GENEMEDICINE INC
PREM14A, 1998-11-25
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)
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<PAGE>
                            SCHEDULE 14A INFORMATION
 
                  Proxy Statement Pursuant to Section 14(a) of
            the Securities Exchange Act of 1934 (Amendment No.    )
 
    Filed by the Registrant /X/
    Filed by a Party other than the Registrant / /
 
    Check the appropriate box:
    /X/  Preliminary Proxy Statement
    / /  Confidential, for Use of the Commission Only (as permitted by Rule
         14a-6(e)(2))
    / /  Definitive Proxy Statement
    / /  Definitive Additional Materials
    / /  Soliciting Material Pursuant to Section240.14a-11(c) or
         Section240.14a-12
 
                                        GENEMEDICINE, INC.
- --------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)
 
                           MEGABIOS CORP./GENEMEDICINE, INC.
- --------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):
 
/ /  No fee required.
/ /  Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
     and 0-11.
     (1) Title of each class of securities to which transaction applies:
         -----------------------------------------------------------------------
     (2) Aggregate number of securities to which transaction applies:
         -----------------------------------------------------------------------
     (3) Per unit price or other underlying value of transaction computed
         pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
         filing fee is calculated and state how it was determined):
         -----------------------------------------------------------------------
     (4) Proposed maximum aggregate value of transaction:
         -----------------------------------------------------------------------
     (5) Total fee paid:
         -----------------------------------------------------------------------
/ /  Fee paid previously with preliminary materials.
/X/  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a)(2) and identify the filing for which the offsetting fee was paid
     previously. Identify the previous filing by registration statement number,
     or the Form or Schedule and the date of its filing.
     (1) Amount Previously Paid:
         $7,731.18
         -----------------------------------------------------------------------
     (2) Form, Schedule or Registration Statement No.:
         Form S-4  (333-68013)
         -----------------------------------------------------------------------
     (3) Filing Party:
         MEGABIOS CORP.
         -----------------------------------------------------------------------
     (4) Date Filed:
         November 25, 1998
         -----------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITATING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
[MEGABIOS LOGO]                                              [GENEMEDICINE LOGO]
 
                  MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
 
    The Boards of Directors of Megabios Corp. and GENEMEDICINE, INC. have agreed
to merge these two companies. If the merger is completed, GENEMEDICINE will
become a wholly-owned subsidiary of Megabios. In the merger, GENEMEDICINE
stockholders will have the right to receive 0.5710 of a share of Megabios common
stock for each share of GENEMEDICINE common stock that they own. We estimate
that the shares of Megabios common stock to be issued to GENEMEDICINE
stockholders will represent approximately 41% of the outstanding Megabios common
stock immediately after the merger.
 
    The merger cannot be completed unless the holders of Megabios common stock
and GENEMEDICINE common stock approve the matters described in this document.
The Board of Directors of each of these two companies has unanimously approved
the merger and recommends that its stockholders approve the matters described in
this document.
 
    We have scheduled special meetings for the Megabios stockholders and for the
GENEMEDICINE stockholders to vote on the matters described in this document. At
the Megabios special meeting, Megabios stockholders will be asked to approve the
issuance of shares of Megabios common stock in the merger. At the GENEMEDICINE
special meeting, GENEMEDICINE stockholders will be asked to approve and adopt
the reorganization agreement and approve the merger of a subsidiary of Megabios
with and into GENEMEDICINE. YOUR VOTE IS VERY IMPORTANT.
 
    Whether or not you plan to attend your special meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. If you sign,
date and mail your proxy card without indicating how you want to vote, your
proxy will count as a vote in favor of the proposal to be voted on.
 
    You may vote at your special meeting if you own shares as of the close of
business on [           , 1998]. The dates, times and places of the special
meetings are as follows:
 
<TABLE>
<S>                                       <C>
FOR MEGABIOS STOCKHOLDERS:                FOR GENEMEDICINE STOCKHOLDERS:
 
           ,              , 1999          ,              , 1999
      a.m. local time                     a.m. local time
863A Mitten Road
Burlingame, CA 94010
</TABLE>
 
    This joint proxy statement/prospectus provides you with detailed information
about the proposed merger. Megabios provided the information concerning
Megabios. GENEMEDICINE provided the information concerning GENEMEDICINE. Please
see "Where You Can Find More Information" on page 105 for additional information
on Megabios and GENEMEDICINE.
 
    WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER
"RISK FACTORS" BEGINNING AT PAGE    .
 
<TABLE>
<S>                                       <C>
/s/ Benjamin F. McGraw III                /s/ Stanley T. Crooke
Benjamin F. McGraw III, Pharm.D.          Stanley T. Crooke, M.D., Ph.D.
President and Chief Executive Officer     Chairman of the Board
MEGABIOS CORP.                            GENEMEDICINE, INC.
</TABLE>
 
    NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THE
JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
 
    We are first mailing this joint proxy statement/prospectus dated
  , 1998 and the forms of proxy on or about December   , 1998.
<PAGE>
PRELIMINARY JOINT PROXY STATEMENT
 
                              [GENEMEDICINE, LOGO]
 
                             8301 NEW TRAILS DRIVE
 
                            THE WOODLANDS, TX 77381
 
                            ------------------------
 
                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                      TO BE HELD ON [             ], 1999
 
                            ------------------------
 
TO THE STOCKHOLDERS OF GENEMEDICINE, INC.:
 
    NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
GENEMEDICINE, INC. will be held on [             ], 1999, at [      ], local
time, at                     ,                 to consider and vote upon the
following proposal:
 
    1.  To approve and adopt the agreement and plan of merger and reorganization
       between GENEMEDICINE and Megabios Corp. and to approve the merger,
       pursuant to which GENEMEDICINE will become a wholly-owned subsidiary of
       Megabios. A copy of the reorganization agreement is attached as Appendix
       A to the joint proxy statement/prospectus accompanying this notice; and
 
    2.  To transact such other business as may properly come before the meeting
       or any adjournment or postponement thereof.
 
    The proposed merger and other related matters are more fully described in
the attached joint proxy statement/prospectus.
 
    Stockholders of record at the close of business on [             ], 1998 are
entitled to notice of, and to vote at, the GENEMEDICINE special meeting and any
adjournments or postponements thereof. A list of GENEMEDICINE stockholders
entitled to vote at the special meeting will be available for examination during
normal business hours, at           ,           ,           ,
          , for ten (10) days prior to the meeting.
 
    All stockholders are cordially invited to attend the GENEMEDICINE special
meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. FAILURE
TO RETURN A PROPERLY EXECUTED PROXY OR TO VOTE AT THE SPECIAL MEETING WILL
GENERALLY HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER.
 
    THE BOARD OF DIRECTORS OF GENEMEDICINE UNANIMOUSLY RECOMMENDS THAT
GENEMEDICINE STOCKHOLDERS VOTE TO APPROVE THE REORGANIZATION AGREEMENT AND THE
MERGER.
 
                                          By Order of the Board of Directors,
 
                                          /s/ Richard A. Waldron
 
                                          Richard A. Waldron
                                          SECRETARY
 
The Woodlands, Texas
[          ], 1998
 
    YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, WE
REQUEST THAT YOU COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD USING
THE ENCLOSED PRE-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
U.S. YOUR PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF GENEMEDICINE.
<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                           ---------
<S>                                                                                                        <C>
QUESTIONS AND ANSWERS ABOUT THE MEGABIOS/GENEMEDICINE MERGER.............................................          1
SUMMARY..................................................................................................          2
  The Companies..........................................................................................          2
  Megabios Corp..........................................................................................          2
  GENEMEDICINE, INC......................................................................................          2
  Our Reasons for the Merger.............................................................................          2
  Record Date; Voting Power..............................................................................          3
  Our Recommendation to Our Stockholders.................................................................          3
  Vote Required..........................................................................................          3
  The Merger.............................................................................................          3
  When the Merger Will Occur.............................................................................          3
  What Stockholders Will Receive in the Merger...........................................................          3
  Ownership of Megabios Following the Merger.............................................................          4
  Material Federal Income Tax Consequences...............................................................          4
  Opinions of Financial Advisors.........................................................................          5
  Share Ownership of Management and Certain Holders......................................................          5
  Interests of Certain Persons in the Merger.............................................................          5
  Conditions to the Merger...............................................................................          5
  Termination of the Reorganization Agreement............................................................          6
  Expenses and Termination Fees..........................................................................          7
  Anticipated Accounting Treatment.......................................................................          7
  Regulatory Approvals...................................................................................          7
  Rights of Dissenting Stockholders......................................................................          7
  Forward-Looking Statements May Prove Inaccurate........................................................          7
  Markets and Market Prices..............................................................................          8
MEGABIOS CORP. SELECTED HISTORICAL FINANCIAL INFORMATION.................................................          9
GENEMEDICINE, INC. SELECTED HISTORICAL FINANCIAL INFORMATION.............................................         10
MEGABIOS CORP. AND GENEMEDICINE, INC. UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL
  INFORMATION............................................................................................         11
COMPARATIVE PER SHARE DATA...............................................................................         12
RISK FACTORS.............................................................................................         13
  Risks Relating to the Merger...........................................................................         13
  Risks Relating to the Business of Megabios.............................................................         14
  Risks Relating to the Business of GENEMEDICINE.........................................................         20
THE MEGABIOS SPECIAL MEETING.............................................................................         25
  Purpose of the Megabios Special Meeting................................................................         25
  Proxies................................................................................................         25
  Date, Time and Place of Meeting........................................................................         25
  Voting Rights and Outstanding Shares...................................................................         25
  Solicitation...........................................................................................         25
  Vote Required..........................................................................................         26
  Revocability Of Proxies................................................................................         26
THE GENEMEDICINE SPECIAL MEETING.........................................................................         26
  Purpose of the GENEMEDICINE Special Meeting............................................................         26
  Proxies................................................................................................         26
  Date, Time and Place of Meeting........................................................................         27
  Voting Rights and Outstanding Shares...................................................................         27
  Solicitation...........................................................................................         27
</TABLE>
 
                                       i
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<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                           ---------
<S>                                                                                                        <C>
  Vote Required..........................................................................................         27
  Revocability of Proxies................................................................................         28
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY..............................................         29
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS..........................................................         30
  Background of the Merger...............................................................................         30
  Joint Reasons for the Merger...........................................................................         33
  GENEMEDICINE'S Reasons for the Merger..................................................................         33
  Megabios' Reasons for the Merger.......................................................................         34
  Opinion of Financial Advisor to GENEMEDICINE...........................................................         36
  Opinion of Financial Advisor to Megabios...............................................................         40
  Interests of Certain Persons in the Merger.............................................................         43
  Material Federal Income Tax Consequences...............................................................         45
  Anticipated Accounting Treatment.......................................................................         47
  Regulatory Matters.....................................................................................         47
  No Appraisal Rights....................................................................................         48
  Resale of Megabios Common Stock........................................................................         48
THE REORGANIZATION AGREEMENT.............................................................................         49
  General................................................................................................         49
  Merger Consideration...................................................................................         49
  Stock Options, Warrants and Employee Stock Purchase Plan...............................................         49
  Stock Ownership Following the Merger...................................................................         50
  Conversion of Shares; Procedures for Exchange of Certificates..........................................         50
  Effect on Certificates.................................................................................         50
  Corporate Matters......................................................................................         51
  Conditions to the Merger...............................................................................         51
  Representations and Warranties.........................................................................         53
  Covenants..............................................................................................         54
  Termination............................................................................................         58
  Expenses and Termination Fees..........................................................................         60
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS..............................................         61
INFORMATION RELATING TO MEGABIOS.........................................................................         67
MEGABIOS BUSINESS........................................................................................         67
  Overview...............................................................................................         67
  Megabios' In Vivo, Non-Viral Gene Delivery Approach....................................................         67
  Megabios' Gene Delivery Systems........................................................................         69
  Corporate Partners.....................................................................................         72
  Technology Licenses....................................................................................         74
  Patents and Proprietary Technology.....................................................................         75
  Manufacturing and Commercialization....................................................................         76
  Government Regulation..................................................................................         77
  Competition............................................................................................         79
  Product Liability Insurance............................................................................         80
  Employees..............................................................................................         80
  Facilities.............................................................................................         80
  Legal Proceedings......................................................................................         80
MEGABIOS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........         81
  Overview...............................................................................................         81
  Results of Operations..................................................................................         81
  Liquidity and Capital Resources........................................................................         83
</TABLE>
 
