year ended December 31,       ended March 31,
                                   1998         1999         1999         1998
-------------------------------------------------------------------------------
                                                      (unaudited)  (unaudited)
<S>                         <C>          <C>          <C>          <C>
Cash flows from operating
   activities:
Net income (loss).........  $  (225,847) $  (100,082)    $102,316    $(484,084)
Adjustments to reconcile
   net income (loss) to
   net cash provided by
   (used in) operating
   activities:
 Depreciation.............       12,193       17,760        4,427        4,411
 Gain on disposal of
    equipment.............      (35,873)          --           --           --
 Gain on extinguishment of
    accounts payable......           --      (20,000)     (20,000)          --
 Changes in assets and
    liabilities:
  Accounts receivable.....       20,810       55,974       33,544      (75,142)
  Grants receivable.......      (28,179)       1,731      (20,662)      33,299
  Inventory...............          883        3,694        3,694          --
  Other assets............      (11,299)         400          299          --
  Accounts payable........      130,462       74,497        1,213      280,168
  Accrued payroll.........       68,490       (9,524)     (38,959)      55,174
  Accrued interest........       14,029        8,927        3,607        3,838
  Contract advance........                        --           --      100,000
  Deferred revenue........           --       40,000       22,380           --
                            -----------  -----------     --------    ---------
Net cash (used in)
   provided by operating
   activities.............      (54,331)      73,377       91,859      (82,336)
                            -----------  -----------     --------    ---------
Cash flows from investing
   activities:
Proceeds from the disposal
   of equipment...........       75,000           --           --           --
Equipment purchases.......      (74,640)      (2,249)      (1,351)      (1,400)
                            -----------  -----------     --------    ---------
Net cash provided by (used
   in) investing
   activities.............          360       (2,249)      (1,351)      (1,400)
                            -----------  -----------     --------    ---------
Cash flows from financing
   activities:
Increase in cash
   overdraft..............           --           --           --       10,409
Proceeds from issuance of
   debt to shareholders...       27,471       38,032       10,449       10,090
Proceeds from notes
   payable................        7,346           --           --           --
Repayments of notes
   payable................       (8,155)     (40,923)      (6,500)      (5,000)
                            -----------  -----------     --------    ---------
Net cash provided by (used
   in) financing
   activities.............       26,662       (2,891)       3,949       15,499
                            -----------  -----------     --------    ---------
Net increase (decrease) in
   cash...................      (27,309)      68,237       94,457      (68,237)
Cash at beginning of
   period.................       27,309           --           --       68,237
                            -----------  -----------     --------    ---------
Cash at end of period.....  $        --  $    68,237     $ 94,457    $      --
                            ===========  ===========     ========    =========
Supplemental disclosure of
   cash flow information--
   cash paid for
   interest...............  $       863  $    10,583     $     --    $      --
                            ===========  ===========     ========    =========
Non-cash financing
   activities:
Issuance of note payable
   in satisfaction of
   accounts payable.......  $        --  $    81,519     $ 81,519    $      --
Issuance of note payable
   in satisfaction of note
   payable................           --       34,000       34,000           --
                            ===========  ===========     ========    =========
</TABLE>

See accompanying notes to financial statements.

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

                                                                            F-29
<PAGE>

THERMOGEN, INC.

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

NOTES TO FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

(a) Organization and Nature of Business
ThermoGen, Inc. (the Company) was incorporated in Illinois on November 15,
1988. Since its inception, ThermoGen has been engaged in the advanced research
and development of thermostable enzymes and their applications. ThermoGen
obtains the majority of its funding though contract services, Small Business
Innovation Research (SBIR) grants, strategic alliances, and product sales.
ThermoGen's products, ThermoCat(R) kits and bulk enzymes, are designed for
rapid development of practical biocatalytic processes.

(b) Interim Financial Statements
The financial information as of March 31, 2000 and for the three-month periods
ended March 31, 1999 and 2000 is unaudited. These interim financial statements
have been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial information set forth therein.

(c) Liquidity
The Company incurred losses in 1998 and 1999 and as of December 31, 1999 has
current liabilities in excess of current assets. The Company intends to finance
its operations in fiscal year 2000 using funds generated from contract services
provided to third parties. There is no assurance that such contracts will be
negotiated on acceptable terms to the Company, if at all. Should the plans
contemplated by management not be consummated, the Company may have to seek
alternative sources of capital or reevaluate its operating plans. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

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

(e) Inventory
Inventory consists of completed ThermoCat(R) kits and is valued at the lower of
cost (first-in first-out) or market value.

(f) Equipment
Equipment is recorded at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, ranging from five to ten years.
Expenditures for repairs and maintenance are charged to operations as incurred.

(g) Revenue Recognition
Revenue from SBIR and Small Business Technology Transfer (STTR) grants is
recorded as allowable research expenses are incurred under the terms of the
respective grants. Revenue from contract research is recorded as earned based
on the terms of the respective contract agreements. Contract revenue is
recognized either on a per diem basis as services are rendered or on the
percentage of completion method based on costs incurred to expected total costs
for fixed fee contracts. Any losses on contracts

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

F-30
<PAGE>

THERMOGEN, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

are provided for when they are determinable and estimable. Revenue is recorded
for product sales when the respective products are shipped.

(h) Research and Development Costs
Research and development costs are charged to expense when incurred. Research
and development costs reimbursed under SBIR grants amounted to $435,872 and
$430,925 for the years ended December 31, 1998 and 1999, respectively, and
research and development costs reimbursed under the STTR contract were $276,924
and $64,489 for the years ended December 31, 1998 and 1999, respectively. In
addition, research and development costs of $56,544 and $56,325 for the years
ended December 31, 1998 and 1999, respectively, are included in professional
compensation costs in the accompanying statements of operations.

