HUMAN GENOME SCIENCES INC, S-3/A, 1997-03-12

HUMAN GENOME SCIENCES INC
S-3/A, 1997-03-12
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

Previous: WELLCARE MANAGEMENT GROUP INC, SC 13D/A, 1997-03-12

Next: HUMAN GENOME SCIENCES INC, 10-Q/A, 1997-03-12

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 12, 1997

REGISTRATION NO. 333-22293

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1
TO
FORM S-3

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

HUMAN GENOME SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 8980 22-3178468
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

9410 KEY WEST AVENUE
ROCKVILLE, MARYLAND 20850-3338
(301) 309-8504
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

WILLIAM A. HASELTINE, PH.D.
HUMAN GENOME SCIENCES, INC.
9410 KEY WEST AVENUE
ROCKVILLE, MARYLAND 20850-3338
(301) 309-8504
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
SHELDON E. MISHER, ESQ. JONATHAN L. KRAVETZ, ESQ.
STEVEN A. FISHMAN, ESQ. MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND
BACHNER, TALLY, POLEVOY & MISHER LLP POPEO, P.C.
380 MADISON AVENUE ONE FINANCIAL CENTER
NEW YORK, NEW YORK 10017-2590 BOSTON, MASSACHUSETTS 02111
(212) 687-7000 (617) 542-6000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If 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 to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please 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. [ ]

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

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 OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MARCH 12, 1997

PROSPECTUS

3,000,000 SHARES

HUMAN GENOME SCIENCES, INC. LOGO

HUMAN GENOME SCIENCES, INC.
COMMON STOCK
-------------------------

All the shares of Common Stock offered hereby are being sold by Human
Genome Sciences, Inc. (the "Company"). The Common Stock is traded on the Nasdaq
National Market under the symbol "HGSI." On February 21, 1997, the last reported
sale price of the Common Stock was $43.00. See "Price Range of Common Stock."
-------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
-------------------------

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

<TABLE>
<CAPTION>
==================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- --------------------------------------------------------------------------------------------------
Total(3).................................. $ $ $
==================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock on the same terms and
conditions set forth herein, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."

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

The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.

-------------------------
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
SMITH BARNEY INC.
UBS SECURITIES
, 1997
<PAGE> 3

AVAILABLE INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act covering the securities offered by this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance such statement is qualified by
reference to each such contract or document. The Company is subject to the
informational requirements of the Exchange Act, and in accordance therewith
files reports and other information with the Commission. Reports and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661-2511. Copies of such material can be obtained
from the Public reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.

The Company's Common Stock is listed on the Nasdaq National Market under
the symbol HGSI. Certain reports, proxy statements and other information
concerning the Company are available for inspection at the offices of the Nasdaq
National Market Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Commission (File No. 0-022962)
pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, including any documents or portions thereof incorporated
by reference therein;

2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
September 30, 1996, June 30, 1996 and March 31, 1996, as amended;

3. All other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of this offering.

Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus. The Company will provide
without charge to each person to whom this Prospectus is delivered, upon written
or oral request of any such person, a copy of any or all of the documents
incorporated herein by reference (other that exhibits to such documents which
are not specifically incorporated by reference into such documents). Requests
for such documents should be directed to the Company, 9410 Key West Avenue,
Rockville, Maryland 20850-3338, (301) 309-8504, Attn: Senior Vice President and
Chief Financial Officer.
---------------

The Company furnishes to its stockholders annual reports containing audited
financial statements and quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.
---------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY, INCLUDING INITIATING BIDS OR EFFECTING PURCHASES ON THE
NASDAQ NATIONAL MARKET FOR THE PURPOSE OF PREVENTING OR RETARDING A DECLINE IN
THE MARKET PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Except as otherwise noted, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. Investors should carefully
consider the information set forth under the heading "Risk Factors." See
"Glossary of Terms" for definitions of certain terms used herein.

THE COMPANY

Human Genome Sciences, Inc. (the "Company") is engaged in the research and
development of novel, proprietary pharmaceutical and diagnostic products based
on the discovery and understanding of the medical utility of genes. Using
automated, high throughput gene sequencing technology, the Company has generated
over 1,000,000 partial human gene sequences, which the Company believes
correspond to most of the expressed genes in the human body, and possesses one
of the largest proprietary databases of human and microbial genes. Based on this
genomic database, the Company has created a broad base of product opportunities.
The Company's activities have progressed to focusing primarily on research and
development of therapeutic protein product candidates. In its efforts to
identify the most promising product candidates, the Company uses its advanced
proprietary bioinformatics system to analyze partial gene sequences and identify
the genes corresponding to such partial gene sequences and the proteins encoded
by such genes. As of February 15, 1997, the Company has isolated and
characterized several hundred full-length genes and expressed and purified more
than 100 potential therapeutic proteins. The Company is currently evaluating six
therapeutic protein product candidates in preclinical studies. In addition, the
Company is investigating for development with its collaborators proprietary
product opportunities in diagnostics and small molecule drugs based on human
genes, as well as vaccines, antibiotics, and diagnostics based on genes of
microorganisms.

The Company has a two-pronged commercialization strategy:

Product Development and Commercialization. The Company utilizes its
internal capabilities to research and develop recombinant therapeutic
proteins, which are proteins that can be produced on a large scale and
used as drugs to treat diseases. The Company generally intends to
develop potential products to a late preclinical or early clinical stage
and then to collaborate with pharmaceutical or biotechnology companies
for further development and commercialization. However, the Company may
consider developing certain potential products on its own.

Corporate Collaborations. The Company leverages its resources and
capabilities by establishing collaborations with pharmaceutical
companies for the development and commercialization of new products. The
Company believes that these arrangements will enable the Company to
focus its internal resources on a select number of promising product
candidates while still exploiting the broader product opportunities
presented by its genomic database.

The Company's initial collaboration was formed with SmithKline Beecham
Corporation ("SmithKline Beecham") in May 1993 (as amended, the "SB
Collaboration Agreements"). To date, the Company has received $125 million in
payments from SmithKline Beecham and is further entitled to product development
milestone payments and royalty payments. In June 1995, the Company and
SmithKline Beecham entered into a collaboration agreement with Takeda Chemical
Industries, Ltd. ("Takeda"), whereby Takeda was granted certain rights to
develop and commercialize products based on the Company's and SmithKline
Beecham's human gene technology ("Human Gene Technology") and an option to
develop and commercialize for Japan certain products developed by the Company.
In June 1996 the Company entered into a significant amendment (the "SB
Amendment") to the SB Collaboration Agreements which, among other things, allows
the Company to designate six therapeutic proteins at any one time for exclusive
development and commercialization (subject to certain restrictions and
co-development rights of its collaborators) and permits the Company and
SmithKline Beecham to enter into additional collaboration agreements in the
field covered by the SB Collaboration Agreements.

3
<PAGE> 5

In June 1996 and July 1996, the Company and SmithKline Beecham entered into
collaboration agreements (the "New Collaboration Partner Agreements") with
Schering Corporation and Schering-Plough, Ltd. (collectively,
"Schering-Plough"), Synthelabo S.A. ("Synthelabo") and Merck KGaA ("Merck")
(collectively, the "New Collaboration Partners"). Under the terms of the New
Collaboration Partner Agreements, $87.5 million of license and research payments
is payable to the Company over five years, of which $17.5 million has been
received to date. In addition, the New Collaboration Partner Agreements provide
for milestone and royalty payments with respect to products developed under
these agreements. In exchange, the New Collaboration Partners received certain
rights to research, develop and commercialize therapeutic products based on the
Company's and SmithKline Beecham's Human Gene Technology. Schering-Plough and
SmithKline Beecham have been granted the right to develop jointly with the
Company certain of the therapeutic protein product candidates to which the
Company has retained the exclusive development rights.

The Company has entered into other collaborative agreements in certain
areas where the Company has retained exclusive rights, including: the creation
of bacterial vaccines and immunotherapeutics and antimicrobial agents based on
genes of infectious agents; corn genomics; and gene therapy. Pursuant to the
terms of such collaboration agreements, an aggregate of $34.1 million of license
and research payments is payable to the Company over five years, of which $14.6
million has been received to date.

The Company also has formed a collaboration with The Institute of Genomic
Research ("TIGR"). Under the collaboration agreement, the Company has agreed to
provide TIGR with funding totaling $85 million over a ten-year period ending
September 2002, of which $44 million has been paid to date. In return, the
Company is entitled to exclusive intellectual property rights to TIGR's
research.

The Company vigorously pursues patents to protect its intellectual
property. As of February 15, 1997, the Company has five issued U.S. patents
covering full-length genes and has filed U.S. patent applications covering more
than 230 full-length genes and the proteins they encode. The Company makes
patent filings outside the United States as it deems appropriate. In addition,
the Company has filed patent applications with respect to more than 190,000
expressed sequence tags ("EST's") that represent over 1,000,000 partial gene
sequences, although there is substantial uncertainty as to the patentability of
partial gene sequences.

The Company was incorporated in Delaware in June 1992. The Company's
executive offices are located at 9410 Key West Avenue, Rockville, Maryland
20850, and its telephone number is (301) 309-8504.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered......................... 3,000,000 shares
Common Stock to be outstanding after the
offering................................... 21,814,564 shares(1)
Use of proceeds.............................. To accelerate its therapeutic protein research
and preclinical development, to expand
clinical development, to fund the filing and
prosecution of patents, to fund the operation
of a pilot plant facility to be constructed,
and for working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol................ HGSI
</TABLE>

- ---------------
(1) Excludes (i) 2,634,034 shares of Common Stock reserved for issuance under
the Company's 1993 Stock Option Plan and 1994 Stock Option Plan (the
"Plans"), pursuant to which options to purchase a total of 2,313,570 shares
are outstanding and (ii) 146,286 shares of Common Stock issuable upon
exercise of outstanding warrants to purchase Common Stock.

4
<PAGE> 6

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JUNE 26, 1992
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------------
1992 1993 1994 1995 1996
-------------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- research and development
collaborative contracts........... $ -- $22,000 $41,065 $ 5,000 $36,460
Costs and expenses:
Research and development:
Direct expenditures............ 805 7,611 17,636 22,904 30,409
Payments under research
services agreement........... 2,925 8,989 9,662 10,075 10,063
General and administrative........ 541 3,998 6,840 8,745 9,639
Net interest (income) expense..... 121 (390) (2,813) (4,005) (6,092)
-------- ------- ------- -------- -------
Income (loss) before taxes.......... (4,392) 1,792 9,740 (32,719) (7,559)
Provision (benefit) for income
taxes............................. 0 (2) 2,436 (1,651) 208
-------- ------- ------- -------- -------
Net income (loss)................... $ (4,392) $ 1,794 $ 7,304 $(31,068) $(7,767)
======== ======= ======= ======== =======
Net income (loss) per share......... $ (0.41) $ 0.15 $ 0.47(1) $ (1.98)(1) $ (0.42)(1)
======== ======= ======= ======== =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments............................. $116,116 $237,721
Total assets....................................................... 140,117 261,722
Total debt and capital leases, less current portions............... 2,954 2,954
Retained earnings (deficit)........................................ (34,129) (34,129)
Total stockholders' equity......................................... 128,521 250,126
</TABLE>

- ---------------
(1) Computed on the basis described in Note B of Notes to Financial Statements.

(2) Adjusted to give effect to the sale of 3,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $43.00 per share. See
"Capitalization."

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

This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this Prospectus.

5
<PAGE> 7

RISK FACTORS

The following risk factors should be carefully considered in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby.

Unproven Business Strategy. The Company's strategy of using high
throughput gene sequencing for the purpose of rapidly identifying and obtaining
proprietary rights to a substantial number of genes and then selecting from
those genes promising candidates to be used to develop novel pharmaceutical or
diagnostic products or pharmaceutical targets is unproven. The application of
this strategy is in too early a stage to determine whether it can be
successfully implemented. Unlike companies that have targeted particular
diseases and sought to find cures through gene-based therapies, the Company's
approach is to find as many genes as possible and then use this information as
the basis for development of potential products. There can be no assurance that
this strategy will result in the development of any products. See
"-- Competition."

Although the Company has identified a substantial number of genes through
partial sequencing, its success will depend upon its ability and that of its
collaborators to determine which genes have potential value and to select an
appropriate commercialization strategy for each potential product they choose to
pursue. To select potential product candidates, the Company is investing
significant time and resources isolating and sequencing full-length genes,
testing and analyzing the genes and determining their functions. The Company is
now devoting an increasing portion of its resources to early-stage development
of therapeutic protein product candidates. The Company has recently made
substantial capital expenditures and hired additional personnel to enable it to
engage in these activities. Substantial additional expenditures will be required
by the Company. The failure to allocate its resources towards those products, if
any, with the most commercial potential could have a material adverse effect on
the Company. There can be no assurance that the Company will successfully select
those genes with the most potential for commercial development, or that any
products based on genes discovered by the Company can be successfully
commercialized.

Early Stage of the Company; Anticipated Future Losses. The Company is in
the early stage of development, and it will be a number of years, if ever,
before the Company is likely to receive revenues from product sales or
royalties. To date, substantially all of the Company's revenues have resulted
from payments made under the SB Collaboration Agreements and, to a lesser
extent, from other collaboration, option and licensing agreements. The Company
expects that most of its revenues for the foreseeable future will result from
payments under collaboration agreements previously entered into, including the
New Collaboration Partner Agreements. The Company expects to continue to incur
substantial expenses relating to its research and development efforts, which are
expected to increase relative to historical levels as the Company focuses on
preclinical and clinical trials required for the development of therapeutic
protein product candidates. As a result, the Company expects to incur continued
and increasing losses over the next several years unless it is able to realize
additional revenues under existing or new collaboration agreements. There can be
no assurance that the Company will receive milestone and royalty payments under
the SB Collaboration Agreements, the New Collaboration Partner Agreements or
other collaboration agreements, or that the Company will ever be profitable. See
"-- Relationship With SmithKline Beecham and Other Collaborators."

Since inception, the Company has expended, and expects to continue to
expend, substantial funds to continue its research and development programs. In
the event of unanticipated expenses or delays in receipt of revenues, the
Company may, in the future, require additional financing to fund its operating
expenses and capital requirements. There can be no assurance that additional
financing will be available on acceptable terms or at all in the event that the
Company requires additional funding to conduct its operations. If additional
funds are raised by issuing equity securities, further dilution to the existing
stockholders may result.

Relationship With SmithKline Beecham and Other Collaborators. The Company
is substantially dependent on SmithKline Beecham and the New Collaboration
Partners for research, development and commercialization of products pursuant to
the SB Collaboration Agreements and the New Collaboration Partner Agreements,
and on other collaborators. Under the collaboration agreements, the Company has
agreed to restrictions on entering into other collaboration agreements in
certain significant fields, including restrictions on entering into new
collaboration agreements granting rights to Human Gene Technology in the

6
<PAGE> 8

fields covered by the SB Collaboration Agreements. SmithKline Beecham and other
collaborators will have the right to control the development, regulatory
approval and marketing of any products developed by them under these
collaboration agreements. If SmithKline Beecham or other collaborators fail to
develop marketable products, to obtain regulatory approvals for or to
successfully market products based on the genes identified by the Company, the
Company's ability to achieve profitability could be delayed or materially
adversely affected. See "Business -- Collaborative Arrangements."

The Company has entered into collaboration agreements with several
companies with respect to development of products based on genes discovered by
the Company in certain areas not covered by the SB Collaboration Agreements and
has also entered into material transfer agreements with a number of academic
institutions. In connection with these agreements, the Company is dependent upon
the success of these outside parties in performing their responsibilities.

Conflicts of interest could arise between the Company and its
collaborators. Each of the Company's collaborators is conducting multiple
product development efforts. The Company's collaborators may pursue existing or
alternative technologies in preference to products being developed under the
collaboration agreements with the Company, and this could have a material
adverse impact on the Company's receipt of milestone and royalty revenues.
Additionally, the Company's collaborators may develop, either alone or with
others, products that are similar to or in competition with products being
developed under collaboration agreements with the Company.

Product Development Risks. The Company has recently begun to focus an
increasing amount of its resources on the development of therapeutic protein
product candidates. The Company's ability to develop and commercialize products
based on therapeutic proteins and, in the future, other products as to which it
has retained the rights to commercialize on its own will depend on the Company's
ability to develop internally product development, preclinical development and
testing, clinical, regulatory, sales and marketing resources, or enter into
arrangements with third parties to provide such functions. The Company has only
recently commenced such product development activities, and has limited
experience in connection with these activities. There can be no assurance that
the Company will be successful in developing such resources or entering into
agreements with third parties. Additionally, there can be no assurance that the
Company will be able to enter into collaboration agreements with respect to
products being developed by the Company on favorable terms, to the extent that
the Company seeks to enter into such agreements.

In addition, the Company has limited experience in conducting preclinical
and clinical development activities and intends to rely in large part on its
collaborative partners and third party clinical research organizations to design
and conduct most of such activities, if required. The Company's inability to
contract for any necessary clinical activities on acceptable terms would impair
or delay the Company's ability to complete product development, which could have
a material adverse effect on the Company. Moreover, the Company's reliance upon
such collaborators and third parties for preclinical and clinical development
activities will reduce the Company's control over such activities and will make
the Company dependent upon such parties.

Competition. There is a finite number of genes in the human genome, and
the Company believes that the majority of such genes have been identified by the
Company or others conducting genomic research and that virtually all will be
identified within several years. While the Company's goal has been to identify,
establish the utility of and ultimately patent as many genes as it can as
rapidly as possible, the Company continues to face substantial competition in
these efforts both from entities using high throughput gene sequencers to
discover genes, as well as from entities using more traditional methods to
discover genes related to particular diseases. Research to identify genes is
also being conducted by various institutes and United States and foreign
government-financed entities, including British, French, German and Japanese
efforts, as well as numerous smaller laboratories associated with universities
or other not-for-profit entities. In addition, a number of pharmaceutical and
biotechnology companies and government-financed programs are engaged in or have
announced the intention to engage in areas of human genome research similar to
or competitive with the Company's focus on gene discovery, and other companies
are likely to enter the field. The gene sequencing machines used by the Company
are commercially available and are currently being utilized by many other

7
<PAGE> 9

companies, in some cases for business purposes competitive with those of the
Company. In addition, a number of other companies have announced plans to engage
in gene discovery and could acquire similar machines and develop procedures for
automated sequencing of genes. Although the Company believes that its large
scale, automated processes and lead time provide it with a competitive
advantage, any one of these companies or other entities may discover and
establish a patent position in one or more genes that the Company has identified
and might have designated or considered designating as a product candidate. Any
potential products based on genes identified by the Company will face
competition both from companies developing gene-based products and from
companies developing other forms of treatment for diseases that may be caused
by, or related to, genes identified by the Company.

The Company's potential competitors include pharmaceutical and
biotechnology firms and other companies, not-for-profit entities and United
States and foreign government-financed programs, many of which have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than the Company. These
competitors may succeed in identifying genes or developing products earlier than
the Company or its collaborators, obtaining approvals from the United States
Food and Drug Administration (the "FDA") or other regulatory agencies for such
products more rapidly than the Company or its collaborators, or developing
products that are more effective than those proposed to be developed by the
Company or its collaborators. Certain of these competitors may be further
advanced than the Company in developing potential products that may compete with
potential products of the Company. There can be no assurance that research and
development by others will not render the products that the Company or its
collaborators may seek to develop obsolete or uneconomical or result in
treatments, cures or diagnostics superior to any therapy or diagnostics
developed by the Company or its collaborators, or that any therapy or
diagnostics developed by the Company or its collaborators will be preferred to
any existing or newly developed technologies. The Company expects that
competition in this field will intensify.

Technological Uncertainty; Risk of Obsolescence. Development of products
based on genes discovered by the Company is still in an early stage and will
require significant further research, development, testing and regulatory
approvals and is subject to the risks of failure inherent in the development of
products based on innovative technologies and the risks associated with drug
development generally. These risks include the possibilities that: these
technologies or any or all of the products based on these technologies will be
found to be ineffective or toxic, or otherwise fail to receive necessary
regulatory clearances; the products, if safe and effective, will be difficult to
manufacture on a large scale or uneconomical to market; proprietary rights of
third parties will preclude the Company or its collaborators from marketing
products; or third parties will market superior or equivalent products.

To date, relatively few products based on genes have been developed and
commercialized. Even if the Company identifies a gene and determines that it has
potential commercial value, the Company and its collaborators may not be able to
develop a commercially feasible product based on the gene or the protein
expressed by the gene. Certain areas of drug discovery conducted by the
Company's collaborators, including gene therapy, and other areas, such as
antisense drugs, involve new technologies, and existing data on the safety and
efficacy of these technologies is very limited. At present, there are no
products for patient use that have been developed from these technologies or
that have received FDA approval. Several significant scientific challenges must
be addressed before the therapeutic potential of these technologies can be
commercially realized. The Company and its licensees or collaborators will not
be able to commercialize any products for a number of years, if at all.
Additionally, the areas in which the Company or its licensees or collaborators
plan to develop products are new and rapidly evolving, and are expected to
continue to undergo significant and rapid technological changes. Rapid
technological development could result in actual and proposed products, services
or processes becoming obsolete before the Company recovers a significant portion
of its related research, development and capital expenses. In addition, new gene
sequencing machines are being developed, and, depending on the conditions upon
which they are made available, there can be no assurance that the Company will
be able to obtain access to those new machines. The introduction of gene
sequencing machines that embody new and superior technology could render
obsolete the gene sequencers used by the Company. The Company's competitive
position would be adversely affected if it were unable to anticipate such future
developments and obtain access to the new technology.

8
<PAGE> 10

Patents and Proprietary Rights. The Company's commercial success is
dependent in part on its ability to obtain patent protection on genes discovered
by it. The Company applies for patent protection for genes identified by partial
sequencing and, subsequently, for those genes which it fully sequences. However,
there is substantial uncertainty as to the patentability of genes based on
partial sequences. Even if patent protection is afforded for such sequences, it
may not provide effective commercial exclusivity. While the Company's business
might be enhanced by obtaining patent protection based on partial gene
sequences, the Company does not believe that its commercial success will be
materially dependent on its ability to do so. The Company has isolated and
obtained full-length sequence information for many of the genes that the Company
or its collaborators intend to develop further and has filed, and continues to
file, for patent protection based on such full-length sequences. However, the
Company does not expect to isolate and fully sequence a significant portion of
the partial gene sequences it discovers. See "Business -- Company Technology and
Research."

The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. There is a substantial backlog
of biotechnology patent applications at the United States Patent and Trademark
Office ("PTO"), and no clear policy has emerged regarding the breadth of claims
covered in biotechnology patents. There have been, and continue to be, intensive
discussions on the scope of patent protection for both gene fragments and
full-length genes. There have also been proposals for review of the
appropriateness of patents on genes and gene fragments. There can be no
assurance that these or other proposals will not result in changes in, or
interpretations of, the patent laws which will adversely affect the Company's
patent position. The biotechnology patent situation outside the United States is
even more uncertain and is currently undergoing review and revision in many
countries.

As of February 15, 1997, the Company had filed United States patent
applications with respect to more than 230 full-length human genes and their
corresponding proteins. The Company has also filed U.S. patent applications with
respect to all or portions of genomes of five infectious microorganisms and one
non-infectious microorganism. As of February 15, 1997, the Company has five
issued U.S. patents covering full-length human genes, which expire between 2013
and 2014. There can be no assurance that the remaining applications covering
full-length genes and their corresponding proteins will result in the issuance
of any patent. While the Company identifies multiple uses for genes it has fully
sequenced, these uses may not be sufficient to meet the statutory requirements
for patentability in all cases. Additionally, in view of the substantial number
of genes that may be covered by the Company's patent applications, the Company
cannot predict what issues may arise in connection with the Company's patent
applications or the timing of the grant of patents with respect to genes covered
by such patent applications. Moreover, in certain instances, the Company will be
dependent upon its collaborators to file and prosecute patent applications.

The Company has also filed U.S. patent applications claiming more than
190,000 partial human gene sequences. These applications seek to protect partial
human and non-human gene sequences, the full-length gene sequences that include
the partial sequences, as well as products derived therefrom and uses therefor.
These applications identify possible biological functions for some of the genes
based in part on a comparison to genes included in public databases, but do not
contain any laboratory or clinical data with respect to such biological
functions. There are certain court decisions indicating that disclosure of a
partial sequence may not be sufficient to support the patentability of a
full-length sequence. In view of these court decisions, as well as the position
of the PTO referred to below, the Company believes that there is significant
risk that patents will not issue based on patent disclosures limited to partial
gene sequences. Finally, even if patents issue on the basis of partial gene
sequences, there is uncertainty as to the scope of the coverage, enforceability
or commercial protection provided by any such patents.

In June 1991, the National Institutes of Health (the "NIH") filed a patent
application seeking protection for a substantial number of genes based upon
partial gene sequences. The application generated substantial controversy in the
scientific community regarding the patentability of gene fragments and the
full-length gene based on only partial sequencing of genes, particularly in
cases where the biological function of the full-length gene is not identified.
An examiner in the PTO rejected the patent claims contained in the NIH
application and the rejection was not appealed by the NIH. The Company believes
that the patent applications that have been filed by the Company based on
partial gene sequences may be considered similar to the application filed

9
<PAGE> 11

by the NIH. To date, the Company has not received notice from the PTO of a
similar rejection of its patent applications covering partial gene sequences.

Publication of information concerning genes prior to the time the Company
applies for patent protection based on the full-length gene could adversely
affect the Company's ability to obtain patent protection with respect to genes
identified by it. Washington University has identified genes through partial
sequencing pursuant to funding provided by Merck & Co. and has deposited the
partial sequences identified in a public database. See "-- Competition." In July
1994, the Company, TIGR and SmithKline Beecham reached an agreement to
contribute a number of partial cDNA sequences to a database (the "Human cDNA
Database"). Pursuant to the agreement, the Human cDNA Database is accessible
only to academic scientists and researchers at non-profit institutions that sign
access agreements. In October 1996, TIGR notified SmithKline Beecham and the
Company of its decision to terminate the Human cDNA Database Agreement according
to its terms, effective in April 1997. TIGR and researchers who are provided
access to proprietary data in the Human cDNA Database have certain rights to
publish human cDNA sequences in which the Company has rights. The termination of
the Human cDNA Database Agreement in April 1997 will eliminate limitations on
publication of those sequences in the Human cDNA Database as of that date. While
the Company believes that the limitations on publication of sequences in the
Human cDNA Database have generally been sufficient to permit the Company to
apply for patent protection on genes in which it is interested in pursuing
further research, there can be no assurance that such publication will not
affect the Company's ability to obtain patent protection for some genes in which
it may have an interest.

In January 1997, TIGR, in collaboration with the National Center for
Biological Information (NCBI), disclosed full-length DNA sequences (which are
reportedly in excess of 35,000 sequences) assembled from partial gene sequences
(EST's) available in publicly accessible databases or sequenced at TIGR. Such
disclosure might limit the scope of claims or make unpatentable subsequent
patent applications on full length genes filed by the Company which, in the case
of genes of commercial significance, could have a material adverse effect on the
Company. See "-- Relationship with TIGR; Funding Obligations; Potential
Dispute."

In addition, others have filed and are likely to file in the future patent
applications which have not yet been published covering genes or protein
sequences similar or identical to those of the Company. Moreover, the number of
patent applications covering genes and proteins expressed by genes has been
increasing, and is expected to continue to increase, as a result of the increase
in the number of entities conducting genomic research. See "-- Competition." The
Company has been notified that there may be patent applications filed by others
which cover genes for which the Company has filed patent applications. The
priority of competing patent claims would be decided in an interference
proceeding before the PTO. No assurance can be given that any such patent
application of third parties will not have priority over patent applications
filed by the Company or that any patent applications filed by the Company will
result in issued patents.

The Company is aware that patent applications have been filed by one or
more third parties with respect to three of the Company's therapeutic protein
product candidates. The Company has been granted a patent with respect to DNA
sequences encoding one of the three therapeutic proteins. However, proceedings
may be instituted in the PTO to determine which of the Company or a third party
is entitled to a United States patent covering such protein and/or DNA encoding
such protein. As to the remaining two therapeutic proteins, the Company has been
notified that the PTO is considering instituting proceedings to determine which
of the Company or a third party is entitled to a patent covering the DNA
encoding one of such therapeutic proteins, and it is possible that proceedings
may be instituted as to the third therapeutic protein.

10
<PAGE> 12

others may discover uses for genes or proteins other than those uses covered in
the Company's patent applications, and these other uses may be separately
patentable. In such case, the holder of a use patent covering an invention as to
which the Company has a composition of matter patent claim could exclude the
Company from selling a product for a use covered by such use patent.

The Company's potential products may conflict with patents that have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued and other companies engage in the
business of discovering genes through the use of high speed sequencers, the risk
increases that the Company's potential products may give rise to claims that
they infringe the patents of others. Such other persons could bring legal
actions against the Company claiming damages and seeking to enjoin clinical
testing, manufacturing and marketing of the affected products. If any such
actions are successful, in addition to any potential liability for damages, the
Company could be required to obtain a license in order to continue to
manufacture or market the affected products. There can be no assurance that the
Company would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms. The Company believes
that there will continue to be significant litigation in the industry regarding
patent and other intellectual property rights. If the Company becomes involved
in such litigation, it could consume a substantial portion of the Company's
resources.

In addition, some of the genes (representing a small percentage of
sequences covered by the Company's patent filings) covered by two of the patent
applications in which the Company has rights that have been filed were
identified pursuant to research funded by grants from the United States
Department of Energy ("DOE"). TIGR is also receiving funding from the DOE with
respect to certain non-pathogenic bacterial genomes it is sequencing. The DOE
has a statutory right under certain circumstances (including lack of action on
the part of the holder of the patent rights to achieve practical application of
the invention or a need to alleviate public health or safety concerns not
reasonably satisfied by the holder of the patent rights) to grant to other
parties licenses under the patents which may be granted based on research funded
by the DOE.

The Company also relies on trade secret protection for its confidential and
proprietary information. The Company believes it has developed proprietary
procedures for making cDNA libraries and sequencing and analyzing genes. The
Company has not sought patent protection for these procedures. Additionally, the
Company has developed a substantial database concerning genes identified by it.
The Company has taken security measures to protect its data and continues to
explore ways to further enhance the security for its data. However, trade
secrets are difficult to protect. While the Company has entered into
confidentiality agreements with employees and academic collaborators who are
provided data or materials under material transfer agreements, there can be no
assurance that such data or material will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade secrets.
In addition, certain trade secrets important to the Company's business have been
developed by, or are in the possession of, TIGR, including information
concerning sequencing procedures and genes identified by TIGR. Although TIGR
also enters into confidentiality agreements with its employees, there is an
additional risk that such trade secrets cannot be meaningfully protected.