                                       ii
<PAGE>
<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                           ---------
<S>                                                                                                        <C>
  Impact of the Year 2000................................................................................         84
MEGABIOS MANAGEMENT AFTER THE MERGER.....................................................................         85
  Executive Officers and Directors.......................................................................         85
  Board Composition......................................................................................         87
  Board Committees.......................................................................................         88
  Director Compensation..................................................................................         88
  Executive Compensation.................................................................................         89
  Option Grants in Last Fiscal Year......................................................................         90
  Aggregate Option Exercises in Last Fiscal Year.........................................................         90
  Limitation of Liability and Indemnification Matters....................................................         91
  Certain Transactions of Megabios.......................................................................         91
MEGABIOS PRINCIPAL STOCKHOLDERS..........................................................................         92
INFORMATION RELATING TO GENEMEDICINE.....................................................................         94
GENEMEDICINE BUSINESS....................................................................................         94
GENEMEDICINE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......         96
  Results of Operations..................................................................................         96
  Liquidity and Capital Resources........................................................................         98
  Impact of Year 2000 on Information Systems.............................................................         98
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................        100
DESCRIPTION OF MEGABIOS CAPITAL STOCK....................................................................        101
COMPARISON OF STOCKHOLDERS' RIGHTS.......................................................................        102
  Percentage of Voting Stock; Influence Over Affairs.....................................................        102
  Power to Call Special Stockholders' Meetings...........................................................        102
  Interested Stockholder Transactions....................................................................        102
  Amendment of Bylaws....................................................................................        102
  Rights Plan............................................................................................        103
EXPERTS..................................................................................................        103
LEGAL MATTERS............................................................................................        103
MEGABIOS STOCKHOLDER PROPOSALS...........................................................................        103
GENEMEDICINE STOCKHOLDER PROPOSALS.......................................................................        104
WHERE YOU CAN FIND MORE INFORMATION......................................................................        105
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..........................................................        105
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................................................        106
INDEX TO FINANCIAL STATEMENTS............................................................................        F-1
 
APPENDICES
  Appendix A.............................................................................................        A-1
  Appendix A-1...........................................................................................      A-1-1
  Appendix B-1...........................................................................................      B-1-1
  Appendix B-2...........................................................................................      B-2-1
</TABLE>
 
                                      iii
<PAGE>
                             QUESTIONS AND ANSWERS
                     ABOUT THE MEGABIOS/GENEMEDICINE MERGER
 
Q:  WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
 
A:  We believe that the merger will create a combined company that will be able
    to:
 
    - leverage its collective scientific expertise, intellectual property and
      product development efforts into additional corporate partnerships in the
      pharmaceutical and biotechnology industries
 
    - streamline its product development efforts
 
    - respond more quickly and effectively to emerging opportunities in the
      field of gene-based therapeutics
 
    - develop products more efficiently than either company alone
 
Q:  AS A GENEMEDICINE STOCKHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
 
A:  You will receive 0.5710 of a share of Megabios common stock in exchange for
    each share of GENEMEDICINE common stock that you own. For example, if you
    own 1000 shares of GENEMEDICINE common stock, you will receive 571 shares of
    Megabios common stock in exchange for your shares. No fractional shares will
    be issued. In lieu thereof, stockholders will be paid in cash the amount
    equal to the fractional share multiplied by the price of Megabios common
    stock on the date the merger is consummated.
 
Q:  IF I HAD OPTIONS OR WARRANTS TO PURCHASE GENEMEDICINE COMMON STOCK, WHAT
    WILL I RECEIVE IN THE MERGER?
 
A:  Each option and warrant to purchase GENEMEDICINE common stock will convert
    into an option or warrant to purchase 57.10% as many shares of Megabios
    common stock at an adjusted exercise price. The adjusted exercise price is
    calculated by dividing the original exercise price by 0.5710. For example,
    if you have an option or warrant to purchase 1000 shares of GENEMEDICINE
    common stock at an exercise price of $5.71, after the merger you will have
    an option or warrant to purchase 571 shares of Megabios common stock at an
    exercise price of $10.00.
 
Q:  AS A MEGABIOS STOCKHOLDER, WILL I RECEIVE ADDITIONAL SHARES OF MEGABIOS
    COMMON STOCK IN THE MERGER?
 
A:  No. You will continue to hold the same number of shares of Megabios common
    stock after the merger. Additional shares of Megabios common stock will be
    issued in the merger only to the GENEMEDICINE stockholders.
 
Q:  IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY SHARES
    FOR ME?
A:  Your broker will vote your shares only if you provide instructions on how to
    vote. You should instruct your broker to vote your shares according to your
    directions. Without instructions, your broker will not vote your shares.
 
Q:  IF I AM NOT GOING TO ATTEND THE STOCKHOLDER MEETING, SHOULD I RETURN MY
    PROXY CARD INSTEAD?
 
A:  Yes. Please fill out and sign your proxy card and mail it to us in the
    enclosed return envelope as soon as possible. Returning your proxy card
    ensures that your shares will be represented at your special meeting.
 
Q:  WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
 
A:  Send in a later dated, signed proxy card to your company's corporate
    secretary before your special meeting or attend your special meeting in
    person and vote.
 
Q:  SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
 
A:  No. After the merger is completed, we will send GENEMEDICINE stockholders
    written instructions for exchanging their stock certificates. Megabios
    stockholders do not need to exchange their certificates.
 
Q:  WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
 
A:  We are working to complete the merger as quickly as possible. We hope to
    complete the merger within a few days of satisfying the conditions of the
    reorganization agreement, including conditions relating to stockholder
    approval.
 
Q:  WHAT ARE THE TAX CONSEQUENCES TO STOCKHOLDERS OF THE MERGER?
 
A:  We intend that the merger will be treated as a tax-free reorganization for
    federal income tax purposes. Generally, GENEMEDICINE stockholders will not
    recognize gain or loss on the exchange of their stock, other than taxes on
    cash received for a fractional share. Megabios stockholders will not
    recognize any gain or loss in connection with the merger. Tax matters,
    however, are very complicated and the tax consequences of the merger to you
    will depend on the facts of your particular situation. We encourage you to
    contact your tax advisors to determine the tax consequences of the merger to
    you. To review the tax consequences to Megabios and GENEMEDICINE
    stockholders in greater detail, see pages 45 to 47 of this joint proxy
    statement/prospectus.
 
                                       1
<PAGE>
                                    SUMMARY
 
    THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS DOCUMENT. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. WE URGE YOU TO READ THE ENTIRE DOCUMENT (INCLUDING THE
APPENDICES) AND THE DOCUMENTS INCORPORATED BY REFERENCE BEFORE YOU DECIDE HOW TO
VOTE.
 
                                 THE COMPANIES
 
MEGABIOS CORP.
863A Mitten Road
Burlingame, CA 94010
(650) 697-1900
 
    Megabios develops proprietary gene delivery systems and provides preclinical
and early clinical development expertise to create gene-based therapeutics
designed for the treatment or prevention of genetic and acquired diseases.
 
    Megabios has developed several IN VIVO, plasmid gene delivery systems to
address a number of potential therapeutic applications using a variety of
therapeutic genes. Megabios believes its proprietary, plasmid gene delivery
systems may have the following benefits:
 
    - therapeutically relevant gene expression
 
    - tissue specific gene delivery and expression
 
    - ease of handling and administration, stability and scalable manufacturing
      methods
 
    - improved safety profile
 
    Megabios was incorporated in California in April 1992 and reincorporated in
Delaware in September 1997. For more information, see "Information Relating to
Megabios" beginning on page 67.
 
GENEMEDICINE, INC.
8301 New Trails Drive
The Woodlands, TX 77381
(281) 364-1150
 
    GENEMEDICINE is engaged in the development of gene medicines for the
treatment of certain cancers and other diseases. Gene medicines are designed to
deliver instructions to targeted cells in the body to produce therapeutic
proteins or desired immune responses. GENEMEDICINE is also engaged in the
development of genetic vaccines which may be used for the treatment or
prevention of infectious diseases.
 
    GENEMEDICINE was incorporated in Delaware in January 1992. For more
information on GENEMEDICINE, see "Where You Can Find More Information" on Page
105.
 
                           OUR REASONS FOR THE MERGER
 
    We believe that the merger will create a combined company capable of:
 
    - leveraging its collective scientific expertise, intellectual property and
      product development efforts into additional corporate partnerships in the
      pharmaceutical and biotechnology industries
 
    - streamlining its product development efforts
 
    - responding more quickly and effectively to emerging opportunities in the
      field of gene-based therapeutics
 
    - developing products more efficiently than either company alone
 
    The combined company may also offer a greater range of career opportunities
for employees, may improve employee retention, and may operate with reduced
general and administrative expenses.
 
    The Megabios Board of Directors believes that the merger will provide a
number of benefits to Megabios and its stockholders by resulting in a combined
company with greater financial and intellectual property resources, a more
diverse product base and enhanced collaborative partnership opportunities.
 
    The GENEMEDICINE Board of Directors believes that the merger may provide a
number of benefits to GENEMEDICINE and its stockholders, by resulting in a
combined company with greater financial resources, greater research and
development capabilities and enhanced collaborative partnership opportunities.
 
    To review the background and reasons for the merger in more detail, as well
as the risks of the
 
                                       2
<PAGE>
merger, see "Approval of the Merger and Related Transactions--Background of the
Merger," "--Joint Reasons for the Merger," "--GENEMEDICINE'S Reasons for the
Merger" and "--Megabios' Reasons for the Merger," beginning on page 30 and "Risk
Factors--Risks Relating to the Merger" beginning on page 13.
 
                           RECORD DATE; VOTING POWER
 
    You are entitled to vote at the Megabios special meeting or the GENEMEDICINE
special meeting if you own shares as of the close of business on [            ],
1998. This date is referred to in this document as the "record date."
 
    At the close of business on the record date, [      ] shares of Megabios
common stock were outstanding and entitled to vote at the Megabios special
meeting. You will have one vote at the Megabios special meeting for each share
of Megabios common stock you own as of the record date.
 
    At the close of business on the record date, [      ] shares of GENEMEDICINE
common stock were outstanding and entitled to vote at the GENEMEDICINE special
meeting. You will have one vote at the GENEMEDICINE special meeting for each
share of GENEMEDICINE common stock you own as of the record date.
 
                     OUR RECOMMENDATION TO OUR STOCKHOLDERS
 
TO THE MEGABIOS STOCKHOLDERS:
 
    The Megabios Board of Directors believes that the merger is fair to, and is
in the best interests of, both you and Megabios. The Megabios Board of Directors
unanimously recommends that you vote "FOR" the proposal to approve the issuance
of shares of Megabios common stock in the merger.
 