(i) Stock Option Plan
The Company applies the intrinsic value-based method of accounting prescribed
by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its fixed
plan stock options. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting described above, and has adopted the disclosure requirements of SFAS
No. 123.

(2) Business and Credit Concentrations

In 1998, the Company had contracts with two customers for amounts exceeding 10%
of total revenues. Contract revenue with these two customers was $750,000 and
$235,939 for the year ended December 31, 1998.

In 1999, the Company had contracts with two customers for amounts exceeding 10%
of total revenues. Contract revenue with these two customers was $750,000 and
$480,000 for the year ended December 31, 1999.

During 1998 and 1999, the Company was awarded SBIR grants totaling $437,980 and
$312,020, respectively. Available funding for research work to be completed
under all SBIR grants as of December 31, 1999 was $305,848.

The Company derived 41% and 24% in 1998 and 1999, respectively, of its revenue
from grants with the federal government. Such revenue is dependent upon the
government's continuance of these programs.

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

                                                                            F-31
<PAGE>

THERMOGEN, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)


(3) Equipment

Equipment is summarized at December 31, 1998 and 1999 as follows:

<TABLE>
<CAPTION>
                                                                  1998     1999
--------------------------------------------------------------------------------
<S>                                                            <C>      <C>
Equipment..................................................... $96,336  $98,585
 Less accumulated depreciation................................ (28,504) (46,264)
                                                               -------  -------
                                                               $67,832  $52,321
                                                               =======  =======
</TABLE>

(4) Notes Payable

Notes payable at December 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                  1998     1999
-------------------------------------------------------------------------------
<S>                                                            <C>     <C>
Unsecured demand note payable to vendor, $75,000 face value,
   interest accrues at prime (7.5% at December 31, 1998) plus
   1.0%......................................................   $4,346 $     --
Unsecured note payable to vendor, $34,000 face value,
   interest accrues at prime plus 1.0%, due on January 31,
   1999......................................................   34,000       --
Unsecured note payable to vendor, $4,800 face value, interest
   accrues at 5.0%, due July 15, 2000........................    1,500       --
Unsecured note payable to vendor, $34,000 face value,
   interest accrues at prime (8.5% at December 31, 1999) plus
   1.0%, due December 31, 2000...............................       --   15,991
Unsecured note payable to vendor, $81,519 face value,
   interest accrues at prime plus 1.0%, due January 31,
   2001......................................................       --   64,451
Unsecured demand note payable, $75,000 face value, interest
   accrues at 12.5%..........................................   75,000   75,000
                                                               ------- --------
                                                               114,846  155,442
  Less current maturities....................................   39,846   15,991
                                                               ------- --------
                                                               $75,000 $139,451
                                                               ======= ========
</TABLE>

The holder of the $75,000 unsecured demand note payable has signed an agreement
indicating that the principal and interest amounts owed by the Company will not
become payable before January 1, 2001; accordingly, these amounts have been
classified as non current liabilities. The $75,000 unsecured demand note
payable is convertible into common or preferred stock at the time and under the
same terms that such stock is issued to shareholders, other than the current
shareholders.

On January 1, 1999 the holder of the $34,000 unsecured note payable due on
January 31, 1999 cancelled the note and reissued a note in the same amount with
the same terms due on December 31, 2000.

On February 1, 1999 the Company executed an unsecured note payable with a
vendor in the amount of $81,519 in satisfaction of $101,519 of legal fees
payable. The gain on extinguishment of the payable is recorded as an
extraordinary item in the accompanying 1999 statement of operations. The note
accrues interest at the prime rate plus 1.0% and is due on January 31, 2001.

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

F-32
<PAGE>

THERMOGEN, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)


Annual maturities of notes payable as of December 31, 1999 are as follows:
2000--$15,991; 2001--$139,451.

(5) Related-party Transactions

The shareholders have provided loans to the Company to meet ongoing operating
expenses. The related party notes payable are due on demand and bear interest
currently at annual rates ranging from 10% to 12%. Each of the shareholders has
signed agreements indicating that the principal and interest amounts owed by
the Company will not become payable before January 1, 2001. Amounts due to
shareholders consist of the following:

<TABLE>
<CAPTION>
                                                                   1998     1999
--------------------------------------------------------------------------------
<S>                                                            <C>      <C>
Notes payable................................................  $173,978 $173,978
Interest.....................................................   129,055  167,087
                                                               -------- --------
  Due to shareholders........................................  $303,033 $341,065
                                                               ======== ========
</TABLE>

The holder of the $75,000 unsecured demand note payable is a related party of
an officer of the Company.

(6) Stock Option Plan

Effective January 1, 1997 the Board of Directors approved a plan for the
creation and implementation of a stock option plan (Plan) and reserved 500,000
shares of Class B common stock for issuance under the Plan. Under the Plan, key
full-time employees of ThermoGen, Inc. are entitled to stock options which vest
over periods from three to six years. In addition, nonemployees are entitled to
stock options as compensation for services rendered.

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Plan. Accordingly, no compensation cost has been recorded.
Had compensation cost for the Plan been determined consistent with SFAS No.
123, the Company's net loss would have been the proforma amounts reported
below:

<TABLE>
<CAPTION>
                                                                1998       1999
--------------------------------------------------------------------------------
<S>                                                        <C>        <C>
Net loss:
  As reported............................................  $(225,847) $(100,082)
  Pro forma..............................................   (228,157)  (102,602)
                                                           =========  =========
</TABLE>
The compensation cost of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1998 and 1999:

<TABLE>
<S>                                                                          <C>
Dividend yield..............................................................   0%
Risk-free interest rate.....................................................   6%
Expected term in years......................................................   3
</TABLE>

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

                                                                            F-33
<PAGE>

THERMOGEN, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)


Stock option activity during 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                        Number of        average
                                                           shares exercise price
--------------------------------------------------------------------------------
<S>                                                     <C>       <C>
Balance at December 31, 1997..........................    380,000           $.25
  Granted.............................................     20,000            .25
                                                          -------           ----
Balance at December 31, 1998..........................    400,000            .25
  Granted.............................................     15,000            .40
                                                          -------           ----
Balance at December 31, 1999..........................    415,000           $.26
                                                          =======           ====
</TABLE>

The weighted average minimum value of options on the date of grant was $.05 in
1998 and $.07 in 1999.