Relationship With TIGR; Funding Obligations; Potential Dispute. The
Company has committed to pay TIGR approximately $85 million during the ten-year
period ending September 30, 2002, approximately $44 million of which had been
paid through February 15, 1997. In return, the Company received exclusive
proprietary rights to the intellectual property resulting from TIGR's research
through September 30, 2002. Under the Company's agreements with TIGR, TIGR
generally has the right to direct its research activities independently from the
Company and there can be no assurance that TIGR will conduct research in areas
of interest to the Company. The Company's substantial financial commitment to
fund TIGR's research continues regardless of whether the Company requires TIGR's
services or derives useful information therefrom.

The Company's agreements with TIGR include non-disclosure obligations on
the part of TIGR. The Company and TIGR have had recent disagreements concerning
the scope of these non-disclosure obligations. It has come to the Company's
attention that certain disclosures by TIGR of sequence and other information

11
<PAGE> 13

which the Company believes may violate such non-disclosure obligations may have
taken place or may take place in the future. Disclosure of information by TIGR
in violation of its non-disclosure obligations may negatively affect the
Company's ability to obtain patent protection on inventions described therein.
The Company is investigating this situation and will determine what action, if
any, should be taken to prevent such disclosures. See "-- Patents and
Proprietary Rights." There can be no assurance that these disagreements will not
materially affect the Company's relationship with TIGR. However, TIGR has been
primarily sequencing microbial genes and not human genes in recent years, and
the Company does not believe that it is or will be dependent on TIGR.

Dependence Upon Key Personnel. The Company is dependent on its Chairman
and Chief Executive Officer, William A. Haseltine, Ph.D., and its Senior Vice
President, Research and Development, Craig A. Rosen, Ph.D. The Company has
entered into employment agreements with each of Drs. Haseltine and Rosen for
terms expiring in February 2000 and November 1997, respectively. Each of these
employment agreements automatically renews for a one year term unless terminated
by either party. The Company has not purchased key-man life insurance on either
Dr. Haseltine or Dr. Rosen. Competition among pharmaceutical and biotechnology
companies for qualified employees is intense, and the loss of qualified
employees, or an inability to attract, retain and motivate additional highly
skilled employees required for the expansion of the Company's activities, could
adversely affect its business and prospects. There can be no assurance that the
Company will be able to retain its existing personnel or to find and attract
additional qualified employees.

Uncertainty of Government Regulatory Requirements; Lengthy Approval
Process; No Assurance of Product Approval. Products such as those proposed to
be developed by the Company or its collaborators are subject to an extensive
regulatory approval process by the FDA and comparable agencies in other
countries. The U.S. government has recently established a working group to
assess whether additional regulation in the area of genetic testing may be
appropriate, which may ultimately result in further regulation. The regulation
of new therapeutic products and diagnostics is extensive, and the required
preclinical and clinical testing is lengthy and expensive. There can therefore
be no assurance that FDA approvals will be obtained in a timely manner, if at
all. The Company or its collaborators may encounter significant delays or
excessive costs in their efforts to secure necessary approvals or licenses. Even
if FDA regulatory approvals are obtained, the FDA extensively regulates
manufacturing, labeling, distributing, marketing, promotion and advertising
after product approval. Moreover, several areas in which the Company or its
collaborators may develop products involve relatively new technology and have
not been the subject of extensive product testing in patients. Accordingly, the
regulatory requirements governing such products and related clinical procedures
are uncertain and such products may be subject to substantial additional review
by various governmental regulatory authorities, which could prevent or delay
regulatory approval. Regulatory requirements ultimately imposed on these and
other areas could adversely affect the Company's ability to clinically test,
manufacture or market products.

The Company is also subject to regulation under state and federal laws
regarding environmental protection and hazardous substances control. The Company
believes it is in material compliance with applicable laws relating to
environmental protection and hazardous substances control. The impact that these
laws or any changes in these laws may have on future operations of the Company
cannot be predicted. Moreover, federal and state agencies and congressional
committees have expressed interest in further regulation of biotechnology. The
Company is unable to estimate the extent and impact of regulation in the
biotechnology field (including genetic testing) resulting from any future
federal, state or local legislation or administrative action.

Dependence Upon Third Parties for Supply. The Company currently relies on
a single supplier, Applied Biosystems, a division of Perkin-Elmer Corporation,
to provide all of its gene sequencing machines and certain reagents required in
connection with the gene sequencing process. While other gene sequencing
machines are available, the Company does not believe that such other machines
are as efficient as the machines currently used by the Company. No assurance can
be given that either the gene sequencing machines or the reagents will remain
available in commercial quantities at acceptable costs. Should the Company be
unable to obtain additional machines or an adequate supply of reagents or other
ingredients at commercially reasonable rates, its ability to continue to
identify genes through gene sequencing would be adversely affected.

12
<PAGE> 14

The Company has contracted for the manufacture of therapeutic proteins for
preclinical testing and clinical development from a single supplier. The
supplier is a recently organized entity which will manufacture the therapeutic
proteins in a new cGMP manufacturing facility. The Company will be dependent on
this company for its supply of therapeutic proteins. Any failure or delay in
supplying therapeutic proteins could affect the timing of preclinical tests and
clinical trials and could delay submission of products for regulatory approval.

No Manufacturing or Marketing Capacity. The Company has developed in-house
capabilities for the production and purification of recombinant proteins for use
in its research activities, but does not currently have any manufacturing
facilities capable of supplying materials suitable for clinical trials or for
commercial sale or any experience in manufacturing materials suitable for
clinical trials or for commercial sale. In the near term, the Company intends to
rely on third parties for production of certain of its therapeutic proteins for
use in pre-clinical and early clinical development and has entered into an
agreement with a third party to supply such materials. The Company will depend
on such third party to comply with current good manufacturing practices
("cGMPs") and other regulatory requirements and to deliver materials on a timely
basis; however, there can be no assurance that such party will perform. Any
failures by third parties may delay clinical development or the submission of
products for regulatory approval, or otherwise impair the Company's competitive
position, which could have a material adverse effect on the Company's business.

The Company is planning the construction of a pilot scale production and
process development facility for the preparation of clinical trial quantities of
its therapeutic proteins in compliance with cGMP requirements. The Company has
completed the conceptual design and has begun the preliminary engineering design
and site selection process. Construction is expected to begin by mid 1997 and be
completed in mid to late 1998. The facility will be designed to allow for the
production and purification of multiple recombinant proteins. The Company
intends to use the facility for production of preclinical and clinical supplies
of its therapeutic proteins and for process development and scale-up. A delay in
completion of the facility could adversely affect the cost and timing of
clinical trials and could delay submission of products for regulatory approval.
Moreover, the Company intends to seek financing with respect to all or a portion
of the estimated $40 million construction cost of such facility. There can be no
assurance that the Company will be able to obtain any such financing on terms
acceptable to the Company, or at all. In the event that financing is not
available on acceptable terms, the Company may determine to use its own capital
resources to finance all or a portion of the cost of such facility.

The Company's long range plan is to establish manufacturing capabilities to
allow it to meet its clinical trial and commercial manufacturing requirements.
However, the Company may contract with third party manufacturers or develop
products with partners and take advantage of the partner's manufacturing
capabilities. There can be no assurance that the Company will be able to
successfully establish manufacturing capabilities and manufacture its products
economically or in compliance with cGMPs and other regulatory requirements.

The Company generally expects to rely on its collaborators or on third
parties with whom the Company may contract to market any products. In either
case, the Company will be dependent on such third parties for marketing.
However, in the future, the Company may co-promote or retain U.S. marketing
rights to certain of its products. Significant additional expenditures and
management resources will be required to develop an external sales force and
implement its marketing strategy if the Company decides to market products
directly. There can be no assurance that the Company's collaborators or other
third parties will be successful in marketing products, or that the Company will
be able to establish a successful marketing force.

Uncertainty Related to Changes in the Healthcare System; Reimbursement
Policies. In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for certain medical procedures
and treatments or subject the pricing of pharmaceuticals to government control.
In addition, significant uncertainty exists as to the reimbursement status of
newly-approved healthcare products. Government and other third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new therapeutic and diagnostic products and by
refusing, in some cases, to provide any

13
<PAGE> 15

coverage of uses of approved products for disease indications other than those
for which the FDA has granted marketing approval. It is uncertain what
legislative proposals will be adopted or what actions Federal, state or private
payors for healthcare goods and services may take to limit their payments for
such goods and services. The Company cannot predict the effect that changes in
the healthcare system may have on its business, and no assurance can be given
that any such changes will not have a material adverse effect on the Company.

Volatility of Stock Price. The market prices for securities of both
emerging and biotechnology companies, including the market price of shares of
the Company's Common Stock, have historically been highly volatile. Future
announcements concerning the Company or its competitors, including the results
of clinical testing, technological innovations or new commercial products,
changes in government regulations, regulatory actions, announcements relating to
healthcare reform, developments concerning proprietary rights, litigation and
public concern as to safety of the Company's products, as well as
period-to-period variances in financial results could cause the market price of
the Common Stock to fluctuate substantially. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many emerging and biotechnology companies and that
have often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Common
Stock.

Dilution. Purchasers of shares in this offering will experience immediate
and substantial dilution of net tangible book value because the offering price
of the Common Stock offered hereby will exceed the net tangible book value of
the Company after giving effect to the offering being made hereby. See
"Dilution."

Shares Available for Resale. All of the 21,814,564 shares of Common Stock
that will be outstanding after this offering will be eligible for immediate
sale in the public market, subject in the case of approximately 6,628,616 such
shares to compliance with the provisions of Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"). Additionally, holders of 6,075,760
shares of Common Stock or warrants to purchase Common Stock have registration
rights with respect to such shares. Sales of substantial amounts of Common
Stock pursuant to Rule 144 or otherwise may have an adverse effect on the
market price of the Common Stock. See "Shares Eligible for Future Sale."
Officers, directors and stockholders of the Company holding in the aggregate
6,329,741 shares of Common Stock have agreed for a period of 90 days after the
date of this Prospectus not to sell or otherwise dispose of any shares of
Common Stock without the consent of the Underwriters.

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares
offered hereby are estimated to be approximately $121,605,000 ($139,890,750 if
the Underwriters over-allotment option is exercised in full) after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company and based on an assumed public offering price of $43.00 per
share. The Company intends to utilize the net proceeds to accelerate its
therapeutic protein research and preclinical development and to expand clinical
development, and to fund the filing and prosecution of patents to protect its
intellectual property. The Company also expects to use a portion of the net
proceeds in connection with the operation of a new pilot plant facility, which
is to be constructed (see "Business-Manufacturing and Marketing"), as well as
for working capital and general corporate purposes.

The Company believes that the net proceeds of this offering, together with
its available cash, interest income and payments under the agreements with its
collaborators should be sufficient to finance its operations for the foreseeable
future. The amounts and timing of the Company's actual expenditures for each
purpose may vary significantly depending upon numerous factors, including the
progress of the Company's research and development program, the scope and
results of preclinical studies and clinical trials, the cost, timing and
outcomes of regulatory reviews, the rate of technological advances,
determinations as to commercial potential of the Company's products under
development, patent and legal expenses, the status of competitive products, the
establishment of clinical trial capability or third-party clinical trial
arrangements, the establishment of manufacturing or third-party manufacturing
agreements, and the establishment of collaborative and/or licensing arrangements
with other companies.

Pending such uses, the Company intends to invest the net proceeds of the
offering in U.S. Treasury and government agency obligations, investment-grade
commercial paper and interest-bearing securities. Such investment reflects the
Company's policy regarding the investment of its liquid assets, which is to seek
a reasonable rate of return consistent with the emphasis on safety, liquidity
and preservation of capital.

15
<PAGE> 17

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the Nasdaq Market under the symbol
HGSI. Prior to December 2, 1993, there was no public trading market for the
Company's Common Stock. The following table presents the quarterly high and low
sale prices as quoted by Nasdaq.

<TABLE>
<CAPTION>
PRICE
-------------
HIGH LOW
---- ----
<S> <C> <C>
1997
-----------------------------------------------------------------------
First Quarter through February 20, 1997................................ $49 $38 3/4
1996
-----------------------------------------------------------------------
First Quarter.......................................................... 49 3/4 31 1/2
Second Quarter......................................................... 48 1/4 32 1/2
Third Quarter.......................................................... 39 1/2 24 3/4
Fourth Quarter......................................................... 43 1/4 34 3/4
1995
-----------------------------------------------------------------------
First Quarter.......................................................... 15 1/2 12 1/4
Second Quarter......................................................... 17 3/4 12 1/4
Third Quarter.......................................................... 29 16 5/8
Fourth Quarter......................................................... 38 1/4 18 1/4
1994
-----------------------------------------------------------------------
First Quarter.......................................................... 20 3/4 14
Second Quarter......................................................... 20 1/2 15 1/4
Third Quarter.......................................................... 19 3/4 14
Fourth Quarter......................................................... 18 1/2 14 1/4
1993
-----------------------------------------------------------------------
Fourth Quarter (from December 2, 1993)................................. 27 3/4 14 1/2
</TABLE>

As of February 21, 1997, there were approximately 538 holders of record of
the Company's Common Stock. On February 21, 1997, the closing price per share of
the Common Stock was $43.00.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for research and development
and the development of its business.

16
<PAGE> 18

CAPITALIZATION

The following table sets forth as of December 31, 1996 the actual
capitalization of the Company and the capitalization of the Company as adjusted
to reflect the sale of the 3,000,000 shares of Common Stock offered hereby at an
assumed offering price of $43.00 per share and the receipt of the net proceeds
therefrom, after deducting estimated underwriting discounts and commissions and
estimated offering expenses. This table should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Total debt and capital lease obligations, less current portion........ $ 2,954 $ 2,954
Stockholders' equity:
Common Stock, $.01 par value; 50,000,000 shares authorized;
18,784,382 shares issued and outstanding actual; 21,784,382
shares issued and outstanding as adjusted(1)..................... 188 218
Additional paid-in capital.......................................... 162,583 284,158
Unrealized (loss) on investments available for sale................. (121) (121)
Retained deficit.................................................... (34,129) (34,129)
-------- ---------
Total stockholders' equity....................................... 128,521 250,126
-------- ---------
Total capitalization........................................ $131,475 $ 253,080
======== =========
</TABLE>

- ---------------
(1) Excludes (i) 2,664,216 shares of Common Stock reserved for issuance under
the Company's 1993 Stock Option Plan and 1994 Stock Option Plan (the
"Plans"), pursuant to which options to purchase a total of 1,822,397 shares
were outstanding at December 31, 1996 and options to purchase 500,000 shares
were granted subsequent to December 31, 1996; and (ii) 146,286 shares of
Common Stock issuable upon exercise of outstanding warrants to purchase
Common Stock.

17
<PAGE> 19

DILUTION

The net tangible book value of the Company at December 31, 1996, was
$128,416,000, or approximately $6.84 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets reduced by the amount of its total liabilities, divided by the total
number of shares of Common Stock outstanding. After giving effect to the sale of
the 3,000,000 shares of Common Stock in this offering at an assumed offering
price of $43.00 and receipt of the net proceeds therefrom (after deducting
estimated underwriting discounts and commissions and estimated offering
expenses), the net tangible book value of the Company at December 31, 1996 would
have been $25,021,000, or $11.48 per share, representing an immediate increase
in net tangible book value of $4.64 per share to existing stockholders and an
immediate dilution of $31.52 per share to the persons purchasing shares at the
public offering price. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed price to public............................................ $ 43.00
Net tangible book value per share at December 31, 1996............. $6.84
Increase per share attributable to new investors................... 4.64
-----
Net tangible book value per share after the offering............... 11.48
-------
Dilution per share to new investors(1)(2).......................... $ 31.52
=======
</TABLE>

- ---------------
(1) If the Underwriters over-allotment option were exercised in full, the net
tangible book value per share after the offering would be $12.07, resulting
in immediate dilution to New Investors of $30.93 per share.

(2) If all options and warrants outstanding at December 31, 1996 to purchase an
aggregate of 1,968,683 shares of Common Stock at a weighted average exercise
price of $21.37 were exercised in full in addition to the Underwriters'
over-allotment option, the net tangible book value per share after the
offering would be $12.82, resulting in immediate dilution to new investors
of $30.18 per share.

18
<PAGE> 20

SELECTED FINANCIAL DATA

The following selected financial data of the Company for the years ended
December 31, 1994, 1995 and 1996, and as of December 31, 1995 and 1996 have been
derived from the audited financial statements included as part of this
Prospectus and should be read in conjunction with such financial statements and
the accompanying notes. The following selected financial data of the Company for
the period from June 26, 1992 (inception) to December 31, 1992 and for the year
ended December 31, 1993, and as of December 31, 1992, 1993 and 1994 have been
derived from audited financial statements not included herein. The results of
operation of prior periods are not necessarily indicative of results that may be
expected for any other period.

<TABLE>
<CAPTION>
JUNE 26, 1992
(INCEPTION) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, --------------------------------------------
1992 1993 1994 1995 1996
--------------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue-research and development
collaborative contracts.......... $ -- $22,000 $41,065 $ 5,000 $36,460
Costs and expenses:
Research and development:
Direct expenditures........... 805 7,611 17,636 22,904 30,409
Payments under research
services agreement.......... 2,925 8,989 9,662 10,075 10,063
General and administrative....... 541 3,998 6,840 8,745 9,639
Net interest (income) expense.... 121 (390) (2,813) (4,005) (6,092)
------- ------- ------- -------- -------
Income (loss) before taxes......... (4,392) 1,792 9,740 (32,719) (7,559)
Provision (benefit) for income
taxes............................ -- (2) 2,436 (1,651) 208
------- ------- ------- -------- -------
Net income (loss).................. $(4,392) $ 1,794 $ 7,304 $(31,068) $(7,767)
======= ======= ======= ======== =======
Net income (loss) per share........ $ (0.41) $ 0.15 $ 0.47(1) $ (1.98)(1) $ (0.42)(1)
======= ======= ======= ======== =======
Weighted average shares
outstanding...................... 10,783 12,197 15,543(1) 15,723(1) 18,631(1)
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
investments.......................... $ 2,898 $69,478 $76,002 $105,462 $116,116
Total assets........................... 9,835 82,450 95,543 126,963 140,117
Total debt and capital leases, less
current portions..................... 64 1,338 5,346 4,332 2,954
Retained earnings (deficit)............ (4,392) (2,598) 4,706 (26,362) (34,129)
Total stockholders' equity............. 68 75,929 83,785 115,606 128,521
</TABLE>

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

(1) Computed on the basis described in Note B of Notes to Financial Statements.

19
<PAGE> 21

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

OVERVIEW

The Company initially focused its efforts on establishing collaborative
arrangements, establishing and expanding its gene sequencing, bioinformatics,
molecular biology, cell biology, protein expression and pharmacology
capabilities, developing proprietary processes for automating the gene discovery
process and creating, together with its collaborators, approximately 600 cDNA
libraries representing most human organs, tissues and cell types. The Company's
activities are focused primarily on research and development of therapeutic
protein product candidates.

The Company has not received any product sales revenue or royalties from
product sales and does not anticipate revenues from product sales or from
royalties on product sales in the foreseeable future. Through December 31, 1996,
the Company had received (i) $69.9 million in revenue and $55.1 million in
equity payments pursuant to the SB Collaboration Agreements, (ii) payments from
the New Collaboration Partners of $17.5 million and (iii) an aggregate of $14.6
million from other collaborators, including $8.0 million from Pioneer Hi-Bred
International, Inc. ("Pioneer"), $2.0 million from F. Hoffmann-La Roche
("Roche"), $3.0 million from Pharmacia & Upjohn Company ("Pharmacia"), $0.6
million from OraVax Merieux Co. and Merieux OraVax S.N.C. (collectively,
"OraVax") and $1.0 million from Schering-Plough (in addition to certain payments
received from Schering-Plough pursuant to the New Collaboration Partner
Agreements). Pursuant to the terms of such collaboration agreements, the Company
expects to receive license fees and research payments of $17.5 million annually
over the next four years from the New Collaboration Partners and an aggregate of
$19.5 million over the next four years from other collaborators. See
"Business -- Collaborative Arrangements."

The Company expects that its revenue sources for at least the next several
years may be limited to interest income, payments under the collaboration
agreements with the New Collaboration Partners, payments from the sale of rights
and other payments from other collaborators and licensees under existing or
future arrangements, to the extent that the Company enters into any such further
arrangements. The Company expects to continue to incur substantial expenses
relating to its research and development efforts, which are expected to increase
relative to historical levels as the Company focuses on preclinical and clinical
trials required for the development of therapeutic protein product candidates.
As a result, the Company expects to incur continued and increasing losses over
the next several years unless it is able to realize additional revenues under
existing or new collaboration agreements. The timing and amounts of such
revenues, if any, cannot be predicted with certainty and will likely fluctuate
sharply. Results of operations for any period may be unrelated to the results of
operations for any other period. In addition, historical results should not be
viewed as indicative of future operating results.

RESULTS OF OPERATIONS

Years Ended December 31, 1996 and 1995

Revenues. The Company had revenues of $36.5 million and $5.0 million for
the years ended December 31, 1996 and December 31, 1995, respectively. The 1996
revenue consisted of $6.9 million for the achievement of the third milestone
("Milestone III") under the SB Collaboration Agreements, $10.0 million in
license fees and research payments from collaborations with Pioneer and Roche
entered into in the first quarter of 1996, $12.0 million in annual license fees
and additional payments from collaborations with Schering-Plough and Synthelabo
entered into in the second quarter of 1996, $5.5 million in annual license fees
and additional payments pursuant to a collaboration agreement entered into with
Merck in July 1996, and $2.1 million in license fees from collaborations with
Pharmacia, MedImmune and OraVax entered into in the fourth quarter of 1996. The
1995 revenue consisted of $5.0 million from Takeda for an option and license
agreement to commercialize certain future products of the Company in Japan.

Expenses. Research and development expenses increased to $40.5 million for
the year ended December 31, 1996 from $33.0 million for the year ended December
31, 1995. The increase resulted primarily from

20
<PAGE> 22

significant expansions in the Company's cell biology, protein expression and
pharmacology departments and reflect the Company's increasing emphasis on
determining the biological functions and possible medical utilities of genes and
proteins discovered as a result of the Company's gene discovery efforts.
Expenses will continue to increase in support of research and development of
potential products by the Company and in support of the new collaborations.

General and administrative expenses increased to $9.6 million for the year
ended December 31, 1996 from $8.7 million for the year ended December 31, 1995.
The increase resulted primarily from significantly higher legal expenses
associated with filing and prosecuting a larger number of patent applications
relating to genes and proteins discovered by the Company. Patent expenses will
continue to increase significantly as additional applications are filed and
existing applications are prosecuted in the United States and internationally.
Interest income was significantly higher for the year ended December 31, 1996
compared to the year ended December 31, 1995 due to higher cash balances and
interest rates.

Net Income (Loss). The Company recorded a net loss of $7.8 million, or
$0.42 per share, for the year ended December 31, 1996 compared to a net loss of
$31.1 million, or $1.98 per share, for the year ended December 31, 1995. The
difference in results for the year ended December 31, 1996 and 1995 is primarily
due to the receipt of $36.5 million in license fees and research payments during
the year ended December 31, 1996, which was partially offset by higher expenses.

Years Ended December 31, 1995 and December 31, 1994

Revenues. The Company generated $5.0 million in revenues for the year
ended December 31, 1995, compared with revenues of $41.1 million for the year
ended December 31, 1994. The 1995 revenues were received from Takeda for an
Option and License Agreement to commercialize certain future products of the
Company in Japan. Substantially all of the 1994 revenues were payments upon the
achievement of the first milestone ("Milestone I") (first quarter) and the
second milestone ("Milestone II") (second quarter) under the SB Collaboration
Agreements, and the exercise by SB of an option for certain rights in Southeast
Asia, pursuant to the SB Collaboration Agreements.

Expenses. Research and development expenses were $33.0 million for the
year ended December 31, 1995, compared to $27.3 million for the year ended
December 31, 1994. The Company's payments to TIGR increased from $9.7 million in
1994 to $10.1 million in 1995 due primarily to higher scheduled research
payments in accordance with the long-term contractual agreement between TIGR and
the Company. Direct expenditures for research and development increased to $22.9
million for the year ended December 31, 1995 from $17.6 million for the year
ended December 31, 1994 due to planned expansions in the areas of molecular
biology, cell biology, protein expression and pharmacology.

General and administrative expenses increased to $8.7 million for the year
ended December 31, 1995 from $6.8 million for the year ended December 31, 1994
to support the increase in the Company's activities. Patent expenses increased
significantly as additional applications were filed and existing applications
were prosecuted in the United States and internationally. Interest income was
significantly higher for the year ended December 31, 1995 compared to the year
ended December 31, 1994 due to higher interest rates and cash balances.

Net Income (Loss). The Company reported a net loss of $31.1 million, or
$1.98 per share, for the year ended December 31, 1995 compared to net income of
$7.3 million, or $0.47 per share, for the year ended December 31, 1994. This
difference is primarily due to the considerably higher revenues recorded during
1994 compared to 1995 coupled with higher overall expenses during 1995 compared
to 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital plus long term investments, which include
obligations of the U.S. government and commercial paper that have maturities
greater than 12 months from the balance sheet date, of $110.8 million at
December 31, 1996 as compared to $101.0 million at December 31, 1995. The
increase resulted from the sale of 339,065 shares of Common Stock to SmithKline
Beecham for $18.1 million

21
<PAGE> 23

upon completion of Milestone III under the SB Collaboration Agreements, which
was partially offset by the net loss generated during the year, capital
expenditures, and payments on capitalized leases.

The Company expects to continue to incur substantial expenses relating to
its research and development efforts, which expenses are expected to increase
relative to historical levels as the Company focuses on preclinical and clinical
trials required for the development of therapeutic protein product candidates.
As of December 31, 1996, the Company is committed to pay TIGR approximately
$43.5 million during the next six years, including approximately $16.9 million
through December 31, 1998. At December 31, 1996, the Company had outstanding
commitments for construction and equipment purchases totaling approximately
$700,000. In addition, the Company is planning the construction of a pilot scale
production and process development facility and intends to seek financing with
respect to all or a portion of the estimated $40 million construction cost of
such facility. There can be no assurance that the Company will be able to obtain
any such financing on terms acceptable to the Company, or at all. In the event
that financing is not available on acceptable terms, the Company may determine
to use its own capital resources to finance all or a portion of the cost of such
facility.

The Company expects that the proceeds from this offering, its existing
funds, interest income, and committed license fees and research payments from
the New Collaboration Partners and under existing collaboration agreements will
be sufficient to fund the Company's operations for the foreseeable future. The
Company's future capital requirements and the adequacy of its available funds
will depend on many factors, including scientific progress in its research and
development programs, the magnitude of those programs, the ability of the
Company to establish collaborative and licensing arrangements, the cost involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims and
competing technological and market developments.

As of December 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $30 million the majority of
which expire, if unused, in the year 2011. The Company also has available
research and development tax credit carryforwards of approximately $4.8 million,
the majority of which will expire, if unused, between the years 2000 and 2010.

The Company's funds are currently invested in U.S. Treasury and government
agency obligations, investment-grade commercial paper and interest-bearing
securities. Such investment reflects the Company's policy regarding the
investment of liquid assets, which is to seek a reasonable rate of return
consistent with the emphasis on safety, liquidity and preservation of capital.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements contained in "Prospectus Summary -- The Company", "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," including statements concerning future
collaboration agreements, royalties and other payments under collaboration
agreements, and product development and sales and other statements are forward
looking statements, as defined in the Private Securities Litigation Reform Act
of 1995. Actual results may differ materially from those projected in the
forward looking statements, which statements involve risks and uncertainties,
including but not limited to, the following: the scientific progress of the
Company in its research and development programs; the magnitude of these
programs; the ability of the Company to establish additional collaborative and
licensing arrangements; the extent to which the Company engages in clinical
development of any products on its own; the scope and results of pre-clinical
testing and clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims; competing technological and market developments; and
whether conditions to milestone payments are met and the timing of such payment.
Investors are also directed to the other risks discussed under the heading "Risk
Factors," and elsewhere herein.

22
<PAGE> 24

BUSINESS

GENERAL

Human Genome Sciences, Inc. (the "Company") is engaged in the research and
development of novel, proprietary pharmaceutical and diagnostic products based
on the discovery and understanding of the medical utility of genes. Using
automated, high throughput gene sequencing technology, the Company has generated
over 1,000,000 partial human gene sequences, which the Company believes
correspond to most of the expressed genes in the human body, and now possesses
one of the largest proprietary databases of human and microbial genes. Based on
this genomic database, the Company has created a broad base of product
opportunities. The Company's activities have progressed to focusing primarily on
research and development of therapeutic protein product candidates. In its
efforts to identify the most promising product candidates, the Company uses its
advanced proprietary bioinformatics system to analyze partial gene sequences and
identify the genes corresponding to such partial gene sequences and the proteins
encoded by such genes. As of February 15, 1997, the Company has isolated and
characterized several hundred full-length genes and expressed and purified more
than 100 potential therapeutic proteins. The Company is currently evaluating six
therapeutic protein product candidates in preclinical studies. In addition, the
Company is investigating for development with its collaborators proprietary
product opportunities in diagnostics and small molecule drugs based on human
genes, as well as vaccines, antibiotics, and diagnostics based on genes of
microorganisms.

The Company has a two-pronged commercialization strategy:

23
<PAGE> 25

exchange, the New Collaboration Partners received certain rights to research,
develop and commercialize therapeutic products based on the Company's and
SmithKline Beecham's Human Gene Technology. Schering-Plough and SmithKline
Beecham have been granted the right to develop jointly with the Company certain
of the therapeutic protein product candidates to which the Company has retained
the exclusive development rights.

The Company also has entered into other collaborative agreements in certain
areas where the Company has retained exclusive rights, including: the creation
of bacterial vaccines and immunotherapeutics and antimicrobial agents based on
genes of infectious agents; corn genomics; and gene therapy. Pursuant to the
terms of such collaboration agreements, an aggregate of $34.1 million of license
and research payments is payable to the Company over five years, of which $14.6
million has been received to date.

GENOME SCIENCE

Genome science refers to the characterization of the entire set of genetic
information of any organism, including humans. All cells contain DNA, a complex
material containing all of the genetic information necessary to govern a cell's
biological processes. In humans, approximately 3-5% of DNA consists of segments
called genes. The entire human genome is believed to contain at least 100,000
genes, of which only several thousand were known to have been identified at the
time the Company commenced its operations. Each gene consists of a linear
sequence of nucleotides, the basic structural units of DNA. Sequencing genes
involves determining the order of nucleotides in the gene, which permits
identification of the gene and the protein produced by the gene.

Genes act as the fundamental blueprint for all the physiological attributes
of an individual. Each gene contains the information required to produce
("express") a gene product, generally a protein. Proteins are expressed by a
gene according to a set of genetic instructions encoded in the DNA and are the
principal determinants of an organism's characteristics. A typical cell of
higher animals, such as humans, contains thousands of different proteins
essential to cellular structure, growth and function. The aberrant expression
within a cell by even a single gene can severely alter the cell's normal
function and result in a disease condition.