TO THE GENEMEDICINE STOCKHOLDERS:
 
    The GENEMEDICINE Board of Directors believes that the merger is fair to you
and is in your best interests. The GENEMEDICINE Board of Directors unanimously
recommends that you vote "FOR" the proposal to approve and adopt the
reorganization agreement and approve the merger.
                                 VOTE REQUIRED
 
    A majority of shares of Megabios common stock present in person or
represented by proxy and entitled to vote at the Megabios special meeting must
vote to approve the issuance of shares of Megabios common stock in the merger.
 
    A majority of the outstanding shares of GENEMEDICINE common stock as of the
record date must vote to approve and adopt the reorganization agreement and
approve the merger.
 
                                   THE MERGER
 
    THE REORGANIZATION AGREEMENT IS ATTACHED AS APPENDIX A TO THIS DOCUMENT. WE
ENCOURAGE YOU TO READ THE REORGANIZATION AGREEMENT. IT IS THE LEGAL DOCUMENT
GOVERNING THE MERGER.
 
WHEN THE MERGER WILL OCCUR
 
    The merger will take place on a date agreed to by Megabios and GENEMEDICINE.
This date will be no later than the second business day after all of the
conditions to closing contained in the reorganization agreement have been
satisfied or waived. Assuming that our companies satisfy or waive all of the
conditions in the reorganization agreement, we anticipate that the merger will
occur on or before February   , 1999. For more information on regulatory matters
and conditions of the merger, see "Approval of the Merger and Related
Transactions--Regulatory Matters" beginning on page 47 and "The Reorganization
Agreement--Conditions to the Merger" beginning on page 51.
 
WHAT STOCKHOLDERS WILL RECEIVE IN THE MERGER
 
    If the merger is approved, GENEMEDICINE stockholders, will receive 0.5710 of
a share of Megabios common stock for each share of GENEMEDICINE common stock
they own prior to the merger. No fractional shares will be issued. In lieu
thereof, stockholders will be paid in cash the amount equal to the fractional
share multiplied by the price of Megabios common stock on the effective date of
the merger.
 
    Similarly, each option to purchase GENEMEDICINE common stock will convert
into an option to purchase 57.10% as many shares of Megabios common stock at an
adjusted exercise
 
                                       3
<PAGE>
price. Megabios will assume each GENEMEDICINE option in accordance with the
terms of the stock option plan under which the option was issued and the stock
option agreement. Likewise, each outstanding warrant to purchase GENEMEDICINE
common stock shall convert into a warrant to purchase 57.10% as many shares in
Megabios common stock at an adjusted exercise price. Megabios will assume each
warrant in accordance with its terms. The adjusted exercise price is calculated
by dividing the original exercise price by 0.5710. For example, if you have an
option or warrant to purchase 1000 shares of GENEMEDICINE common stock at an
exercise price of $5.71, after the merger you will have an option or warrant to
purchase 571 shares of Megabios common stock, at an exercise price of $10.00.
The terms and conditions that will apply to your new option or warrant will be
substantially the same as the terms and conditions that apply to your existing
option or warrant. For more information on stock options and warrants, see "The
Reorganization Agreement--Stock Options, Warrants and Employee Stock Purchase
Plan" beginning on page 49.
 
    Soon after the merger occurs, Boston Equiserve L.P. will mail to the holders
of GENEMEDICINE common stock (1) a letter of transmittal with respect to the
surrender of valid certificates representing shares of GENEMEDICINE common stock
in exchange for certificates representing Megabios common stock and (2)
instructions for use of the letter of transmittal.
 
    GENEMEDICINE STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK CERTIFICATES
UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. For more information on exchanging
GENEMEDICINE shares, see "The Reorganization Agreement--Conversion of Shares;
Procedures for Exchange of Certificates" beginning on page 50.
 
                   OWNERSHIP OF MEGABIOS FOLLOWING THE MERGER
 
    Based upon the number of shares of GENEMEDICINE common stock issued and
outstanding on the record date (which excludes outstanding options, warrants or
other rights to purchase GENEMEDICINE common stock), approximately 8,900,000
shares of Megabios common stock will be issued in connection with the merger.
Based upon the number of shares of Megabios common stock issued and outstanding
on the record date (which excludes outstanding options or other rights to
purchase Megabios common stock), and the number of additional shares of Megabios
common stock that will be issued in connection with the merger, the former
holders of GENEMEDICINE common stock will hold approximately 41.0% of the total
number of shares of the combined company.
 
    The total number of outstanding options to purchase GENEMEDICINE common
stock will become rights to purchase an aggregate of 1,797,523 shares of
Megabios common stock at a weighted average price of $7.26 per share in
connection with the merger. The total number of outstanding warrants to purchase
GENEMEDICINE common stock will become rights to purchase an aggregate of 687,919
shares of Megabios common stock at a weighted average price of $35.32 per share
in connection with the merger.
 
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
 
    We intend that the merger will be treated as a tax-free reorganization for
federal income tax purposes. Generally, GENEMEDICINE stockholders will not
recognize gain or loss in the merger (other than gain or loss on cash received
for a fraction of a share which will be subject to tax). The reorganization
agreement does not require the parties to obtain a ruling from the Internal
Revenue Service as to the tax consequences of the merger. As a condition to the
closing of the merger, each of GENEMEDICINE and Megabios must receive opinions
from its legal counsel that, based on certain assumptions and certifications,
the merger will be treated as a tax-free reorganization for federal income tax
purposes. For more information, see "Approval of the Merger and Related
Transactions--Material Federal Income Tax Consequences" beginning on page 44.
 
    TAX MATTERS ARE VERY COMPLICATED. THE TAX CONSEQUENCES OF THE MERGER TO YOU
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. WE URGE STOCKHOLDERS TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER,
 
                                       4
<PAGE>
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
 
OPINIONS OF FINANCIAL ADVISORS
 
    In deciding to approve the merger, each Board of Directors considered the
opinion of its financial advisor. Megabios received an opinion from its
financial advisor, Hambrecht & Quist LLC, that the exchange ratio was fair to
Megabios from a financial point of view. GENEMEDICINE received an opinion from
its financial advisor, PaineWebber Incorporated, that the exchange ratio was
fair from a financial point of view to the holders of GENEMEDICINE common stock.
More information on these opinions is provided in the following sections of this
document: "Approval of the Merger and Related Transactions--Opinion of Financial
Advisor to Megabios" beginning on page 40 and "--Opinion of Financial Advisor to
GENEMEDICINE" beginning on page 36. These opinions are attached as Appendices
B-1 and B-2 to this document. We encourage you to read these opinions carefully
and in their entirety.
 
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN HOLDERS
 
    As of the record date, the directors and executive officers of Megabios, as
a group, beneficially owned approximately [        ] percent of Megabios common
stock.
 
    As of the record date, the directors and executive officers of GENEMEDICINE,
as a group, beneficially owned approximately [      ] percent of GENEMEDICINE
common stock.
 
INTERESTS OF CERTAIN PERSONS IN THE MERGER
 
    GENEMEDICINE'S stockholders should note that certain members of
GENEMEDICINE'S management and the GENEMEDICINE Board of Directors have interests
in the merger as employees and/or directors that are different from, or in
addition to, your interest as a stockholder. Certain employees and management of
GENEMEDICINE will share in cash payments equal to a total of three percent of
the cash value of the Megabios common stock issued to GENEMEDICINE stockholders
pursuant to the reorganization agreement. Employees and management may also be
entitled to additional cash payments, benefits and accelerated option vesting if
they are terminated after the merger is completed. The options of non-employee
directors will accelerate if the merger is completed and must be exercised prior
to the merger.
 
    Certain indemnification arrangements for persons serving as directors and
officers of GENEMEDICINE at the time of the merger will be continued for at
least six years after the merger is consummated. The combined company will also
maintain a policy of directors' and officers' liability insurance for the
benefit of those persons for three years after the merger. In addition, Megabios
has agreed to use reasonable efforts to nominate and appoint:
 
    - Arthur M. Pappas to Class I of the Megabios Board of Directors to serve
      until the annual meeting of stockholders to be held in 2001
 
    - Stanley T. Crooke to Class II of the Megabios Board of Directors to serve
      until the annual meeting of stockholders to be held in 1999
 
    - Bert W. O'Malley to Class III of the Megabios Board of Directors to serve
      until the annual meeting of stockholders to be held in 2000
 
    For more information, see "Approval of the Merger and Related
Transactions--Interests of Certain Persons in the Merger" beginning on page 42.
 
CONDITIONS TO THE MERGER
 
    Megabios will complete the merger only if a number of conditions are either
satisfied or waived by Megabios, some of which include:
 
    - the representations and warranties of GENEMEDICINE made in the
      reorganization agreement, subject to certain materiality limitations, are
      accurate
 
    - GENEMEDICINE performs certain covenants and obligations contained in the
      reorganization agreement in all material respects
 
                                       5
<PAGE>
    - the registration statement relating to the shares of Megabios common stock
      to be issued in connection with the merger becomes effective
 
    - the GENEMEDICINE stockholders approve the reorganization agreement and the
      merger
 
    - the Megabios stockholders approve the issuance of Megabios common stock in
      the merger
 
    - Megabios receives certain other consents, certificates, letters and legal
      opinions
 
    - there is no material adverse change to the business, condition, assets,
      liabilities or results of operations of GENEMEDICINE
 
    - the Megabios common stock to be issued in the merger is authorized for
      listing on Nasdaq
 
    - there are no restraining orders, injunctions and other orders preventing
      the consummation of the merger or other certain litigation or
      administrative actions or proceedings
 
    - all outstanding shares of GENEMEDICINE Series B preferred stock are
      converted into GENEMEDICINE common stock
 
    GENEMEDICINE will complete the merger only if a number of conditions are
satisfied or waived by GENEMEDICINE, some of which include:
 
    - the representations and warranties of Megabios made in the reorganization
      agreement, subject to certain materiality limitations, are accurate
 
    - Megabios performs certain covenants and obligations contained in the
      reorganization agreement in all material respects
 
    - the registration statement relating to the shares of Megabios common stock
      to be issued in connection with the merger becomes effective
 
    - the GENEMEDICINE stockholders approve the reorganization agreement and the
      merger
 
    - the Megabios stockholders approve the issuance of Megabios common stock in
      the merger
 
    - GENEMEDICINE receives certain other consents, certificates, letters and
      legal opinions
 
    - there is no material adverse change to the business, condition, assets,
      liabilities or results of operations of Megabios
 
    - the Megabios common stock to be issued in the merger is authorized for
      listing on Nasdaq
 
    - there are no restraining orders, injunctions and other orders preventing
      the consummation of the merger or other certain litigation or
      administrative actions or proceedings
 
    - The Megabios Board of Directors appoints Mr. Pappas and Drs. Crooke and
      O'Malley as directors of Megabios
 
    For more information on the conditions to the merger, see "The
Reorganization Agreement--Conditions to the Merger" on page 51.
 
TERMINATION OF THE REORGANIZATION AGREEMENT
 
    The Boards of Directors of both companies can agree to terminate the
reorganization agreement at any time without completing the merger. Either
company can terminate the reorganization agreement if:
 
    - the merger is not completed by February 28, 1999
 
    - a governmental authority or other legal action permanently prohibits the
      merger
 
    - the GENEMEDICINE stockholders do not approve the merger or the Megabios
      stockholders do not approve the issuance of Megabios common stock to
      GENEMEDICINE stockholders in the merger
 
    - the other party's representations and warranties are inaccurate, resulting
      in a material adverse effect on the party or the other party breaches or
      materially fails to comply with its obligations under the
 
                                       6
<PAGE>
      reorganization agreement, resulting in the inability to satisfy a
      condition to the completion of the merger
 
    In addition, Megabios can terminate the reorganization agreement if certain
"triggering events," as defined in the reorganization agreement, occur at any
time prior to approval by the GENEMEDICINE stockholders. GENEMEDICINE can
terminate the merger if its Board of Directors withdraws, amends or modifies its
unanimous recommendation in favor of the merger and accepts or recommends to
GENEMEDICINE'S stockholders a "superior offer," as defined in the reorganization
agreement. For more information on the circumstances under which the merger can
be terminated, see "The Reorganization Agreement--Termination" beginning on page
58.
 