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

<TABLE>
<CAPTION>
                                Average     Weighted                     Weighted
                 Number       remaining      average          Number      average
Exercise    outstanding     contractual     exercise     exercisable     exercise
   price       12/31/99            life        price        12/31/99        price
---------------------------------------------------------------------------------
<S>         <C>             <C>             <C>          <C>             <C>
    $.25        380,000            2.33         $.25         239,000         $.25
     .40         35,000            4.43          .40           4,000          .40
    ====        -------            ====         ====         -------         ====
                415,000                                      243,000
                =======                                      =======
</TABLE>

(7) Income Taxes

The Company is classified as a Subchapter S corporation for Federal income tax
purposes and is therefore not subject to Federal income taxes; however, the
Company is subject to a state replacement tax in the state in which it conducts
business. No state replacement tax has been provided for in the accompanying
financial statements because of net operating losses incurred and utilized.

(8) Shareholders' Agreement

Pursuant to the terms of a shareholders' agreement dated April 28, 1989, there
are certain restrictions on the sale, transfer, or encumbrance of any kind
relating to the common stock outstanding of the Company. In addition, the
Company has the right of first refusal to repurchase outstanding common stock
at a price equal to the greater of the original issuance price or fair market
value (determined by mutual agreement of the buyer and seller).

(9) Commitments

The Company leases its offices and research laboratories under a three year
operating lease with two one-year renewal option periods. The lease expires on
January 17, 2001 unless the option is exercised. Future minimum rental
commitments are: $130,801--2000; $5,977--2001. Rent expense charged to

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

F-34
<PAGE>

THERMOGEN, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

operations totaled $85,900 and $130,801 for the years ended December 31, 1998
and 1999, respectively.

(10) Subsequent Events (Unaudited)

On April 1, 2000, the Board of Directors granted options to purchase 83,100
shares of the Company's Class B common stock under the Company's stock option
plan at an exercise price of $7.50. The options vest in equal installments over
three years.

On April 30, 2000 all of the existing shareholder notes and accrued interest
were converted into two shareholder notes bearing interest at the applicable
Federal tax rate. In the event of a proposed merger with MCR Holdings, Inc. the
notes are due at the earlier of an initial public offering of MCR Holdings,
Inc.'s capital stock or at the end of the six month period following the
proposed merger. In the event no such merger occurs, the principal amount and
all accrued interest is due on April 30, 2001.

On May 1, 2000 the Company converted $134,250 in notes payable and accrued
interest into 17,900 shares of Class B common stock at a conversion rate of
$7.50 per share.

On May 12, 2000, the Company entered into an agreement and plan of merger
(Merger) with MCR Holdings, Inc. Under the terms of the Merger, each of the
issued and outstanding shares of the Company's common stock shall be canceled,
extinguished and converted into the right to receive 0.052613 shares of Class A
common stock of MCR Holdings, Inc. Outstanding stock options of the Company
will be converted into options to purchase 25,486 shares of Class B common
stock of MCR Holdings, Inc.

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

                                                                            F-35
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Emerald BioStructures, Inc.:

We have audited the accompanying balance sheets of Emerald BioStructures, Inc.
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Emerald BioStructures, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.

                                          /s/ KPMG LLP

Seattle, Washington
April 28, 2000

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

F-36
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

BALANCE SHEETS
December 31, 1998 and 1999 and March 31, 2000 (unaudited)

<TABLE>
<CAPTION>
                                                  December 31,        March 31,
                                                    1998      1999         2000
--------------------------------------------------------------------------------
                                                                    (unaudited)
<S>                                             <C>       <C>       <C>
Assets
Current assets:
 Cash.........................................  $ 20,332  $ 47,310     $ 28,389
 Accounts receivable..........................     9,642    35,760       97,432
 Inventories..................................     5,649     7,151       13,043
 Stockholder receivable.......................     9,590     8,780        8,820
                                                --------  --------     --------
 Total current assets.........................    45,213    99,001      147,684
Property and equipment, net...................   108,181   139,148      158,263
Capitalized software costs, net of accumulated
   amortization of $3,056 and $6,723 at
   December 31, 1999 and March 31, 2000
   (unaudited), respectively..................        --    40,944       37,277
Other assets..................................        --    66,741       71,991
                                                --------  --------     --------
 Total assets.................................  $153,394  $345,834     $415,215
                                                ========  ========     ========
Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable.............................  $ 14,917  $ 29,406     $ 35,198
 Accrued liabilities..........................    16,936    64,238      115,553
 Loan from stockholder........................     6,694    17,095       17,095
 Current portion of capital lease and long-
    term obligations..........................    20,870    18,244       25,594
 Deferred revenue.............................    11,800   103,760       87,742
                                                --------  --------     --------
 Total current liabilities....................    71,217   232,743      281,182
                                                --------  --------     --------
Capital lease obligations, excluding current
   portion....................................    34,008    27,439       36,068
Long-term obligation, excluding current
   portion....................................    12,449    10,947        7,681

Stockholders' equity (deficit):
 Common stock, no par value. Authorized
    10,000,000 shares; issued and outstanding
    4,712,500 shares at December 31, 1998,
    4,762,500 shares at December 31, 1999 and
    4,787,500 shares at March 31, 2000
    (unaudited)...............................   101,500   107,500      110,500
 Additional paid-in capital...................     4,551     4,551        4,551
 Deferred stock compensation..................      (569)       --           --
 Accumulated deficit..........................   (69,762)  (37,346)     (24,767)
                                                --------  --------     --------
 Total stockholders' equity...................    35,720    74,705       90,284
                                                --------  --------     --------
 Total liabilities and stockholders' equity...  $153,394  $345,834     $415,215
                                                ========  ========     ========
</TABLE>

See accompanying notes to financial statements.