When a gene is expressed in a cell, the order of different nucleotides in
the gene is copied into RNA in a duplication process called transcription. A
splicing process within the cell then removes the introns, or non-coding gene
segments, from the transcript, thereby creating a messenger RNA ("mRNA"), which
contains only the exons, or coding regions, of the transcribed gene. The mRNA
then directs the production of a protein in a process called translation. The
order of nucleotides in the mRNA determines the protein that is made. By
isolating mRNA from cells, the Company's scientists can analyze primarily the
coding regions of a gene. However, mRNA is unstable and therefore is difficult
to analyze directly. To sequence the mRNA, it is preferable to copy or
transcribe the mRNA back into DNA. This process produces a DNA copy ("cDNA"),
which contains only the exons, or coding regions, of the expressed gene. This
process avoids examination of the majority of human DNA, as approximately 95-97%
of the human genome consists of long stretches of nucleotides which do not code
for protein. By focusing on the mRNA, the Company examines the portion of the
genome which it believes to be the most important, because it is the portion
which makes protein.

24
<PAGE> 26

Genes play an important role in the development of a variety of
therapeutics, diagnostics and other products and services. Proteins expressed by
genes are the targets of most drugs. As a result, the identification of proteins
can play an important role in the development of drugs and drug screens.
Proteins themselves can also be used as drugs. Two examples of protein drugs on
the market are erythropoietin, which stimulates the production of red blood
cells, and insulin, which regulates sugar metabolism. The identification of
genes that code for proteins that may be missing or defective can enable the
development of therapeutics for genetic diseases. In addition, identification of
genes that may predispose a person to a particular disease may enable the
development of diagnostic tests for the disease.

COMPANY TECHNOLOGY AND RESEARCH

The Human Gene Anatomy Project

The gene discovery activity of the Company has focused on its Human Gene
Anatomy Project. The goal of this project is to identify virtually all human
genes, to catalogue the relative abundance of expressed genes by organ, tissue
and cell of origin and to identify changes in gene expression associated with
the normal processes of development, differentiation and activation, as well as
abnormal changes in gene expression associated with the development of disease.
The Company believes its Human Gene Anatomy Project approach is substantially
different from most others engaged in genomic research, which seek either to
isolate a single copy of each gene, determine the sequence of large regions of
human chromosomes or determine the chromosome location of genes responsible for
inherited genetic diseases. While such approaches will provide information
valuable for the creation of some new gene-based pharmaceutical products, the
Company believes that its Human Gene Anatomy Project provides a much broader
opportunity to discover genes of potential medical use.

The first component of the Human Gene Anatomy Project is the isolation and
preparation of a set of cDNA libraries from most normal human tissues. A library
is comprised of cDNA derived from samples of mRNA expressed in a particular
tissue. The Company's libraries reflect the relative abundance of the various
mRNAs expressed in each tissue. As of February 15, 1997, the Company, SmithKline
Beecham and TIGR had prepared more than 600 such libraries, which include almost
all normal human tissues. The Company isolates and purifies individual cDNA
fragments from each library for sequence analysis to identify the structure and
possible function of genes. The Company sequences a portion of each cDNA, which
the Company believes is often sufficient to identify the expressed gene and
represent the best method for rapid gene discovery.

The Company's gene sequencing efforts now focus principally on comparing
genes expressed in normal and abnormal, developmental tissues. The Company uses
such information to analyze changes in gene expression associated with
development, differentiation and disease processes, such as tumors of the
prostate, breast, colon and ovary. Additional areas of planned research include
changes in gene expression that occur during the processes of atherosclerosis,
asthma, emphysema, restenosis, osteoporosis, psoriasis, arthritis and a number
of neurological diseases.

Development of Product Opportunities

The Company has created an advanced proprietary bioinformatics system to
facilitate the selection of genes with potential medical utility. Bioinformatics
refers to the use of computers to process, analyze, store and retrieve
biological information. The Company believes it has one of the largest sets of
human gene sequences, and its computer system enables it to access publicly
available gene sequences. The Company's high capacity computer system has been
designed for ease of use by research scientists, who readily access the system
through desktop computers. The Company's data is also available to scientists at
SmithKline Beecham, Takeda, and the New Collaboration Partners through
bioinformatics systems created by the Company and SmithKline Beecham. See
" -- Collaborative Arrangements."

The Company believes that its proprietary bioinformatics system is an
important asset for the creation of gene-based product opportunities. The
Company's bioinformatics system has several capacities that facilitate

25
<PAGE> 27

identification of genes with potential medical utility, including gene
similarity detection, sequence motif identification, sequence assembly and
differential gene expression analysis.

The Company's primary focus has progressed from identification of genes
having potential medical utility to the creation of proprietary product
opportunities. Specifically, the Company is now engaged in the identification
and development of product candidates, including the isolation and
characterization of full-length cDNAs, purification of proteins encoded by cDNAs
of interest, the creation of cell lines that express specific receptors of
interest, the mapping of genes of interest, the creation of polyclonal and
monoclonal antibodies, the testing of the effects of purified proteins in cell
and tissue-based in vitro assays and the study of the effects of purified
proteins in small laboratory animals.

Approximately 184 of the Company's 244 scientific staff at February 15,
1997 are devoted to these activities. As of February 15, 1997, the Company has
isolated and fully sequenced several hundred full-length cDNAs, purified more
than 100 potential therapeutic proteins and mapped more than 250 full-length
cDNAs to their chromosomal locations.

The Company's research and development efforts have been organized into the
following divisions:

Molecular Biology Division. The Company's Molecular Biology Division seeks
to identify and evaluate genes that may be useful for the creation of
therapeutic protein drugs, small molecule drugs, gene therapy, antisense
treatments and diagnostic products. The Molecular Biology Division contains the
Protein Therapeutics group and Exploratory Research group.

The Protein Therapeutics group identifies and evaluates genes which encode
proteins which may be useful as therapeutic protein drugs or for gene therapy or
antisense applications. The Protein Therapeutics group also identifies genes
that may be useful for diagnostic purposes. When comparative analysis indicates
that a gene encodes a potential therapeutic protein, this group isolates the
corresponding full-length cDNA, determines its pattern of tissue expression and
its entire coding sequence.

The Company has commenced a program to identify from its database what it
believes to be full-length cDNAs likely to encode potential therapeutic
proteins. To date, the Company has identified what it believes to be over 4,000
secreted proteins. The Company is expressing and evaluating these proteins and
assessing their activity using in vitro and in vivo models covering different
therapeutic areas.

In addition to efforts relating to the identification of potential
therapeutic proteins, the Protein Therapeutics group characterizes genes and
proteins that may serve as targets for small molecule drug discovery,
principally to support the work of the Company's collaborators. The group
isolates full-length cDNAs, performs experiments to determine the tissue and
cell type in which the genes are expressed and determines the complete sequence
of the cDNA corresponding to each candidate gene. The group has identified
several hundred genes which encode proteins that may be targets for small
molecule drug screening. Full-length cDNAs corresponding to many of these genes
have been isolated and fully sequenced, and tissue distribution and chromosomal
location of most of these full-length genes have been determined.

The efforts of the Exploratory Research group are focused on development
and implementation of new technologies useful in the identification of
medically-relevant gene candidates. Responsibilities of this group include new
methodologies for cDNA library construction, chromosome mapping, optimization of
full-length gene cloning and development of new methods for gene analysis. This
group is also currently responsible for efforts in microbiology, including
construction and analysis of microbial genome libraries and selection of
candidate genes which may be useful in vaccine and immunotherapeutic programs.

Protein Expression Division. The purpose of the Protein Expression
Division is to provide proteins in a form suitable for in vitro and in vivo
testing. The Protein Expression Division uses bacterial, insect and mammalian
expression systems that have been engineered to express abundant amounts of
proteins. The Company's therapeutic protein production facilities include 15
bioreactors ranging in capacity from 2 to 100 liters. The Protein Expression
Division also purifies potential therapeutic proteins, enzymes that may be
useful in the discovery of small molecule drugs and bacterial proteins that may
be useful as vaccine components. This division will also oversee the contract
production of cGMP materials by third parties for preclinical

26
<PAGE> 28

qualification and Phase I clinical studies and will also oversee the
construction, and be responsible for the operation, of the Company's proposed
pilot scale production and process development facility.

Through February 15, 1997 the Company has produced and purified more than
100 novel human proteins in amounts sufficient to test for activity. In some
cases, the Company also provides highly purified proteins to its collaborators
for further analysis.

Cell Biology Division. The Cell Biology Division determines the activities
of purified therapeutic protein candidates on cells in tissue culture. This
division is also developing high throughput screens to assess the activity of
the Company's therapeutic protein candidates. This division uses over 75 in
vitro assays to evaluate biological activities of therapeutic protein
candidates, many of which are used to determine whether such candidates have
biological activities relevant to serious unmet medical needs. Examples of such
in vitro tests include assays that detect proteins that have an anti-viral
effect, proteins that are capable of prolonging the life of neurons and of
promoting neural cell growth, proteins that have anti-cancer activity and
proteins that affect the growth and differentiation of hematopoietic cells.

Pharmacology Division. The Pharmacology Division tests for in vitro and in
vivo activity of therapeutic protein candidates and is also responsible for
safety studies. The division is responsible for preclinical animal testing of
the Company's therapeutic protein product candidates and employs a number of
standard assays for determining biological function. The division has also
developed several specialized assays to test biological function of specific
therapeutic proteins. The Company has recently expanded this division to
increase its efforts to develop therapeutic protein product candidates, and the
Company expects to continue to expand the division as necessary to support
preclinical and clinical development. The Company intends to establish a
clinical management team to manage and oversee clinical trials. The Company
intends to utilize contract research organizations to conduct toxicology,
pathology and clinical trials on the Company's lead therapeutic protein product
candidates.

AREAS OF PRODUCT DEVELOPMENT

The Company believes that the genes it identifies have the potential to be
valuable for the development of a wide range of healthcare products in some or
all of the following areas:

Therapeutic Proteins. Therapeutic proteins are recombinant human proteins
that in native or modified form exert medically useful physiologic or
pharmacologic activity. By discovering and isolating genes, the Company may be
able to cause the genes that code for therapeutic proteins to express those
proteins. Therapeutic proteins may be useful for the treatment of diseases,
including inflammatory and autoimmune diseases, neurodegenerative diseases,
cardio-pulmonary diseases and other diseases caused by insufficient or defective
proteins resulting from a missing or defective gene. Therapeutic proteins
currently in clinical use include interferon, insulin, human growth hormone,
DNAse, G-CSF, GM-CSF and erythropoietin.

Currently, the Company is conducting pre-clinical development studies on
the following proteins:

Myeloid Progenitor Inhibitory Factor-1 (MPIF-1)
Myeloid Progenitor Inhibitory Factor-2 (MPIF-2)
Keratinocyte Growth Factor-2 (KGF-2)
Monocyte Attractant Protein (MAP)
Monocyte Colony Inhibition Factor-1 (MCIF-1)
Fibroblast Growth Factor-10 (FGF-10)

MPIF-1 and MPIF-2. MPIF-1 and MPIF-2 are members of the chemokine family.
The Company has shown that MPIF-1 and MPIF-2 in in vitro and in vivo studies
inhibit the differentiation and growth of bone marrow cells (myeloid progenitor
cells) responsible for maintenance of red and white blood cells. Myeloid
progenitor cells are destroyed by many forms of cancer chemotherapy resulting in
severe leukopenia, thrombocytopenia and anemia. By preventing the growth of
myeloid progenitor cells during aggressive cancer chemotherapy, it may be
possible to reduce the destruction of these cells allowing the more rapid
repopulation

27
<PAGE> 29

of red and white blood cells in the circulation. This, in turn, may reduce the
incidence of serious infection, anemia and coagulation disorders associated with
cancer chemotherapy.

KGF-2 and MAP. KGF-2 is a member of the Fibroblast Growth Factor
superfamily and MAP is a member of the chemokine family of proteins. The Company
has shown in in vivo tests that KGF-2, and in vitro tests that MAP, stimulate
the growth of epithelial cells. Both proteins have potential for use in the
treatment of topical (skin) ulcers, surgical and other wounds and burns and
possibly other conditions affecting epithelial cells. In addition, KGF-2 may be
useful in the treatment of mucositis (frequently a toxicity of cancer
chemotherapy) and/or acute renal failure.

MCIF-1. MCIF-1 is also a member of the chemokine family. The Company has
shown in in vivo tests that MCIF-1 inhibits the differentiation and growth of
macrophages and monocytes, white blood cells involved in inflammation. In in
vivo animal studies, MCIF-1 has been shown to reduce the severity of cartilage
and bone destruction associated with a model of arthritis, and to reduce the
severity of septic shock in a model of that disease.

FGF-10. FGF-10 is a member of the Fibroblast Growth Factor superfamily.
The Company has shown in in vivo studies that FGF-10 protects motor neurons from
destruction caused by experimental trauma. These models have been used to
identify agents which may have use in preventing or treating neurodegenerative
diseases such as Amyotrophic Lateral Sclerosis (Lou Gehrig's Disease).

As a result of the SB Amendment, in June 1996, the Company obtained the
right to designate six therapeutic proteins at any one time for exclusive
development and commercialization by the Company. Schering-Plough and SmithKline
Beecham have certain co-development rights with respect to these product
candidates. Subject to certain limitations, the Company has the right to
substitute new therapeutic proteins for therapeutic proteins that have been
licensed to third parties under procedures set forth in the SB Amendment, are
the subject of clinical trials or the right to which have been surrendered by
the Company. See " -- Collaborative Arrangements."

All of the Company's therapeutic protein product candidates are in the
early stages of preclinical testing. Accordingly, the results of preclinical
testing to date may not be indicative of results that will be obtained in
clinical trials. As further results of preclinical tests are received, the
Company may abandon particular projects which it might otherwise have considered
promising. Additionally, there can be no assurance that clinical trials as to
any particular product candidate, if commenced, will be successful.

Small Molecule Drugs. The Company believes that knowledge of a more
complete set of genes and the proteins they express will enable pharmaceutical
companies to design and screen pharmaceutical products in a more efficient
fashion by providing logical specific targets for discovering drugs. The
discovery of new drugs often involves screening a large family of synthetic and
natural products to determine their impact on proteins expressed by genes.
Increasingly, automated biochemical assays that test the ability of proteins to
bind to and modify the activity of purified proteins are used to test the
efficacy and selectivity (i.e., the ability to affect only the desired protein
targets and not other proteins expressed in the human body) of new drugs. The
undesired binding of a drug to other proteins not detected by a screening assay
can result in toxicity or other undesirable side effects. The Company believes
that the genes it discovers may contribute to screening assays by permitting
more complete sets of target proteins to be assembled for an assay. SmithKline
Beecham is currently using proteins expressed by genes identified by the Company
in a number of screening assays used to identify new drugs.

Diagnostics. The Company also believes that the genetic data obtained by
it could lead to the development of diagnostic tests for diseases. Such
diagnostics would likely be focused on four different applications. First, the
comparative analysis of genes expressed during the progression of tissues from
normal to fully diseased states may permit more accurate staging of diseases,
thereby facilitating the diagnosis and treatment of the disease. Proteins
expressed by "marker" genes associated with a specific disease can be a starting
point in the synthesis of antibodies, the principal components in many
diagnostic systems. Second, the Company's genetic data may enable the
development of methods to determine individual predisposition to disease. Third,
tests could be designed to detect inherited diseases in fetal cells. Fourth, the
Company believes that the genetic data obtained from the sequencing of
disease-causing microorganisms may allow for the rapid

28
<PAGE> 30

determination of the presence and activity of a particular microorganism in an
infected person. The development of diagnostics based on genes identified by the
Company is part of SmithKline Beecham's field under the SB Collaboration
Agreements.

Antimicrobial Agents and Vaccines. The Company has retained exclusive
rights to utilize its information and technology to develop antimicrobial agents
and vaccines and, accordingly, is identifying and characterizing genes of
microorganisms, including bacteria, viruses, fungi and multicellular parasites.
The Company anticipates using its automated sequencing techniques to identify
genes expressed by microorganisms and parasites during resting, vegetative and
pathogenic states of infection. The Company believes that genes expressed during
the pathogenic phase of a microorganism may be found to be required for disease.
Each such gene (called a virulence gene) might be a candidate target for a new
antibiotic or vaccine. The Company also believes that knowledge of genes and
proteins expressed by pathogenic organisms may facilitate the development of
gene-based and antibody-based diagnostic assays for infectious diseases.

Analysis of the total genome of a microorganism should provide a complete
picture of all genes encoded by the microorganism. With this information, the
Company believes it may be possible to choose protein candidates that may be
useful as vaccine components or antigens required for the development of
immunotherapeutics. The Company also believes that a high throughput approach of
gene identification may identify new genes capable of producing antibiotics and
other useful secondary metabolites. Additionally, the Company has completed
sequencing pathogenicity islands of Escherichia coli, and, in collaboration with
TIGR, has sequenced the essentially complete genome of Streptococcus pneumonia.
Patent applications have been filed by the Company on these genomes.

In January 1996, the Company completed sequencing the majority of the DNA
comprising the genome of the bacterium Staphylococcus aureus. Staphylococcus
aureus is the most frequent cause of infections in hospitals. The bacterium is
also the major cause of toxic shock syndrome and wound infections. Many strains
are resistant to most antibiotics, and there is concern that the organism will
soon develop widespread resistance to one of the last remaining effective
antibiotics, vancomycin. The work on Staphylococcus aureus is the first
application of the Company's large scale sequencing technology to a non-human
organism. Staphylococcus aureus was selected for both its medical and commercial
importance.

The Company also owns certain intellectual property rights related to the
genome sequences of three other microorganisms, Haemophilus influenzae,
Mycoplasma genitalium and Methanococcus jannaschii, arising from its
collaboration with TIGR. In addition, the Company intends to file patent
applications related to genes of Helicobacter pylori, another microorganism
sequenced by TIGR. TIGR has recently been focusing its sequencing efforts on
infectious and other microorganisms, and the Company will own any intellectual
property arising from these efforts. In July 1995, the Company entered into a
collaboration with MedImmune to create vaccines and immunotherapeutic products
based on the genomes of infectious microorganisms. See "-- Collaborative
Arrangements."

Gene Therapy. The Company believes that its gene discovery technology may
identify new genes that can be introduced into the body through the use of gene
therapy techniques. Many diseases result when specific proteins are produced in
inappropriate quantities, in a defective manner or not at all. Gene therapy is a
novel approach to the treatment of disease in which genes are inserted into a
patient's cells for the purpose of inducing these cells to produce therapeutic
proteins or to replace defective or missing genes. In other applications, the
Company believes that gene therapy may induce cells to secrete proteins that
enhance the immune system's ability to recognize and attack a specific disease.
Gene therapy might also allow localized delivery of proteins that cannot reach
the appropriate site through conventional methods of administration. There are
currently no gene therapy products on the market, although a number are
undergoing clinical trials. In June 1996, the Company entered into a
collaboration with Schering-Plough with respect to use of the Company's
technologies for gene therapy. See "-- Collaborative Arrangements."

Antisense Drugs. The Company believes that the knowledge of the structure
of genes developed through the use of its sequencing technology may facilitate
the development of antisense drugs. Antisense technology involves the use of
short oligonucleotide sequences, complementary to the gene, that, after binding
to the mRNA encoded by the gene, inhibit the synthesis of the protein encoded by
the gene. If, for example, the

29
<PAGE> 31

target gene expressed a protein involved in rapid cell growth leading to a
particular cancer, then use of the antisense drug could have the potential of
inhibiting the synthesis of the target protein encoded by the particular gene
and lead to restoration of normal growth. Antisense drugs could also be of
potential benefit in diseases where production of excess protein leads to the
disease state. There are currently no antisense drugs approved for treatment.

COLLABORATIVE ARRANGEMENTS

Agreements with SmithKline Beecham. In May 1993, the Company entered into
the SB Collaboration Agreements pursuant to which SmithKline Beecham was granted
certain exclusive rights to develop and commercialize therapeutic and diagnostic
products within the "SB Field" (as defined below) based on human genes
discovered by the Company. Pursuant to the SB Collaboration Agreements,
SmithKline Beecham has paid to the Company an aggregate of $125 million
including $55.1 million which was allocated to the purchase of an aggregate of
1,351,738 shares of Common Stock.

In June 1996, the SB Collaboration Agreements were substantially amended
(the "SB Amendment"). The SB Amendment allowed the Company and SmithKline
Beecham together to enter into collaboration agreements with additional
pharmaceutical companies ("New Collaboration Partners") in the SB Field (other
than diagnostics and animal healthcare in which SmithKline Beecham has generally
retained exclusive rights). The "SB Field" is the field of human and animal
healthcare, other than gene therapy (excluding gene therapy vaccines), antisense
products and the use of genes for synthesizing drugs that were known at the time
the SB Collaboration Agreements were executed. In addition, the SB Amendment
provides that each of the Company and SmithKline Beecham can independently
designate potential therapeutic proteins for its exclusive development and
commercialization (e.g. marketing or outlicensing) provided that it is the first
among the Company, SmithKline Beecham and the New Collaboration Partners to
select the protein and certain research requirements are met prior to such
designation. Under the SB Amendment, the Company can designate six therapeutic
proteins for its exclusive development and commercialization at any one time.
Subject to certain limitations, the Company may substitute additional
therapeutic proteins for any of the six therapeutic proteins designated by the
Company (i) which have been licensed by the Company to third parties in
accordance with the SB Amendment, (ii) which are the subject of clinical studies
by the Company and (iii) the rights to which have been surrendered by the
Company. SmithKline Beecham's right to select therapeutic proteins during the
initial research term of the SB Collaboration Agreements is not limited. In
addition, the SB Amendment provides that each of the Company and SmithKline
Beecham may independently (i) research, develop and commercialize antibody
products directed against antigens derived from the human genome database
created by the Company and (ii) identify and use novel molecular targets derived
from the human genome database created by the Company to discover and develop
small molecule pharmaceutical products, provided that the Company will not
initiate screening of such targets for three years from the effective date of
the SB Amendment and will not use certain targets subject to agreements with
third parties, subject to certain other restrictions. The SB Amendment restricts
the Company from entering into collaborations with third parties (other than New
Collaboration Partners and Takeda) in the SB Field (i) during the initial
research term except with respect to products for which the Company has
exclusive development rights and (ii) during the initial research term and for a
period thereafter with respect to certain products which are the subject of
research plans submitted by SmithKline Beecham or a New Collaboration Partner or
Takeda prior to the expiration of the initial research term.

The SB Amendment provides that SmithKline Beecham and the Company will
share equally in any license fees and product development milestone payments
paid under New Collaboration Partner Agreements, and that the Company will
receive all royalties and research support payments under such New Collaboration
Partner Agreements. The SB Collaboration Agreements provide for payments to the
Company of royalties on net sales of products based on the Company's patents or
technologies within the SB Field ("SB Products") sold by SmithKline Beecham (or
its licensees) and milestone payments in connection with the development of SB
Products. The Company has an option to co-promote SB Products sold by SmithKline
Beecham, on a country-by-country basis, in the United States, Canada, Mexico and
Europe (subject to certain limitations as to rights granted to Takeda and other
parties). If the Company develops and markets or outlicenses a product

30
<PAGE> 32

in the SB Field pursuant to its rights under the agreements with SmithKline
Beecham, SmithKline Beecham will generally be entitled to royalties or to share
in milestone payments and license fees received by the Company from licensees
with respect to such products. The New Collaboration Partner Agreement with
Schering-Plough includes an option for Schering-Plough to co-develop and
co-commercialize up to two products in the SB Field to which the Company has
exclusive development and commercialization rights under the SB Collaboration
Agreements. The SB Collaboration Agreements include an option for SmithKline
Beecham to co-develop and co-commercialize products in the SB Field to which the
Company has exclusive development and commercialization rights under the SB
Collaboration Agreements and for which Schering-Plough has not exercised its
option to co-develop and co-commercialize. SmithKline Beecham will also be
entitled to royalties on, and an option to co-promote products outside the SB
Field sold by the Company which are based on or incorporate patents or
information developed by SmithKline Beecham based on the Human Gene Technology
of the Company.

The initial research term under the SB Collaboration Agreements continues
through June 2001. After expiration of the initial research term, the Company
will have all rights to the Company's Human Gene Technology, except that
SmithKline Beecham will retain rights to the Company's Human Gene Technology
pursuant to research plans meeting certain specified criteria submitted prior to
expiration of the initial term, Takeda will retain rights granted to it under a
license agreement prior to expiration of the initial research term and New
Collaboration Partners will retain rights granted to them under New
Collaboration Partner Agreements. See "-- Other Collaborations in the SB Field."
SmithKline Beecham has the right to extend the research term for up to five
additional years by making certain payments, which would extend the time for
submitting research plans as to therapeutic products other than antibody
products and therapeutic protein products.

The Company has agreed that it will make available 35 gene sequencers and
related personnel and reagents to sequence genes at the direction of a research
committee.

Other Collaboration Agreements in the SB Field. In June 1996 and July
1996, the Company and SmithKline Beecham entered into the New Collaboration
Partner Agreements with Schering-Plough, Synthelabo, and Merck. Each of the New
Collaboration Partner Agreements provides the New Collaboration Partner the
rights and licenses to access and use the Company's Human Gene Technology, as
well as biological information developed by the Company and SmithKline Beecham
prior to, and in the case of the Company, after the effective date of such
Agreement, to discover, develop and commercialize products based upon or derived
from such Human Gene Technology in the SB Field (other than diagnostics and
animal healthcare). Each New Collaboration Partner may also designate, and
receive exclusive license rights under the Company and SmithKline Beecham
patents and technology to, potential therapeutic protein products for its
exclusive development and commercialization, subject, in certain cases, to
certain restrictions as to the number of therapeutic proteins that can be
claimed, and subject to achievement of certain research requirements prior to
such designation. Each of the New Collaboration Partners is obligated to pay
license fees, research payments, milestone payments in connection with
development of products under the agreement and royalties. Each of the New
Collaboration Partner Agreements is for an initial research term expiring in
June 2001. Each New Collaboration Partner has the right to extend the term for
up to five additional years by making certain payments. The Company cannot enter
into additional agreements similar to the New Collaboration Partner Agreements
without the consent of SmithKline Beecham, Takeda and certain of the New
Collaboration Partners.

The Company will be entitled to one-half of all license fees and milestone
payments and to all royalties due from each New Collaboration Partner. In
addition, each New Collaboration Partner will make research payments directly to
the Company for the duration of the initial research term which continues
through June 2001. Aggregate license fees and research payments due under the
New Collaborative Partner Agreements are $140 million during the initial
research term, of which the Company will be entitled to $87.5 million, payable
in equal installments over a five-year period. $17.5 million have been received
by the Company to date.

The New Collaboration Partner Agreement with Schering-Plough includes an
option for Schering-Plough to co-develop and co-commercialize up to two of the
Company's products in the SB Field to which

31
<PAGE> 33

the Company has exclusive development and commercialization rights under the SB
Collaborative Agreements.

SmithKline Beecham and Takeda entered into a License Agreement (the "Takeda
License Agreement") relating to the development and sale of products in the SB
Field based upon rights licensed from the Company. The Company will be entitled
to all royalty payments and one-half of the milestone payments due from Takeda
to SmithKline Beecham under the Takeda License Agreement on sales of products
developed by Takeda under the agreement. In addition, at the same time that
SmithKline Beecham and Takeda entered into the Takeda License Agreement, Takeda
and the Company entered into an Option and License Agreement pursuant to which
Takeda was granted an exclusive option to license rights under the Company's
patents and technology in the field of human healthcare (other than gene
therapy, antisense and diagnostics) to make and sell a limited number (equal to
the number of collaboration partners other than SmithKline Beecham and Takeda
with which the Company enters into collaboration agreements in the SB Field) of
products in Japan. In consideration of the grant of the option, Takeda paid the
Company $5 million and agreed to pay to the Company royalties based on the sale
of Takeda products covered by the Option and License Agreement and certain
milestone payments. The option period terminates three years following
expiration of the initial research term under the SB Collaboration Agreements.

Collaboration Agreements Outside of the SB Field. The Company has entered
into collaboration agreements with respect to the development of products based
on the Company's gene discovery research outside of the SB Field. These
collaboration agreements, which generally provide for milestone payments and
royalties and in most cases up front license fees and/or research payments,
include the following:

A Collaboration and License Agreement with MedImmune entered into in
July 1995 with respect to the development of drugs based upon infectious
agents sequenced by the Company or TIGR or as to which the Company has
licensed the rights. Programs under the agreement with MedImmune include
the creation of vaccines and immunotherapeutics for non-encapsulated
Haemophilus influenzae, Streptococcus pneumoniae, Escherichia coli,
Staphylococcus aureus, Helicobacter pylori and Borellia bergdorferi;

A Research Collaboration Agreement with Pioneer entered into in January
1996 under which Pioneer was granted exclusive license rights in the
field of corn genomics;

A License Agreement with Roche entered into in March 1996, under which
the Company is responsible for sequencing and assembling the genome of
Streptococcus pneumoniae, a bacterial pathogen responsible for severe
respiratory and other infections and under which Roche received a
non-exclusive license to use this information to identify potential new
anti-infectives and antibiotics;

A Collaboration and License Agreement with Schering-Plough relating to
the field of human gene therapy (including gene therapy vaccines to the
extent the Company has the right to do so), under which Schering-Plough
was granted (i) a non-exclusive license to use the Company's Human Gene
Technology to conduct research and (ii) an option to obtain an exclusive
license to specific genes in the field of gene therapy;

An agreement entered into in October 1996 with Pharmacia, whereby the
Company granted to Pharmacia (i) a nonexclusive license to conduct
research and to make, use and sell products based on genes of
Staphylococcus aureus and the pathogenicity islands of Escherichia coli
sequenced by the Company, (ii) the right to obtain an exclusive license
to certain products and (iii) the right to negotiate to obtain an
exclusive license as to certain microbial genomes as to which the
Company desires to grant an exclusive license; and

An agreement entered into in November 1996 with OraVax with respect to
an exclusive license granted by MedImmune and the Company with respect
to use of the Company's and MedImmune's technology for a Helicobacter
pylori vaccine.

As of February 15, 1997, the Company had entered into approximately 200
material transfer agreements with 96 academic institutions covering
approximately 1,000 gene sequences, cDNAs and proteins. The

32
<PAGE> 34

Company is continuing to negotiate additional material transfer and license
agreements. The purpose of these agreements is to expand research and
development relating to the Company's gene information by providing academic
researchers with proprietary gene sequence information and related materials
which enable them to explore the biological activity and potential medical
utility of newly discovered human genes. Most of these material transfer
agreements grant to the Company a license, with established royalty rates, to
any invention resulting from the use of gene sequence information or related
materials provided by the Company. A relatively small number of the material
transfer agreements signed by the Company provide for an option to license any
invention resulting from the use of the Company's gene sequencing information.
The Company has not, in any case, signed a material transfer agreement with an
academic institution which does not provide for a license or option to exclusive
rights for inventions resulting from use of the Company's information. In
addition, TIGR, SmithKline Beecham and Takeda have also entered into material
transfer agreements with academic institutions. The Company is also entitled to
rights with respect to inventions resulting from use of sequence information and
related materials under such arrangements.