EXPENSES AND TERMINATION FEES
 
    We have agreed that each party will pay its own fees and expenses in
connection with the merger, whether or not the merger is consummated, except
that we will share equally all fees and expenses (other than attorneys' fees) in
connection with the printing and filing of this document and the registration
statement of which this document is a part. GENEMEDICINE has agreed that if the
reorganization agreement is terminated under certain circumstances, it will pay
to Megabios either $1,400,000 or 3% of the aggregate consideration received in
an "acquisition transaction," as defined in the reorganization agreement,
depending on the circumstances. For more information, see "The Reorganization
Agreement--Expenses and Termination Fees" beginning on page 60.
 
ANTICIPATED ACCOUNTING TREATMENT
 
    The merger is expected to be accounted for as a purchase. For more
information, see "Approval of the Merger and Related Transactions--Anticipated
Accounting Treatment" beginning on page 47 and "Unaudited Proforma Condensed
Combined Financial Statements" on page 61.
 
REGULATORY APPROVALS
 
    We are not required to notify the Federal Trade Commission ("FTC") or the
Antitrust Division of the U.S. Department of Justice before the merger can be
completed. However, the FTC or the Antitrust Division has the authority to
challenge the merger on antitrust grounds before or after the merger is
completed. For more information, see "Approval of the Merger and Related
Transactions--Regulatory Matters" beginning on page 47.
 
RIGHTS OF DISSENTING STOCKHOLDERS
 
    Megabios and GENEMEDICINE are organized under Delaware law. Under Delaware
law, the stockholders of Megabios and GENEMEDICINE are not entitled to appraisal
rights in connection with the merger.
 
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
 
    Both companies have made forward-looking statements in this document (and in
the documents that are incorporated by reference) that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Megabios, GENEMEDICINE or
the combined company. Also, when words such as "believes," "expects,"
"anticipates" or similar expressions are used, we are making forward-looking
statements. You should note that the merger and an investment in securities of
Megabios involve certain risks and uncertainties that could affect the future
financial results of Megabios. Some of these risks include: risks related to the
integration of Megabios and GENEMEDICINE, risks associated with a fixed exchange
ratio, risks relating to the respective businesses of Megabios and GENEMEDICINE
and other risks and uncertainties discussed under "Risk Factors" and elsewhere
in this document and in the documents GENEMEDICINE incorporates by reference.
For more information on these risks, see "Risk Factors" beginning on page 13.
 
                                       7
<PAGE>
MARKETS AND MARKET PRICES
 
    Megabios common stock is quoted on Nasdaq under the symbol "MBIO."
GENEMEDICINE common stock is quoted on Nasdaq under the symbol "GMED." Following
the consummation of the merger, GENEMEDICINE common stock will cease to be
quoted on Nasdaq.
 
    The following table sets forth the closing sale price per share of Megabios
and GENEMEDICINE common stock as reported on Nasdaq and the equivalent per share
price, as explained below, of GENEMEDICINE common stock on October 23, 1998 the
last trading day before the announcement of the merger, and on November   ,
1998.
 
<TABLE>
<CAPTION>
                                               MEGABIOS COMMON    GENEMEDICINE COMMON    EQUIVALENT GENEMEDICINE
                                                 STOCK PRICE          STOCK PRICE           PER SHARE PRICE(1)
                                              -----------------  ----------------------  ------------------------
<S>                                           <C>                <C>                     <C>
October 23, 1998............................     $     4.188          $      2.000             $      2.391
November   , 1998...........................     $         []         $          []            $          []
</TABLE>
 
- ------------------------
 
(1) The equivalent GENEMEDICINE per share price represents 0.5710 of the price
    of one share of Megabios common stock.
 
    The actual prices of Megabios common stock or GENEMEDICINE common stock
prior to or at the time the merger is consummated cannot be guaranteed or
predicted. For more information on this risk, see "Risk Factors--Risks Relating
to the Merger" beginning on page 13.
 
                                       8
<PAGE>
                                 MEGABIOS CORP.
                   SELECTED HISTORICAL FINANCIAL INFORMATION
 
    The selected historical financial information set forth below with respect
to Megabios' statements of operations for the years ended June 30, 1994, 1995,
1996, 1997 and 1998, and the balance sheet data at June 30, 1994, 1995, 1996,
1997 and 1998, has been derived from the financial statements of Megabios
audited by Ernst & Young LLP, independent auditors. The selected financial
information of Megabios set forth below as of September 30, 1998 and for the
three-month periods ended September 30, 1997 and 1998 has been derived from the
unaudited financial statements included elsewhere herein, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of Megabios' financial
position and results of operations. The data set forth below should be read in
conjunction with Megabios' "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements, related notes
and independent auditors' report included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                                                              THREE MONTHS
                                                                                                                 ENDED
                                                                FISCAL YEAR ENDED JUNE 30,                   SEPTEMBER 30,
                                                   -----------------------------------------------------  --------------------
                                                     1994       1995       1996       1997       1998       1997       1998
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)   (UNAUDITED)
<S>                                                <C>        <C>        <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue.................................  $     500  $   1,157  $   1,890  $   5,793  $   8,083  $   2,287  $     773
Expenses:
  Research and development.......................      1,922      4,691      6,487      8,593     15,111      2,758      3,429
  General and administrative.....................        795      1,811      2,169      2,417      3,561        675      1,076
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
    Total operating expenses.....................      2,718      6,502      8,656     11,015     18,672      3,433      4,505
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
Operating loss...................................     (2,218)    (5,345)    (6,766)    (5,222)   (10,589)    (1,146)    (3,732)
Interest income (expense), net...................         65        (84)      (135)       275      2,211        300        533
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net loss.........................................     (2,153)    (5,429)    (6,901)    (4,947)    (8,378)      (846)    (3,199)
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net loss per share--basic and diluted(1).........  $   (3.59) $   (8.72) $   (9.86) $   (4.40) $   (0.83) $   (0.29) $   (0.25)
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
Shares used in computing basic and diluted net
  loss per share(1)..............................        601        622        700      1,126     10,088      2,902     12,736
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                      AT JUNE 30,
                                                 -----------------------------------------------------
                                                   1994       1995       1996       1997       1998
                                                 ---------  ---------  ---------  ---------  ---------  AT SEPTEMBER 30,
                                                                                                              1998
                                                                                                        ----------------
                                                                                                          (UNAUDITED)
<S>                                              <C>        <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments.........  $   1,886  $     282  $   5,253  $  24,269  $  48,426     $   44,931
Working capital (deficit)......................        758       (873)     3,568     21,629     20,966         26,554
Total assets...................................      4,344      4,969      9,956     29,978     55,901         55,208
Long-term debt.................................        412      1,305      1,894      1,487      2,464          4,808
Accumulated deficit............................     (2,931)    (8,360)   (15,261)   (20,208)   (28,586)       (31,785)
Total stockholders' equity.....................      2,436      2,219      6,086     25,223     50,282         47,506
</TABLE>
 
- ------------------------------
 
(1) See Note 1 to June 30, 1998 Financial Statements for information regarding
    the calculation of net loss per share.
 
                                       9
<PAGE>
                               GENEMEDICINE, INC.
                   SELECTED HISTORICAL FINANCIAL INFORMATION
 
    The selected historical financial information set forth below with respect
to GENEMEDICINE's statements of operations for the years ended December 31,
1993, 1994, 1995, 1996 and 1997, and the balance sheet data at December 31,
1993, 1994, 1995, 1996 and 1997, has been derived from the financial statements
of GENEMEDICINE audited by Arthur Andersen LLP, independent public accountants.
The selected financial information set forth below as of September 30, 1998 and
for the nine month periods ended September 30, 1997 and 1998 is derived from the
unaudited financial statements included elsewhere herein, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of financial position
and results of operations. The data set forth below should be read in
conjunction with GENEMEDICINE's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements,
related notes and accountants' report included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                                              NINE MONTHS
                                                                                                 ENDED
                                                  YEAR ENDED DECEMBER 31,                    SEPTEMBER 30,
                                   -----------------------------------------------------  --------------------
                                     1993       1994       1995       1996       1997       1997       1998
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)   (UNAUDITED)
<S>                                <C>        <C>        <C>        <C>        <C>        <C>        <C>
STATEMENTS OF OPERATIONS DATA:
Revenues and other income:
  Contract revenue...............  $      --  $      --  $   3,680  $   4,000  $   4,500  $   3,500  $   3,068
  Research and development grant
    revenue......................         --        125         --        722        679        509        219
  Interest income................        105        713      1,384      1,862      1,634      1,273        967
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
    Total revenues and other
      income.....................        105        838      5,064      6,584      6,813      5,282      4,254
Expenses:
  Research and development.......      2,269      7,042     11,338     13,727     14,125     10,068     11,511
  General and administrative.....      1,497      2,881      3,736      3,406      4,380      3,385      3,435
  Interest expense...............         82         88        140        104         62         50         21
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
    Total expenses...............      3,848     10,011     15,214     17,237     18,567     13,503     14,967
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
  Net loss.......................  $  (3,743) $  (9,173) $ (10,150) $ (10,653) $ (11,754) $  (8,221) $ (10,713)
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
  Net loss per share--basic and
    diluted(1)...................  $   (0.91) $   (1.27) $   (1.10) $   (0.84) $   (0.86) $   (0.60) $   (0.74)
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
  Shares used in computing basic
    and diluted net loss per
    share(1).....................      4,119      7,238      9,195     12,753     13,703     13,656     14,469
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                   AT DECEMBER 31,
                                                -----------------------------------------------------
                                                  1993       1994       1995       1996       1997
                                                ---------  ---------  ---------  ---------  ---------  AT SEPTEMBER 30,
                                                                                                             1998
                                                                                                       ----------------
                                                                                                         (UNAUDITED)
<S>                                             <C>        <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
  investments.................................  $   4,410  $  22,173  $  35,197  $  30,872  $  24,582     $   18,419
Total assets..................................      5,344     25,004     38,760     34,049     27,987         21,443
Long-term liabilities.........................      1,019        410      1,588      2,179      2,975          3,700
Deficit accumulated during the development
  stage.......................................     (5,132)   (14,305)   (24,455)   (35,108)   (46,861)       (57,574)
Total stockholders' equity....................      3,561     23,383     35,667     29,929     23,198         16,707
</TABLE>
 
- ------------------------------
 
    (1) Computed on the basis described in Note 2 of GENEMEDICINE Notes to
Financial Statements for the year ended
December 31, 1997.
 
                                       10
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
     UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
 
    The unaudited pro forma condensed combined financial information set forth
below gives effect to the merger as a purchase, assuming that 0.5710 of a share
of Megabios common stock is issued in exchange for each share of GENEMEDICINE
common stock. The unaudited pro forma condensed combined statements of
operations for year ended June 30, 1998 and for the three-month period ended
September 30, 1998, combine the historical statements of operations of Megabios
and GENEMEDICINE as if the merger had occurred at the beginning of the earliest
period presented. The GENEMEDICINE financial information has been recast to
conform to the June 30 fiscal year end used by Megabios. The unaudited pro forma
condensed combined balance sheet data as of September 30, 1998 gives effect to
the merger as if it had occurred on September 30, 1998, and gives effect to the
allocation of the purchase price to the GENEMEDICINE assets acquired, including
in-process research and development, and liabilities assumed. This data should
be read in conjunction with the selected historical financial information, the
unaudited pro forma condensed combined financial statements and the separate
historical financial statements of Megabios and GENEMEDICINE included elsewhere
in this joint proxy statement/prospectus. The unaudited pro forma condensed
combined financial information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have been achieved had the merger been consummated at the beginning
of the earliest period presented, and such information should not be construed
as representative of future operating results or financial position.
 