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

                                                                            F-37
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            Three months
                              Year ended December 31,      ended March 31,
                                     1998         1999        1999         2000
-------------------------------------------------------------------------------
                                                       (unaudited)  (unaudited)
<S>                           <C>          <C>         <C>          <C>
Revenues:
 Sales......................  $    30,171     $150,928    $ 15,007     $ 69,479
 Research grants............      112,490      340,654      38,972      125,571
 Other......................        5,700       54,065      19,300       71,900
                              -----------  -----------    --------     --------
  Total revenues............      148,361      545,647      73,279      266,950
                              -----------  -----------    --------     --------
Operating expenses:
 Cost of sales..............       24,266      113,852       7,751       60,608
 Research and development...       92,335      225,372      36,388      110,011
 Selling, general and
    administrative..........       75,252      155,093      38,131       79,114
                              -----------  -----------    --------     --------
  Total operating expenses..      191,853      494,317      82,270      249,733
                              -----------  -----------    --------     --------
  Income (loss) from
     operations.............      (43,492)      51,330      (8,991)      17,217
Interest expense............        8,739       18,914       5,515        4,638
                              -----------  -----------    --------     --------
  Net income (loss).........  $   (52,231) $    32,416    $(14,506)    $ 12,579
                              ===========  ===========    ========     ========
</TABLE>

See accompanying notes to financial statements.

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

F-38
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1998 and 1999 and
the three-month period ended March 31, 2000 (unaudited)

<TABLE>
<CAPTION>
                                                                                           Total
                                             Additional     Deferred               stockholders'
                             Common stock       paid-in        stock  Accumulated         equity
                             Shares   Amount    capital compensation      deficit      (deficit)
-------------------------------------------------------------------------------------------------
<S>                       <C>       <C>      <C>        <C>           <C>          <C>
Balance at December 31,
   1997.................         -- $ 16,000     $   --      $    --     $(17,531)      $ (1,531)
Sale of common stock....  4,712,500   85,500         --           --           --         85,500
Grant of stock options
   to non-employees.....         --       --      4,551       (4,551)          --             --
Amortization of deferred
   stock compensation...         --       --         --        3,982           --          3,982
Net loss................         --       --         --           --      (52,231)       (52,231)
                          --------- --------     ------      -------     --------       --------
Balance at December 31,
   1998.................  4,712,500  101,500      4,551         (569)     (69,762)        35,720
Exercise of non-employee
   stock option.........     50,000    6,000         --           --           --          6,000
Amortization of deferred
   stock compensation...         --       --         --          569           --            569
Net income..............         --       --         --           --       32,416         32,416
                          --------- --------     ------      -------     --------       --------
Balance at December 31,
   1999.................  4,762,500  107,500      4,551           --      (37,346)        74,705
Exercise of non-employee
   stock options
   (unaudited)..........     25,000    3,000         --           --           --          3,000
Net income (unaudited)..         --       --         --           --       12,579         12,579
                          --------- --------     ------      -------     --------       --------
Balance at March 31,
   2000 (unaudited).....  4,787,500 $110,500     $4,551      $    --     $(24,767)      $ 90,284
                          ========= ========     ======      =======     ========       ========
</TABLE>

See accompanying notes to financial statements.

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

                                                                            F-39
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                     Year ended         Three-month period
                                    December 31,          ended March 31,
                                      1998      1999         1999         2000
-------------------------------------------------------------------------------
                                                      (unaudited)  (unaudited)
<S>                               <C>       <C>       <C>          <C>
Cash flows from operating
   activities:
Net income (loss)...............  $(52,231) $ 32,416     $(14,506)     $12,579
Adjustments to reconcile net
   income (loss) to net cash
   provided by (used in)
   operating activities:
 Depreciation and amortization..    28,635    47,554        8,150       18,401
 Amortization of deferred stock
    compensation................     3,982       569          569           --
 Changes in assets and
    liabilities:
  Accounts receivable...........    (9,642)  (26,118)     (15,694)     (61,672)
  Inventories...................    (5,649)   (1,502)      (6,947)      (5,892)
  Accounts payable and accrued
     liabilities................    24,631    61,791       29,495       57,107
  Deferred revenue..............    11,800    91,960      (11,800)     (16,018)
  Other assets..................        --   (66,741)          --       (5,250)
                                  --------  --------     --------      -------
Net cash provided by (used in)
   operating activities.........     1,526   139,929      (10,733)        (745)
                                  --------  --------     --------      -------
Cash flows from investing
   activities:
Loan to stockholder.............    (9,590)      810         (890)         (40)
Purchases of property and
   equipment....................   (81,732)  (64,762)      (2,581)     (12,125)
Increase in capitalized software
   costs........................        --   (44,000)          --           --
                                  --------  --------     --------      -------
Net cash used in investing
   activities...................   (91,322) (107,952)      (3,471)     (12,165)
                                  --------  --------     --------      -------
Cash flows from financing
   activities:
Proceeds from long-term
   obligation...................    23,000        --           --           --
Repayments of long-term
   obligation...................        --   (10,551)          --       (1,290)
Proceeds from loan from
   stockholder..................     6,694    10,401        1,210           --
Capital lease payments..........    (5,151)  (10,849)      (1,806)      (7,721)
Sales of common stock...........    85,500        --           --           --
Exercise of stock options.......        --     6,000           --        3,000
                                  --------  --------     --------      -------
Net cash provided by (used in)
   financing activities.........   110,043    (4,999)        (596)      (6,011)
                                  --------  --------     --------      -------
Increase (decrease) in cash.....    20,247    26,978      (14,800)     (18,921)
Cash at beginning of period.....        85    20,332       20,332       47,310
                                  --------  --------     --------      -------
Cash at end of period...........  $ 20,332  $ 47,310     $  5,532      $28,389
                                  ========  ========     ========      =======
Supplemental disclosures of cash
   flow information--cash paid
   during the period for
   interest.....................  $  2,036  $ 22,507     $  2,642      $ 6,354
                                  ========  ========     ========      =======
Supplemental schedule of non-
   cash investing and financing
   activities--equipment
   obtained through capital
   leases.......................  $ 46,439  $ 10,703     $     --      $21,724
                                  ========  ========     ========      =======
</TABLE>