Agreements with TIGR. In October 1992 the Company entered into a Research
Services Agreement and an Intellectual Property Agreement with TIGR, a
not-for-profit research institute. TIGR initially performed most of the gene
sequencing and made the sequences available to the Company and continues to
perform genomic research, including sequencing the genomes of microbial
organisms. The Company currently has a sequencing and analysis capacity greater
than that of TIGR. The Company believes that it benefits from, but is no longer
dependent upon, TIGR's assistance for achieving research and development goals.
Pursuant to the agreements with TIGR, the Company has exclusive rights to all
intellectual property resulting from TIGR's gene sequencing and other research.

Pursuant to these agreements, a Lease Funding Agreement entered into in
March 1993 and a subsequent agreement entered into in April 1993, the Company
has committed to provide an aggregate of approximately $85 million to TIGR over
a ten-year period, ending September 2002, of which $70 million consists of a
research grant and equipment funding for TIGR's scientific research relating to
determining human genes and their functions and uses. Through February 15, 1997,
the Company had paid approximately $44 million pursuant to these agreements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

TIGR operates independently from the Company, and the Company does not have
the right to control or direct TIGR's activities. TIGR receives funding from
government sources in addition to funding from the Company. Under the Research
Services Agreement and the Intellectual Property Agreement, for a ten-year
period ending 2002, TIGR is obligated to disclose to the Company all significant
developments relating to information or inventions discovered at TIGR, and the
Company will own (on a royalty-free basis) all of TIGR's interest in inventions
and patent rights arising out of TIGR's research during the term of the
agreement (including rights arising from research funded by third parties,
except for research funded by certain governmental and not-for-profit
organizations as to which the Company has been granted a royalty-bearing,
worldwide, perpetual, exclusive license, subject to a non-exclusive royalty-free
license retained by such organization).

TIGR has completed the sequencing of the genomes of several microbial
organisms, including nonencapsulated Haemophilus influenzae, Mycoplasma
genitalium, and Methanococcus jannaschii. The Company has exclusive rights in
the intellectual property resulting from this research. TIGR has advised the
Company that it plans to sequence complete genomes of other organisms that cause
diseases in humans or which may have other uses, such as industrial or
agricultural uses. TIGR has agreed with the Company that it will sequence the
genome of certain specified bacterial organisms.

Pursuant to the Human cDNA Database Agreement, TIGR has generally agreed
not to publish the sequences of any human cDNAs sequenced at TIGR and, instead,
will contribute those sequences to the Human cDNA Database (described below).
TIGR has retained the right to publish sequence data included in the Human cDNA
Database on the same basis as researchers who are provided access to proprietary
information in the Human cDNA Database. See "-- The Human cDNA Database
Agreement." As set forth below, the Human cDNA Database Agreement will terminate
in April 1997. TIGR has agreed not to publish

33
<PAGE> 35

any other information or inventions (other than information with respect to
non-animal genes), including human cDNA's after the termination or expiration of
the Human cDNA Database Agreement, resulting from TIGR's research until six
months after TIGR discloses the information or invention to the Company,
provided that this six-month period can be extended to up to 18 months under
certain circumstances if the information or invention relates to a product that
the Company and its collaborators intend to develop. With respect to non-animal
genes (which includes microbial agents), TIGR has agreed not to publish
information or inventions until at least six months after substantially all
information and inventions resulting from studies being conducted by TIGR have
been disclosed to the Company.

The Human cDNA Database Agreement. In July 1994, the Company, TIGR and
SmithKline Beecham reached an agreement to contribute a number of partial cDNA
sequences to a database (the "Human cDNA Database") that is accessible to
academic scientists and researchers at non-profit institutions that sign access
agreements. To date, approximately 160,000 human cDNAs resulting from the
collaboration between the Company and TIGR have been contributed to the Human
cDNA Database, including 50,000 cDNAs sequenced by the Company. The Human cDNA
Database Agreement provides that the Human cDNA Database is not available to
persons or entities engaged in commercial activities. In October 1996, TIGR
notified SmithKline Beecham and the Company of its decision to terminate the
Human cDNA Database Agreement according to its terms, such termination to be
effective in April 1997. Upon termination, all Company sequences will be removed
from the database and the remaining TIGR sequences may be made publicly
available without restriction.

Potential Dispute with TIGR. The Company's agreements with TIGR include
non-disclosure obligations on the part of TIGR. The Company and TIGR have had
recent disagreements concerning the scope of these non-disclosure obligations.
It has come to the Company's attention that certain disclosures by TIGR of
sequence and other information which the Company believes may violate such
non-disclosure obligations may have taken place or may take place in the future.
Disclosure of information by TIGR in violation of its non-disclosure obligations
may negatively affect the Company's ability to obtain patent protection on
inventions described therein. The Company is investigating this situation and
will determine what action, if any, should be taken to prevent such disclosures.
See "-- Patents and Proprietary Rights." There can be no assurance that these
disagreements will not materially affect the Company's relationship with TIGR.
However, TIGR has been primarily sequencing microbial genes and not human genes
in recent years, and the Company does not believe that it is or will be
dependent on TIGR.

PATENTS AND PROPRIETARY RIGHTS

The Company's commercial success is dependent in part on its ability to
obtain patent protection on genes discovered by it. The Company applies for
patent protection for genes identified by partial sequencing and, subsequently,
for those genes which it fully sequences. However, there is substantial
uncertainty as to the patentability of genes based on partial sequences. Even if
patent protection is afforded for such sequences, it may not provide effective
marketing exclusivity. The Company's business might be enhanced by obtaining
patent protection based on partial gene sequences, but the Company does not
believe that its commercial success will be materially dependent on its ability
to do so. The Company has isolated and obtained full-length sequence information
for many of the genes that the Company or its collaborators intend to develop
further and has filed, and continues to file, for patent protection based on
such full-length sequences. However, the Company does not expect to isolate and
fully sequence a significant portion of the partial gene sequences it discovers.
See "-- Company Technology and Research."

The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. There is a substantial backlog
of biotechnology patent applications at the PTO, and no clear policy has emerged
regarding the breadth of claims covered in biotechnology patents. There have
been, and continue to be, intensive discussions on the scope of patent
protection for both gene fragments and full-length genes. There have also been
proposals for review of the appropriateness of patents on genes and gene
fragments. There can be no assurance that these or other proposals will not
result in changes in, or interpretations of, the patent laws which will
adversely affect the Company's patent position. The biotechnol-

34
<PAGE> 36

ogy patent situation outside the United States is even more uncertain and is
currently undergoing review and revision in many countries.

As of February 15, 1997, the Company had filed United States patent
applications with respect to more than 230 full-length human genes and their
corresponding proteins. The Company has also filed U.S. patent applications with
respect to all or portions of the genomes of five infectious microorganisms and
one non-infectious microorganism. As of February 15, 1997, the Company has five
issued U.S. patents covering full-length human genes, which expire between 2013
and 2014. There can be no assurance that the remaining applications covering
full-length genes and their corresponding proteins will result in the issuance
of any patents. While the Company identifies multiple uses for genes it has
fully sequenced, these uses may not be sufficient to meet the statutory
requirements for patentability in all cases. Additionally, in view of the
substantial number of genes that may be covered by the Company's patent
applications, the Company cannot predict what issues may arise in connection
with the Company's patent applications or the timing of the grant of patents
with respect to genes covered by such patent applications. Moreover, in certain
instances, the Company will be dependent upon its collaborators to file and
prosecute patent applications.

The Company also has filed United States patent applications claiming more
than 190,000 partial human gene sequences. These applications seek to protect
partial human and non-human gene sequences, the full-length gene sequences that
include the partial sequences, as well as products derived therefrom and uses
therefor. These applications identify possible biological functions for some of
the genes based in part on a comparison to genes included in public databases,
but do not contain any laboratory or clinical data with respect to such
biological functions. There are certain court decisions indicating that
disclosure of a partial sequence may not be sufficient to support the
patentability of a full length sequence. In view of these court decisions, as
well as the position of the PTO referred to below, the Company believes that
there is significant risk that patents will not issue based on patent
disclosures limited to partial gene sequences. Finally, even if patents issue on
the basis of partial gene sequences, there is uncertainty as to the scope of the
coverage, enforceability or commercial protection provided by any such patents.

Publication of information concerning genes prior to the time the Company
applies for patent protection based on the full-length gene could adversely
affect the Company's ability to obtain patent protection with respect to genes
identified by it. Washington University has identified genes through partial
sequencing pursuant to funding provided by Merck & Co. and has deposited the
partial sequences identified in a public database. See "-- Competition." In July
1994, the Company, TIGR and SmithKline Beecham reached an agreement to
contribute a number of partial cDNA sequences to the Human cDNA Database.
Pursuant to the Agreement, the Human cDNA Database is accessible only to
academic scientists and researchers at non-profit institutions that sign access
agreements. In October 1996, TIGR notified SmithKline Beecham and the Company of
its decision to terminate the Human cDNA Database Agreement effective in April
1997. TIGR and researchers who are provided access to proprietary data in the
Human cDNA Database have certain rights to publish human cDNA sequences in which
the Company has rights. The termination of the Human cDNA Database Agreement in
April 1997 will eliminate limitations on publication of these sequences in the
Human cDNA Database as of that date. While the Company believes that the
limitations on publication of sequences in the Human cDNA Database have
generally been sufficient to permit the Company to apply for patent protection
on genes in which it is interested in pursuing further research, there can be no
assurance that such publication will not affect the Company's ability to obtain
patent protection for some genes in which it may have an interest, which, in the
case of genes of commercial significance, could have a material adverse effect

35
<PAGE> 37

on the Company. See "-- Collaborative Agreements -- Agreements with TIGR -- The
Human cDNA Database Agreement" and " -- Potential Dispute with TIGR."

Accordingly, there can be no assurance that patents issued and any
additional patents, if issued, will provide commercially meaningful protection
against competitors. There can also be no assurance that any patent issued to
the Company will provide it with competitive advantages, or will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products which could result in an interference
proceeding in the PTO. Others may be able to design around issued patents or
develop products providing similar effect to products being developed by the
Company based on genes or proteins expressed by genes which are not covered by
patents issued to the Company. In addition, others may discover uses for genes
or proteins other than those uses covered in the Company's patent applications,
and these other uses may be separately patentable. In such case, the holder of a
use patent covering an invention as to which the Company has a composition of
matter patent claim could exclude the Company from selling a product for a use
covered by such use patent.

36
<PAGE> 38

were identified pursuant to research funded by grants from the United States
Department of Energy ("DOE"). TIGR is also receiving funding from the DOE with
respect to certain non-pathogenic bacterial genomes it is sequencing. The DOE
has a statutory right under certain circumstances (including inaction on the
part of the holder of the patent rights to achieve practical application of the
invention or a need to alleviate public health or safety concerns not reasonably
satisfied by the holder of the patent rights) to grant to other parties licenses
under the patents which may be granted based on research funded by the DOE.

The enactment of the legislation implementing the General Agreement on
Trade and Tariffs has resulted in certain changes to United States patent laws
that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of seventeen years from the date of grant. The new term of United States
patents will commence on the date of issuance and terminate twenty years from
the earliest effective filing date of the application. Because the time from
filing to issuance of patent applications is often more than three years, a
twenty-year period from the effective date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position.

COMPETITION

There is a finite number of genes in the human genome, and the Company
believes that the great majority of such genes have been identified by the
Company or others conducting genomic research and that virtually all will be
identified within several years. While the Company's goal has been to identify,
establish the utility of and ultimately patent as many genes as rapidly as
possible, the Company continues to face substantial competition in these efforts
both from entities using high throughput gene sequencers to discover genes, as
well as from entities using more traditional methods to discover genes related
to particular diseases. Research to identify genes is also being conducted by
various institutes and United States and foreign government-financed entities,
including British, French, German and Japanese efforts, as well as numerous
smaller laboratories associated with universities or other not-for-profit
entities. In addition, a number of pharmaceutical and biotechnology companies
and government-financed programs are engaged or have announced the intention to
engage in areas of human genome research similar to or competitive with the
Company's focus on gene discovery, and other companies are likely to enter the
field.

The gene sequencing machines used by the Company are commercially available
and are currently being utilized by many other companies, in some cases for
business purposes competitive with those of the Company. In addition, a number
of other companies have announced plans to engage in gene discovery and could
acquire similar machines and develop procedures for automated sequencing of
genes. Although the Company believes that its large scale, automated processes
and lead time provide it with a competitive advantage, any one of these
companies or other entities may discover and establish a patent position in one
or more genes that the Company has identified and might have designated or
considered designating as a product candidate. Any potential products based on
genes identified by the Company will face competition both from

37
<PAGE> 39

companies developing gene-based products and from companies developing other
forms of treatment for diseases that may be caused by, or related to, genes
identified by the Company.

The Company's potential competitors include pharmaceutical and
biotechnology firms and other companies, not-for-profit entities and United
States and foreign government-financed programs, many of which have
substantially greater research and product development capabilities and
financial, scientific, marketing and human resources than the Company. These
competitors may succeed in identifying genes or developing products earlier than
the Company or its collaborators, obtaining approvals from the United States
Food and Drug Administration (the "FDA") or other regulatory agencies for such
products more rapidly than the Company or its collaborators, or developing
products that are more effective than those proposed to be developed by the
Company or its collaborators. Certain of these competitors may be further
advanced than the Company in developing potential products that may compete with
potential products of the Company. There can be no assurance that research and
development by others will not render the products that the Company or its
collaborators may seek to develop obsolete or uneconomical or result in
treatments, cures or diagnostics superior to any therapy or diagnostic developed
by the Company or its collaborators, or that any therapy or diagnostic developed
by the Company or its collaborators will be preferred to any existing or newly
developed technologies. The Company expects that competition in this field will
intensify.

GOVERNMENT REGULATION

Regulation of Pharmaceutical Products. New drugs are subject to regulation
under the Federal Food, Drug, and Cosmetic Act, and biological products, in
addition to being subject to certain provisions of that Act, are regulated under
the Public Health Service Act. The Company believes that the pharmaceutical
products developed by it or its collaborators will be regulated either as
biological products or as new drugs. Both statutes and the regulations
promulgated thereunder govern, among other things, the testing, manufacturing,
distribution, safety, efficacy, labeling, storage, record keeping, advertising
and other promotional practices involving biologics or new drugs, as the case
may be. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs. At the
FDA, the Center for Biological Evaluation and Research ("CBER") is responsible
for the regulation of biologics, and the Center for Drug Evaluation and Research
("CDER") is responsible for the regulation of new drugs.

In addition, any gene therapy products (which is one of the areas in which
the Company may develop products) developed by the Company will require
regulatory approvals prior to clinical trials and additional regulatory
approvals prior to commercialization. New human gene therapy products are
expected to be subject to extensive regulation by the FDA and comparable
agencies in other countries. The precise regulatory requirements with which the
Company will have to comply are uncertain at this time due to the novelty of the
human gene therapies currently under development. Currently, each protocol is
reviewed by the FDA and, in some instances, the NIH, on a case-by-case basis.
The FDA and the NIH have published a "Points to Consider" guidance document with
respect to the development of gene therapy protocols.

Obtaining FDA approval has historically been a costly and time consuming
process. Generally, in order to gain FDA pre-market approval, a developer first
must conduct preclinical studies in the laboratory and in animal model systems
to gain preliminary information on an agent's efficacy and to identify any
safety problems. The results of these studies are submitted as a part of an
investigational new drug ("IND") application, which the FDA must review before
human clinical trials of an investigational drug can start. The IND application
includes a detailed description of the initial clinical investigation to be
undertaken.

Preclinical studies can take several years to complete, and there is no
assurance that an IND based on such studies will ever become effective so as to
permit clinical testing to begin. A 30-day waiting period after the receipt of
each IND is required by the FDA prior to the commencement of initial clinical
testing, unless the FDA approves the IND before then. If the FDA has not
commented on or questioned the IND within this 30-day period, initial clinical
studies may begin, although companies often obtain affirmative FDA approval
before beginning such studies. If the FDA has comments or questions, it places
the studies on clinical hold and the questions must be answered to the
satisfaction of the FDA before the initial clinical testing may begin.

38
<PAGE> 40

In order to commercialize pharmaceutical products, the Company or its
collaborator must sponsor and file an IND and will be responsible for initiating
and overseeing the clinical studies to demonstrate the safety and efficacy and,
for a biologic product, the potency that are necessary to obtain FDA approval of
any such products. For Company or collaborator-sponsored INDs, the Company or
its collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the IND. Clinical trials are normally done in three
phases, although the phases may overlap. Phase I trials are concerned primarily
with the safety and preliminary effectiveness of the drug, involve fewer than
100 subjects, and may take from six months to over a year. Phase II trials
normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to gather the
additional information for proper dosage and labeling of the drug and
demonstrate its safety and effectiveness. Clinical trials generally take two to
five years, but may take longer, to complete. Recent regulations promulgated by
the FDA may shorten the time periods and reduce the number of patients required
to be tested in the case of certain life-threatening diseases which lack
available alternative treatments.

The FDA receives reports on the progress of each phase of clinical testing,
and it may require the modification, suspension, or termination of clinical
trials if an unwarranted risk is presented to patients. If the FDA imposes a
clinical hold, clinical trials may not recommence without prior FDA
authorization and then only under terms authorized by the FDA. The IND process
can thus result in substantial delay and expense. Human gene therapy products
(which is one of the areas in which the Company may seek to develop products)
are a new category of therapeutics, and there can be no assurance as to the
length of the clinical trial period, the number of patients the FDA will require
to be enrolled in the clinical trials in order to establish the safety, efficacy
and, in the case of a biologic, potency of human gene therapy products, or that
the clinical data generated in these studies will be acceptable to the FDA to
support marketing approval.

After completion of clinical trials of a new drug or biologic product, FDA
marketing approval must be obtained. If the product is regulated as a biologic,
CBER will require the submission and approval, depending on the type of
biologic, of either a Biologic License Application or both a Product License
Application and an Establishment License Application before commercial marketing
of the biologic (collectively these forms of application are referred to below
as the "BLA"). If the product is classified as a new drug, the Company must file
a New Drug Application ("NDA") with CDER and receive approval before commercial
marketing of the drug. The NDA or BLA must include results of product
development, preclinical studies and clinical trials. The testing and approval
processes require substantial time and effort and there can be no assurance that
the FDA will accept the NDA or BLA for filing and, even if filed, that any
approval will be granted on a timely basis, if at all. NDAs and BLAs submitted
to the FDA can take, on average, two to five years to receive approval. If
questions arise during the FDA review process, approval can take more than five
years. Notwithstanding the submission of relevant data, the FDA may ultimately
decide that the NDA or BLA does not satisfy its regulatory criteria for approval
and require additional clinical studies. Even if FDA regulatory approvals 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. In addition, the FDA may condition marketing approval on the
conduct of specific post-marketing studies to further evaluate safety and
effectiveness.

If a developer obtains designation by the FDA of a biologic or drug as an
"orphan" drug for a particular use, the developer may request small grants from
the federal government to help defray the costs of qualified testing expenses in
connection with the development of such drug. Orphan drug designation may be
granted to drugs for rare diseases (generally, a disease or condition that
affects populations of fewer than 200,000 individuals in the United States),
including many genetic diseases. The first applicant who has obtained
designation of a drug for a particular use as an orphan drug and then obtains
approval of a marketing application for such drug for the particular use is
entitled to marketing exclusivity for a period of seven years,

39
<PAGE> 41

subject to certain limitations. Essentially, this means that no other company
can market the same orphan drug for the use approved by the FDA for seven years
after the approval.

Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation and marketing
approval will remain in effect in the future.

Rigorous and extensive FDA regulation of pharmaceutical products continues
after approval, particularly with respect to manufacturing, which must be done
in compliance with cGMP, reporting of adverse effects, and advertising,
promotion, and marketing.

Regulation of Diagnostics. Some of the diagnostic products developed by
the Company or its collaborators are likely to be regulated by the FDA as
medical devices rather than drugs. The nature of the FDA requirements applicable
to such diagnostic devices depends on their classification by the FDA. A
diagnostic device developed by the Company or its collaborators would be
automatically classified as a Class III device, requiring premarket approval,
and would remain in Class III and require premarket approval unless the device
were reclassified into Class II or Class I by the FDA or the sponsor could
demonstrate to the FDA, in the required pre-market notification procedure, that
the device was substantially equivalent to a legally marketed existing device
that has been classified in Class I or Class II or to a legally marketed Class
III device for which premarket approval is not required. Following submission of
a premarket notification, a company may not market the device for clinical use
until an order is issued by the FDA finding the device to be substantially
equivalent. The FDA has no specific time limit by which it must respond to a
premarket notification. If the Company or its collaborators were unable to
demonstrate such substantial equivalence to the FDA's satisfaction, it would be
required to undertake the costly and time-consuming process, comparable to that
for new drugs, of conducting preclinical studies and conducting clinical tests,
filing a pre-market approval ("PMA") application, and obtaining FDA approval.

If the Company or its collaborators can demonstrate substantial equivalence
to a Class I product, the "general controls" of the Food, Drug, and Cosmetic
Act -- chiefly adulteration, misbranding, and "good manufacturing practice"
requirements -- will apply. If substantial equivalence to a Class II device can
be shown, the general controls plus "special controls" -- such as performance
standards, guidelines for safety and effective, and post-market
surveillance -- will apply. If substantial equivalence to a Class III device
(for which premarket approval is not required) can be shown, the general
controls plus any applicable special controls will apply, and the product will
require premarket approval once the FDA requires such approval for the device to
which substantial equivalence was shown and other devices of the same generic
type. While demonstrating substantial equivalence to a Class I, Class II or
Class III product (for which premarket approval is not required) is not
ordinarily as costly or time-consuming as the premarket approval process for
Class III devices, it can in some cases also involve conducting clinical tests
to demonstrate that any differences between the new device and devices already
on the market do not affect safety or effectiveness.

In January 1997, the NIH-Department of Energy Task Force on Genetic Testing
issued proposed recommendations including increased monitoring of genetic
disorders, and tracking of people with positive and negative test results, by
CDC; establishment (under the Clinical Laboratory Improvement Amendments of
1988) of a national program for the accreditation of laboratories performing
genetic testing, based on quality assurance, proficiency testing, and on-site
inspections; and additional regulation by the FDA. The Task Force's proposed
recommendations, if adopted and implemented, would significantly increase
federal regulation of genetic tests, whether provided as a product or service,
beginning with their manufacture and continuing through their marketing and use.

Marketed devices are subject to pervasive and continuing regulatory
oversight by the FDA, including record-keeping requirements and reporting of
adverse experiences with the use of the device. The Federal Food, Drug and
Cosmetic Act requires that medical devices be manufactured in accordance with
the FDA's cGMP regulation. This regulation requires, among other things, that
(i) the manufacturing process be regulated, controlled and documented by the use
of written procedures, and (ii) the ability to produce devices

40
<PAGE> 42

which meet the manufacturer's specifications be validated by extensive and
detailed testing of every aspect of the process. The regulation also requires
investigation of any deficiencies in the manufacturing process or in the
products produced and detailed record keeping. Manufacturing facilities are
subject to FDA inspection on a periodic basis to monitor compliance with GMP
requirements. If violations of the applicable regulations are noted during FDA
inspections of manufacturing facilities, the FDA can prohibit further
manufacturing, distribution and sale of the devices until the violations are
cured. On October 7, 1996, the FDA published a revision of its GMP requirements,
incorporating them into a new regulation called the quality system ("QS")
regulation. The QS regulation requires, among other things, pre-production
design controls, purchasing controls, and maintenance of service records. The QS
regulation is effective June 1, 1997, except that the FDA has stated that as
long as manufacturers are taking reasonable steps to come into compliance with
the design control requirements, the FDA will not initiate action (including
enforcement cases) based on a failure to comply with these requirements before
June 1, 1998. Once in effect, the QS regulation is expected to increase the cost
of complying with the cGMP requirements and related requirements. Other
applicable requirements include the FDA's medical device (manufacturer)
reporting regulation, which requires that the device manufacturer provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its marketed devices, as well as product malfunctions
that would likely cause or contribute to a death or serious injury if the
malfunction were to recur.

Labeling, advertising and promotional activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions against
promoting or marketing products for unapproved uses.

Other. In addition to the foregoing, the Company's business is and will be
subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Resource Conservation and
Recovery Act and the Toxic Substances Control Act. These and other laws govern
the Company's use, handling and disposal of various biological, chemical and
radioactive substances used in and wastes generated by its operations. The
Company believes that it is in material compliance with applicable environmental
laws and that its continued compliance therewith will not have a material
adverse effect on its business. The Company cannot predict, however, whether new
regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed by state or federal regulators and
agencies.

SOURCES OF SUPPLY

The Company currently relies on a single supplier, Applied Biosystems, a
division of Perkin-Elmer Corporation, to provide all of its gene sequencing
machines and certain reagents required in connection with the gene sequencing
process. The Company has not experienced problems in obtaining either gene
sequencing machines or reagents in a timely manner. While other gene sequencing
machines are available, the Company does not believe that such other machines
are as efficient as the machines currently used by the Company. The Company has
entered into certain agreements with Perkin-Elmer Corporation that (i) provide
for an established pricing structure with respect to the Company's purchases of
selected reagents, although such pricing is subject to change if the Company
does not meet certain minimum purchase requirements, and (ii) in the case of one
enzyme, provide that the Company will purchase and Perkin-Elmer Corporation will
sell a stated quantity at a fixed price. The Company orders these reagents by
submitting purchase orders at the time of purchase. No assurance can be given
that either the gene sequencing machines or the reagents will remain available
in commercial quantities at costs that are not economically prohibitive. Should
the Company be unable to obtain additional machines or an adequate supply of
reagents or other ingredients at commercially reasonable rates, its ability to
continue to identify genes through gene sequencing in accordance with its
current business plan would be adversely affected.

41
<PAGE> 43

MANUFACTURING AND MARKETING

The Company has developed in-house capabilities for the production and
purification of recombinant proteins for use in its research activities, but
does not currently have any manufacturing facilities capable of supplying
materials suitable for clinical trials or for commercial sale or any experiences
in manufacturing materials suitable for clinical trials or for commercial sale.
In the near term, the Company intends to rely on third parties for production of
certain of its therapeutic proteins for use in pre-clinical and early clinical
development and has entered into an agreement with a third party to supply such
materials. The Company will depend on such third party to comply with current
good manufacturing practices ("cGMPs") and other regulatory requirements and to
deliver materials on a timely basis, however there can be no assurance that such
party will perform. Any failures by third parties may delay clinical trial
development or the submission of products for regulatory approval, or otherwise
impair the Company's competitive position, which could have a materially adverse
effect on the Company's business.

The Company is planning the construction of a pilot scale production and
process development facility for the preparation of clinical trial quantities of
its therapeutic proteins in compliance with cGMP requirements. The Company has
completed the conceptual design and is beginning the preliminary engineering
design and site selection process. Construction is expected to begin by mid 1997
and be completed in mid to late 1998. The facility will be designed to allow for
the production and purification of multiple recombinant proteins. The Company
intends to use the facility for production of preclinical and clinical supplies
of its therapeutic proteins and for process development and scale-up. A delay in
completion of the facility could adversely affect the cost and timing of
clinical trials and could delay submission of products for regulatory approval.
The Company intends to seek financing with respect to all or a portion of the
estimated $40 million construction cost of this proposed facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."

The Company's long range plan is to establish manufacturing capabilities to
allow it to meet its clinical trial and commercial manufacturing requirements.
However, the Company may contract with third party manufacturers or may develop
products with partners and take advantage of the partner's manufacturing
capabilities. There can be no assurance that the Company will be able to
successfully establish manufacturing capabilities and manufacture its products
economically or in compliance with cGMPs and other regulatory requirements.

FACILITIES

The Company currently leases approximately 135,000 square feet of
laboratory and office space in five buildings in Rockville, Maryland. This
includes approximately 119,000 square feet of laboratory space and approximately
16,000 square feet of administrative office space.

The Company considers that its properties are generally in good condition,
are well maintained and are generally suitable and adequate to carry on the
Company's business.

EMPLOYEES

As of February 15, 1997, the Company had 284 full-time employees, of whom
244 were in research and development, including 61 scientists holding doctorate
degrees. The Company anticipates hiring approximately 25 additional employees
during the next twelve months. The additional staff are expected to include a
formulation and stability staff and a clinical development group in support of
product development research. None of the Company's employees is covered by
collective bargaining agreements and management considers its relations with its
employees to be good.

42
<PAGE> 44

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the names, ages and positions of the
executive officer and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------ --- -----------------------------------
<S> <C> <C>
William A. Haseltine, Ph.D.(1)............ 52 Chairman of the Board and Chief
Executive Officer
Melvin D. Booth(1)........................ 51 President, Chief Operating Officer
and Director
Craig A. Rosen, Ph.D...................... 39 Senior Vice President, Research and
Development and Director
Bradley G. Lorimier....................... 51 Senior Vice President, Business
Development and Director
Steven C. Mayer........................... 43 Senior Vice President and Chief
Financial Officer
Michael J. Antonaccio, Ph.D............... 54 Vice President, Strategic Drug
Development
Robert H. Benson, Ph.D.................... 52 Vice President, General Counsel and
Secretary
Susan D. Bateson-McKay.................... 42 Vice President, Human Resources
Robert A. Armitage(2)..................... 47 Director
James H. Cavanaugh, Ph.D.(1).............. 59 Director
Beverly Sills-Greenough(4)................ 67 Director
Robert Hormats(4)......................... 53 Director
Donald D. Johnston(1)(3)(4)............... 71 Director
Max Link, Ph.D............................ 56 Director
Joshua Ruch(1)(3)......................... 47 Director
James Barnes Wyngaarden, M.D.............. 72 Director
</TABLE>

- ---------------
(1) Member of Executive Committee.

(2) Elected as designee of SmithKline Beecham pursuant to the rights granted to
SmithKline Beecham in the SB Collaboration Agreements. SmithKline Beecham's
right to designate a director will continue until the termination of the SB
Collaboration Agreements for certain reasons or the later of (i) expiration
of the initial research term under the SB Collaboration Agreements or (ii)
the date on which SmithKline Beecham beneficially owns less than 5% of the
Company's Common Stock (on a fully diluted basis). See
"Business -- Collaborative Arrangements."

(3) Member of Compensation Committee.

(4) Member of Audit Committee.