<TABLE>
<CAPTION>
                                                                                                  THREE MONTHS
                                                                                 YEAR ENDED          ENDED
                                                                                JUNE 30, 1998  SEPTEMBER 30, 1998
                                                                                -------------  ------------------
                                                                                 (IN THOUSANDS, EXCEPT PER SHARE
                                                                                              DATA)
<S>                                                                             <C>            <C>
STATEMENTS OF OPERATIONS DATA:
REVENUE:
  Contract revenue............................................................   $    12,106       $    1,818
  Research and development grant revenue......................................           509           --
                                                                                -------------         -------
    Total revenue.............................................................        12,615            1,818
 
EXPENSES:
  Research and development....................................................        30,189            7,218
  General and administrative..................................................         8,012            2,249
  Amortization of purchased intangible assets.................................         1,055              264
                                                                                -------------         -------
    Total operating expenses..................................................        39,256            9,731
                                                                                -------------         -------
Operating loss................................................................       (26,641)          (7,913)
 
Interest income (expense), net................................................         3,619              814
                                                                                -------------         -------
Net loss......................................................................       (23,022)          (7,099)
                                                                                -------------         -------
                                                                                -------------         -------
 
Net loss per share--basic and diluted.........................................   $     (1.21)      $    (0.33)
                                                                                -------------         -------
                                                                                -------------         -------
 
Shares used in computing basic and diluted net loss per share.................        19,024           21,672
                                                                                -------------         -------
                                                                                -------------         -------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                               SEPTEMBER 30, 1998
                                                                                               -------------------
<S>                                                                                            <C>
BALANCE SHEET DATA:
  Cash, cash equivalents and investments.....................................................      $    63,350
  Working capital............................................................................           37,110
  Total assets...............................................................................           79,815
  Long-term debt.............................................................................            4,808
  Accumulated deficit........................................................................          (57,785)
  Total stockholders' equity.................................................................           60,338
</TABLE>
 
                                       11
<PAGE>
                           COMPARATIVE PER SHARE DATA
 
    The following table sets forth certain historical per share data of Megabios
and GENEMEDICINE and combined per share data on an unaudited pro forma basis
after giving effect to the merger as a purchase. This data should be read in
conjunction with the selected historical financial information and unaudited pro
forma condensed combined financial information of Megabios and GENEMEDICINE and
notes thereto, included elsewhere in this joint proxy statement/prospectus. The
unaudited pro forma combined per share data are not necessarily indicative of
the operating results or financial position that would have occurred if the
merger had been consummated at the beginning of the periods presented, nor is it
necessarily indicative of future operating results or financial position.
 
<TABLE>
<CAPTION>
                                                                                                   THREE MONTHS
                                                                                  YEAR ENDED           ENDED
                                                                                 JUNE 30, 1998  SEPTEMBER 30, 1998
                                                                                 -------------  -------------------
<S>                                                                              <C>            <C>
Historical Megabios:
  Net loss per basic and diluted share.........................................    $   (0.83)        $   (0.25)
  Book value per share (1).....................................................    $    3.90         $    3.68
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                    NINE MONTHS
                                                                                YEAR ENDED             ENDED
                                                                             DECEMBER 31, 1997  SEPTEMBER 30, 1997
                                                                             -----------------  -------------------
<S>                                                                          <C>                <C>
Historical GENEMEDICINE
  Net loss per basic and diluted share.....................................      $   (0.86)          $   (0.74)
  Book value per share (1).................................................      $    1.67           $    1.15
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                   THREE MONTHS
                                                                                  YEAR ENDED           ENDED
                                                                                 JUNE 30, 1998  SEPTEMBER 30, 1998
                                                                                 -------------  -------------------
<S>                                                                              <C>            <C>
 
Pro Forma Combined Net Loss
  Per Megabios basic and diluted share.........................................    $   (1.21)        $   (0.33)
  Per equivalent GENEMEDICINE basic and diluted share (2)......................    $   (0.69)        $   (0.19)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                SEPTEMBER 30, 1998
                                                                                                -------------------
<S>                                                                                             <C>
Pro Forma Combined Book Value per Share (3)
  Per Megabios share..........................................................................       $    2.71
  Per equivalent GENEMEDICINE share (2).......................................................       $    1.55
</TABLE>
 
- ------------------------
 
(1) The historical book value per share is computed by dividing stockholders'
    equity by the number of shares of common stock outstanding at the end of
    each period.
 
(2) The GENEMEDICINE Equivalent Pro Forma combined per share amounts are
    calculated by multiplying the Megabios combined pro forma per share amounts
    by the exchange ratio of 0.5710.
 
(3) The Pro Forma Combined Book Value per Share is computed by dividing pro
    forma stockholders' equity by the pro forma number of shares of common stock
    outstanding at the end of the period.
 
                                       12
<PAGE>
                                  RISK FACTORS
 
    THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF
THE COMBINED COMPANY MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED
BELOW, ELSEWHERE IN THIS DOCUMENT, AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE IN MAKING AN INVESTMENT DECISION. KEEP IN MIND THAT THE RISKS
DESCRIBED BELOW ARE NOT THE ONLY RISKS FACING MEGABIOS, GENEMEDICINE OR THE
COMBINED COMPANY.
 
RISKS RELATING TO THE MERGER
 
    MEGABIOS AND GENEMEDICINE MAY NOT BE SUCCESSFULLY INTEGRATED.  Integrating
Megabios and GENEMEDICINE will be a complex, time-consuming and expensive
process. Before the merger, Megabios and GENEMEDICINE operated independently,
each with its own business, business culture, employees and systems. After the
merger, Megabios and GENEMEDICINE must operate as a combined organization
utilizing common (1) information and communication systems, (2) operating
procedures, (3) financial controls and (4) human resource practices, including
benefit, training and professional development programs. There may be
substantial difficulties, costs and delays involved in integrating Megabios and
GENEMEDICINE. These may include:
 
    - Distracting management from the business of the combined company
 
    - Potential incompatibility of business cultures
 
    - Perceived uncertainty in career opportunities, benefits and the long-term
      return value of stock options available to employees
 
    - Potential inability to coordinate research and development efforts
      successfully
 
    - Costs and delays in implementing common systems and procedures
 
    Any one or all of these factors may increase operating costs or lower
anticipated financial performance. In addition, the combined company may lose
corporate partners and employees. Many of these factors are also outside the
control of either company. The failure to integrate Megabios and GENEMEDICINE
would have a material adverse effect on the business, financial condition and
results of operations of the combined company.
 
    THE NUMBER OF SHARES OF MEGABIOS COMMON STOCK RECEIVED IN THE MERGER WILL
NOT INCREASE OR DECREASE DUE TO CHANGES IN THE PRICE OF EITHER COMPANY'S STOCK.
At the effective time of the merger, each outstanding share of GENEMEDICINE
common stock will be converted into 0.5710 of a share of Megabios common stock.
The exchange ratio will not increase or decrease due to fluctuations in the
market price of either company's stock. The value of the shares of Megabios
common stock to be received by GENEMEDICINE stockholders in the merger will
depend upon the market price of Megabios common stock at the effective time of
the merger. Megabios common stock and GENEMEDICINE common stock are subject to
substantial price volatility. The market prices of Megabios common stock and
GENEMEDICINE common stock cannot be guaranteed or predicted. Recent market
prices of Megabios common stock and GENEMEDICINE common stock are set forth
under the captions "Summary--Markets and Market Prices" beginning on page 8 and
"Comparative Per Share Market Price Data and Dividend Policy" beginning on page
29. We encourage GENEMEDICINE stockholders to obtain current market quotations
for Megabios common stock and GENEMEDICINE common stock.
 
    RIGHTS OF GENEMEDICINE STOCKHOLDERS WILL CHANGE AFTER MERGER.  Following the
merger, GENEMEDICINE stockholders will become Megabios stockholders. There are
important differences between the rights of stockholders of GENEMEDICINE and the
rights of stockholders of Megabios. For a description of these differences, see
"Comparison of Stockholders' Rights" beginning on page 102.
 
                                       13
<PAGE>
RISKS RELATING TO THE BUSINESS OF MEGABIOS
 
    MEGABIOS EXPECTS TO CONTINUE TO OPERATE AT A LOSS AND MAY NEVER ACHIEVE
PROFITABILITY.  Since its inception, Megabios has engaged in research and
development activities. As a result, Megabios has generated minimal revenues
from operations and has experienced significant operating losses. As of
September 30, 1998, Megabios had an accumulated deficit of approximately $31.8
million. The process of developing the Megabios' gene delivery systems will
require significant additional research and development, preclinical testing,
clinical trials and regulatory approvals. These activities, together with
general and administrative expenses, are expected to result in operating losses
for the foreseeable future. Megabios cannot be certain that it will ever achieve
and sustain profitability in the future.
 
    THE DEVELOPMENT OF MEGABIOS' PRODUCTS WILL TAKE SEVERAL MORE YEARS, AND
MEGABIOS CANNOT BE CERTAIN THESE PRODUCTS WILL BE SUCCESSFULLY MARKETED OR
MANUFACTURED.  Megabios is at an early stage of development. Because
substantially all of the products under development by Megabios are in research
or preclinical development, revenues from the sale of any products will not be
realized for at least the next several years, if at all. Megabios cannot be
certain that any of its products will be safe and effective or that Megabios or
its corporate partners will obtain regulatory approvals. In addition, any
products developed by Megabios may not be economical to manufacture on a
commercial scale. Even if Megabios develops a product that becomes available for
commercial sale, it cannot be certain that consumers will accept the product.
 
    MEGABIOS' BUSINESS DEPENDS ON ATTRACTING AND RETAINING CORPORATE
PARTNERS.  Megabios relies on corporate partnerships in order to fund or conduct
research and development, preclinical studies, clinical trials, manufacturing,
marketing and sales necessary to commercialize its gene delivery systems.
Megabios cannot be certain that it will be able to retain current or establish
additional corporate partnerships. Even if it is able to establish new corporate
partnerships, the terms may not be favorable. In addition, Megabios cannot be
certain that its current or future corporate partnerships will be successful or
that it will derive any revenue from such partnerships. Corporate partners have
considerable discretion in electing whether to pursue the development of any
products. Corporate partners may pursue alternative technologies or products
either on their own or in collaboration with Megabios' competitors. Disputes may
also not arise in the future with respect to the ownership of rights to any
technology developed with corporate partners. Disagreements between corporate
partners and Megabios could lead to delays or termination in the research,
development or commercialization of certain product candidates. Such
disagreements could also result in litigation or arbitration which would be time
consuming and expensive. If any corporate partner fails to develop or
commercialize successfully any product, Megabios' business, financial condition
and results of operations could be materially adversely affected.
 