See accompanying notes to financial statements.

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

F-40
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

NOTES TO FINANCIAL STATEMENTS

(1) Organization and Summary of Significant Accounting Policies

(a) Description of Business
Emerald BioStructures, Inc. (Company) is engaged in the development and
commercialization of novel crystallization research tools and sophisticated
crystallization data management software, and performing its own in-house
structure-based drug design projects. In addition, the Company performs
research services through collaborative agreements with other companies or
institutions that wish to know the atomic structures of proteins and nucleic
acids that have defined roles in human disease or in disease therapy, or are of
unique biotechnological value.

The Company's activities involve inherent risks. These risks include, among
others, dependence on key personnel, availability of raw materials, and
determination of patentability of the Company's products and processes.

(b) Interim Financial Statements
The financial information as of March 31, 2000 and for the three months ended
March 31, 1999 and 2000 is unaudited. These interim financial statements have
been prepared on substantially the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the financial information set forth therein.

(c) Concentrations
The Company's customers are concentrated in the biotechnology and
pharmaceutical industries and include private and governmental entities. Credit
is granted in the ordinary course of business.

Accounts receivable at December 31, 1998 include 30%, 11% and 11% from single
customers. Accounts receivable at December 31, 1999 include 11% from a single
customer.

Revenues in 1998 include 49% and 27% from two single customers. Revenue in 1999
includes 62% from a single customer.

(d) Inventories
Inventories, consisting primarily of finished goods, are stated at the lower of
cost, as determined by the first-in, first-out method, or market value.

(e) Property and Equipment
Equipment, consisting of lab equipment, computers, and other office equipment,
is depreciated or amortized using the straight-line method over the assets'
estimated useful lives of three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the assets'
estimated useful lives or the remaining term of the lease.

(f) Capitalized Software Costs
Software development costs incurred in conjunction with product development are
charged to research and development expense until technological feasibility has
been established. Thereafter, all software development costs are capitalized
and reported at the lower of unamortized cost or net realizable value.

Amortization of capitalized software costs begins when the related product is
available for general release to customers and is provided for using the
straight-line method or based on expected sales levels

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

                                                                            F-41
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

over the product's estimated economic life of three years, whichever results in
a greater expense. Included in cost of sales in 1999 and the three months ended
March 31, 2000 is $3,056 and $3,667, respectively, related to amortization of
capitalized software costs.

(g) Revenues
Research grant revenues are recognized as research and development activities
are performed under the terms of related agreements. Included in accounts
receivable is unbilled revenue related to research grants.

Revenues related to products other than software are recognized upon shipment,
pursuant to the terms of sale. Revenues from software arrangements where the
Company has continuing obligations to customers are deferred and recognized
ratably over the arrangement period as services are performed.

Contract service revenues included in other revenues are recognized upon
completion of the services provided under the related contract. Also included
in other revenues are revenues from products sold under service contracts.

(h) Research and Development Costs
Research and development costs are charged to expense as incurred.

(i) Income Taxes
The Company has elected under the Internal Revenue Code to be an S corporation.
In lieu of corporation income taxes, the stockholders of an S corporation are
taxed on their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal income taxes has been recorded in the
financial statements.

(j) Fair Value of Financial Instruments
The Company has financial instruments consisting of cash, accounts receivable,
loans to and from stockholders', accounts payable and its long-term obligation.
The fair value of these financial instruments approximates their carrying
amount based upon market rates of interest or their short-term nature.

(k) Stock-Based Compensation
The Company accounts for its stock option grants to employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation expense related to employee stock options is recorded
if, on the date of grant, the fair value of the underlying stock exceeds the
exercise price. The Company applies the disclosure only requirements of
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB 25 for transactions with employees, and to provide pro forma
results of operations disclosures for employee stock option grants as if the
fair-value-based method of accounting in SFAS No. 123 had been applied to these
transactions.

(l) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and

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

F-42
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

(m) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less costs to sell.

(n) Business Segments
The Company's operations are confined to one business segment, the development
and commercialization of novel crystallization technology.

(2) Stockholder Receivable

The stockholder receivable is noninterest bearing and due on demand.

(3) Property and Equipment

Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                  1998     1999
-------------------------------------------------------------------------------
<S>                                                           <C>      <C>
Furniture and equipment...................................... $138,694 $204,104
Leasehold improvements.......................................       --   10,055
                                                              -------- --------
                                                               138,694  214,159
Less accumulated depreciation and amortization...............   30,513   75,011
                                                              -------- --------
                                                              $108,181 $139,148
                                                              ======== ========
</TABLE>

(4) Accrued Liabilities

Accrued liabilities at December 31 is comprised of:

<TABLE>
<CAPTION>
                                                                   1998    1999
-------------------------------------------------------------------------------
<S>                                                             <C>     <C>
Accrued compensation........................................... $ 8,343 $27,282
Accrued consulting fees........................................      --  28,000
Other..........................................................   8,593   8,956
                                                                ------- -------
                                                                $16,936 $64,238
                                                                ======= =======
</TABLE>


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

                                                                            F-43
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

(5) Long-Term Obligation

During 1998, the Company obtained $23,000 in financing from investors
specifically related to the development of a product. The Company guaranteed
the investors a return of the invested funds and up to a 100% return on the
investment based on a percentage of sales of the related product. The Company
has accrued interest expense based on the expected repayment schedule which
includes a final payment on June 1, 2001. As of December 31, 1998 and 1999, the
balance outstanding on the obligation was $23,000 and $12,449, respectively.
The Company's estimated repayment schedule includes principal payments of
$1,502 in 2000 and $10,947 in 2001.