William A. Haseltine, Ph.D. has served as the Company's Chairman and Chief
Executive Officer since May 1993. Prior to May 1993, he served as a consultant
to the Company from December 1992 until May 1993. He was a member of the Faculty
of Harvard Medical School and the Dana Farber Cancer Institute from 1976 to May
1993. He was also a member of the faculty of the Harvard School of Public Health
from 1977 to May 1993 and Chief of Human Retrovirology at the Dana Farber Cancer
Institute from 1988 to May 1993. Dr. Haseltine was a founder of Cambridge
BioTech, Inc., a company developing therapeutics and diagnostics for infectious
diseases, and served on its Scientific Advisory Board from 1981 to 1990, and
Virus Research Institute, Inc. He is one of the founding scientists of
MyoGenics, Inc., LeukoSite, Inc., Activated Cell Therapy, Inc., and Recombinant
Biocatalysis, Inc., all of which are privately held biotechnology companies.
Since 1987 Dr. Haseltine has been a scientific advisor to HealthCare Investment
Corporation ("HIC"). He is

43
<PAGE> 45

the author of approximately 250 scientific publications. Dr. Haseltine holds a
doctorate degree in BioPhysics from Harvard University.

Melvin D. Booth has been President, Chief Operating Officer and a director
of the Company since July 1995. Prior to this time, Mr. Booth was with Syntex
Corporation and its subsidiaries from 1975 to 1995. Mr. Booth was the President
of Syntex Laboratories, Inc. from 1993 to 1995 and served as a Vice President of
Syntex Corporation from 1992 to 1995. From 1992 to 1993 he served as the
President of Syntex Pharmaceuticals Pacific. From 1991 to 1992 he served as an
area Vice President of Syntex, Inc. From 1986 to 1991 he served as the President
of Syntex, Inc., Canada. He has been active in U.S. pharmaceutical industry
organizations and is also a past Chairman of the Pharmaceutical Manufacturers
Association of Canada. Mr. Booth holds a Certified Public Accountant
certificate.

Craig A. Rosen, Ph.D. joined the Company in December 1992 as Vice President
and Director of Research and a director and has served as Senior Vice President,
Research and Development since December 1994. From 1987 to December 1992, Dr.
Rosen was employed by the Roche Institute of Molecular Biology, serving as
Chairman of the Department of Gene Regulation from 1991 to December 1992 and in
varying positions in the Department of Molecular Oncology and Virology from 1987
to 1991. Dr. Rosen is the author of approximately 125 publications and an
editorial board member of several scientific publications. Dr. Rosen holds a
doctorate degree in Microbiology from the University of Rhode Island.

Bradley G. Lorimier has served as Senior Vice President, Business
Development and a director of the Company since March 1994. From 1986 to 1994 he
was employed by Johnson & Johnson, serving as Vice President, Corporate
Development of Ortho-McNeil Pharmaceutical from 1991 to March 1994, and as Vice
President, Licensing from 1986 to 1991. Mr. Lorimier will retire as Senior Vice
President, Business Development effective June 30, 1997.

Steven C. Mayer has served as Senior Vice President and Chief Financial
Officer since September 1996. Prior to joining the Company, Mr. Mayer was Vice
President and Chief Financial Officer of GenVec, Inc., an early-stage gene
therapy company, from 1995 to 1996. From 1991 to 1995, he served as Vice
President (subsequently Senior Vice President) and Chief Financial Officer of
TheraTech, Inc. Mr. Mayer holds a master degree in Business Administration from
Stanford University.

Michael J. Antonaccio, Ph.D. has served as Vice President, Strategic Drug
Development, of the Company since April 1994. Prior to joining the Company, Dr.
Antonaccio served as Vice President, Cardiovascular Diseases at Bristol-Meyers
Squibb Pharmaceutical Research Institute from July 1990 to March 1994. Dr.
Antonaccio holds a doctorate degree in Pharmacology from the University of
Michigan.

Robert H. Benson, Ph.D. has served as Vice President, General Counsel and
Secretary of the Company since February 1995. From 1992 until he joined the
Company, Dr. Benson was employed by Genelabs Technology, Inc., serving as Vice
President and General Counsel from 1993 to 1995 and as Director, Intellectual
Property from 1992 to 1993. From 1989 to 1992, Dr. Benson served as Senior
Patent Counsel for Genentech, Inc. Dr. Benson holds a doctorate degree in
Molecular Biology from the University of Florida and a law degree from the
University of Houston.

Susan D. Bateson-McKay has served as Vice President, Human Resources, of
the Company since January 1997. Prior to joining the Company, Ms. Bateson-McKay
served as Director of Human Resources and Administration at Finnegan, Henderson,
Farabow, Garrett & Dunner, L.L.P. from May 1994 to December 1996. From 1983 to
1994, Ms. Bateson-McKay was employed by J.P. Morgan & Co. Incorporated, and was
appointed Vice President, Human Resources, in 1985. Ms. Bateson-McKay holds a
master degree in Business Administration from New York University.

Robert A. Armitage has served as a director of the Company since February
1995. Since 1993, Mr. Armitage has been a partner resident in the Washington
office of Vinson & Elkins. Prior to joining Vinson & Elkins, he served as chief
intellectual property counsel for The Upjohn Corporation from 1983 to 1993.

James H. Cavanaugh, Ph.D. has served as a director of the Company since
June 1992. Dr. Cavanaugh has been President of HIC since 1989 and is a general
partner of HealthCare Partners III, L.P. ("HCP III"),

44
<PAGE> 46

the general partner of HealthCare Ventures III, L.P. ("HCV III"), and HealthCare
Partners IV, L.P. ("HCP IV"), the general partner of HealthCare Ventures IV,
L.P. ("HCV IV"), and a general partner of HealthCare Partners I, L.P. ("HCP I")
and HealthCare Partners II, L.P. ("HCP II"), the general partners of HealthCare
Ventures I, L.P. ("HCV I") and HealthCare Ventures II, L.P. ("HCV II"),
respectively. Prior thereto, Dr. Cavanaugh served as President of SmithKline &
French Laboratories U.S. from March 1985 to February 1989 and as President of
SmithKline Clinical Laboratories from 1981 to 1985. In addition to serving on
the Boards of Directors of several health care and biotechnology companies,
including MedImmune, Inc., Magainin Pharmaceuticals, Inc. and Procept, Inc. Dr.
Cavanaugh has served on the Board of Directors of the Pharmaceutical
Manufacturers Association, UniHealth America and the Proprietary Association.
Dr. Cavanaugh holds a doctorate degree from the University of Iowa.

Beverly Sills-Greenough has served as a director of the Company since
August 1993. She is presently a Managing Director of The Metropolitan Opera in
New York, a position she has held since 1991. From 1989 to 1990, she was
President of the New York City Opera Board. From 1979 to 1989 she served as
General Director of the New York City Opera Company. Ms. Sills Greenough serves
on the Boards of Directors of American Express Company, R.H. Macy Co., Inc. and
Time Warner, Inc., and she is a consultant to Televisa, Mexico.

Robert D. Hormats has served as a Director of the Company since August
1996. Mr. Hormats has served in various capacities with Goldman Sachs
(International) since 1982 and has served as Vice Chairman since 1987. Mr.
Hormats served as a Senior Staff Member for International Economic Affairs on
the National Security Council from 1974 to 1977. He also served as Senior Deputy
Assistant Secretary for Economic and Business Affairs at the Department of State
from 1977 to 1979, Ambassador and Deputy U.S. Trade Representative from 1979 to
1981 and Assistant Secretary of State for Economic and Business Affairs from
1981 to 1982. Mr. Hormats is a board member of the Council on Foreign Relations
and Engelhard Hanovia, Inc. He was appointed by President Clinton in 1993 to the
Board of the Russian-American Enterprise Fund (now the U.S. Russia Investment
Fund). Mr. Hormats received his A.B. from Tufts University in 1965 with a
concentration in economics and political science. In 1966 he received an M.A.,
and, in 1969, a Ph.D. in international economics from the Fletcher School of
International Law and Diplomacy.

Donald D. Johnston has served as a director of the Company since June 1992.
Mr. Johnston was employed by Johnson & Johnson from 1961 until his retirement in
1986, serving as a director and member of the Executive Committee fro 1975 until
1986. Since retiring, Mr. Johnston has served as an independent consultant to
Johnson & Johnson and to HIC. Mr. Johnston is also the Chairman of Osteotech,
Inc.

Max Link, Ph.D. has served as a director of the Company since May 1995. In
addition, Dr. Link has held a number of executive positions with pharmaceutical
and healthcare companies. Most recently, he served as Chief Executive Officer of
Corange, Limited, from May 1993 until June 1994. Prior to joining Corange,
Limited, Dr. Link served in a number of positions within Sandoz Pharma Ltd.
including Chief Executive Officer, from 1990 until April 1992, and Chairman,
from April 1992 until May 1993. Dr. Link currently serves on the Boards of
Directors of Procept, Inc. and Protein Design Labs, Inc. Dr. Link received his
doctorate in Economics from the University of St. Gallen.

Joshua Ruch has served as a director of the Company since October 1992. Mr.
Ruch is chief executive officer and controlling stockholder of the general
partner of Rho Management Partners L.P. ("Rho"), which serves as investment
advisor to Rho Management Trust III, a principal stockholder of the Company. Mr.
Ruch has been affiliated with Rho since 1981. Mr. Ruch holds a master degree in
Business Administration from Harvard University.

James Barnes Wyngaarden, M.D. has served as a director of the Company since
August 1993. From 1990 to 1995, he served as Foreign Secretary, National Academy
of Sciences and Institute of Medicine and as Associate Vice Chancellor for
Health Affairs at Duke University. Dr. Wyngaarden served as Director of the
National Institutes of Health from 1982 to 1989 and then as Associate Director
for Life Sciences, Office of Science and Technology Policy, Executive Office of
the President from 1989 to 1990. From 1990 to 1995 he served as Director, Human
Genome Organization. The author of approximately 250 publications, Dr.
Wyngaarden earned his M.D. from the University of Michigan.

45
<PAGE> 47

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the ownership
of Common Stock as of February 15, 1997 by (i) each person known by the Company
to be the beneficial owner of more than five percent of the outstanding Common
Stock, (ii) each of the directors and named executive officers of the Company,
and (iii) all executive officer and directors of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OWNED OWNED
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------- ------------------ ---------- ----------
<S> <C> <C> <C>
Reliance Financial Services Corporation(2)................ 2,449,624 13.0% 11.2%
Park Avenue Plaza
New York, New York 10055
SmithKline Beecham Corporation(3)......................... 1,355,338 7.2 6.2
One Franklin Plaza
Philadelphia, Pennsylvania 19101
Rho Management Trust III(4)............................... 1,012,915 5.4 4.6
c/o Rho Management Company, Inc.
767 Fifth Avenue
New York, New York 10153
William A. Haseltine, Ph.D(5)............................. 1,062,887 5.7 4.9
c/o Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
Michael J. Antonaccio, Ph.D(6)............................ 50,000 * *
c/o Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
Robert A. Armitage........................................ None * *
c/o Vinson & Elkins LLP
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Susan Bateson-McKay(7).................................... None * *
c/o Human Genome Sciences, Inc.
9410 Keywest Avenue
Rockville, Maryland 20850
Robert H. Benson, Ph.D(8)................................. 39,000 * *
c/o Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
Melvin D. Booth(9)........................................ 50,000 * *
c/o Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, Maryland 20850
James H. Cavanaugh, Ph.D(10).............................. 338,081 1.8 1.5
c/o HealthCare Investment Corporation
Twin Towers at Metro Park
379 Thornall Street
Edison, New Jersey 00837
Beverly Sills-Greenough(11)............................... 6,750 * *
211 Central Park West, #4-F
New York, New York 10024
Robert Hormats(12)........................................ 2,000 * *
c/o Goldman Sachs & Co.
85 Broad Street
New York, New York 10128
Donald D. Johnston(13).................................... 75,000 * *
18 Oyster Shell Lane
Hilton Head, South Carolina 29926
</TABLE>

46
<PAGE> 48

- ---------------
* Less than 1%.

(1) Except as otherwise indicated, each party has sole voting and investment
power over the shares beneficially owned.

(2) Consists of shares owned by Reliance Insurance Company and Reliance
National Insurance Company (U.K.) Ltd., which are direct or indirect
wholly-owned subsidiaries of Reliance Financial Services Corporation, based
on the Form 4 filed by Reliance Financial Services Corporation as of
November 1, 1997.

(3) Based on the Form 13-D filed by SmithKline Beecham on January 27, 1997.

(4) Rho Management Partners L.P. ("Rho") may be deemed the beneficial owner of
shares registered in the name of Rho Management Trust III, pursuant to an
investment advisory agreement that confers sole voting and investment
control over such shares to Rho. Shares indicated include 6,915 shares
subject to immediately exercisable warrants. See also footnote (18).

(5) Does not include 15,500 shares of Common Stock owned by Dr. Haseltine's
wife, as to which Dr. Haseltine disclaims beneficial ownership, and 500,000
shares of Common Stock issuable upon exercise of options held that are not
exercisable within 60 days.

(6) Consists of 50,000 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days. Does not include 55,000 shares of
Common Stock issuable upon exercise of options held that are not
exercisable within 60 days.

(7) Does not include 20,000 shares of Common Stock issuable upon exercise of
options held that are not exercisable within 60 days.

(8) Includes 37,000 shares of Common Stock issuable upon exercise of options,
that are exercisable within 60 days. Does not include 60,000 shares of
Common Stock issuable upon exercise of options held that are not
exercisable within 60 days.

47
<PAGE> 49

(9) Consists of 50,000 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days. Does not include 250,000 shares of
Common Stock issuable upon exercise of options that are not exercisable
within 60 days.

(10) Includes 256,167 shares of Common Stock owned by HCV III and HCV IV. Mr.
Cavanaugh is a general partner of HCP III and HCP IV, the general partners
of HCV III and HCV IV, respectively.

(11) Consists of 6,750 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days. Does not include 4,500 shares of
Common Stock issuable upon exercise of options that are not exercisable
within 60 days.

(12) Does not include 11,250 shares of Common Stock issuable upon exercise of
options that are not exercisable within 60 days.

(13) Includes 18,609 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days.

(14) Does not include 9,000 shares of Common Stock issuable upon exercise of
options held that are not exercisable within 60 days.

(15) Includes 124,500 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days by Mr. Lorimier. Does not include
40,000 shares of Common Stock issuable upon exercise of options held by Mr.
Lorimier that are not exercisable within 60 days.

(16) Consists of 20,000 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days. Does not include 130,000 shares of
Common Stock issuable upon exercise of options that are not exercisable
within 60 days.

(17) Includes 30,522 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days by Dr. Rosen. Also includes 36,000
shares of Common Stock held in trust for Dr. Rosen's minor children, as to
which Dr. Rosen disclaims beneficial ownership. Does not include 116,000
shares of Common Stock issuable upon exercise of options that are not
exercisable within 60 days by Dr. Rosen.

(18) As chief executive officer and controlling stockholder of the general
partner of Rho Management Partners L.P. ("Rho"), the investment advisor to
Rho Management Trust III, Joshua Ruch may be deemed to share voting and
investment control with Rho over shares registered in the name of Rho
Management Trust III, and therefore be considered a beneficial owner of
such shares. Includes an additional 205,266 shares held directly or
indirectly by Joshua Ruch individually or for the account of family
members, and 2,500 held by a foundation of which Joshua Ruch serves as a
trustee. See also footnote (4).

(19) Consists of 14,250 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days. Does not include 15,750 shares of
Common Stock issuable upon exercise of options held by Dr. Wyngaarden that
are not exercisable within 60 days.

(20) Includes 358,546 shares of Common Stock issuable upon exercise of options
and warrants that are exercisable within 60 days. Does not include 711,500
shares issuable upon exercise of options that are not exercisable within 60
days.

48
<PAGE> 50

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of shares by current stockholders could adversely effect the
price of the Company's Common Stock. All of the 21,814,564 shares of Common
Stock to be outstanding after this offering, including the 3,000,000 shares
offered hereby, will be eligible for immediate sale in the public market,
subject in the case of approximately 6,628,616 such shares to compliance with
the provisions of Rule 144. In addition, approximately 700,386 shares of Common
Stock currently subject to vested stock options or exercisable warrants are
eligible, upon exercise, for immediate sale in the public market, subject in the
case of approximately 358,546 such shares to compliance with the provisions of
Rule 144. In addition, holders of 6,075,760 shares of Common Stock have certain
demand and piggy-back registration rights. Officers, directors and stockholders
of the Company holding in the aggregate 6,329,741 shares of Common Stock have
agreed for a period of 90 days after the date of this Prospectus not to sell or
otherwise dispose of any shares of Common Stock without the consent of the
Underwriters.

In general, under Rule 144, after giving effect to its recent amendment,
which is scheduled to become effective approximately 60 days from the date
hereof, a person (or persons whose shares are aggregated), including persons
deemed to be "affiliates" of the Company (as that term is defined under the
Act), who has beneficially owned his or her shares for at least one year, is
entitled to sell in brokers' transactions within any three-month period that
number of restricted securities that does not exceed the greater of one percent
of the then outstanding shares of Common Stock (218,146 shares based on the
number of shares to be outstanding immediately after the offering) or the
average weekly trading volume in the Common Stock during the four calendar weeks
immediately preceding such sale, subject to the filing of a Form 144 with
respect to the sale, the availability of current public information about the
Company and other limitations of Rule 144. After two years have elapsed from the
later of the issuance of restricted securities by the Company or their
acquisition from an affiliate, such shares may be sold pursuant to Rule 144(k)
without regard to the manner-of-sale, volume and other limitations of Rule 144
by persons who have not been affiliates of the Company for at least three
months. Prior to its recent amendment, Rule 144 required that restricted
securities be held for at least two years to be eligible for sale under Rule
144, and three years for sale under Rule 144(k).

49
<PAGE> 51

UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below,
for whom Lehman Brothers Inc., Bear, Stearns & Co. Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Smith Barney Inc. and UBS Securities LLC are acting
as representatives (the "Representatives"), have severally agreed to purchase
from the Company, and the Company has agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite the name of each
such Underwriter below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------------------------------------------------------------------- ----------
<S> <C>
Lehman Brothers Inc. ..................................................
Bear, Stearns & Co. Inc. ..............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.....................
Smith Barney Inc. .....................................................
UBS Securities LLC ....................................................
---------
Total............................................................. 3,000,000
=========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page hereof, and to certain dealers at such public offering price
less a selling concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the offering to the public, the offering price and
other selling terms may be changed by the Representatives.

The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Securities and
Exchange Commission and that there has been no material adverse change or any
development involving a prospective material adverse change in the condition of
the Company from that set forth in the Registration Statement otherwise than as
set forth or contemplated in this Prospectus, and that certain certificates,
opinions and letters have been received from the Company and its counsel and
independent auditors. The Underwriters are obligated to take and pay for all of
the above shares of Common Stock if any such shares are taken.

The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.

The Company has granted to the Underwriters an option to purchase up to an
additional 450,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the public offering price, less the underwriting discounts
and commissions shown on the cover page of this Prospectus. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed, subject to certain conditions, to purchase a number of the additional
shares of Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table.

The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.

In connection with the offering, the rules of the Commission permit the
Representatives to engage in certain transactions that stabilize the price of
the Common Stock. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Common Stock. In
addition, if the Representatives over-allot (sell more shares of Common Stock
than are set forth on the cover page of this Prospectus) and thereby create a
short position in the Common Stock in connection with the offering, the

50
<PAGE> 52

Representatives may reduce that short position by purchasing Common Stock in the
open market. The Representatives also may elect to reduce any short position by
exercising all or part of the over-allotment option described herein.

In general, purchases of shares of Common Stock for the purpose of
stabilization or to reduce a syndicate short position could cause the price of
the Common Stock to be higher than it might otherwise be in the absence of such
purchases. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.

The Company, and directors, officers and stockholders holding an aggregate
of 6,329,741 shares of Common Stock, have agreed not to offer, sell, or
otherwise dispose of any shares of Common Stock (or any securities convertible
into or exercisable for Common Stock), with certain limited exceptions, for a
period of 90 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc. on behalf of the Representatives.

Lehman Brothers Inc. acted as financial advisor to SmithKline Beecham in
connection with the negotiation and execution of the SB Collaboration Agreements
between SmithKline Beecham and the Company and received customary compensation
in connection with such transaction. Bear, Stearns International Limited holds a
warrant to purchase 50,871 shares of Common Stock, which warrant was purchased
from a securityholder of the Company in a transaction to which the Company was
not a party. In addition, certain of the Representatives have provided, and may
provide in the future, investment banking services to the Company.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters with respect to information contained in this Prospectus under the
headings "Risk Factors -- Patents and Proprietary Rights" and "Business --
Patents and Proprietary Rights" will be passed upon for the Company by Carella,
Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, Roseland, New Jersey, patent
counsel to the Company. A member of Carella, Byrne, Bain, Gilfillan, Cecchi,
Stewart & Olstein holds a less than 0.1% limited partnership interest in HCV
III. Certain legal matters with respect to information contained in this
Prospectus under the headings "Risk Factors -- Uncertainty of Government
Regulatory Requirements; Lengthy Approval Process" and "Business -- Government
Regulation" will be passed upon for the Company by Fenwick & West LLP,
Washington, D.C. Certain legal matters will be passed upon for the Underwriters
by Mintz, Levin, Cohen, Ferris, Glovsky, and Popeo, PC, Boston, Massachusetts.

EXPERTS

The financial statements of the Company at December 31, 1995 and 1996, and
for the years then ended, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, and for
the year ended December 31, 1994, by Richard A. Eisner & Company, LLP ("Eisner")
independent auditors, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing. The Company has
agreed to indemnify Eisner against certain liabilities, including liabilities
arising under the Securities Act, provided, that such indemnification shall not
be effective with regard to any liability for professional malpractice or
payment of settlement or judgement costs.

51
<PAGE> 53

GLOSSARY OF TERMS

Amino Acid: The basic building blocks from which peptides and proteins are
constructed. The specific amino acid sequence of a peptide or protein is
governed by the nucleotide sequence contained in the gene coding for it.

Antibody: A specialized protein called an immunoglobulin, produced by the
B lymphocyte cells of the immune system, that recognizes a particular foreign
antigen and thus triggers the immune response.

Antisense Technology: A molecular method that uses short DNA sequences to
precisely inhibit the synthesis of a target protein associated with particular
diseases by binding to either the mRNA or DNA coding for the protein.

Base Pair: The fundamental unit of the double-stranded DNA polymer
consisting of paired nucleotides on opposite strands; C pairs with G, A pairs
with T.

Bioinformatics: The use of computers to process, analyze, store and
retrieve biological information.

Chromosome: A discrete unit of the genome which contains many genes. Human
cells have 23 chromosomes (found in pairs) containing approximately
75,000-150,000 unique genes in total. Each chromosome consists of a very long
molecule of duplex DNA and an equal amount of protein. It is visible as a
distinct unit only during the process of cell division.

Clone: A particular group of living cells that are identical in all
respects, having derived from a single ancestral cell. Cloned cells are useful
in laboratory studies due to their homogeneous properties.

Coding Sequence: The set of nucleotides in either DNA or mRNA that become
expressed as the amino acid sequence in a protein. Coding sequences are
organized in groups of three nucleotides, triplet codons, so that there is a
direct, one-to-one correspondence between a triplet codon and an amino acid.

Codon: A triplet of nucleotides that represents an amino acid, or a
translation (protein synthesis) termination signal.

Complementary DNA ("cDNA"): DNA sequences that are made by specialized
enzymes that copy RNA templates into DNA by reverse transcription. These cDNA
can be single- or double-stranded, and are often made using mRNA as a template.

Deoxyribonucleic Acid ("DNA"): The molecular structures containing the
genetic information governing all functional characteristics of living
organisms. DNA is made of two long polymer strands of interconnected nucleotides
which are paired. DNA usually but not always exists in nature as a double-
stranded molecule and is found in the nucleus of all higher organisms.

Enzymes: Proteins that perform catalytic functions in living cells.

Exon: The portion of a gene which codes for protein.

Expressed Sequence Tags ("EST"): A partial sequence of an expressed gene
that comprises 50 nucleotides or more. It is often possible to assign a possible
function to the unique gene identified by the partial sequence of the expressed
mRNA. The cDNA clone of the expressed mRNA used for sequence analysis can also
be used to identify the chromosomal location of the gene.

Gene: The segment of DNA sequence in a chromosome involved in producing a
polypeptide chain (protein). Genes include regulatory sequences preceding and
following the coding sequence. In higher organisms, genes are often segmented
into coding (exons) and noncoding (introns) sequences.

Gene Expression: The process of conversion of a DNA sequence (gene) into a
specific protein. This process has two major steps, referred to as transcription
(the formation of RNA) and translation (the formation of protein).

52
<PAGE> 54

Gene Mapping: The process of identifying the linear sequence and relative
position of genes along the DNA of chromosomes. A gene map locates the position
of genes with respect to one another on the double-stranded DNA in a chromosome.

Genetic Disorder: A disease that has its origin in errors in the DNA
sequence of a particular gene. Genetic disorders are transmitted through the
parental germ line in offspring.

Genome: The total sum of genes and additional DNA present in the
chromosomes of a particular organism. Thus, the complete set of DNA sequences
present in the twenty-three chromosomes of a human is referred to as the human
genome.

Intron: The portion of a gene which does not code for protein.

Messenger RNA ("mRNA"): A single RNA chain that can be decoded into a
protein and serves as an intermediate in gene expression.

Nucleotide: The basic molecular structure of genetic material, both DNA
and RNA. It is composed of a sugar group, a phosphate group, and a base
structure (Adenine, Thymine, Guanine, Cytosine in DNA with Uracil replacing
Thymine in RNA).

Protein/Peptide: A polymer consisting of a sequence of amino acids
connected by peptide bonds. Peptides themselves may be biologically active as
are proteins, having distinct physiological roles in living cells.

Receptor: A protein bound within or on cell membranes which selectively
binds to a specific chemical substance (such as a neurotransmitter or drug).
Receptors are part of the mechanism by which cells communicate.

Recombinant DNA ("rDNA"): DNA formed by joining separate specific
nucleotide sequence pieces isolated from different organisms. The pieces are
generated using restriction enzymes, and are spliced together using special
ligating enzymes.

Ribonucleic Acid ("RNA"): A polymer of ribonucleotides constructed in
cells by the transcription of a DNA template. The chemical structure of RNA is
similar but not identical to DNA in that it contains a ribose sugar, not
deoxyribose. When the RNA molecule serves as an intermediary in gene expression,
the RNA is known as messenger RNA ("mRNA") and is the template for translation
to form protein.

53
<PAGE> 55

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Report of Richard A. Eisner & Company, LLP, Independent Auditors.................... F-3
Balance Sheets at December 31, 1995 and 1996........................................ F-4
Statements of Operations for the years ended December 31, 1994, 1995 and 1996....... F-5
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996.............................................................................. F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996....... F-7
Notes to Financial Statements....................................................... F-8
</TABLE>

F-1
<PAGE> 56

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Human Genome Sciences, Inc.
Rockville, Maryland

We have audited the accompanying balance sheets of Human Genome Sciences,
Inc. as of December 31, 1995 and 1996 and the related statements of operations,
stockholders' equity, 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. The financial statements of Human Genome Sciences, Inc. for the year
ended December 31, 1994 were audited by other auditors whose report dated
February 14, 1995 expressed an unqualified opinion on those statements.

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 Human Genome Sciences, Inc.
at December 31, 1995 and 1996 and the results of its operations and cash flows
for the years then ended, in conformity with generally accepted accounting
principles.

/s/ Ernst & Young LLP

Vienna, Virginia
February 14, 1997

F-2
<PAGE> 57

REPORT OF RICHARD A. EISNER & COMPANY, LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Human Genome Sciences, Inc.
Rockville, Maryland

We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Human Genome Sciences, Inc. for the year ended December
31, 1994. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the results of operations and cash flows of Human
Genome Sciences, Inc. for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.

/s/ Richard A. Eisner & Company, LLP

New York, New York
February 14, 1995

F-3
<PAGE> 58

HUMAN GENOME SCIENCES, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
-------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 39,853 $ 27,341
Short-term investments........................................... 58,529 58,282
Prepaid expenses and other current assets........................ 2,163 2,935
-------- --------
Total current assets..................................... 100,545 88,558
Long-term investments.............................................. 7,080 30,493
Furniture and equipment (net of accumulated depreciation and
amortization).................................................... 16,005 18,031
Restricted investments............................................. 2,000 1,705
Other assets....................................................... 1,333 1,330
-------- --------
TOTAL.................................................... $126,963 $140,117
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt................................ $ 444 $ 444
Accounts payable and accrued expenses............................ 2,341 3,361
Accrued payroll and related taxes................................ 692 1,120
Current obligation under capital leases.......................... 1,174 811
Deferred income.................................................. 2,000 2,537
-------- --------
Total current liabilities................................ 6,651 8,273
Long-term debt, net of current portion............................. 3,112 2,668
Obligations under capital leases, net of current portion........... 1,220 286
Other liabilities.................................................. 374 369
-------- --------
TOTAL.................................................... 11,357 11,596
Commitments and other matters...................................... -- --

STOCKHOLDERS' EQUITY
Common stock -- $.01 par value; shares authorized -- 50,000,000;
shares issued -- 18,231,931 and 18,784,382 at December 31, 1995
and 1996, respectively........................................... 182 188
Additional paid-in capital......................................... 142,624 162,583
Unearned portion of compensatory stock and warrants................ (885) --
Unrealized gain (loss) on investments available for sale........... 47 (121)
Retained deficit................................................... (26,362) (34,129)
-------- --------
Total stockholders' equity............................... 115,606 128,521
-------- --------
TOTAL.................................................... $126,963 $140,117
======== ========
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-4
<PAGE> 59

HUMAN GENOME SCIENCES, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue -- research and development collaborative $ 41,065 $ 5,000 $ 36,460
contracts.........................................
Costs and expenses:
Research and development:
Direct expenditures............................ 17,636 22,904 30,409
Payments under research services agreement..... 9,662 10,075 10,063
----------- ----------- -----------
Total research and development............ 27,298 32,979 40,472

General and administrative........................ 6,840 8,745 9,639
----------- ----------- -----------
Total costs and expenses....................... 34,138 41,724 50,111
----------- ----------- -----------
Income (loss) from operations....................... 6,927 (36,724) (13,651)
Interest income..................................... 3,115 4,555 6,462
Interest expense.................................... (302) (550) (370)
----------- ----------- -----------
Income (loss) before taxes.......................... 9,740 (32,719) (7,559)
Provision (benefit) for income taxes:
Current........................................... 2,419 (1,651) 208
Deferred.......................................... 17 -- --
----------- ----------- -----------
2,436 (1,651) 208
----------- ----------- -----------
NET INCOME (LOSS)................................... $ 7,304 $ (31,068) $ (7,767)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE......................... $ 0.47 $ (1.98) $ (0.42)
=========== =========== ===========
Weighted average shares outstanding................. 15,543,375 15,723,144 18,630,986
=========== =========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-5
<PAGE> 60

HUMAN GENOME SCIENCES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK UNEARNED
------------------ PORTION OF
NUMBER ADDITIONAL COMPENSATORY UNREALIZED RETAINED
OF PAID-IN STOCK AND GAIN EARNINGS
SHARES AMOUNT CAPITAL WARRANTS (LOSS) (DEFICIT) TOTAL
---------- ------ ---------- ------------ ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1993......... 14,555,874 $145 $ 80,696 $ (2,314) $ -- $ (2,598) $ 75,929
Exercise of options.................. 44,168 1 35 -- -- -- 36
Warrants exercised by lessor......... 245,967 2 (2) -- -- -- --
Compensatory stock and warrants
earned............................. -- -- -- 730 -- -- 730
Net income........................... -- -- -- -- -- 7,304 7,304
Unrealized (loss) on investments..... -- -- -- -- (214) -- (214)
---------- ---- -------- -------- ------ -------- --------
Balance -- December 31, 1994......... 14,846,009 148 80,729 (1,584) (214) 4,706 83,785
Exercise of options.................. 113,691 1 932 -- -- -- 933
Warrants exercised................... 7,499 -- 1 -- -- -- 1
Warrants exercised by lessor......... 216,330 2 (2) -- -- -- --
Issuance of common stock pursuant to
public offering (net of
expenses).......................... 3,048,402 31 60,964 -- -- -- 60,995
Compensatory stock and
warrants earned.................... -- -- -- 699 -- -- 699
Net loss............................. -- -- -- -- -- (31,068) (31,068)
Unrealized gain on investments....... -- -- -- -- 261 -- 261
---------- ---- -------- -------- ------ -------- --------
Balance -- December 31, 1995......... 18,231,931 182 142,624 (885) 47 (26,362) 115,606
Exercise of options.................. 193,752 3 1,897 -- -- -- 1,900
Warrants exercised by lessor......... 17,431 -- -- -- -- -- --
Warrants exercised................... 2,203 -- -- -- -- -- --
Issuance of common stock in
connection with SB Milestone III... 339,065 3 18,062 -- -- -- 18,065
Compensatory stock and
warrants earned.................... -- -- -- 885 -- -- 885
Net loss............................. -- -- -- -- -- (7,767) (7,767)
Unrealized (loss) on investments..... -- -- -- -- (168) -- (168)
---------- ---- -------- -------- ------ -------- --------
Balance -- December 31, 1996......... 18,784,382 $188 $162,583 $ -- $ (121) $(34,129) $128,521
========== ==== ======== ======== ====== ======== ========
</TABLE>

The accompanying notes to financial statements are an integral part hereof.