    MEGABIOS MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP GENE-BASED THERAPEUTICS
THAT SATISFY EXISTING CLINICAL AND REGULATORY APPROVAL PROCEDURES.  Before
Megabios or its corporate partners can obtain regulatory approval for the
commercial sale of any of its products, Megabios or its corporate partner must
demonstrate, through preclinical studies and clinical trials, that a potential
product is safe and effective for use in each target indication. Megabios cannot
be certain that it or its corporate partners will be permitted to undertake
clinical testing of its products. Megabios or its corporate partners may also
experience delays in commencing clinical trials due to a variety of factors,
including:
 
    - Unfavorable or delayed preclinical study results
 
    - Inability to manufacture sufficient quantities of materials used for
      clinical trials
 
    - Delays or difficulties in patient enrollment
 
    - Delays in regulatory approvals
 
    While Megabios has demonstrated some evidence of the utility of its gene
delivery systems in preclinical studies, these results do not mean that they
will be safe or effective in humans. The gene
 
                                       14
<PAGE>
delivery systems may have undesirable and unintended side effects or other
characteristics that may prevent or limit their use.
 
    Megabios' gene delivery systems face certain risks in addition to those
common to all biotechnology or biopharmaceutical companies. Gene-based therapy
is a new and rapidly evolving technology that is expected to undergo significant
technological changes in the future. Many companies are seeking to identify
therapeutic genes and understand their function in the development and
progression of various diseases. However, there is limited clinical data
available regarding the safety and efficacy of gene-based therapeutics. Megabios
is not aware of any gene-based therapeutics that have received marketing
approval from the Food and Drug Administration ("FDA") or foreign regulatory
authorities. As a result of the limited data available and other factors,
clinical trials relating to gene-based therapeutics may take longer to complete
than clinical trials involving more traditional pharmaceuticals.
 
    MEGABIOS MAY BE UNABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY
RIGHTS.  Megabios' success will depend to a significant degree on its ability to
obtain patents and licenses to patent rights. In addition, Megabios' success
will also depend on its ability to preserve trade secrets and to operate without
infringing on the proprietary rights of others. The patent positions of
biotechnology and pharmaceutical companies are uncertain and involve complex
legal and factual questions. As a result, Megabios cannot predict how broad any
claims in allowed patents will be. In addition, there is a substantial backlog
of biotechnology patent applications at the U.S. Patent and Trademark Office
that may delay the review and the potential issuance of patents.
 
    Megabios cannot be certain that patents will issue from any applications
filed in the U.S. and other countries. In addition, Megabios cannot be certain
that issued patents will be sufficient to protect Megabios' technology. Patent
applications in the U.S. are maintained in secrecy until a patent issues. As a
result, Megabios cannot be certain that others have not filed patent
applications for technology covered by Megabios' pending applications. Megabios
also cannot be certain it was the first to invent the technology that is the
subject of such patent applications. Competitors may have filed patent
applications or received patents and may obtain additional patents and
proprietary rights that block or compete with those held by Megabios. Megabios
is aware of patent applications filed and patents issued to third parties
relating to gene delivery technologies. Megabios currently is unable to verify
that any of these patent applications or patents held by third parties will have
any effect on its products in development.
 
    If any of its competitors have filed patent applications in the U.S. that
claim technology also invented by Megabios, Megabios may have to participate in
interference proceedings. These interference proceedings determine priority of
invention and, thus, the right to a patent for the technology in the U.S.
Participation in these proceedings would be expensive to Megabios. In addition,
litigation may be necessary to enforce any patents issued to Megabios or to
determine the scope and validity of the proprietary rights of third parties.
Litigation is also expensive. In the event Megabios is required to participate
in interference proceeding or litigation, Megabios cannot predict the outcome of
the proceedings. An unfavorable outcome could result in the loss of patent
protection.
 
    Megabios' success depends in large part on its ability to operate without
infringing upon the patents and other proprietary rights of third parties.
Megabios cannot be certain that its technologies do not and will not infringe
upon the patents or other proprietary rights of third parties. In the event of
such infringement, Megabios and its corporate partners may be enjoined from
pursuing commercialization of products or may be required to obtain licenses to
these patents or other proprietary rights. Megabios cannot be certain that it or
its corporate partners will be able to obtain alternative technologies or any
required license. Even if it were to obtain such technologies or licenses,
Megabios cannot be certain that the terms would be commercially reasonable. If
such licenses or alternative technologies are not obtained, Megabios may be
delayed or prevented from pursuing the development of some or all of its
products.
 
    Megabios also relies on proprietary information and trade secrets, including
its proprietary database of preclinical IN VIVO experiments, to develop and
maintain its competitive position. Third parties may
 
                                       15
<PAGE>
independently develop equivalent proprietary information or techniques or gain
access to Megabios' trade secrets. Megabios typically requires its employees,
consultants, collaborators, advisors and corporate partners to execute
confidentiality agreements. However, these agreements may not provide meaningful
protection or adequate remedies in the event of unauthorized use or disclosure
of such information. Megabios also cannot guarantee that the parties to such
agreements will not breach the agreements.
 
    MEGABIOS MUST OBTAIN RIGHTS TO PROPRIETARY GENES OR OTHER
TECHNOLOGIES.  Megabios and its corporate partners are investigating the use of
certain gene sequences in Megabios' products. A number of these gene sequences
are, or may become, patented by others. As a result, Megabios or its corporate
partners may be required to obtain licenses to those gene sequences or other
technology. In addition, some of the products based on Megabios' gene delivery
systems may require the use of multiple proprietary technologies. Consequently,
Megabios or its corporate partners may be required to make cumulative royalty
payments to several third parties. These cumulative royalties would reduce
amounts retained by or paid to Megabios and could be commercially prohibitive.
Megabios cannot be certain that it or its corporate partners will be able to
obtain any required licenses.
 
    MEGABIOS MUST SECURE ADDITIONAL FINANCING TO MEET ITS FUTURE
NEEDS.  Megabios will require additional funding in order to continue its
research and development activities. Megabios has financed its operations
primarily through the sale of equity securities and through corporate
partnerships. Megabios has generated no royalty revenues from product sales. No
such revenues are expected for the foreseeable future, if ever. Megabios
anticipates that its existing resources will enable it to maintain its
operations through fiscal 2000. However, Megabios may require additional funding
prior to such time. Megabios' future capital requirements will depend on many
factors, including:
 
    - Scientific progress in its research and development programs
 
    - Size and complexity of such programs
 
    - Scope and results of preclinical studies and clinical trials
 
    - Ability to establish and maintain corporate partnerships
 
    - Time and costs involved in obtaining regulatory approvals
 
    - Time and costs involved in filing, prosecuting and enforcing patent claims
 
    - Competing technological and market developments
 
    - The cost of manufacturing preclinical and clinical material
 
    Megabios cannot be certain that additional financing to meet its funding
requirements will be available. Even if financing is available, the terms may
not be attractive. Furthermore, any additional equity financing may be dilutive
to stockholders. If Megabios is unable to raise capital when needed, it may have
to reduce operations to conserve cash or cease operations entirely.
 
    MEGABIOS MAY BE UNABLE TO SATISFY GOVERNMENT REGULATIONS RELATING TO THE
DEVELOPMENT, MARKETING AND MANUFACTURING OF ITS PRODUCTS IN THE U.S.  Megabios
has not received approval from any regulatory authorities to market any
products. The production and marketing of Megabios' products and its ongoing
research and development activities are subject to extensive regulation by the
FDA and state agencies. Prior to marketing any drug or biological product in the
U.S., the product must undergo rigorous preclinical studies and clinical trials.
In addition, the product must undergo an extensive regulatory approval process
implemented by the FDA. These regulatory requirements are designed to determine
that the product is both safe and effective. Satisfaction of these regulatory
requirements typically takes several years or more depending on the type,
complexity and novelty of the product. In addition, the process of obtaining
regulatory approval requires a substantial commitment of resources. Moreover,
Megabios cannot be certain that it will obtain regulatory approval even if it
devotes substantial resources and time. For
 
                                       16
<PAGE>
example, Megabios cannot be certain that any product under development will
prove safe and effective in clinical trials. Data obtained from preclinical
studies and clinical trials may be interpreted in a variety of ways. Such
interpretations could delay, limit or prevent regulatory approvals.
 
    Megabios believes that the FDA will regulate the commercial uses of its
products as biologics. However, gene-based therapy is a relatively new
technology. As a result, the regulatory requirements governing gene-based
therapeutics are particularly uncertain. This uncertainty may result in
excessive costs or extensive delays in the regulatory approval process. Academic
institutions and companies conducting research in the gene-based therapy field
are using a variety of approaches and technologies. If these parties experience
any adverse results in preclinical studies or clinical trials, Megabios could
experience delays in the approval process for its products. Adverse results
could also prevent approval altogether.
 
    In addition, manufacturing facilities in the U.S. must comply with the FDA's
Good Manufacturing Process ("GMP") regulations. Such facilities are subject to
periodic inspection by the FDA and state authorities. Manufacturers of biologics
also must comply with the FDA's general biological product standards and also
may be subject to state regulation. Failure to comply with GMP or other
applicable regulatory requirements may result in the following:
 
    - Withdrawal of marketing approval
 
    - Civil penalties
 
    - Recall or seizure of products or total or partial suspension of production
 
    - FDA warning letters
 
    - Refusal by the FDA to review applications or supplements to approved
      applications
 
    - Injunctions
 
    - Other legal or regulatory actions
 
    Even after a product is approved for marketing, the product, its
manufacturer and its manufacturing facilities are subject to continued
regulatory review, oversight and periodic FDA inspections. Discovery of
previously unknown problems with a product, manufacturer or facility may result
in penalties, including withdrawal of the product from the market.
 
    MEGABIOS MAY NOT BE SUCCESSFUL IN OBTAINING REQUIRED FOREIGN REGULATORY
APPROVALS.  In order to market its products outside of the U.S., Megabios and
its corporate partners must also comply with numerous and varying regulatory
requirements of other countries regarding safety and quality. The approval
procedures vary among countries and can involve additional testing. The time
required obtaining approval in other countries might differ from that required
to obtain FDA approval. The regulatory approval process in other countries
includes all of the risks associated with obtaining FDA approval set forth
above. Megabios cannot be certain that it will obtain any regulatory approvals
in other countries. Approval by the FDA does not ensure approval by the
regulatory authorities of any other country.
 
    THE GENE-BASED THERAPEUTICS MARKET IS HIGHLY COMPETITIVE.  The
pharmaceutical and biotechnology industries are highly competitive. Megabios is
aware of several pharmaceutical and biotechnology companies that are pursuing
gene-based therapeutics. Many of these companies are addressing diseases that
have been targeted by Megabios or its corporate partners. Megabios is also aware
that certain of its corporate partners are developing gene-based therapeutics of
Megabios' competitors. These corporate partners may devote more resources to
competing products or technologies. Megabios also may experience competition
from companies that enter the field of gene-based therapeutics in the future. As
competitors develop their technologies, they may develop proprietary positions
in certain aspects of gene delivery and gene-based therapeutics that could
prevent Megabios from developing its products.
 
                                       17
<PAGE>
    In addition, Megabios faces intense competition from other companies for
corporate partnerships, for establishing relationships with academic and
research institutions and for licenses to proprietary technology. In addition,
many other companies are developing non-gene-based therapies to treat these same
diseases.
 
    Most of Megabios' competitors and potential competitors have substantially
greater resources than Megabios. Those resources include superior product
development capabilities and financial, scientific, manufacturing, managerial
and human resources. Megabios' competitors may develop safer, more effective or
less costly gene delivery systems, gene-based therapeutics or non-gene-based
therapies. In addition, competitors may achieve superior patent protection or
obtain regulatory approval or product commercialization earlier than Megabios.
 