(6) Stock Options

The stockholders of the Company have authorized the grant of options for the
acquisition of up to 1,200,000 shares to employees or non-employees of which
425,000 remain available for grant at December 31, 1999. Options are granted at
an exercise price equal to the estimated fair value of the Company's common
stock at the date of grant. Options granted to employees were vested
immediately upon grant and have expiration dates of 4-2/3 years from date of
grant.

A summary of employee stock option activity follows:

<TABLE>
<CAPTION>
                                                                Stock options
                                                                       Weighted
                                                                        average
                                                                       exercise
                                                                          price
                                                                            per
                                                                Shares    share
-------------------------------------------------------------------------------
<S>                                                            <C>     <C>
Outstanding at December 31, 1997..............................      --    $  --
Granted....................................................... 700,000     0.12
                                                               -------    -----
Outstanding at December 31, 1998.............................. 700,000     0.12
Granted.......................................................      --       --
                                                               -------    -----
Outstanding at December 31, 1999.............................. 700,000    $0.12
                                                               =======    =====
</TABLE>

At both December 31, 1998 and 1999, options to purchase 700,000 shares were
vested and exercisable. The weighted average remaining contractual life of
stock options outstanding at December 31, 1999 is approximately three years.

Had compensation cost for the employee options been determined consistent with
SFAS No. 123, the Company's net loss in 1998 would have been adjusted to a pro
forma loss of $84,052.

The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: expected
dividend yield of 0%; expected volatility of 100%; risk-free interest rate of
6.0%; and expected lives of 4.67 years. Using these assumptions, the fair value
of options granted was estimated as $0.09 per share.

Options are granted to nonemployees primarily for services provided.
Nonemployee options have varying terms with vesting occurring from immediately
upon grant to up to 1 year from grant and

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

F-44
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

expirations occurring from 1.5 years from date of grant to up to 2 years from
date of grant. The fair value of the options is charged to expense in the
period or periods the related services are provided.

In 1998, the Company granted to non-employees options to purchase 75,000 shares
of which 25,000 remain unexercised at December 31, 1999. No options were
granted to nonemployees in 1999.

The fair value of each nonemployee option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: expected dividend yield of 0%; expected volatility of 100%; risk-
free interest rate of 6.0%; and expected lives of 1.5 and 2 years. Using these
assumptions, the weighted average fair value of options was estimated as $0.06
per share.

(7) Commitments

(a) Leases
The Company leases office and lab facilities under a noncancelable operating
lease which expires in 2001. In addition, the Company is obligated under
various capital leases for certain equipment.

Minimum annual payments under operating leases and the present value of future
minimum capital lease payments as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                             Capital Operating
                                                              leases    leases
------------------------------------------------------------------------------
<S>                                                          <C>     <C>
Year ending December 31:
 2000....................................................... $22,762   $18,000
 2001.......................................................  22,461    15,000
 2002.......................................................   9,555        --
                                                             -------   -------
Total minimum lease payments................................  54,778   $33,000
                                                                       =======
Less amounts representing interest (at rates ranging from
   12.84% to 30.48%)........................................  10,597
                                                             -------
Present value of net minimum capital lease payments.........  44,181
Less current installments under capital lease obligations...  16,742
                                                             -------
Capital lease obligations, excluding current installments... $27,439
                                                             =======
</TABLE>

Rent expense for 1998 and 1999 was $13,700 and $18,000, respectively.

At December 31, the gross amount of equipment and related accumulated
amortization recorded under capital leases included in property and equipment
were as follows:

<TABLE>
<CAPTION>
                                                                   1998    1999
-------------------------------------------------------------------------------
<S>                                                             <C>     <C>
Equipment...................................................... $49,732 $60,435
Less accumulated amortization..................................  10,107  21,609
                                                                ------- -------
                                                                $39,625 $38,826
                                                                ======= =======
</TABLE>


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

                                                                            F-45
<PAGE>

EMERALD BIOSTRUCTURES, INC.

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

NOTES TO FINANCIAL STATEMENTS (continued)

(b) Royalties
The Company has an obligation to pay 30% of the gross revenues from sales of a
software product. Included in cost of goods sold in 1999 is $800 related to
this royalty. Beginning October 2000, this royalty will be based on 50% of net
profit from the software product as defined in the agreement. There was no
revenue from sales of the software in 1998. This royalty lasts in perpetuity.

(8) Benefit Plan

The Company has a plan whereby it makes a contribution of 15% of employee wages
into an individual retirement account in that employee's name. Company
contributions amounted to $7,325 and $18,338 in 1998 and 1999, respectively.

(9) Liquidity

During 1998, the Company incurred a net loss of $52,231. Additionally, current
liabilities at December 31, 1999 exceed current assets by $133,742. Management
plans to take action to obtain needed capital through an agreement to be
acquired by MCR Holdings, Inc. (note 10), and to reduce operating expenses
which it believes will enable the Company to meet its obligations during 2000.

(10) Subsequent Event (Unaudited)
In May 2000, the Company entered an agreement to be acquired by MCR Holdings,
Inc. If consummated, the acquisition would be completed through the exchange of
common shares.