F-6
<PAGE> 61

HUMAN GENOME SCIENCES, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 7,304 $(31,068) $ (7,767)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Accrued interest on U.S. Treasury bills and
commercial paper................................... (350) (251) (857)
Depreciation and amortization........................ 3,061 4,395 5,858
Loss due to disposal and write-down of furniture and
equipment.......................................... 257 665 66
Issuance of and accretion of compensatory stock and
warrants........................................... 730 699 885
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.......... (419) (699) (718)
Deferred tax asset................................. 353 -- --
Funds available -- facility fund................... -- (52) --
Other assets....................................... (117) 12 3
Accounts payable and accrued expenses.............. (741) 305 1,376
Accrued payroll and related taxes.................. (561) 143 428
Deferred income.................................... -- 2,000 537
Deferred income taxes.............................. (336) -- --
Income taxes payable............................... 1,919 (2,134) --
Other liabilities.................................. 337 (26) (5)
-------- -------- ---------
Net cash provided by (used in) operating
activities.................................... 11,437 (26,011) (194)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- furniture and equipment......... (4,206) (8,327) (8,306)
Proceeds from sale of furniture and equipment........... -- 630 --
Purchase of investments and marketable securities....... (78,741) (98,717) (182,030)
Proceeds from sale and maturities of investments and
marketable securities................................ 65,559 73,552 159,499
-------- -------- ---------
Net cash used in investing activities........... (17,388) (32,862) (30,837)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................ 1,699 2,353 --
Repayment of long-term debt............................. -- (444) (444)
Collateral on line of credit -- restricted.............. (2,000) -- 295
Payments on capital lease obligations................... (703) (1,139) (1,297)
Proceeds from issuance of common stock (net of
expenses)............................................ 36 61,929 19,965
Assets held for resale -- expenditures.................. (41) -- --
-- proceeds...................... 176 -- --
-------- -------- ---------
Net cash (used in) provided by financing
activities.................................... (833) 62,699 18,519
-------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... (6,784) 3,826 (12,512)
Cash and cash equivalents -- beginning of year............ 42,811 36,027 39,853
-------- -------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................. $ 36,027 $ 39,853 $ 27,341
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................. $ 521 $ 233 $ 199
Income taxes......................................... 280 508 208
</TABLE>

See Note G for noncash exercise of warrants.

The accompanying notes to financial statements are an integral part hereof.

F-7
<PAGE> 62

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS

(NOTE A) -- THE COMPANY

Human Genome Sciences, Inc. (the "Company") was incorporated and commenced
operations on June 26, 1992. The Company is engaged in the research and
development of novel, proprietary pharmaceutical and diagnostic products based
on the discovery and understanding of the medical utility of genes. The
Company's revenue is currently derived from contract research arrangements. The
Company does not yet generate any revenues from product sales.

(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates:

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

Depreciation and amortization:

Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:

<TABLE>
<S> <C>
Laboratory equipment..................................... 3 -- 10 years
Computers and EDP equipment.............................. 3 years
Furniture and office equipment........................... 3 -- 5 years
Leasehold improvements................................... over the lease term
</TABLE>

Equipment acquired under capital lease agreements is amortized over the
terms of the leases ranging from three to four years.

Patent costs:

Patent application costs are charged to expense as incurred.

Cash equivalents:

The Company considers all highly liquid investment instruments purchased
with a maturity of three months or less to be cash equivalents. On December 31,
1995 and 1996, the Company had purchased $5,244,000 and $6,840,054,
respectively, of U.S. Government securities under agreements to resell on
January 1, 1996 and 1997, respectively. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
held by the Company's asset managers. The market value of the securities
approximated the carrying amount.

Investments:

The Company classifies its investments into the categories:
"held-to-maturity" and "available-for-sale", each of which have different
accounting treatment. Investments in securities that are classified as
available-for-sale and have readily determinable fair values are measured at
fair market value in the balance sheet, and unrealized holding gains and losses
for these investments are reported as a separate component of stockholders'
equity until realized. Debt securities classified as held-to-maturity securities
will be carried at amortized cost.

F-8
<PAGE> 63

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE B) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Concentration of credit risk:

The Company has invested its cash in obligations of the U.S. Government and
in commercial paper which bear minimal risk.

Research and development:

Research and development costs are charged to expense as incurred.

Compensatory stock and warrants:

The Company accounts for the difference between the issue or grant price of
compensatory stock and warrants and fair value as "Unearned Compensatory Stock
and Warrants," which the Company charges to operations over their vesting
period.

Stock-Based Compensation:

During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) but
disclose the pro forma effects on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans. See Note L to the financial
statements for further information.

Net income (loss) per share:

Net income (loss) per share is calculated using the weighted average number
of outstanding shares of common stock. Common stock issuable upon the exercise
of stock options or warrants is included in the calculation of net income (loss)
per share to the extent that its inclusion would have a dilutive effect.

Revenue recognition:

Nonrefundable license fees, research payments, and milestone payments in
connection with collaboration agreements are recognized when they are earned in
accordance with the applicable performance requirements and / or contractual
terms.

Sources of supply:

F-9
<PAGE> 64

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE C) -- INVESTMENTS

Investments, including accrued interest, at December 31, 1995 and 1996 were
as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
AMORTIZED UNREALIZED
HELD TO MATURITY COST FAIR VALUE GAIN/(LOSS)
---------------- ----------- ----------- -----------
<S> <C> <C> <C>
Corporate debt securities........................ $58,529,000 $58,584,000 $ 55,000
=========== =========== =========
AVAILABLE FOR SALE
------------------
U.S. Treasury and agencies....................... $ 7,033,000 $ 7,080,000 $ 47,000
=========== =========== =========
DECEMBER 31, 1996
HELD TO MATURITY
----------------
Corporate debt securities........................ $58,282,000 $58,247,000 $ (35,000)
=========== =========== =========
AVAILABLE FOR SALE
------------------
U.S. Treasury and agencies....................... $15,262,000 $15,194,000 $ (68,000)
Corporate debt securities........................ 15,352,000 15,299,000 (53,000)
----------- ----------- ---------
$30,614,000 $30,493,000 $(121,000)
=========== =========== =========
</TABLE>

(NOTE D) -- AGREEMENTS WITH THE INSTITUTE FOR GENOMIC RESEARCH ("TIGR")

Research Services Agreement:

Effective October 1, 1992, the Company entered into a ten-year Research
Services Agreement (the "Services Agreement") with TIGR, which is largely
dependent upon the Company for its funding. The Services Agreement provides for
the payment of $65,000,000 over ten years in specified annual amounts payable in
quarterly installments and the provision of up to $5,000,000 of equipment (see
Note G). In return, TIGR has assigned to the Company all of its rights, title
and interest in and to any invention and patent rights stemming from research
funded by the Company. However, TIGR can conduct ongoing research under any such
invention or patent free of any royalty. The Company is to bear all
patent-related costs.

Minimum payments pursuant to the Services Agreement for the next five years
are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------------
<S> <C>
1997..................................................... $7,375,000
1998..................................................... $7,000,000
1999..................................................... $7,000,000
2000..................................................... $6,750,000
2001..................................................... $5,587,500
Thereafter............................................... $3,262,500
</TABLE>

The Company also committed, pursuant to an agreement dated April 19, 1993,
to provide to TIGR (i) an additional $1 million per year for 10 years,
commencing on May 1, 1993, to enable TIGR to enhance its bioinformatics
capacity, and (ii) certain additional amounts including compensation for certain
sequencing performed for the Company, reimbursement for salaries of certain TIGR
employees, a portion of TIGR's rent and utilities and other miscellaneous items.

Intellectual Property Agreement:

Effective October 2, 1992, the Company also entered into a ten-year
intellectual property agreement with TIGR pursuant to which TIGR assigned all of
its interest in inventions and patent rights other than those resulting from
research services funded by the Company and granted the Company a worldwide
noncancel-

F-10
<PAGE> 65

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE D) -- AGREEMENTS WITH THE INSTITUTE FOR GENOMIC RESEARCH ("TIGR")
(CONTINUED)

Intellectual Property Agreement: (continued)

lable license to any invention and patent right stemming from funding provided
by U.S. government and other nonprofit organizations. In return for such
license, the Company is required to pay to TIGR a percentage of net sales of, or
sub-license income from, such inventions and patent rights.

Stock Purchase, Restriction and Repurchase Agreement:

In connection with the intellectual property agreement, the Company sold
1,609,884 shares (the "shares") of its common stock at $.01 per share to TIGR in
1993.

(NOTE E) -- COLLABORATION AGREEMENTS

Agreements with SmithKline Beecham Corporation:

In May 1993, the Company entered into a collaboration agreement, as amended
("SB Collaboration Agreements"), providing SmithKline Beecham Corporation ("SB")
a first right to develop and market products in human and animal healthcare ("SB
Products"), based upon human genes identified by the Company. In return, SB has
paid $125 million to the Company since 1993. Approximately $55 million related
to the purchase price of 1,351,738 shares of common stock with the balance of
$70 million recognized as revenue related to license fees, option rights, and
milestone payments. Of the $70 million recognized as revenue since 1993, $41
million and $6.9 were recognized as revenues during the years ended December 31,
1994 and 1996, respectively.

The 1996 payment by SB of $25 million was made pursuant to the Company's
achievement of Milestone III. Pursuant to the SB Collaboration Agreements, the
payment was allocated as follows. The Company sold 339,065 shares of common
stock to SB at $58.28 per share, which was calculated pursuant to the contract
as 125% of the average market price of the Company's common stock for the five
trading days preceding payment, for total proceeds of approximately $18,065,000.
The remainder of the payment was allocated to the deliverables and other data
being transferred to SB and recorded by the Company as revenue.

In addition, the Company is entitled to (i) royalties on the net sales of
SB Products, (ii) product development progress payments and (iii) the option to
co-promote up to 20% of any product developed by SB under the collaboration
agreement.

In June 1996, the SB Collaboration Agreements were substantially amended
(the "SB Amendment") to allow the Company and SB together to enter into
collaboration agreements with additional pharmaceutical companies
("Collaboration Partners") in the SB Field (other than diagnostics and animal
healthcare in which SB has generally retained exclusive rights). The SB
Amendment restricts the Company from entering into further collaborations in the
SB Field during the initial research term (through June 2001). The restriction
also applies to certain products which are subject to research plans submitted
by SB prior to the expiration of the initial research term and for a period
thereafter. SB has the right to extend the research term for up to five
additional years by making certain payments, which would extend the time for
submitting research plans as to therapeutic products.

The SB Amendment provides that SB and the Company will share equally in any
license fees and product development milestone payments paid by the
Collaboration Partners, that the Company will receive all royalties and research
payments paid by the Collaboration Partners. The SB Collaboration Agreements
provide for payments to the Company by SB of royalties on net sales of products
based on the Company's patents or technologies within the SB Field ("SB
Products") made by SB and milestone payments in connection with the development
of SB Products.

F-11
<PAGE> 66

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE E) -- COLLABORATION AGREEMENTS (CONTINUED)

Other Collaboration Agreements in the SB Field:

In June 1995, the Company entered into an Option and License Agreement with
Takeda Chemical Industries, Ltd. ("Takeda") pursuant to which Takeda was granted
an exclusive option to license rights under the Company's patents and technology
in the field of human healthcare (other than gene therapy, antisense and
diagnostics) to make and sell a limited number (equal to the number of
collaboration partners other than SB and Takeda with which the Company enters
into collaboration agreements in the SB field) of products in Japan. In
consideration of the grant of the option, Takeda paid the Company $5 million,
which was recognized as revenue by the Company in 1995, and agreed to pay to the
Company royalties based on the sale of Takeda products covered by the Option and
License Agreement and certain milestone payments.

In June 1996, the Company and SB entered into collaboration agreements
("New Collaboration Partner Agreements") with Schering Corporation and
Schering-Plough Ltd. ("Schering Plough"), Synthelabo S.A., and Merck KGaA
("Merck"), (collectively "New Collaboration Partners"). The New Collaboration
Partner Agreements provide the New Collaboration Partners the rights and
licenses to access the Company's Human Gene Technology, as well as biological
information developed by the Company and SB prior to, and in the case of the
Company, after the effective date of such Agreement, to discover, develop and
commercialize products based upon or derived from such Company technology in the
SB Field (other than diagnostics and animal healthcare). The New Collaboration
Partners are obligated to pay license fees, research payments, milestone
payments and royalties in connection with the agreements. The initial research
term expires in June, 2001. The New Collaboration Partners have the right to
extend the term for up to five additional years by making certain additional
payments. Aggregate license fees and research payments due under the New
Collaborative Partner Agreements are $140 million during the initial research
term, of which the Company will be entitled to $87.5 million, payable in equal
installments over a five-year period. The Company has received $17.5 million of
the license fees, research, and additional payments during 1996 related to the
New Collaboration Partner Agreements, of which $16.5 million has been recorded
as revenue.

Collaborative Agreements Outside of the SB Field:

In January, 1996, the Company entered into a comprehensive Research
Collaboration Agreement in the field of corn genomics with Pioneer Hi-Bred
International, Inc. ("Pioneer"). Under the terms of the agreement, the Company
will receive $16 million from Pioneer over three years for work performed under
the collaboration. The relationship is exclusive for five years. Pioneer will
own all sequence information and intellectual property developed as a result of
this collaboration. The Company retains commercial rights to use any gene
sequence in human health and for certain specialty and industrial enzyme
applications. During 1996, pursuant to this agreement, the Company received and
recorded as revenue $8 million related to license fees and research payments. In
January 1997, the Company received an additional $3 million pursuant to this
agreement that the Company anticipates will be recognized as revenue in 1997.

In March, 1996 the Company entered into a License Agreement with F.
Hoffmann-La Roche, Ltd. ("Roche") to sequence and assemble the genome of
Streptococcus pneumoniae, a major bacterial pathogen responsible for severe
respiratory and other infections. Roche has received a license to use this
information to identify potential new anti-infectives and antibiotics. The
Company received $2 million from Roche in 1995, which was recorded as revenue in
1996. The Company will receive research payments and potential future royalties.

In June 1996, the Company entered into a Collaboration and License
Agreement with Schering-Plough relating to the field of human gene therapy
(including gene therapy vaccines to a limited extent). Under this agreement, the
Company has granted Schering-Plough a non-exclusive license to use the Company's
Human Gene Technology to conduct research, and an option to obtain an exclusive
license to specific genes in the field

F-12
<PAGE> 67

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE E) -- COLLABORATION AGREEMENTS (CONTINUED)

Collaborative Agreements Outside of the SB Field: (continued)

of gene therapy. The agreement provides that Schering-Plough will pay the
Company a $5 million license fee (payable over five years) for a non-exclusive
research license, an option exercise fee and development milestone payments for
each gene for which it exercises its option to obtain an exclusive license and
royalties on net sales of gene therapy products resulting from research under
the agreement. The agreement is for an initial term expiring June 2001, subject
to extension until 2006 on payment of certain amounts. The Company has received
$1 million for the license fee, which the Company recorded as revenue.

In October 1996, the Company entered into a License and Research Agreement
with Pharmacia & Upjohn Company to sequence a certain genome. Pharmacia & Upjohn
Company has received license rights to use this information to develop products
for the human pharmaceutical and veterinary fields. The Company has received $3
million from Pharmacia & Upjohn Company in 1996 of which $1.5 million is
recorded as deferred revenue.

(NOTE F) -- FURNITURE AND EQUIPMENT

Furniture and equipment, including equipment under capital leases, are
stated at cost and are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Laboratory equipment...................................... $12,555,000 $16,692,000
Computers and EDP equipment............................... 4,089,000 5,363,000
Furniture and office equipment............................ 694,000 1,010,000
Leasehold improvements.................................... 6,134,000 7,777,000
----------- -----------
23,472,000 30,842,000
Less accumulated depreciation and amortization............ 7,467,000 12,811,000
----------- -----------
$16,005,000 $18,031,000
=========== ===========
</TABLE>

(NOTE G) -- EQUIPMENT LEASE OBLIGATIONS

During 1993 and 1994, the Company entered into sale and leaseback
agreements in connection with certain computer and laboratory equipment having a
net book value of $2,132,000 and $1,302,000, respectively. The Company sold the
equipment for $2,198,000 and $1,575,000, respectively, and entered into three
master lease agreements pursuant to which it leased back the above equipment for
initial terms of 48 months. All of the equipment leased under these agreements
have been accounted for as capital leases.

In addition, the Company entered into other capital lease agreements for
certain equipment for initial terms of 36 months. Equipment purchases under
these leases were $92,000 and $934,000 for the years ended December 31, 1994 and
1995, respectively. The recording of capital leases is considered a non-cash
transaction, and therefore is excluded from the Statements of Cash Flows.
Amortization expense related to equipment under capital leases is included in
depreciation and amortization on the statements of cash flows.

The net book value of the equipment held under capital leases was
$1,982,000 and $719,000 at December 31, 1995 and 1996, respectively.

F-13
<PAGE> 68

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE G) -- EQUIPMENT LEASE OBLIGATIONS (CONTINUED)

Future lease payments as of December 31, 1996, are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------------
<S> <C>
1997..................................................... $ 874,000
1998..................................................... 291,000
----------
1,165,000
Less amounts representing interest....................... 68,000
----------
Present value of future lease payments................... 1,097,000
Less amounts due within one year......................... 811,000
----------
Amounts due after one year............................... $ 286,000
==========
</TABLE>

In conjunction with the master lease agreements, the Company granted
warrants to the lessors to purchase 594,000 shares of the Company's common
stock, which the Company valued at $.27 per warrant. The warrants may be
exercised at a purchase price of $1.33 per share or by receiving shares equal to
the value (as determined by a formula) of the warrants by surrender of the
warrants. The warrants contain registration and certain antidilution rights and
are exercisable through November 1998.

In 1994, the lessors exercised warrants for the purchase of 265,000 shares
by electing to receive 245,967 shares, equal to the value of the warrants
surrendered. In 1995, the lessors exercised warrants for the purchase of 230,000
shares by electing to receive 216,330 shares, equal to the value of the warrants
surrendered. In 1996, a lessor exercised warrants for the purchase of 18,000
shares by electing to receive 17,431 shares, equal to the value of the warrants
surrendered.

Pursuant to the Services Agreement (Note D), the Company has provided
equipment with an aggregate purchase price of approximately $5,000,000 which it
sold or assigned to a leasing consortium which, in turn, leased it to TIGR (the
"Leases") over a four-year term; the Company funds the rental payments required
by the Leases. The Company has the right under certain circumstances to take
possession of the equipment and assume the Leases.

Future funding payments relating to the Leases to be made to TIGR are as
follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------------------------------------
<S> <C>
1997................................................ $454,000
1998................................................ 36,000
--------
$490,000
========
</TABLE>

(NOTE H) -- OTHER ASSETS

Other assets at December 31, 1995 and 1996, include a note receivable from
an officer of $891,000. The note is due on demand and does not bear interest.
The note is collateralized by shares of the Company's common stock owned by the
officer that have a market value of at least 200% of the outstanding balance of
the note.

F-14
<PAGE> 69

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE I) -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- ----------
<S> <C> <C>
Equipment purchases........................................ $ 917,000 $ 561,000
Due to TIGR................................................ -- --
Professional fees.......................................... 230,000 489,000
Accrued registration costs................................. 6,000 --
Other accrued expenses..................................... 1,188,000 2,311,000
---------- ----------
$2,341,000 $3,361,000
========== ==========
</TABLE>

(NOTE J) -- LONG-TERM DEBT

In December 1994, the Company entered into a loan agreement with Maryland
Industrial Development Financing Authority ("MIDFA"). Major leasehold
improvements were financed with the proceeds of a $4,000,000 taxable variable
rate bond issue (the "Bonds") from MIDFA. The Company is required to make annual
payments of $444,000 commencing December 1995 plus interest at a variable rate
of interest (5.91% at December 31, 1995 and 5.64% at December 31, 1996,
respectively), to the trustee on behalf of the bondholders which is equal to the
interest and principal requirements on the bonds. The variable rate is equal to
50 basis points plus the higher of the yield equivalent of the average 30-day or
90-day commercial paper rate. Under certain circumstances, the rate may be
adjusted either upward or downward but in no event in excess of 10 basis points
above or below the rate determined above. MIDFA has entered into an indenture
with the Trustee whereby the Trustee has obtained an irrevocable letter of
credit on behalf of the bondholders.

The following funds were created under the terms of the trust indenture:

[1] Facility fund:

The initial bond proceeds of $4 million were deposited into this fund and
disbursed in accordance with the agreement. The funds were restricted under the
bond agreement to be used for leasehold improvements at one of the Company's
leased buildings. As of December 31, 1995, approximately $4.1 million of bond
proceeds and accrued interest had been drawn from the fund.

[2] Bond fund:

Required monthly principal payments of $37,000 plus interest are deposited
into this fund beginning January 1, 1995. The interest is disbursed monthly to
the bondholders. Principal is to be repaid from this fund to the bondholders at
the rate of $444,000 annually commencing on December 1, 1995 with a final
payment of $448,000 on December 1, 2003. The Company deposited $686,000 and
$632,000 of principal and interest into this fund during the years ended
December 31, 1995 and 1996, respectively.

In connection with the Loan Agreement, the Company entered into an
irrevocable Letter of Credit Agreement with a bank for the account of the
Company and in favor of the Trustee in the initial amount of $4,066,667 which
expires on December 15, 2003. Concurrently, the Company entered into a
Collateral Pledge Agreement with the bank. The Company is required to maintain
43% of the outstanding principal amount of the Bonds (50% is required under
certain circumstances) with the bank as Collateral for the Letter of Credit.
Pursuant to the Collateral Pledge Agreement at December 31, 1996, the Company
had $1,705,000 on deposit with the bank that is invested in a U.S. Government
agency security. The pledge collateral will be released upon the payment and
performance in full of the Company's Letter of Credit obligations. The agreement
contains covenants with respect to tangible net worth, cash and cash equivalents
and investment securities, as

F-15
<PAGE> 70

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE J) -- LONG-TERM DEBT (CONTINUED)

[2] Bond Fund: (continued)

well as other covenants and prohibits the payment of cash dividends. During
1994, the Company incurred costs of $136,000 in connection with this loan which
are being amortized over the term of the loan.

(NOTE K) -- COMMITMENTS AND OTHER MATTERS

Operating leases:

The Company leases office and laboratory premises and equipment pursuant to
operating leases expiring at various dates through 2003. The leases contain
various renewal options. Minimum annual rentals are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------
<S> <C>
1997.............................................. $ 2,086,000
1998.............................................. 1,948,000
1999.............................................. 1,372,000
2000.............................................. 1,307,000
2001.............................................. 1,344,000
Thereafter........................................ 2,260,000
-----------
10,317,000
Less sub-lease income............................... 59,000
-----------
$10,258,000
===========
</TABLE>

In 1994 and 1996, the Company entered into leases for office and laboratory
space which provide for certain rent abatement and rent escalations on each
anniversary of the lease commencement date. For financial reporting purposes,
rent expense is charged to operations on a straight-line basis over the term of
the lease, resulting in a liability for deferred rent of $182,000 and $262,000
included in other liabilities at December 31, 1995 and 1996, respectively.

Certain other leases provide for escalation for increases in real estate
taxes and certain operating expenses, as well as various renewal terms.

Rent expense aggregated $1,124,000, $1,866,000, and $1,988,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.

Capital expenditures:

At December 31, 1995 and 1996, the Company had commitments for capital
expenditures, consisting primarily of laboratory equipment, of $2,100,000 and
$700,000, respectively.

401(k) Plan:

Effective January 15, 1993, the Company adopted a 401(k) pension plan
available to eligible full-time employees. The Company made discretionary
contributions of $97,000 and $168,000 to the plan for the years ended December
31, 1995 and 1996. The Company made no contributions to the plan for the year
ended December 31, 1994.

F-16
<PAGE> 71

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE L) -- STOCKHOLDERS' EQUITY

Preferred Stock:

In November, 1993, the shareholders authorized a new series of preferred
stock of 1,000,000 shares, $.01 par value, none of which was issued and
outstanding at December 31, 1995 and 1996.

Common Stock:

The Company has the right of first refusal on the sale of certain common
stock issued in connection with restricted stock purchase agreements. The price
to be paid by the Company is $1.13 and $.19 per share less than the price of any
proposed sale for 561,160 shares and 246,052 shares, respectively.

Stock option plan:

The Company applies APB 25 in accounting for its stock option incentive
plan and, accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the grant price of the
option at the date of grant. The effect of applying SFAS No. 123 on 1995 and
1996 pro forma net loss as stated above is not necessarily representative of the
effects on reported net loss for future years due to, among other things, (1)
the vesting period of the stock options and the (2) fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1995 and 1996 would have been approximately $32.8
million and $12.9 million, or $2.08 per share and $0.69 per share, respectively.
The fair value of the options granted during 1995 and 1996 are estimated as
$11.99 and $16.92 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield 0%, volatility of 63.61%, risk-free interest rate of 5.61% for 1995 and
6.28% for 1996, and expected life of 6 years.

The 1993 Employee Incentive and Non-qualified Stock Option Plan (the "1993
Plan") provides for the granting of options to purchase up to 565,827 shares of
the Company's common stock, at a price, for the incentive options, not less than
the fair market value of the common stock on the date of grant. The vesting
period of the options is determined by the Board of Directors and is generally
five years. Outstanding options expire after ten years.

Additional information with respect to 1993 Stock Option activity is
summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 528,346 $ 4.11 428,592 $ 4.40 399,111 $ 9.16
Options granted................ 26,500 17.49 78,455 27.50 -- --
Options exercised.............. (44,168) .81 (73,449) 2.98 (96,128) 2.07
Options canceled or expired.... (82,086) 8.67 (34,487) 4.89 (9,365) 17.90
------- ------- -------
Outstanding at end of year..... 428,592 4.40 399,111 9.16 293,618 11.21
======= ======= =======
Options exercisable at
year-end..................... 70,625 2.62 118,724 3.27 148,900 9.25
======= ======= =======
</TABLE>

F-17
<PAGE> 72

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE L) -- STOCKHOLDERS' EQUITY (CONTINUED)

Stock Option Plan: (continued)

The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------------ ----------- ---------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.20 to $6.00................. 141,198 6.4 $ 2.45 84,948 $ 1.99
$9.00 to $27.50............... 152,420 7.9 19.31 63,952 18.99
------- --- ------ ------- ------
293,618 7.2 $11.21 148,900 $ 9.25
======= === ====== ======= ======
</TABLE>

On March 14, 1994, the Company adopted a 1994 Employee Incentive and
Nonqualified Stock Option Plan (the "1994 Plan") for the granting of options to
purchase up to 950,000 shares of common stock to officers, employees, directors,
consultants and non-employee directors. The exercise price of options granted
under the plan may not be less than the market price on the date of grant. In
May, 1996, an amendment was approved to increase the number of shares available
for issuance from 950,000 options to 2,450,000 options. The vesting period of
the options is determined by the Board of Directors and is generally five years.
Outstanding options expire after ten years.

Additional information with respect to 1994 Stock Option activity is
summarized as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... -- $ -- 655,958 $ 18.01 884,214 $ 18.01
Options granted................. 664,958 18.03 348,263 17.86 790,616 32.18
Options exercised............... -- -- (40,242) 17.75 (97,624) 17.42
Options canceled or expired..... (9,000) 19.38 (79,765) 17.54 (48,427) 20.58
------- ------- ---------
Outstanding at end of year...... 655,958 18.01 884,214 18.01 1,528,779 25.29
======= ======= =========
Options exercisable at
year-end...................... 80,000 $ 17.84 190,861 $ 17.52 348,533 $ 20.05
======= ======= =========
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- --------------------------------- ----------- ---------------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$12.75 to $22.00................. 672,163 7.7 $ 17.15 265,883 $17.53
$23.50 to $33.88................. 460,400 8.8 26.44 62,550 25.07
$36.25 to $42.56................. 396,216 9.8 37.78 20,100 37.77
--------- --- ------- ------- ------
1,528,779 8.6 $ 25.29 348,533 $20.05
========= === ======= ======= ======
</TABLE>

On January 21, 1997, the Company granted options to purchase 500,000 shares
of common stock to an officer.

F-18
<PAGE> 73

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE L) -- STOCKHOLDERS' EQUITY (CONTINUED)

Stock Option Plan: (continued)

At December 31, 1995, options for 49,099 and 25,544 were available for
future grant under the 1993 Plan and 1994 Plan, respectively. At December 31,
1996, options for 58,464 and 783,355 were available for future grant under the
1993 Plan and 1994 Plan, respectively.