    MEGABIOS MAY BE UNABLE TO ATTRACT AND RETAIN A SUFFICIENT NUMBER OF
QUALIFIED EMPLOYEES.  Megabios' success depends, in part, on its ability to
retain its executive officers and scientific staff. In addition, Megabios relies
on consultants and advisors to assist in formulating its research and
development strategy. If Megabios loses any of these persons, its corporate
partnerships, business, financial condition and results of operations could be
adversely affected. Megabios does not maintain key man life insurance on any of
these individuals.
 
    In order to pursue its research and product development plans, Megabios must
attract and retain additional qualified scientific and other personnel. Most of
the individuals sought by Megabios are highly skilled in pharmaceutical product
development or in particular scientific fields. These individuals are generally
in high demand by pharmaceutical and biotechnology companies and by universities
and other research institutions. As a result, Megabios cannot be certain it will
be able to attract and retain qualified individuals. The loss of key personnel
or the inability to hire and retain qualified personnel could adversely affect
Megabios' product development efforts.
 
    MEGABIOS HAS ONLY LIMITED MANUFACTURING EXPERIENCE.  Megabios has entered
into a strategic partnership with DSM Biologics ("DSM") for the manufacture and
supply of gene based systems for the gene therapy industry. The partnership has
the potential to create the first manufacturing facilities that can produce
high-quality, ultrapure material for plasmid-based therapeutics on every scale,
from preclinical toxicology studies to commercial products. DSM will have full
responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. Megabios will depend on DSM
for commercial-scale manufacturing of its products. Neither DSM nor any third
party has demonstrated successful large-scale manufacturing of Megabios' gene
delivery systems. DSM may be unable to develop adequate manufacturing
capabilities for commercial-scale quantities of gene-based therapeutic products.
If DSM or third parties are unable to establish and maintain large-scale
manufacturing capabilities, Megabios' commercialization of its products may be
delayed and sales of any products would be adversely affected.
 
    MEGABIOS' PRODUCTS MAY NOT BE ACCEPTED BY PHYSICIANS AND
INSURERS.  Megabios' success is dependent on commercial acceptance of its
products. Megabios believes that recommendations by physicians and health care
payers will be essential for commercial acceptance of its products. Concerns
have arisen regarding the potential safety and efficacy of gene-based
therapeutics using viral delivery systems. While Megabios' gene delivery systems
are lipid-based and do not contain viruses these concerns could adversely affect
physicians' and health care payers' evaluations of Megabios' products.
Physicians and health care payers could conclude that Megabios' products or
technology are not safe and effective. If products developed by Megabios and its
corporate partners are not commercially accepted by patients, physicians or
third-party payers, sales of any products would be adversely affected.
 
    MEGABIOS MAY BE UNABLE TO EFFECTIVELY PRICE ITS PRODUCTS OR OBTAIN ADEQUATE
REIMBURSEMENT.  Sales volume and price of any products successfully developed by
Megabios will depend, in part, on the availability of third-party reimbursement
for the cost of such products and related treatments. Reimbursement is
 
                                       18
<PAGE>
generally provided by government health administration authorities, private
health insurers and other organizations. Third-party payers are increasingly
challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products. As
a result, even if Megabios and its corporate partners succeed in bringing any
products to market, they cannot be certain that reimbursement will be available.
Even if reimbursement is available, payers' reimbursement policies may adversely
affect corporate partner's ability to sell such products on a profitable basis.
If these corporate partners are unable to profitably sell Megabios products,
royalty revenue to Megabios will be reduced.
 
    DELAWARE LAW AND MEGABIOS' CHARTER COULD MAKE THE ACQUISITION OF MEGABIOS BY
ANOTHER COMPANY MORE DIFFICULT.  Certain provisions of Delaware law applicable
to Megabios could delay a merger, tender offer or proxy contest involving
Megabios or make such a transaction more difficult. These provisions include
Section 203 of the Delaware General Corporation Law. Section 203 prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In addition,
the Megabios Board of Directors may issue shares of preferred stock without
stockholder approval on terms determined by the Board of Directors. The rights
of the holders of Megabios common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. In addition, the Megabios Certificate of Incorporation and
Megabios Bylaws contain the following provisions:
 
    - Classified board of directors
 
    - No right of stockholders to act by written consent without a meeting
 
    - Advance stockholder notice required to nominate directors and raise
      matters at the annual stockholders meeting
 
    - No cumulative voting in the election of directors
 
    - Removal of directors only for cause and with a two-thirds vote of
      Megabios' outstanding shares
 
    These provisions could delay, defer or prevent a change in control of
Megabios. In addition, these provisions could limit the price that certain
investors might be willing to pay in the future for shares of Megabios common
stock.
 
    MEGABIOS BUSINESS MAY BE NEGATIVELY IMPACTED BY COMPUTER FAILURES IN THE
YEAR 2000.  Many existing computer programs and systems, including certain of
those used by Megabios for its own internal purposes and certain of those used
by its suppliers, vendors and others, use only two digits to identify the year
in the date field. These programs may be unable to process date/time information
between the twentieth and twenty-first centuries. This inability could cause the
disruption or failure of such computer systems. Megabios has identified two main
areas of its Year 2000 ("Y2K") risk:
 
    - Megabios' internal computer systems could be disrupted or fail, causing an
      interruption or decrease in Megabios' ability to continue its operations
 
    - The computer systems of third parties with whom Megabios regularly deals,
      including its suppliers, vendors, utilities and financial institutions,
      could be disrupted or fail, causing an interruption or decrease in
      Megabios' ability to continue its operations
 
    Megabios is currently evaluating the nature and extent of the Y2K issues for
its internal systems and has developed a plan to address the issue. If Megabios
does not achieve Y2K compliance for its internal systems on a timely basis,
Megabios' business could be adversely affected.
 
                                       19
<PAGE>
    If the business of any third party, including its suppliers, vendors,
utilities or financial institutions, is significantly disrupted because such
party is not Y2K compliant, such disruption could adversely affect Megabios'
business. These disruptions could include, among other things:
 
    - A financial institution's inability to process checks drawn on Megabios'
      bank accounts, accept deposits or process wire transfers
 
    - A client's, supplier's, vendor's or financial institution's business
      failure
 
    - An interruption in deliveries of equipment and supplies from vendors
 
    - A loss of voice and data connections Megabios uses to share information
 
    - A loss of electric power to Megabios' facilities
 
    - Other interruptions to the normal conduct of business by Megabios, the
      nature and extent of which Megabios cannot foresee
 
    Megabios does not know whether any of the disruptions described above will
actually occur. Even if they do occur, Megabios cannot predict the effect they
will have on its business.
 
RISKS RELATING TO THE BUSINESS OF GENEMEDICINE
 
    GENEMEDICINE IS AT AN EARLY STAGE OF DEVELOPMENT AND USES NOVEL
TECHNOLOGIES.  Gene therapy is a new and rapidly evolving technology. There are
no gene therapy products on the market and the clinical data on the safety and
efficacy of potential gene therapy products is limited. Clinical and preclinical
data relating to GENEMEDICINE'S specific gene therapy approach are also limited.
In addition, the results of preclinical studies do not predict safety or
efficacy in humans. All of the potential products under development by
GENEMEDICINE are in research, preclinical or early clinical development.
GENEMEDICINE does not anticipate realizing revenues from the sale of any such
products for at least the next several years, if at all. GENEMEDICINE'S
potential products will require significant additional research and development
efforts, including extensive preclinical and clinical testing and the receipt of
regulatory approval, before they can be used commercially.
 
    Developing products based on innovative technologies is inherently risky.
Accordingly, there is a risk GENEMEDICINE'S research and development efforts may
not be successful and potential products may not prove to be safe and effective
in clinical trials. It is possible that commercially successful products
utilizing GENEMEDICINE'S technology may not ever be developed by GENEMEDICINE or
its collaborators. Even if successfully developed, these potential products may
not receive regulatory approval or be successfully introduced and marketed at
prices that would permit GENEMEDICINE to operate profitably. GENEMEDICINE cannot
predict when it will be able to commercialize any of its potential products, if
at all.
 
    GENEMEDICINE HAS A HISTORY OF OPERATING LOSSES AND WILL REQUIRE FUTURE
CAPITAL TO DEVELOP ITS POTENTIAL PRODUCTS.  GENEMEDICINE expects to incur
operating losses over at least the next several years and may never become
profitable. GENEMEDICINE'S contract revenues, expenses and losses may fluctuate
significantly from quarter to quarter.
 
    GENEMEDICINE has generated no revenues from product sales and does not
anticipate any revenues from the sale of its products for at least the next
several years, if ever. GENEMEDICINE expects to incur substantial operating
losses over the foreseeable future. GENEMEDICINE'S future capital requirements
will depend on many factors, including:
 
    - Continued scientific progress in its research and development programs
 
    - The scope and results of preclinical studies and clinical trials
 
    - The time and costs involved in obtaining regulatory approvals
 
                                       20
<PAGE>
    - The costs involved in filing, prosecuting and enforcing patent claims
 
    - Competing technological and market developments
 
    - The cost of manufacturing scale-up
 
    - Effective commercialization activities and arrangements
 
    - Other factors not within GENEMEDICINE'S control
 
    Based on its current plans, GENEMEDICINE believes that its available cash,
including proceeds from projected interest income and anticipated funding from
its corporate alliance will enable GENEMEDICINE to maintain its current and
planned operations into the first quarter of 2000. GENEMEDICINE'S current
financial plans may change based on changes in its research and development
plans or other events affecting its operating expenses. GENEMEDICINE must raise
substantial additional funds to conduct the research and development,
preclinical studies and clinical trials necessary to bring such products to
market.
 
    GENEMEDICINE DEPENDS ON ITS CORPORATE PARTNERS.  GENEMEDICINE'S strategy is
to enter into various arrangements with corporate and academic collaborators,
licensors, licensees and others for the research, development, clinical testing,
manufacturing, marketing and commercialization of its products. To date,
GENEMEDICINE has entered into corporate partnerships for development and
commercialization of its potential products with two pharmaceutical firms, one
of which ended in accordance with its terms in April 1997. GENEMEDICINE intends
to enter into additional corporate partnering agreements to develop and
commercialize products based upon its gene therapy technology. There is a risk
that GENEMEDICINE may not be able to establish such additional collaborations on
favorable terms, if at all. In addition, GENEMEDICINE cannot predict if any of
its current or future partnership arrangements will be successful. If any
corporate partner fails to develop or commercialize successfully any product to
which it has rights, or any of the partner's products to which GENEMEDICINE has
rights, GENEMEDICINE'S business may be adversely affected.
 
    In addition, collaborative arrangements may be terminated or not continued
and may never result in successfully commercialized products. If a corporate
partner fails to fund any particular program development, commercialization of
any products related to that program may be delayed or halted. In addition,
GENEMEDICINE'S corporate partners may also pursue alternative technologies or
develop alternative products either on their own or in collaboration with
others, including GENEMEDICINE'S competitors, that may compete with
GENEMEDICINE'S potential products. GENEMEDICINE also has licenses, or options to
obtain licenses, to technologies developed by other companies and academic
institutions. Pursuant to the terms of certain license agreements, GENEMEDICINE
is obligated to exercise diligence in bringing potential products to market and
to make certain milestone payments that, in some instances, are substantial.
GENEMEDICINE also is obligated to make royalty payments on the sales, if any, of
products resulting from such licensed technology and, in some instances, is
responsible for the costs of filing and prosecuting patent applications.
 
    GENEMEDICINE MAY BE UNABLE TO EFFECTIVELY PROTECT ITS PATENTS AND
PROPRIETARY RIGHTS OR OBTAIN ACCESS TO PROPRIETARY GENES.  The patent positions
of biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and the breadth of claims allowed in
biotechnology and pharmaceutical patents cannot be predicted. In addition, there
is a substantial backlog of biotechnology patent applications at the U.S. Patent
and Trademark Office that may delay the review and the issuance of any patents.
GENEMEDICINE'S success will depend to a significant degree on its ability to:
 
    - obtain patents and licenses to patent rights,
 
    - maintain trade secrets, and
 
    - operate without infringing on the proprietary rights of others, both in
      the United States and other countries.
 