If the Company is acquired, options to acquire 187,994 shares of the Company's
common stock will be granted to certain employees and nonemployees under
agreements reached in May 2000.

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

F-46
<PAGE>


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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution*

The following table sets forth fees payable by us in connection with the
issuance and distribution of our common stock in this offering. All such fees
and expenses, except the Securities and Exchange Commission registration fee,
are estimated:

<TABLE>
   <S>                                                                   <C>
   Securities and Exchange Commission Registration Fee.................  $   --
   NASD Filing Fee.....................................................      --
   Nasdaq Stock Market Listing Fee.....................................      --
   Transfer Agent Fees and Expenses....................................      --
   Printing Engraving Fees and Expenses................................      --
   Legal Fees and Expenses.............................................      --
   Accounting Fees and Expenses........................................      --
   Miscellaneous.......................................................      --
                                                                         -------
     Total.............................................................  $   --
                                                                         =======
</TABLE>

MediChem Life Sciences, Inc. will bear all of the expenses shown above.
--------
*To be filed by amendment

Item 15. Indemnification of directors and officers

Subsection (a) of Section 145 of the Delaware General Corporation Law ("DGCL")
provides that a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding whether civil, criminal or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the corporation to procure a judgment in its favor, against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or such other court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.


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

                                                                            II-1
<PAGE>


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

The Company's Restated Certificate of Incorporation and By-Laws provide that
indemnification shall be to the fullest extent permitted by the DGCL for all
current or former directors or officers of the Company.

As permitted by the DGCL, the Restated Certificate of Incorporation provides
that directors of the Company shall have no personal liability to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except (i) for any breach of a director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violations of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction in which a director derives
an improper personal benefit.

Recent Sales of Unregistered Securities

Since January 1, 1997 we have issued the following securities which were not
registered under the Securities Act:

(i) On June 14, 1999, in connection with our recapitalization, we issued
    113,481 shares of Class A common stock to Peachtree Medichem Partners, LLC,
    ChaseMedichem Partners, LLC, MedEquity Investors Partners, LLC and Banc of
    America Management Corporation in exchange for a purchase price of $44.06
    per share.

(ii) On June 14, 1999, in connection with our recapitalization, we issued
     400,000 shares of our Class A common stock, 226,960 shares of our Class A
     preferred stock, 1,000 shares of our Class C preferred stock and 400,000
     shares of our Class D preferred stock to Michael T. Flavin, as trustee of
     the Michael T. Flavin Revocable Trust, in exchange for all of our common
     stock that was outstanding at that time.

(iii) 1998 Incentive Compensation Plan Issuances. Since January 1, 1998, we
      have issued options to purchase 88,061 shares of our Class B common
      stock, 24,564 shares of our Class C preferred stock and 24,564 shares of
      our Class D preferred stock to employees of the company, at exercise
      prices ranging from $7.80 to $44.06 per share.

(iv) On June 14, 1999, in connection with our recapitalization, we issued
     warrants to purchase 16,916 shares of our common stock to Nations Credit
     Commercial Corporation, and 8,458 shares of our common stock to Merchant
     Capital, Inc., at exercise prices of $0.01 per share and $40.47 per share,
     respectively.

(v) On May 31, 2000, in connection with the ThermoGen and Emerald BioStructures
    acquisitions, we issued 185,087.27 shares and 84,511 shares of our common
    stock to the former shareholders of ThermoGen and Emerald BioStructures,
    respectively.

In each of the above instances, exemption from registration was claimed on the
grounds that the issuance of such securities did not involve any public
offering within the meaning of Section 4(2) of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules

(a)Exhibits

  The following exhibits are filed as part of this registration statement:

<TABLE>
<CAPTION>
 Exhibit
   No.   Description
------------------------------------------------------------------------------
 <C>     <S>
     1.1 Form of Underwriting Agreement**

     2.1 Form of Agreement and Plan of Merger, among MediChem Life Sciences,
         Inc. and MCR Holdings, Inc.**

     3.1 Form of Certificate of Incorporation of MediChem Life Sciences, Inc.*

</TABLE>


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

II-2
<PAGE>

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
 Exhibit
   No.    Description
-------------------------------------------------------------------------------
 <C>      <S>
     3.2  Form of By-Laws of MediChem Life Sciences, Inc.*

          Specimen Certificate for MediChem Life Sciences, Inc.'s common
     4.1  stock**

     4.2  Registration Rights Agreement between MCR Holdings, Inc. and the
          stockholders named therein, dated as of June 14, 1999*

     5.1  Opinion of Winston & Strawn**

    10.1  MCR Holdings, Inc. Incentive Compensation Plan, dated as of January
          1, 1998 and subsequently amended*

    10.2  MediChem Life Sciences, Inc. Incentive Compensation Plan, dated as of
          June   , 2000**

    10.3  Employment Agreement between MediChem and each of Michael T. Flavin,
          John L. Flavin, Jeffrey A. Whitnell, David E. Zembower and Ze-Qi Xu*

    10.4  Joint Venture Agreement dated as of December 21, 1996, by and between
          MediChem Research, Inc. and Craun Research Sendirian Berhad, a
          company incorporated in Sarawak, Malaysia*

    10.5  Warrant Agreement between MCR Holdings, Inc. and Merchant Capital,
          Inc., dated as of June 14, 1999*

    10.6  Warrant Agreement between MCR Holdings, Inc. and NationsCredit
          Commercial Corporation, dated as of June 14, 1999*

    10.7  Agreement and Plan of Merger dated as of May 12, 2000, by and among
          ThermoGen, Inc., MCR Holdings, Inc., MCR Acquisition Corp. and the
          shareholders named therein*