Reserved for issuance:

The Company has also reserved shares of common stock for issuance upon
exercise of warrants and options as follows:

<TABLE>
<S> <C> <C>
(i) Warrants issued in conjunction with leasing agreements (Note G).... 81,000
(ii) Warrants issued to certain stockholders (a)........................ 65,286
(iii) Stock option plan -- 1993 plan..................................... 352,082
(iv) Stock option plan -- 1994 plan..................................... 2,312,134
These warrants were issued in connection with a commitment made by certain
stockholders; they are exercisable at $.20 per share and expire in December
(a) 1998. In connection therewith, the Company recorded a noncash interest charge
of $7,500 in 1993.
</TABLE>

(NOTE M) -- INCOME TAXES

The Company provides for income taxes using the liability method. The
difference between the tax provision and the amount that would be computed by
applying the statutory Federal income tax rate to income before taxes is
attributable to the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
Federal income tax provision at 34%................ $ 3,296,000 $(11,124,000) $(2,570,000)
State taxes, net of federal effect................. 485,000 (1,511,000) --
Expenses for which no tax benefit is available..... 90,000 96,000 112,000
Utilization of net operating loss carryforward..... (1,338,000) -- --
Increase in valuation allowance on deferred tax
assets........................................... 318,000 12,484,000 3,262,000
State taxes and valuation allowance change......... -- -- (391,000)
Partial utilization of tax credits................. (395,000) -- --
Foreign taxes paid................................. -- 500,000 225,000
Tax credits generated and not used................. -- (2,305,000) (403,000)
Other.............................................. (20,000) 209,000 (27,000)
----------- ------------ -----------
$ 2,436,000 $ (1,651,000) $ 208,000
=========== ============ ===========
</TABLE>

F-19
<PAGE> 74

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE M) -- INCOME TAXES (CONTINUED)

Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
CURRENT LONG-TERM
ASSET/(LIABILITY) ASSET/(LIABILITY)
----------------- -----------------
<S> <C> <C>
December 31, 1995
Net operating loss carryforward............................. $ -- $ 9,384,000
Research and development tax credit carryforward............ -- 4,347,000
Deferred start-up costs..................................... 41,000 41,000
Unearned portion of compensatory stock and warrants......... (180,000) (60,000)
Other....................................................... 173,000 93,000
--------- -------------
34,000 13,805,000
Less valuation allowance.................................... (34,000) (13,805,000)
--------- -------------
$ -- $ --
========= =============
December 31, 1996
Net operating loss carryforward............................. $ -- $ 11,808,000
Research and development tax credit carryforward............ -- 4,750,000
Deferred start-up costs 41,000 --
Other....................................................... 218,000 262,000
--------- -------------
259,000 16,820,000
Less valuation allowance.................................... (259,000) (16,820,000)
--------- -------------
$ -- $ --
========= =============
</TABLE>

The Company recognized a valuation allowance to the full extent of its
deferred tax assets since the likelihood of realization of the benefit cannot be
determined.

Provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
---------- ----------- --------
<S> <C> <C> <C>
Current:
Federal...................................... $1,911,000 $(1,643,000) $ --
State........................................ 508,000 (508,000) (17,000)
Foreign taxes................................ -- 500,000 225,000
Deferred....................................... 17,000 -- --
---------- ----------- --------
$2,436,000 $(1,651,000) $208,000
========== =========== ========
</TABLE>

F-20
<PAGE> 75

HUMAN GENOME SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(NOTE M) -- INCOME TAXES (CONTINUED)

The Company has available tax credit carryforwards expiring as follows:

<TABLE>
<S> <C>
2000..................................................... $ 500,000
2001..................................................... 225,000
2008..................................................... 745,000
2009..................................................... 1,297,000
2010..................................................... 783,000
2011..................................................... 962,000
No expiration............................................ 238,000
----------
$4,750,000
==========
</TABLE>

The Company has net operating loss carryforwards for federal income tax
purposes of approximately $30 million which expire, if unused, in the year 2011.

F-21
<PAGE> 76

================================================================================

No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon has having been authorized by the Company or the Underwriters. This
Prospectus does not constitute an offer of any securities other than those to
which it relates or an offer to sell, or a solicitation of an offer to buy, to
any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any im- plication that the information
contained herein is correct, as of any time subsequent to the date hereof.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference............................ 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 15
Price Range of Common Stock........... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Financial Data............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 23
Management............................ 43
Principal Stockholders................ 46
Shares Eligible for Future Sale....... 49
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 51
Glossary of Terms..................... 52
Index to Financial Statements......... F-1
</TABLE>

================================================================================

3,000,000 Shares

[HUMAN GENOME SCIENCES, INC. LOGO]
HUMAN GENOME
SCIENCES, INC.

COMMON STOCK

---------------------------
PROSPECTUS
, 1997
---------------------------

LEHMAN BROTHERS

BEAR, STEARNS & CO. INC.

MERRILL LYNCH & CO.

SMITH BARNEY INC.

UBS SECURITIES

================================================================================
<PAGE> 77

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:

<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC Registration Fee...................................................... $ 44,955
NASD Filing Fee........................................................... 15,335
NASDAQ Listing Fee........................................................ 17,500
Printing and Engraving Expenses........................................... 50,000
Accounting Fees and Expenses.............................................. 35,000
Legal Fees and Expenses................................................... 165,000
Blue Sky Fees and Expenses................................................ 3,000
Transfer Agent's Fees and Expenses........................................ 5,000
Miscellaneous Expenses.................................................... 14,210
--------
Total........................................................... $350,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Certificate of Incorporation and By-Laws of the Registrant provide that
the Company shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "GCL"). Section 145 of the GCL, relating
to indemnification, is hereby incorporated herein by reference.

In accordance with Section 102(a)(7) of the GCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director with certain limited exceptions set forth in Section
102(a)(7).

Reference is made to Section 8 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriters of the Registrant, its
officers and directors.

ITEM 16. EXHIBITS

<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Bachner, Tally, Polevoy & Misher LLP
23.1 Consent of Bachner, Tally, Polevoy & Misher LLP (See Item 5.1)
23.2 Consent of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein
23.3 Consent of Fenwick & West LLP
23.4* Consent of Ernst & Young LLP
23.5* Consent of Richard A. Eisner & Company, LLP
24.1* Power of Attorney (Included on Page II-3)
27* Financial Data Schedule
</TABLE>

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

* Previously filed.

II-1
<PAGE> 78

ITEM 17. UNDERTAKINGS

Undertaking Required by Regulation S-K, Item 512(f).

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.

Undertaking Required by Regulation S-K, Item 512(h).

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the foregoing provisions, 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 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 Act and will be governed by the final adjudication of
such issue.

Undertakings required by Regulation S-K, Item 512(i).

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, 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 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.

II-2
<PAGE> 79

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all
requirements for filing on Form S-3 and has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rockville, State of Maryland on the 11th day of
March, 1997.

HUMAN GENOME SCIENCES, INC.,

By: *

------------------------------------
William A. Haseltine, Ph.D.
Chairman and Chief Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ------------------

<C> <S> <C>
* Chairman of the Board and Chief March 11, 1997
- ------------------------------------------ Executive Officer (principal
William A. Haseltine, Ph.D. executive officer)

/s/ MELVIN D. BOOTH President and Chief Operating March 11, 1997
- ------------------------------------------ Officer and Director
Melvin D. Booth
* Senior Vice President, Research March 11, 1997
- ------------------------------------------ and Development and Director
Craig A. Rosen, Ph.D.

* Senior Vice President, Business March 11, 1997
- ------------------------------------------ Development and Director
Bradley G. Lorimier

* Senior Vice President and Chief March 11, 1997
- ------------------------------------------ Financial Officer (principal
Steven C. Mayer accounting and financial
officer)

* Director March 11, 1997
- ------------------------------------------
Robert A. Armitage

* Director March 11, 1997
- ------------------------------------------
James H. Cavanaugh, Ph.D.

* Director March 11, 1997
- ------------------------------------------
Beverly Sills-Greenough

* Director March 11, 1997
- ------------------------------------------
Robert Hormats

* Director March 11, 1997
- ------------------------------------------
Donald D. Johnston

* Director March 11, 1997
- ------------------------------------------
Max Link
</TABLE>

II-3
<PAGE> 80

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ------------------

* Director March 11, 1997
- ------------------------------------------
Joshua Ruch

* Director March 11, 1997
- ------------------------------------------
James B. Wyngaarden, M.D.

*By: /s/ MELVIN D. BOOTH
- ------------------------------------------
Melvin D. Booth
Attorney-In-Fact
</TABLE>

II-4
<PAGE> 81
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
1.1 Form of Underwriting Agreement
5.1 Opinion of Bachner, Tally, Polevoy & Misher LLP
23.1 Consent of Bachner, Tally, Polevoy & Misher LLP (See Item 5.1)
23.2 Consent of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein
23.3 Consent of Fenwick & West LLP
23.4* Consent of Ernst & Young LLP
23.5* Consent of Richard A. Eisner & Company, LLP
24.1* Power of Attorney (Included on Page II-3)
27* Financial Data Schedule
</TABLE>

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

* Previously filed.

<PAGE> 1
Exhibit 1.1

3,000,000 SHARES

HUMAN GENOME SCIENCES, INC.

COMMON STOCK
($.01 PAR VALUE)

UNDERWRITING AGREEMENT

, 1997

LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
UBS SECURITIES LLC
As Representatives of the several
Underwriters named in Schedule 1,
C/O LEHMAN BROTHERS INC.
Three World Financial Center
New York, New York 10285

Dear Sirs:

Human Genome Sciences, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule 1 hereto (the "Underwriters") 3,000,000 shares (the "Firm Shares") of
the Company's Common Stock, $.01 par value per share (the "Common Stock"). In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional 450,000 shares of Common Stock on the terms and
for the purposes set forth in Section 2 (the "Option Shares"). The Firm Shares
and the Option Shares, if purchased, are hereinafter collectively called the
"Shares." This is to confirm the agreement concerning the purchase of the
Shares from the Company by the Underwriters.
<PAGE> 2
1. Representations, Warranties and Agreements of the
Company. The Company represents, warrants and agrees that:

(a) A registration statement on Form S-3 (File
No.333-22293) with respect to the Shares has (i) been prepared by the Company
in conformity with the requirements of the United States Securities Act of 1933
(the "Securities Act") and the rules and regulations (the "Rules and
Regulations") of the United States Securities and Exchange Commission (the
"Commission") thereunder, (ii) been filed with the Commission under the
Securities Act and (iii) become effective under the Securities Act. If any
post-effective amendment to such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement, the most
recent such amendment has been declared effective by the Commission. Copies of
such registration statement and all amendments thereto, including
post-effective amendments, if any, have been delivered by the Company to you as
the representatives (the "Representatives") of the Underwriters. As used in
this Agreement, "Effective Time" means the date and the time as of which such
registration statement, or the most recent post-effective amendment thereto or
any related registration statement filed pursuant to Rule 462(b), if any, was
declared effective by the Commission; "Effective Date" means the date of the
Effective Time; "Preliminary Prospectus" means each prospectus included in such
registration statement or amendments thereof, before it became effective under
the Securities Act and any prospectus filed with the Commission by the Company
with the consent of the Representatives pursuant to Rule 424(a) of the Rules
and Regulations; "Registration Statement" means such registration statement, as
amended at the Effective Time, including any documents incorporated by
reference therein at such time and all information contained in the final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations in accordance with Section 5 hereof and deemed to be a part of the
registration statement as of the Effective Time pursuant to paragraph (b) of
Rule 430A of the Rules and Regulations; if the Company has filed or files a
registration statement under Rule 462(b) of the Rules and Regulations ("Rule
462(b)") to register additional shares (a "462(b) Registration Statement"),
then the term "Registration Statement" shall be deemed to include the 462(b)
Registration Statement; and "Prospectus" means such final prospectus, as first
filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of
the Rules and Regulations. References made herein to any Preliminary
Prospectus or to the Prospectus shall be deemed to refer to and include any
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act, as of the date of such Preliminary Prospectus or the

2
<PAGE> 3
Prospectus, as the case may be, and any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include any document filed under the Securities Exchange Act of
1934 (the "Exchange Act") after the date of such Preliminary Prospectus or the
Prospectus, as the case may be, and incorporated by reference in such
Preliminary Prospectus or the Prospectus, as the case may be; and any reference
to any amendment to the Registration Statement shall be deemed to include any
annual report of the Company filed with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act after the Effective Time that is
incorporated by reference in the Registration Statement. The Commission has
not issued any order preventing or suspending the use of any Preliminary
Prospectus or Prospectus or the effectiveness of the Registration Statement,
and no proceeding for any such purpose has been initiated or, to the best of
the Company's knowledge, threatened by the Commission.

(b) The Company meets the requirements for use of
Form S-3 under the Securities Act, and the Registration Statement conforms, and
the Prospectus and any further amendments or supplements to the Registration
Statement or the Prospectus will, when they become effective or are filed with
the Commission, as the case may be, conform in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do not and
will not, as of the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date (as to a
prospectus and any amendment or supplement thereto) contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided
that the Company makes no representation or warranty as to information
contained in or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to the
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein. There is no contract or document required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement which is not described or filed as
required.

(c) The documents incorporated by reference in
the Prospectus or from which information is so incorporated by reference, at
the time they became effective or were filed with the Commission, complied in
all material respects with the requirements of the Securities Act and the
Exchange Act and the rules and regulations of the Commission thereunder, and
none of such documents contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and any further documents so filed
and incorporated by reference in the Prospectus, when such documents become
effective or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Securities Act or Exchange
Act, as applicable, and the rules and regulations of the Commission thereunder
and will not contain an untrue statement of a material

3
<PAGE> 4
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.

(d) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of State of
Delaware, is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of property
or the conduct of its business requires such qualification, and has all
corporate power and authority necessary to own or hold its properties and to
conduct the business in which it is engaged, except where the failure to so
qualify would not have a material adverse effect on the condition (financial or
other), results of operations, business or prospects of the Company. The
Company has no subsidiaries (as defined in Section 15 hereof).

(e) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the outstanding shares of capital
stock of the Company have been duly authorized and validly issued, are fully
paid and non-assessable and conform to the description thereof contained in the
Prospectus. There are no preemptive rights or other rights to subscribe for or
to purchase, or any restriction upon the voting or transfer of, any shares of
capital stock pursuant to the Company's Articles of Incorporation, By-laws or
other governing documents or any agreement or other instrument to which the
Company is a party or by which it may be bound, except pursuant to the
Company's stock option and employee stock purchase plans described in the
Prospectus.

(f) The Shares to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly authorized
and, when issued and delivered against payment therefor as provided herein,
will be duly and validly issued, fully paid and non-assessable and not be
subject to any preemptive rights; and the Shares will conform to the
description thereof contained in the Prospectus.

(g) The Company has full right, corporate power
and authority to enter into this Agreement and to perform and discharge its
obligations hereunder, and this Agreement has been duly authorized, executed
and delivered by the Company and constitutes the valid and legally binding
agreement of the Company, enforceable in accordance with its terms, except as
(x) the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws and (y) the availability
of equitable remedies may be limited by equitable principles of general
applicability (regardless of whether considered in a proceeding in equity or at
law).

4
<PAGE> 5
(h) The execution, delivery and performance of
this Agreement by the Company and the consummation of the transactions
contemplated hereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company is a party or by which the Company is bound or
to which any of the property or assets of the Company is subject, nor will such
actions result in any violation of the provisions of the Certificate of
Incorporation or By-laws or other organizational documents of the Company, as
amended, or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties or assets; and except for the registration of the Shares under the
Securities Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable blue
sky, state or foreign securities laws and the rules of the Nasdaq National
Market in connection with the purchase and distribution of the Shares by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement by the Company
and the consummation of the transactions contemplated hereby.

(i) Other than rights held by Bear Stearns
International Limited, Oxford Bioscience Partners L.P., Oxford Bioscience
Partners (Adjunct) L.P., Oxford Bioscience Partners (Bermuda) Limited
Partnership, HealthCare Ventures III, L.P., HealthCare Ventures IV, L.P., Aetna
Life Insurance Company, members of the Bass family and certain related persons
who entered into a Stock Purchase Agreement with HealthCare Ventures III, L.P.
and HealthCare Ventures IV, L.P. dated April 10, 1996 (the "Bass Group"),
SmithKline Beacham Corporation, MMC/GATX Partnership No. 1, and Rho Management
Trust III, there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such or to include securities
for registration in a registration statement filed by the Company under the
Securities Act (other than rights which have been waived or satisfied); and the
Company is not required to include any securities in the securities registered
pursuant to the Registration Statement, nor is it required to file any
registration statement for the registration of any securities of any person or
register any such securities pursuant to any other registration statement filed
by the Company under the Securities Act for a period of at least 90 days after
the Effective Date.

5
<PAGE> 6
(j) The Company has not sold or issued any shares
of Common Stock during the six-month period preceding the date of the
Prospectus, including any sales pursuant to Rule 144A under, or Regulations D
or S of, the Securities Act, other than shares issued pursuant to the 1994
Stock Option Plan of Human Genome Sciences, Inc. and the Human Genome Sciences,
Inc. 1993 Employee Incentive and Non-Qualified Stock Option Plan
(collectively, the "Stock Option Plans").

(k) The Company has not sustained, since the date
of the latest audited financial statements included in the Prospectus, any
material loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since such date, there has not been any
change in the capital stock or long-term debt of the Company (except as a
result of the exercise of outstanding options or warrants after the date
hereof) or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations
of the Company, otherwise than as set forth or contemplated in the Prospectus.

(l) The financial statements (including the
related notes and supporting schedules) filed as part of the Registration
Statement or included in the Prospectus present fairly the financial condition,
results of operations and changes in financial condition of the entities
purported to be shown thereby, at the dates and for the periods indicated, and
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated.

(m) Ernst & Young LLP, who have certified certain
financial statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 7(g) hereof, are
independent public accountants as required by the Securities Act and the Rules
and Regulations; and Richard A. Eisner & Company, LLP, who have certified
certain financial statements of the Company, whose report appears in the
Prospectus and who have delivered the initial letter referred to in Section
7(g) hereof, are independent accountants as required by the Securities Act and
the Rules and Regulations and were so during the periods covered by the
financial statements on which they reported contained in the Prospectus.

(n) The Company has good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by it, in each case free and

6
<PAGE> 7
clear of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company. All real property and buildings held under lease
by the Company are held by it under valid, subsisting and enforceable leases,
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company.

(o) The Company carries, or is covered by,
insurance in such amounts and covering such risks as is required by its
contractual relations, or as is adequate for the conduct of its business and
the value of its properties and as is customary for companies engaged in
similar businesses in similar industries.

(p) Except as described in the Prospectus, the
Company owns or possesses adequate rights to use all material patents (or
foreign equivalents), patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of its business and has no reason to believe
that the conduct of its business will conflict with, and except as described in
the Prospectus, has not received any notice of any claim of conflict with, any
such rights of others.

(q) Except as described in the Prospectus, there
are no legal or governmental proceedings pending to which the Company is a
party or of which any property or assets of the Company are the subject which,
if determined adversely to the Company, might have a material adverse effect on
the financial position, stockholders' equity, results of operations, business
or prospects of the Company; and to the best of the Company's knowledge, no
such proceedings are threatened or contemplated by governmental authorities or
threatened by others.

(r) There are no contracts or other documents
which are required to be described in the Prospectus or filed as exhibits to
the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed as
exhibits to the Registration Statement.

(s) No relationship, direct or indirect, exists
between or among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand, which is
required to be described in the Prospectus or the documents incorporated by
reference therein but is not so described.

7
<PAGE> 8
(t) No labor disturbance by the employees of the
Company exists or, to the knowledge of the Company, is imminent which might be
expected to have a material adverse effect on the financial position,
stockholders' equity, results of operations, business or prospects of the
Company.

(u) The Company is in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined
in ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by action
or by failure to act, which would cause the loss of such qualification.

(v) The Company has filed all federal, state and
local income and franchise tax returns required to be filed through the date
hereof and has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company which has had (nor does the Company have
any knowledge of any tax deficiency which, if determined adversely to the
Company, might have) a material adverse effect on the financial position,
stockholders' equity, results of operations, business or prospects of the
Company.

(w) Since the date as of which information is
given in the Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities (except pursuant to the exercise of outstanding options and
warrants), (ii) incurred any liability or obligation, direct or contingent,
other than liabilities and obligations which were incurred in the ordinary
course of business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on its capital stock.

(x) The Company (i) makes and keeps accurate
books and records and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain accountability
for its assets, (C) access to its assets is permitted only in accordance with
management's authorization and

8
<PAGE> 9
(D) the reported accountability for its assets is compared with existing assets
at reasonable intervals.

(y) The Company is not (i) in violation of its
Certificate of Incorporation or By-laws or other organizational documents, as
amended, (ii) in default in any material respect, and except as described in
the Prospectus, no event has occurred which, with notice or lapse of time or
both, would constitute such a material default, in the due performance or
observance of any term, covenant or condition contained in any material
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to which any of
its properties or assets is subject or (iii) in violation in any material
respect of any law, ordinance, governmental rule, regulation or court decree to
which it or its property or assets may be subject or has failed to obtain any
material license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or to the
conduct of its business.

(z) Neither the Company, nor any director,
officer, agent, employee or other person associated with or acting on behalf of
the Company, has used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity; made
any direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the Foreign Corrupt Practices Act of 1977; or made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment.

(aa) There has been no storage, disposal,
generation, manufacture, refinement, transportation, handling or treatment of
toxic wastes, medical wastes, hazardous wastes or hazardous substances by the
Company (or, to the knowledge of the Company, any of its predecessors in
interest) at, upon or from any of the property now or previously owned or
leased by the Company in violation of any applicable law, ordinance, rule,
regulation, order, judgment, decree or permit or which would require remedial
action under any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit, except for any violation or remedial action which would not
have, or could not be reasonably likely to have, singularly or in the aggregate
with all such violations and remedial actions, a material adverse effect on the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company, taken as a whole; there has been no
material spill, discharge, leak, emission, injection, escape, dumping or
release of any kind onto such property or into the environment surrounding such
property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or
hazardous substances due to or caused by the Company or with respect to which
the Company has knowledge, except for any such spill,

9
<PAGE> 10
discharge, leak, emission, injection, escape, dumping or release which would
not have or would not be reasonably likely to have, singularly or in the
aggregate with all such spills, discharges, leaks, emissions, injections,
escapes, dumpings and releases, a material adverse effect on the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company; and the terms "hazardous wastes", "toxic wastes",
"hazardous substances" and "medical wastes" shall have the meanings specified
in any applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.

(ab) The Company is not an "investment company"
within the meaning of such term under the United States Investment Company Act
of 1940 and the rules and regulations of the Commission thereunder.

(ac) The Common Stock of the Company is quoted on
the Nasdaq National Market and the symbol HGSI, and the Shares are approved for
listing on the Nasdaq National Market, subject only to prior notice of
issuance.

(ad) The Company has not taken, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.

2. Purchase of the Shares by the Underwriters. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell 3,000,000
Firm Shares to the several Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase the number of Firm Shares
appearing opposite that Underwriter's name in Schedule 1 hereto. The
respective purchase obligations of the Underwriters with respect to the Firm
Shares shall be rounded among the Underwriters to avoid fractional shares, as
the Representatives may determine.

In addition, the Company hereby grants to the Underwriters an
option to purchase up to 450,000 Option Shares. Such option is granted solely
for the purpose of covering over-allotments in the sale of Firm Shares and is
exercisable as provided in Section 4 hereof. Option Shares shall be purchased
severally for the account of the Underwriters in proportion to the number of
Firm Shares set opposite the name of such Underwriters in Schedule 1 hereto.
The respective purchase obligations of each Underwriter with respect to the
Option Shares shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Shares other than in

10
<PAGE> 11
100 share quantities. The price of both the Firm Shares and any Option Shares
shall be $_____ per share.

The Company shall not be obligated to deliver any of the
Shares to be delivered on the First Delivery Date or the Second Delivery Date
(as hereinafter defined), as the case may be, except upon payment for all of
the Shares to be purchased on such Delivery Date as provided herein.

3. Offering of Shares by the Underwriters. Upon
authorization by the Representatives of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.

4. Delivery of and Payment for the Shares. Delivery of
and payment for the Firm Shares shall be made at the offices of Lehman Brothers
Inc., at 10:00 a.m., New York time, on the third full business day following
the date of this Agreement (or on the fourth full business day if the pricing
of the Firm Shares should take place after 4:30 p.m., New York time) or at such
other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to
as the "First Delivery Date." On the First Delivery Date, the Company shall
deliver or cause to be delivered certificates representing the Firm Shares to
the Representatives for the account of each Underwriter against payment to or
upon the order of the Company of the purchase price by certified or official
bank check or checks payable in New York Clearing House (next-day) funds. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Firm Shares shall be registered in such names
and in such denominations as the Representatives shall request in writing not
less than two full business days prior to the First Delivery Date. For the
purpose of expediting the checking and packaging of the certificates for the
Firm Shares, the Company shall make the certificates representing the Firm
Shares available for inspection by the Representatives in New York, New York,
not later than 2:00 p.m., New York City time, on the business day prior to the
First Delivery Date.

At any time on or before the thirtieth day after the date of
this Agreement, the option granted in Section 2 may be exercised by notice to
the Company by the Representatives. Such notice shall provide the aggregate
number of Option Shares as to which the option is being exercised, the names in
which the Option Shares are to be registered, the denominations in which the
Option Shares are to be issued and the date and time, as determined by the
Representatives, when the Option Shares are to be delivered; provided, however,
that this date and time shall not be

11
<PAGE> 12
earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been
exercised. The date and time the Option Shares are delivered are sometimes
referred to as the "Second Delivery Date" and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".

Delivery of and payment for the Option Shares shall be made at
the place specified in the first sentence of the first paragraph of this
Section 4 (or at such other place as shall be determined by agreement between
the Representatives and the Company) at 10:00 a.m., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver
or cause to be delivered the certificates representing the Option Shares to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks payable in New York Clearing House (next-day) funds. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Option Shares shall be registered in such names
and in such denominations as the Representatives shall request in the aforesaid
written notice. For the purpose of expediting the checking and packaging of
the certificates for the Option Shares, the Company shall make the certificates
representing the Option Shares available for inspection by the Representatives
in New York, New York, not later than 2:00 p.m., New York City time, on the
business day prior to the Second Delivery Date.

5. Further Agreements of the Company. The Company
hereby covenants and agrees:

(a) To prepare the Prospectus in the form
required by the Securities Act and acceptable to the Representatives and to
file such Prospectus pursuant to Rule 424(b) under the Securities Act not later
than Commission's close of business on the second business day following the
execution and delivery of this Agreement or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Securities Act; to notify the
Representatives and their counsel of, and provide thereto, any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for supplemental information; to make no further amendment or
any supplement to the Registration Statement or to the Prospectus prior to the
last Delivery Date except as permitted herein; to advise the Representatives,
promptly after it receives notice thereof, of the time when any amendment to
the Registration Statement has been filed or becomes effective or any supplement
to the Prospectus or any amended Prospectus has been filed

12
<PAGE> 13
and to furnish the Representatives with copies thereof; to file, if the Company
elects to rely upon Rule 462(b), a 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 of the Rules and Regulations by the earlier of (i)
10:00 p.m. New York time on the date of this Agreement or (ii) the time
confirmations are sent or given, as specified by Rule 462(b); to file promptly
all reports and any definitive proxy or information statements required to be
filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for
so long as the delivery of a prospectus is required in connection with the
offering or sale of the Shares; to advise the Representatives, promptly after
it receives notice thereof, of the issuance by the Commission of any stop order
or of any order preventing or suspending the use of any Preliminary Prospectus
or the Prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the Prospectus or
for additional information; and, in the event of the issuance of any stop order
or of any order preventing or suspending the use of any Preliminary Prospectus
or the Prospectus or suspending any such qualification, to use promptly its
best efforts to obtain its withdrawal;

(b) To furnish promptly to each of the
Representatives and to counsel for the Underwriters a signed copy of the
Registration Statement as originally filed with the Commission, and each
amendment thereto filed with the Commission, including all consents and
exhibits filed therewith (including all documents incorporated by reference
into the Prospectus pursuant to Form S-3 under the 1933 Act);

(c) To deliver promptly to the Representatives
such number of the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as originally
filed with the Commission and each amendment thereto (including all documents
incorporated by reference into the Prospectus pursuant to Form S-3 under the
1933 Act); and (ii) each Preliminary Prospectus, the Prospectus and any amended
or supplemented Prospectus; and, if the delivery of a prospectus is required at
any time after the Effective Time in connection with the offering or sale of
the Shares or any other securities relating thereto and if at such time any
events shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall be necessary to
amend or supplement the Prospectus in order to comply with the

13
<PAGE> 14
Securities Act, to notify the Representatives and, upon their request, to
prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as the Representatives may from time to time
reasonably request of an amended or supplemented Prospectus which will correct
such statement or omission or effect such compliance;

(d) To file promptly with the Commission any
amendment to the Registration Statement or the Prospectus or any supplement to
the Prospectus that may, in the judgment of the Company or the Representatives,
be required by the Securities Act or requested by the Commission;

(e) Prior to filing with the Commission any
amendment to the Registration Statement, 462(b) Registration Statement or
supplement to the Prospectus, any document incorporated by reference in the
Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations,
to furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the filing, which
consent may not be unreasonably withheld;

(f) As soon as practicable after the Effective
Date (but in any event not later than 45 days after the end of the fiscal
quarter in which the first anniversary of the Effective Date occurs), to make
generally available to the Company's shareholders and to deliver to the
Representatives in accordance with Rule 158 of the Rules and Regulations an
earnings statement of the Company (which need not be audited) complying with
Section 11(a) of the Securities Act and the Rules and Regulations and covering
a period of at least twelve consecutive months beginning after the Effective
Date;

(g) For a period of five years following the
Effective Date, to furnish to the Representatives copies of all materials
furnished by the Company to its shareholders and all public reports and all
reports and financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed pursuant
to requirements of or agreements with such exchange or to the Commission
pursuant to the Exchange Act or any rule or regulation of the Commission
thereunder;

(h) Promptly from time to time to take such
action as the Representatives may reasonably request to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions for as long as

14
<PAGE> 15
may be necessary to complete the distribution of the Shares; provided that in
connection therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;

(i) For a period of 90 days from the date of the
Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in
the future of) any shares of Common Stock (other than the Shares and shares
issued pursuant to the Stock Option Plans or other outstanding options or
warrants), or sell or grant options, rights or warrants with respect to any
shares of Common Stock (other than the grant of options pursuant to the Stock
Option Plans), without the prior written consent of Lehman Brothers Inc.; and
to cause each officer, director (except for Bradley G. Lorimier) and certain
shareholders of the Company to furnish to the Representatives, prior to the
First Delivery Date, a letter or letters, in form and substance satisfactory to
counsel for the Underwriters, pursuant to which each such person shall agree
not to, directly or indirectly, offer for sale, sell or otherwise dispose of
(or enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or other securities of the Company for a period
of 90 days from the date of the Prospectus, without the prior written consent
of Lehman Brothers Inc.