    10.8  Stock Purchase Agreement dated as of May 12, 2000, by and between
          Emerald BioStructures, Inc. and MCR Holdings, Inc.*

    10.9  Lease Agreements between MCR Holdings, Inc. and High Hopes, Inc. (for
          property located in Lemont, Illinois)*

    10.10 Lease Agreement between MCR Holdings, Inc. and The Institute of Gas
          Technology, dated October 1, 1997 (for property located in Des
          Plaines, Illinois)*

    10.11 Agreement of Purchase and Sale between MCR Holdings, Inc. and
          Catellus Development Corporation, dated as of November 12, 1998 and
          most recently amended on April 12, 1999*

    10.12 Construction Agreement between MCR Holdings, Inc. and Walsh
          Construction Company, dated August 11, 1999**

    10.13 License Agreement between MediChem Research, Inc. and Regis
          Technologies, dated August 6, 1999*

    10.14 License Agreement between MediChem Research, Inc. and Advanced Life
          Sciences, Inc., dated May 18, 2000*

    10.15 License Agreement between MediChem Research, Inc. and Advanced Life
          Sciences, Inc. dated May 4, 2000*

    10.16 Master Laboratory Services Agreement between MediChem Research, Inc.
          and Advanced Life Sciences, dated March 22, 1999*

    10.17 Agreement between MediChem Research, Inc. and Advanced Life Sciences,
          dated August 31, 1999, related to the License Agreement with Regis
          Technologies*

    21.1  Subsidiaries of the Company*

    23.1  Consent of KPMG LLP with respect to consolidated financial statements
          of MCR Holdings, Inc.*

    23.2  Consent of KPMG LLP with respect to financial statements of
          ThermoGen, Inc.*

    23.3  Consent of KPMG LLP with respect to financial statements of Emerald
          BioStructures, Inc.*

    23.4  Consent of Winston & Strawn (contained in the opinion filed as
          Exhibit 5.1)**

    27.1  Financial data schedule*
</TABLE>
--------
*  Filed herewith
** To be filed by amendment
--------------------------------------------------------------------------------

II-3
<PAGE>


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


(b)Financial Statement Schedules

  Schedule II--Valuation and Qualifying Accounts

Item 17. Undertakings

(a) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(b) The undersigned Registrant hereby undertakes that:

  (1) For purposes of determining any liability under the Securities Act of
      1933, the information omitted from the form of prospectus filed as part
      of this Registration Statement in reliance upon Rule 430A and contained
      in the form of prospectus filed by the Registrant pursuant to Rule
      424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
      be part of this Registration Statement as of the time it was declared
      effective.

  (2) For the purposes of determining any liability under the Securities Act
      of 1933, each post-effective amendment that contains a form of
      prospectus shall be deemed to be a new registration statement relating
      to the securities offered therein, and the offering of such securities
      at that time shall be deemed to be the initial bona fide offering
      thereof.

(c) The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

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

                                                                            II-4
<PAGE>


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

                                   SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, in the State of
Illinois, on the 16th day of June, 2000.

                                          MEDICHEM LIFE SCIENCES, INC.

                                                   /s/ Michael T. Flavin
                                          By: _________________________________
                                            Name: Michael T. Flavin
                                            Title: Chairman of the Board of
                                                   Directors, President and
                                                   Chief Executive Officer

                               POWER OF ATTORNEY

The undersigned directors and officers of MediChem do hereby constitute and
appoint Michael T. Flavin and John L. Flavin, and each of them, with full power
of substitution, our true and lawful attorneys-in-fact and agents to do any and
all acts and things in our name and behalf in our capacities as directors and
officers, and to execute any and all instruments for us and in our names in the
capacities indicated below which such person may deem necessary or advisable to
enable MediChem to comply with the Securities Act of 1933, as amended (the
"Securities Act"), and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for us, or any of us, in the capacities indicated below and any and all
amendments (including pre-effective and post-effective amendments or any other
registration statement filed pursuant to the provisions of Rule 462(b) under
the Securities Act) hereto; and we do hereby ratify and confirm all that such
person or persons shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Act, this Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:

<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----


<S>                                  <C>                           <C>
      /s/ Michael T. Flavin          Chairman of the Board of        June 16, 2000
____________________________________  Directors, President and
         Michael T. Flavin            Chief
                                      Executive Officer

       /s/ John L. Flavin            Executive Vice President and    June 16, 2000
____________________________________  Chief Operating Officer and
           John L. Flavin             Director

   /s/ R. Richard Wieland, II        Executive Vice President and    June 16, 2000
____________________________________  Chief Financial Officer
       R. Richard Wieland, II

     /s/ Jeffrey A. Whitnell         Vice President of Finance       June 16, 2000
____________________________________  and Treasurer (Principal
        Jeffrey A. Whitnell           Accounting Officer)

</TABLE>


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

II-5
<PAGE>


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

<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----


<S>                                  <C>                           <C>
     /s/ David C. Demirjian          Vice President of Technology    June 16, 2000
____________________________________  Strategy and Director
         David C. Demirjian

       /s/ Darsh T. Wasan            Director                        June 16, 2000
____________________________________
           Darsh T. Wasan

      /s/ Robert D. Weist            Director                        June 16, 2000
____________________________________
          Robert D. Weist

     /s/ Bro. James Gaffney          Director                        June 16, 2000
____________________________________
         Bro. James Gaffney

       /s/ Peter R. Gates            Director                        June 16, 2000
____________________________________
           Peter R. Gates

      /s/ Damion E. Wicker           Director                        June 16, 2000
____________________________________
          Damion E. Wicker

     /s/ W. Brett Ingersoll          Director                        June 16, 2000
____________________________________
         W. Brett Ingersoll

      /s/ Larry C. Hansen            Director                        June 16, 2000
____________________________________
          Larry C. Hansen

</TABLE>

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

                                                                            II-6


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