(j) Prior to the Effective Date, to apply for the
inclusion of the Shares on the Nasdaq National Market system and to complete
that listing, subject only to official notice of issuance, prior to the First
Delivery Date;

(k) To apply the net proceeds from the sale of
the Shares being sold by the Company as set forth in the Prospectus;

(l) To take such steps as shall be necessary to
ensure that the Company shall not become an "investment company" within the
meaning of such term under the United States Investment Company Act of 1940 and
the rules and regulations of the Commission thereunder.

6. Expenses. The Company agrees to pay (a) the costs
incident to the authorization, issuance, sale and delivery of the Shares and
any taxes payable in that connection; (b) the costs incident to the
preparation, printing and filing under the Securities Act of the Registration
Statement and any amendments and exhibits thereto; (c) the costs of
distributing the

15
<PAGE> 16
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus or any document incorporated by reference therein, all as provided
in this Agreement; (d) the costs of producing and distributing this Agreement,
the Agreement Among Underwriters and any other related documents in connection
with the offering, purchase, sale and delivery of the Shares; (e) the filing
fees incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of sale of the Shares; (f) any applicable
Nasdaq National Market system listing or other fees; (g) the fees and expenses
of qualifying the Shares under the securities laws of the several jurisdictions
as provided in Section 5(h) and of preparing, printing and distributing a Blue
Sky Memorandum (including related fees and expenses of counsel to the
Underwriters related thereto); and (h) all other costs and expenses incident to
the performance of the obligations of the Company under this Agreement;
provided that, except as provided in this Section 6 and in Section 11, the
Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on the Shares which they may sell
and the expenses of advertising any offering of the Shares made by the
Underwriters.

7. Conditions of the Underwriters' Obligations. The
respective obligations of the several Underwriters hereunder are subject to the
accuracy, as of the date hereof and on each Delivery Date (as if made on such
date), of the representations and warranties of the Company, the agreements of
the Company and to each of the following additional terms and conditions:

(a) The Prospectus shall have been filed in a
timely manner with the Commission in accordance with Section 5(a); the
Registration Statement and all post-effective amendments thereto shall have
become effective and the Representatives shall have been informed thereof, not
later than the first full business day next following the date of this
Agreement; if the Company has elected to rely on Rule 462(b), the 462(b)
Registration Statement shall have become effective not later than the earlier
of (i) 10:00 p.m. New York time on the date of this Agreement or (ii) the time
confirmations are sent or given as specified in Rule 462(b); all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall have been
made, and no such filings shall have been made without the consent of the
Representatives; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued, and no proceeding for
that purpose shall have been initiated or threatened by the Commission; and any
request of the Commission for inclusion of additional information in the
Registration Statement or the Prospectus or otherwise shall have been disclosed
to you and complied with to your satisfaction.

16
<PAGE> 17
(b) No Underwriter shall have been advised by the
Company or shall have discovered and disclosed to the Company on or prior to
such Delivery Date that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains an untrue statement of fact which, in
your opinion or in the opinion of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., counsel for the Underwriters, is material or omits to state a fact
which, in your opinion or the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the statements therein
not misleading.

(c) All corporate proceedings and other legal
matters incident to the authorization, form and validity of this Agreement, the
Shares, the Registration Statement and the Prospectus, and all other legal
matters relating to this Agreement and the transactions contemplated hereby
shall be reasonably satisfactory in all material respects to you and your
counsel, and the Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass upon such
matters.

(d) On each Delivery Date, there shall have been
furnished to you the written opinion of Bachner, Tally, Polevoy & Misher LLP,
counsel to the Company, addressed to the Underwriters and dated such Delivery
Date, in form and substance reasonably satisfactory to the Representatives and
their counsel, to the effect that:

(i) The Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws the State of Delaware, is duly
qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which its ownership or
leasing of property or the conduct of its business requires
such qualification and has all power and authority necessary
to own or hold its properties and conduct its business in
which it is engaged;

(ii) The Company has an authorized
capitalization as set forth in the Prospectus, and all of the
outstanding shares of capital stock of the Company have been,
and the Shares, upon issuance and delivery and payment
therefore in the manner provided for herein, will be, duly and
validly authorized and issued, fully paid and non-assessable
and conform to the description thereof contained in the
Prospectus; and to such counsel's knowledge, there are no
preemptive or other rights to subscribe for or to purchase,
nor any restriction upon the voting or transfer

17
<PAGE> 18
of, any of the Shares pursuant to the Company's Certificate of
Incorporation or By-laws, as amended, or any agreement or
other instrument known to such counsel;

(iii) To the best of such counsel's
knowledge and other than as set forth in the Prospectus, there
are no legal or governmental proceedings pending to which the
Company is a party or of which any property or assets of the
Company is the subject which, if determined adversely to the
Company, might have a material adverse effect on the financial
position, stockholders' equity, results of operations,
business or prospects of the Company; and, to the best of such
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by
others;

(iv) The Registration Statement and all
post effective amendments thereto, if any, have been declared
effective under the Securities Act, the 462(b) Registration
Statement, if any, became effective within the time limits set
forth in Section 5(a) hereto, the Prospectus has been filed
with the Commission pursuant to the subparagraph of Rule
424(b) of the Rules and Regulations specified in such opinion
on the date specified therein, and no stop order suspending
the effectiveness of the Registration Statement has been
issued and, to the knowledge of such counsel, no proceeding
for that purpose is pending or threatened by the Commission;

(v) The Registration Statement and the
Prospectus and any further amendments or supplements thereto
made by the Company (other than the financial statements and
related schedules and other financial or statistical data
therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations, and the conditions for the use of Form S-3 set
forth in the General Instructions thereto have been satisfied;

(vi) The documents incorporated by
reference in the Prospectus (except for the financial
statements and related schedules and other financial or
statistical data included therein or omitted therefrom, as to
which such counsel need express no opinion) as of the dates
they were filed with the Commission complied as to form in all
material respects to the requirements of the Exchange Act and
the Rules and Regulations promulgated thereunder;

18
<PAGE> 19
(vii) All descriptions in the Prospectus
of statutes, regulations, legal or governmental proceedings,
contracts and other documents are accurate and fairly present
in all material respects the information required to be shown;
and such counsel do not know of any contracts or documents
required to be summarized or described therein (or required to
be filed under the Exchange Act if upon such filing they would
be incorporated, in whole or in part, by reference therein) or
to be filed as exhibits thereto which are not so summarized,
described or filed, nor do such counsel know of any pending or
threatened litigation or any governmental proceeding, statute
or regulation which would affect the subject matter or this
Agreement or is required to be described in the Prospectus
which is not so described.

(viii) This Agreement has been duly
authorized, executed and delivered by the Company and
constitutes the valid and legally binding agreement of the
Company;

(ix) The issue and sale of the Shares
being delivered on such Delivery Date by the Company and the
compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions
contemplated hereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known
to such counsel to which the Company is a party or by which
the Company is bound or to which any of the property or assets
of the Company is subject, which violation would be material
to the Company, nor will such actions result in any violation
of the provisions of the Certificate of Incorporation or
By-laws or other organizational documents of the Company, as
amended, or any statute or any order, rule or regulation known
to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its properties
or assets, the effect of which violation would be material to
the Company; and, except for the registration of the Shares
under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable blue sky, state
or foreign securities laws and as may be required and have
been obtained under the rules and regulations of the Nasdaq
National Market in connection with the purchase and
distribution of the Shares by the Underwriters, no

19
<PAGE> 20
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or
body is required for the execution, delivery and performance
of this Agreement by the Company and the consummation of the
transactions contemplated hereby; and

(x) To our knowledge after due inquiry,
other than Bear Stearns International Limited, Oxford
Bioscience Partners L.P., Oxford Bioscience Partners (Adjunct)
L.P., Oxford Bioscience Partners (Bermuda) Limited
Partnership, HealthCare Ventures III, L.P., HealthCare
Ventures IV, L.P., Aetna Life Insurance Company, members of
the Bass family and certain related persons who entered into a
Stock Purchase Agreement with HealthCare Ventures III, L.P.
and HealthCare Ventures IV, L.P. dated April 10, 1996 (the
"Bass Group"), SmithKline Beacham Corporation, MMC/GATX
Partnership No. 1, and Rho Management Trust III, there are no
contracts, agreements or understandings between the Company
and any person granting such person the right to require the
Company to file a registration statement under the Securities
Act with respect to any securities of the Company owned or to
be owned by such person or to include securities for
registration in a registration statement filed by the Company
under the Securities Act (other than such rights which have
been waived or satisfied); and the Company is not required to
include any such securities in the securities registered
pursuant to the Registration Statement, nor is it required to
file any registration statement for the registration of any
securities of any person or register any such securities
pursuant to any other registration statement filed by the
Company under the Securities Act for a period of at least 90
days after the Effective Date.

(xi) The Company is not an "investment
company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940.

In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the United States
of America, the laws of the State of New York and the General Corporation Law
of the State of Delaware. Such counsel shall also have furnished to the
Representatives a written statement, addressed to the Underwriters and dated
such Delivery Date, in form and substance satisfactory to the Representatives,
to the effect that (x) such counsel has acted as counsel to the Company on a
regular basis and as counsel to the Company in connection with the preparation
of the Registration Statement and (y) based on the foregoing, no

20
<PAGE> 21
facts have come to the attention of such counsel which lead them to believe
that (i) the Registration Statement, as of the Effective Date, or any amendment
thereto, at the time it become effective, (including any document incorporated
by reference under the Exchange Act), contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or (ii) or that the
Prospectus, or any amendment or supplement thereto, including any document
filed under the Exchange Act and deemed to be incorporated by reference into
the Prospectus or any supplement or amendment thereto, contains or contained
any untrue statement of a material fact or omits or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
(except, in the case of both the Registration Statement and any amendment
thereto and the Prospectus and any supplement thereto, for the financial
statements, notes thereto and other financial information and statistical data
contained therein).

Furthermore, such counsel need express no opinion with respect
to the financial statements and other financial or statistical data included in
the Registration Statement or Prospectus or, with respect to paragraph
7(d)(vii) above, to statements made in the Prospectus under the captions "Risk
Factors - Patents and Proprietary Rights" and "Business - Patents and
Proprietary Rights" or to statements made in the Prospectus under the captions
"Risk Factors - Uncertainty of Government Regulatory Requirements; Lengthy
Approval Process" and "Business - Government Regulation" to the extent they
constitute Regulatory Statements..

(e)(I) On each delivery date, the Company
shall have furnished to the Representatives an opinion of Carella, Byrne, Bain,
Gilfillan, Cecchi, Stewart & Olstein, United States patent counsel for the
Company, addressed to the Underwriters and dated such Delivery Date in form and
substance reasonably satisfactory to the Representatives and their counsel to
the effect that:

21
<PAGE> 22
(i) The statements in the Registration
Statement and Prospectus (A) under the caption "Risk Factors
-- Patents and Proprietary Rights" and (B) under the caption
"Business -- Patents and Proprietary Rights," in all material
respects are accurate statements or summaries of the matters
set forth therein.

(ii) No facts have come to the attention
of such counsel which would form a basis for the belief that
(a) the Registration Statement or any amendment thereto at the
time it became effective, (including any document incorporated
by reference under the Exchange Act), or (b) the Prospectus,
as amended or supplemented, including any document filed under
the Exchange Act and deemed to be incorporated by reference
therein or any supplemental or amendment thereto, contain any
untrue statement of a material fact with respect to the patent
position or proprietary rights of the Company, or omit to
state any material fact relating to the patent position or
proprietary rights of the Company, which is necessary to make
the statements contained therein not misleading.

(II) On each delivery date, the Company
shall have furnished to the Representatives an opinion of Robert Benson, Vice
President and General Counsel of the Company, addressed to the Underwriters and
dated such Delivery Date in form and substance reasonably satisfactory to the
Representatives and their counsel to the effect that:

(i) The statements in the Registration
Statement and Prospectus (A) under the caption "Risk Factors
-- Patents and Proprietary Rights" and (B) under the caption
"Business -- Patents and Proprietary Rights," in all material
respects are accurate statements or summaries of the matters
set forth therein.

22
<PAGE> 23
(iii) The Company owns in whole or in part
the United States patents and patent applications and valid
license rights to the patents and patent applications filed by
it, including all such patents and applications referenced in
the Prospectus.

(iv) No facts have come to the attention
of such counsel that would form a basis for the belief that
any of the United States patents owned by the Company is
unenforceable or invalid. Such counsel is not aware of any
patents of others which are or would be infringed by the
manufacture, use or sale of the therapeutic proteins as to
which the Company has rights as set forth in the Prospectus in
such manner as to materially and adversely affect the Company;
except as set forth in the Prospectus, such counsel has no
knowledge of any pending or threatened action, suit,
proceeding or claim by others that the Company is infringing
any patent which could result in any material adverse effect
on the Company.

(v) There are no legal or governmental
proceedings pending relating to the United States patent
rights, other than PTO review of pending applications for
patents, including appeal proceedings, and, except for
potential interference proceedings as described in the
Registration Statement and the Prospectus, to such counsel's
knowledge, no such proceedings are threatened or contemplated
by United States governmental authorities or others.

(III) On each delivery Date, the Company
shall have furnished to the Representatives an opinion of Fenwick & West LLP,
regulatory counsel for the Company, addressed to the Underwriters and dated
such Delivery Date in form and substance reasonably satisfactory to the
Representatives and their counsel to the effect that:

(i) The Statements set forth in the
Registration Statement and Prospectus under the captions "Risk
Factors--Uncertainty of Government Regulatory Requirements;
Lengthy Approval Process" and "Business--Government
Regulation" (collectively, the "Regulatory Sections"), insofar
as such statements constitute descriptions or summaries of the
Federal Food, Drug and Cosmetic Act, the Food and Drug
Administration's regulations concerning its regulation of new
drugs, biologics or devices in general or the Public Health

23
<PAGE> 24
Service Act, are accurate and complete in all material
respects and fairly present the information therein described
in light of the circumstances under which they were made; and
such counsel has no reason to believe that, at the time the
Registration Statement became effective, the statements in the
Regulatory Sections which relate to the regulation of drugs,
biologics and devices and the handling and storage of
radioactive substances (the "Regulatory Statements") contained
any untrue statement of a material fact or omitted to state a
material fact required to be stated or necessary to make the
Regulatory Statements not misleading, or that at such Delivery
Date, Regulatory Statements contained any untrue statement of
a material fact or omitted to state a material fact necessary
to make the Regulatory Statements, in light of the
circumstances under which they were made, not misleading.

(ii) To such counsel's knowledge, the
Company's conduct of business complies in all material
respects with the statutes and laws relating to the
development of therapeutic products and diagnosis,
environmental protection and hazardous substance control in
each country and state in which the Company conducts its
business.

(f) The Representatives shall have received from
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel for the
Underwriters, such opinion or opinions, dated such Delivery Date, with respect
to the issuance and sale of the Shares, the Registration Statement, the
Prospectus and other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass upon such
matters.

(g) At the time of execution of this Agreement,
the Representatives shall have received from each of Ernst & Young LLP and
Richard A. Eisner & Company, LLP a letter, in form and substance satisfactory
to the Representatives, addressed to the Underwriters and dated the date hereof
(i) confirming that they are independent public accountants within the meaning
of the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus, as of a date
not more than five days prior to the date hereof), the conclusions and findings
of such firm with

24
<PAGE> 25
respect to the financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with registered
public offerings.

(h) With respect to the letters of Ernst & Young
LLP and Richard A. Eisner & Company, LLP referred to in the preceding paragraph
and delivered to the Representatives concurrently with the execution of this
Agreement (the "initial letter"), on each Delivery Date the Company shall have
furnished to the Representatives a letter (the "bring-down letter") of each of
such accounting firms, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date of the
bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five days
prior to the date of the bring-down letter), the conclusions and findings of
such firm with respect to the financial information and other matters covered
by the initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.

(i) On each Delivery Date, the Company shall have
furnished to the Representatives a certificate, dated such Delivery Date, of
its Chairman of the Board and President and its Chief Financial Officer stating
that:

(i) The representations and warranties
of the Company contained in this Agreement are true and
correct as of such Delivery Date, and the Company has complied
with all agreements and satisfied all conditions on its part
to be complied with or satisfied prior to such Delivery Date;
and the conditions set forth in Sections 7(a) and 7(l) have
been fulfilled;

(ii) The Company has not sustained, since
the date of the latest audited financial statements included
in the Prospectus, any change in the capital stock or
long-term debt of the Company or any change, in or affecting
the general affairs, management, business, financial
condition, stockholders' equity or results of operations of
the Company, except as set forth or contemplated in the
Prospectus; and

(iii) They have carefully examined the
Registration Statement and the Prospectus and, in their
opinion (A) as of the Effective Date, the

25
<PAGE> 26
Registration Statement and Prospectus did not include any
untrue statement of a material fact and did not omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (B) since the
Effective Date no event has occurred which should have been
set forth in a supplement or amendment to the Registration
Statement or the Prospectus.

(j) You shall have been furnished such additional
documents and certificates as you or counsel for the Underwriters may
reasonably request.

(k) The letter agreements among you and officers,
directors and certain stockholders of the Company relating to restrictions on
sales of the Company's securities, delivered to you on or prior to the date
hereof, shall be in full force and effect on such Delivery Date.

(l) (i) The Company shall not have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the Company or
any change, or any development involving a prospective change, in or affecting
the general affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case described
in clause (i) or (ii), is, in the judgment of the Representatives, so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered on such Delivery
Date on the terms and in the manner contemplated in the Prospectus.

(m) Subsequent to the execution and delivery of
this Agreement there shall not have occurred any of the following: (i) trading
in securities generally on the New York Stock Exchange or the American Stock
Exchange or in the over-the-counter market shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international

26
<PAGE> 27
conditions on the financial markets in the United States shall be such) as to
make it, in the judgment of the Representatives, impracticable or inadvisable
to proceed with the public offering or delivery of the Shares being delivered
on such Delivery Date on the terms and in the manner contemplated in the
Prospectus.

(n) The Nasdaq National Market system shall have
approved the Shares for inclusion, subject only to official notice of issuance.

All such opinions, letters, evidence, certificates and
documents shall be in compliance with the provisions of this Agreement only if
they are satisfactory in form and substance to you and counsel for the
Underwriters. The Company shall furnish to you conformed copies of such
opinions, letters, evidence, certificates and documents in such number as you
shall reasonably request. If any of the conditions specified in this Section 7
shall not have been fulfilled when and as required by this Agreement, the
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or prior to, each Delivery date, by you. Any such cancellation shall be
without liability of the Underwriters to the Company. Notice of such
cancellation shall be given to the Company in writing, or by telecopy or
telephone confirmed in writing.

8. Indemnification and Contribution.

(a) The Company shall indemnify and hold harmless
each Underwriter, its officers and employees and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any action
in respect thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Shares), to which that
Underwriter, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) in any blue sky application or other document
prepared or executed by the Company (or based upon any written information
furnished by the Company) specifically for the purpose of qualifying any or all
of the Shares under the securities laws of any state or other jurisdiction (any
such application, document or information being hereinafter called a A Blue Sky
Application"), (ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, or in any Blue Sky Application any material
fact required to be stated therein or necessary to make the statements therein
not

27
<PAGE> 28
misleading or (iii) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to, the
Shares or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon matters covered by clause (i) or (ii) above (provided that the
Company shall not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such acts
or failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct), and shall reimburse each
Underwriter and each such officer, employee or controlling person promptly upon
demand for any legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any such amendment or supplement, or in any Blue Sky Application, in reliance
upon and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein. The foregoing indemnity
agreement is in addition to any liability which the Company may otherwise have
to any Underwriter or to any officer, employee or controlling person of that
Underwriter.

(b) Each Underwriter, severally and not jointly,
shall indemnify and hold harmless the Company, each of its directors, each of
its offices who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of the Securities Act or otherwise,
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which the Company or any such director, officer
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or (B)
in any Blue Sky Application or (ii) the omission or alleged omission to state
in any Preliminary Prospectus, the Registration Statement or the Prospectus, or
in any amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information concerning such
Underwriter furnished to the Company through the

28
<PAGE> 29
Representatives by or on behalf of that Underwriter specifically for inclusion
therein, and shall reimburse the Company and any such director, officer or
controlling person for any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Underwriter may
otherwise have to the Company or any such director, officer or controlling
person.

(c) Promptly after receipt by an indemnified
party under this Section 8 of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the claim or the commencement of that action;
provided, however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 8 except to
the extent it has been materially prejudiced by such failure and, provided
further, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have to an indemnified party otherwise than
under this Section 8. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party,
to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the Representatives shall have
the right to employ counsel to represent jointly the Representatives and those
other Underwriters and their respective officers, employees and controlling
persons who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the Underwriters against the Company under
this Section 8 if, in the reasonable judgment of the Representatives, it is
advisable for the Representatives and those Underwriters, officers, employees
and controlling persons to be jointly represented by separate counsel, and in
that event the fees and expenses of such separate counsel shall be paid by the
Company. No indemnifying party shall (i) without the prior written consent of
the indemnified parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with respect to
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an

29
<PAGE> 30
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
of any such action effected without its written consent (which consent shall
not be unreasonably withheld), but if settled with the consent of the
indemnifying party or if there be a final judgment of the plaintiff in any such
action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.

(d) If the indemnification provided for in this
Section 8 shall for any reason be unavailable to or insufficient to hold
harmless an indemnified party under Section 8(a) or 8(b) in respect of any
loss, claim, damage or liability, or any action in respect thereof, referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in
respect thereof, (i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and the
Underwriters on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other with respect to such offering shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares purchased
under this Agreement (before deducting expenses) received by the Company on the
one hand, and the total underwriting discounts and commissions received by the
Underwriters with respect to the shares of the Shares purchased under this
Agreement, on the other hand, bear to the total gross proceeds from the
offering of the shares of the Shares under this Agreement, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8 were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 8 shall be deemed
to include, for purposes

30
<PAGE> 31
of this Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise paid or become liable to pay by reason of any untrue
or alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 8(d) are several in proportion to their
respective underwriting obligations and not joint.

(e) The Underwriters severally confirm and the
Company acknowledges that the statements with respect to the public offering of
the Shares by the Underwriters set forth on the cover page of, the legend
concerning over-allotments on the inside front cover page of and the concession
and reallowance figures appearing under the caption "Underwriting" in, the
Prospectus are correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.

9. Defaulting Underwriters. If, on either Delivery Date,
any Underwriter defaults in the performance of its obligations under this
Agreement, the remaining non-defaulting Underwriters shall be obligated to
purchase the Shares which the defaulting Underwriter agreed but failed to
purchase on such Delivery Date in the respective proportions which the number
of the Firm Shares set opposite the name of each remaining non-defaulting
Underwriter in Schedule 1 hereto bears to the total number of the Firm Shares
set opposite the names of all the remaining non-defaulting Underwriters in
Schedule 1 hereto; provided, however, that the remaining non-defaulting
Underwriters shall not be obligated to purchase any of the Shares on such
Delivery Date if the total number of Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such date exceeds 9.09% of the
total number of Shares to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of Shares which it agreed to purchase on such Delivery Date pursuant
to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them,
all the Shares to be purchased on such Delivery Date. If the remaining
non-defaulting Underwriters or

31
<PAGE> 32
other underwriters satisfactory to the Representatives do not elect to purchase
the shares which the defaulting Underwriter or Underwriters agreed but failed
to purchase on such Delivery Date, this Agreement (or, with respect to the
Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Shares) shall terminate without liability on
the part of any non-defaulting Underwriter or the Company, except that the
Company will continue to be liable for the payment of expenses to the extent
set forth in Sections 6 and 11. As used in this Agreement, the term
"Underwriter" includes, for all purposes of this Agreement unless the context
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 9, purchases Firm Shares which a defaulting Underwriter agreed but
failed to purchase.

Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have to the Company for damages caused by
its default. If other underwriters are obligated or agree to purchase the
Shares of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business
days in order to effect any changes that in the opinion of counsel for the
Company or counsel for the Underwriters may be necessary in the Registration
Statement, the Prospectus or in any other document or arrangement.

10. Termination. The obligations of the Underwriters
hereunder may be terminated by the Representatives by notice given to and
received by the Company prior to delivery of and payment for the Firm Shares
if, prior to that time, any of the events described in Sections 7(l) or 7(m),
shall have occurred or if the Underwriters shall decline to purchase the Shares
for any reason permitted under this Agreement.

11. Reimbursement of Underwriters' Expenses. If the
Company shall fail to tender the Shares for delivery to the Underwriters by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled
is not fulfilled or if the Underwriters shall not purchase the Shares for any
reason permitted pursuant to this Agreement, the Company will reimburse the
Underwriters for all reasonable out-of-pocket expenses (including fees and
disbursements of counsel) incurred by the Underwriters in connection with this
Agreement and the proposed purchase of the Shares, and upon demand the Company
shall pay the full amount thereof to the Representatives. If this Agreement is
terminated pursuant to Section 9 by reason of the default of one or more
Underwriters, the Company shall not be obligated to reimburse any defaulting
Underwriter on account of those expenses.

32
<PAGE> 33
12. Notices, etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:

(a) if to the Underwriters, shall be delivered or
sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three
World Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant
to Section 8(c), to the Director of Litigation, Office of the General Counsel,
Lehman Brothers Inc., Three World Financial Center, 10th Floor, New York, NY
10285;

(b) if to the Company, shall be delivered or sent
by mail, telex or facsimile transmission to the address of the Company set
forth in the Registration Statement, Attention: William A. Haseltine (Fax:
301-309-8504);

provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by
the Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement
given or made on behalf of the Underwriters by the Representatives.

13. Persons Entitled to Benefit of Agreement. This
Agreement shall inure to the benefit of and be binding upon the Underwriters,
the Company and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the Company
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any Underwriter within the meaning of
Section 15 of the Securities Act and (B) the indemnity agreement of the
Underwriters contained in Section 8(b) of this Agreement shall be deemed to be
for the benefit of directors of the Company, officers of the Company who have
signed the Registration Statement and any person controlling the Company within
the meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 13, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.

14. Survival. The respective indemnities,
representations, warranties and agreements of the Company and the Underwriters
contained in this Agreement or made by or on

33
<PAGE> 34
behalf on them, respectively, pursuant to this Agreement, shall survive the
delivery of and payment for the Shares and shall remain in full force and
effect, regardless of any investigation made by or on behalf of any of them or
any person controlling any of them.

15. Definition of the Terms "Business Day" and
"Subsidiary". For purposes of this Agreement, (a) "business day" means any day
on which the New York Stock Exchange, Inc. is open for trading and (b)
"subsidiary" has the meaning set forth in Rule 405 of the Rules and
Regulations.

16. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of New York.

17. Counterparts. This Agreement may be executed in one
or more counterparts and, if executed in more than one counterpart, the
executed counterparts shall each be deemed to be an original but all such
counterparts shall together constitute one and the same instrument.

18. Headings. The headings herein are inserted for
convenience of reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Agreement.

34
<PAGE> 35
If the foregoing correctly sets forth the agreement between
the Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.

Very truly yours,

Human Genome Sciences, Inc..

By
---------------------------------------
William A. Haseltine, Ph.D.

Accepted:

LEHMAN BROTHERS INC.
BEAR, STEARNS & CO. INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SMITH BARNEY INC.
UBS SECURITIES LLC

For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto

By LEHMAN BROTHERS INC.

By
---------------------------------
Authorized Representative

35
<PAGE> 36
SCHEDULE 1

<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ -------
<S> <C>
LEHMAN BROTHERS INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BEAR, STEARNS & CO. INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED . . . . . . . . . . . . . . . . . . . . . . . . . . .
SMITH BARNEY INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UBS SECURITIES LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-----------

Total 3,000,000
===========
</TABLE>

<PAGE> 1
BACHNER, TALLY, POLEVOY & MISHER LLP
ATTORNEYS AT LAW

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

380 MADISON AVENUE
NEW YORK, NEW YORK 10017-2590
(212) 687-7000
FAX: (212) 682-5729
NETWORK FAX: (212) 949-9640
E-MAIL: [email protected]

March 11, 1997

Human Genome Sciences, Inc.
9410 Key West Avenue
Rockville, MD 20850

RE: REGISTRATION STATEMENT ON FORM S-3

Ladies and Gentlemen:

We have acted as counsel for Human Genome Sciences, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of a registration statement (the "Registration Statement") on Form
S-3 under the Securities Act of 1933, as amended (the "Act"), relating to the
public offering of up to 3,450,000 shares of the Company's Common Stock, $.01
par value (the "Common Stock"), which includes 450,000 Shares subject to an
option granted to the underwriters to cover over-allotments in connection with
the offering.

We have examined the Certificate of Incorporation, as amended, and
By-Laws of the Company, the minutes of the various meetings and consents of the
Board of Directors of the Company, drafts of the Underwriting Agreement
relating to the offering of the shares, forms of certificates
representing the Common Stock, originals or copies of all such records of the
Company, agreements, certificates of public officials, certificates of officers
and representatives of the Company and others, and such other documents and
records as we have deemed necessary to form the basis of the opinion expressed
below. In such examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity to originals of all documents submitted to us as copies thereof. As
to various questions of fact material to such opinion, we have relied upon
statements and certificates of officers and representatives of the Company and
others.

<PAGE> 2
Human Genome Sciences, Inc.
March 11, 1997
Page 2

Based upon the foregoing, we are of the opinion that the shares of
Common Stock issuable pursuant to this offering have been duly authorized and,
when issued and sold in accordance with the terms described in the Prospectus
forming a part of the Registration Statement (the "Prospectus"), will be
validly issued, fully paid and nonassessable.

We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Prospectus. We further consent to the incorporation by
reference of this consent pursuant to Rule 439(b) under the Act into any
subsequent registration statement for the same offering that may be filed
pursuant to Rule 462(b) under the Act. In giving this consent, we do not
thereby concede that we come within the categories of persons whose consent is
required by the Act or the rules and regulations promulgated thereunder.

Very truly yours,

/s/Bachner , Tally, Polevoy & Misher LLP
BACHNER, TALLY, POLEVOY & MISHER LLP

<PAGE> 1
CONSENT OF COUNSEL

The undersigned hereby consents to the use of our name, and the
statement with respect to us appearing under the heading "Experts" included in
the Registration Statement. We further consent to the incorporation by
reference of this consent pursuant to Rule 439(b) under the Securities Act of
1933, as amended (the "Securities Act"), into any subsequent registration
statement for the same offering that may be filed pursuant to Rule 462(b) under
the Securities Act.

/s/ Carella, Byrne, Bain, Gilfillan,
Cecchi, Stewart & Olstein

CARELLA, BYRNE, BAIN, GILFILLAN,
CECCHI, STEWART & OLSTEIN

Roseland, New Jersey
March 11, 1997

<PAGE> 1
CONSENT OF COUNSEL

Washington, D.C.
March 11, 1997