                                       21
<PAGE>
    To date, GENEMEDICINE has rights to certain U.S. and foreign issued patents
and has filed or participated as a licensee in the filing of a number of patent
applications in the U.S. relating to GENEMEDICINE's technology, as well as
foreign counterparts of certain of these applications in many countries.
GENEMEDICINE intends to continue to file applications as appropriate for patents
covering both its products and processes. There is a risk, however, that patents
may not issue from any of these applications or, that claims allowed under
issued patents or patents that may issue from such applications may not be
sufficient to protect GENEMEDICINE'S technology. Patent applications in the
United States are maintained in secrecy until a patent issues. GENEMEDICINE
cannot be certain that others have not filed patent applications for technology
covered by GENEMEDICINE or its licensors pending applications. GENEMEDICINE also
cannot be certain that it or its licensors were the first to file patent
applications for such technology. There is a risk that competitors may have
filed applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds or processes that block or
compete with those of GENEMEDICINE. GENEMEDICINE is aware of patent applications
filed or patents issued to third parties relating to gene therapy technologies.
GENEMEDICINE'S development efforts are at an early stage, however, and
GENEMEDICINE presently is unable to evaluate whether any such patent
applications or patents will have any effect on its products in development.
 
    Should any of its competitors have filed patent applications in the United
States that claim technology also invented by GENEMEDICINE, GENEMEDICINE may
have to participate in interference proceedings. These proceedings determine
priority of invention and, thus, the right to a patent for the technology in the
U.S., which could result in substantial cost to GENEMEDICINE to determine its
rights or potential loss of rights.
 
    The commercial success of GENEMEDICINE will depend in part on GENEMEDICINE
not infringing patents issued to competitors and not breaching the licenses that
might cover technology used in GENEMEDICINE'S products. It is uncertain whether
any third party patents will require GENEMEDICINE to alter its products or
processes, obtain licenses or cease certain activities. In addition, litigation,
which could result in substantial cost to GENEMEDICINE, also may be necessary to
enforce any patents issued to GENEMEDICINE or to determine the scope and
validity of third party proprietary rights. In addition, there can be no
assurance that any patents issued to GENEMEDICINE or to licensors from whom
GENEMEDICINE has licensed rights to technology will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
proprietary protection or commercial advantage to GENEMEDICINE.
 
    A number of the genes that GENEMEDICINE uses in its research and development
programs or may use in its gene therapy products are or may become patented by
third parties. As a result, GENEMEDICINE may be required to obtain licenses
under such patents in order to test, use or market products that contain any
such proprietary genes. GENEMEDICINE may not be able to obtain any such license
on commercially reasonable terms, if at all. If GENEMEDICINE fails to obtain a
required license, GENEMEDICINE may be adversely affected.
 
    GENEMEDICINE also relies on trade secrets, know-how, improvements to
technology, confidentiality agreements and collaborative and licensing
opportunities to develop and maintain its competitive position. Although
GENEMEDICINE protects its proprietary technology in part by confidentiality
agreements with its licensors, licensees, employees, consultants and certain
contractors, there is always a possibility that such agreements may be breached.
The remedies available to GENEMEDICINE may not be adequate for any such breach.
In addition, GENEMEDICINE'S trade secrets may otherwise become known or be
independently discovered by its competitors.
 
    GOVERNMENT REGULATIONS ARE UNCERTAIN AND THE REGULATORY REVIEW PROCESS IS
LENGTHY.  Because gene therapy is a new method of treatment that has not been
extensively tested in humans, the regulatory requirements governing gene therapy
products and related clinical procedures are uncertain and are subject to
substantial review by various governmental regulatory authorities. This
uncertainty may result in extensive delay in the regulatory approval process,
adding to the already lengthy review process for human therapeutic products in
general. Regulatory requirements could adversely affect the ability of
 
                                       22
<PAGE>
GENEMEDICINE or its collaborative partners to clinically test, manufacture or
market products. Future U.S. or foreign legislative or administrative acts could
also prevent or delay regulatory approval of GENEMEDICINE'S products.
 
    The commercial uses of any of GENEMEDICINE'S products will be regulated by
the FDA and comparable foreign regulatory bodies as either biologics or drugs.
Each therapeutic product containing a particular gene will likely be regulated
as either a separate biologic or a drug, depending on its intended use and FDA
policies in effect at such time. In order to commercialize any products,
GENEMEDICINE must sponsor and file an IND for each proposed product and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA approval of any
products. The regulatory process for new therapeutic products, including the
required preclinical studies and clinical testing, is lengthy and expensive.
There is a risk that GENEMEDICINE may not be able to obtain the necessary FDA
clearances and approvals in a timely manner, if at all. GENEMEDICINE cannot
accurately predict the length of the clinical trial period or the number of
patients the FDA will require to be enrolled in the clinical trials in order to
establish the safety, efficacy and potency of human gene therapy products.
 
    GENEMEDICINE may not be able to obtain the necessary clearances for clinical
trials or approvals for the manufacturing or marketing of any of its products
under development. Even if regulatory approvals are obtained, they may include
significant limitations on the indicated uses for which a product may be
marketed. In addition, a marketed product is subject to continual FDA review.
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, many academic institutions and
companies conducting research in the gene therapy field are using a variety of
approaches and technologies. Any adverse results obtained by such researchers in
preclinical studies or clinical trials could adversely affect the regulatory
environment for gene therapy products generally. This could lead to delays in
the approval process for GENEMEDICINE'S potential products or prevent approval
altogether.
 
    To market its products outside of the United States, GENEMEDICINE is also
subject to numerous and varying foreign regulatory requirements, implemented by
foreign health authorities, governing the design and conduct of human clinical
trials and marketing approval. The approval procedure varies among countries and
can involve additional testing. The time required to obtain approval may differ
from that required to obtain FDA approval. The foreign regulatory approval
process includes all of the risks associated with obtaining FDA approval and
approval by the FDA does not ensure approval by the health authorities of any
other country.
 
    THE GENE THERAPY INDUSTRY IS INTENSELY COMPETITIVE.  The gene therapy field
is new, intensely competitive and rapidly evolving, and it is expected to
continue to undergo significant technological change. As a result,
GENEMEDICINE'S potential products or technologies may become obsolete before it
recovers its related research, development and capital expenditures.
GENEMEDICINE will also experience competition from pharmaceutical and
biotechnology companies that have other forms of treatment for the diseases
targeted by GENEMEDICINE. A large number of development stage and established
enterprises, including major pharmaceutical and biotechnology firms, are
exploring the field of human gene therapy or are actively engaged in research
and development in areas related to gene therapy. GENEMEDICINE also may
experience competition from companies that have acquired or may acquire
technology from universities and other research institutions. As these companies
develop their technologies, they may develop proprietary positions in certain
aspects of gene therapy that may materially and adversely affect GENEMEDICINE.
In addition, GENEMEDICINE may face competition from other companies for limited
opportunities to enter into collaborative arrangements with pharmaceutical or
biotechnology companies and academic institutions and to obtain licenses to
proprietary technology, including genes and methods of gene use, from third
parties.
 
                                       23
<PAGE>
    Many of GENEMEDICINE'S competitors and potential competitors have
substantially greater product development capabilities and financial,
scientific, marketing and human resources than GENEMEDICINE. There is a risk
that these companies may develop products earlier than GENEMEDICINE, obtain
approvals for such products from the FDA more rapidly than GENEMEDICINE, or
develop products that are more effective or affordable than those proposed to be
developed by GENEMEDICINE. In addition, research and development by others may
render GENEMEDICINE'S technology or products obsolete or non-competitive and may
result in treatments or cures superior to GENEMEDICINE'S potential therapies.
GENEMEDICINE cannot be certain that its therapies will be preferred to any
existing or newly developed technologies.
 
    GENEMEDICINE MUST RETAIN ITS EMPLOYEES TO BE SUCCESSFUL.  GENEMEDICINE'S
success depends heavily on the principal members of its scientific and
management staff. In addition, GENEMEDICINE relies on consultants and advisors
to assist GENEMEDICINE in formulating its research and development strategy.
Attracting and retaining qualified personnel, consultants and advisors is
critical to GENEMEDICINE'S success. In order to pursue its product development
and marketing plans, GENEMEDICINE must hire additional qualified scientific
personnel to perform research and development, as well as personnel with
expertise in clinical testing, government regulation, manufacturing and
marketing. GENEMEDICINE competes for qualified individuals from numerous
pharmaceutical and biotechnology companies, universities and other research
institutions. GENEMEDICINE may not be able to attract and retain such
individuals on acceptable terms or at all.
 
    GENEMEDICINE DOES NOT HAVE COMMERCIAL MANUFACTURING OR MARKETING
CAPABILITIES.  GENEMEDICINE currently does not have the resources or capability
to manufacture or market any of its proposed products by itself on a commercial
scale. In addition, no one has demonstrated the capability to manufacture gene
therapy products on a large scale. GENEMEDICINE depends to a significant extent
on collaborators, licensees or other entities for commercial scale manufacturing
of its products. GENEMEDICINE has a pilot manufacturing facility, which will
require ongoing funding and compliance with extensive regulations applicable to
such a facility. GENEMEDICINE may not be able to develop adequate commercial
manufacturing capabilities either on its own or through third parties. In
addition, GENEMEDICINE does not anticipate establishing its own sales and
marketing capability in the foreseeable future, and will be dependent on third
parties for those functions. GENEMEDICINE many not be able to develop adequate
marketing capabilities either on its own or through third parties.
 
    THE COST OF GENEMEDICINE'S POTENTIAL PRODUCTS MAY NOT BE SUBJECT TO
REIMBURSEMENT.  The ability of GENEMEDICINE to commercialize its products
successfully may depend in part on the extent to which reimbursement for the
cost of such products and related treatments will be available from government
health administration authorities, private health insurers and other
organizations. Third-party payors are increasingly challenging the price of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. If GENEMEDICINE
succeeds in bringing one or more products to market, these products may not be
considered cost effective and reimbursement may not be available. If
reimbursement available, the payor's reimbursement policies may adversely affect
GENEMEDICINE'S ability to sell its products on a profitable basis.
 
    GENEMEDICINE USES HAZARDOUS AND RADIOACTIVE MATERIALS AND IS SUBJECT TO
ENVIRONMENTAL REGULATIONS. GENEMEDICINE'S research and development processes
involve the controlled use of hazardous and radioactive materials. GENEMEDICINE
is subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. The risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, GENEMEDICINE
could be held liable for any damages that result and any such liability could
exceed the resources of GENEMEDICINE. GENEMEDICINE may be required to incur
significant costs to comply with environmental laws and regulations in the
future. In addition, the operations, business or assets of GENEMEDICINE could be
materially adversely affected by current or future environmental laws or
regulations.
 
                                       24
<PAGE>
                          THE MEGABIOS SPECIAL MEETING
 
PURPOSE OF THE MEGABIOS SPECIAL MEETING
 
    The purpose of the Megabios special meeting is to consider and vote upon a
proposal to approve the issuance of the Megabios common stock in connection with
the proposed merger of Montana Acquisition Sub, Inc. ("Merger Sub") with and
into GENEMEDICINE as described in the agreement and plan of merger and
reorganization. Holders of Megabios common stock may also consider and vote upon
such other matters as may be properly brought before the Megabios special
meeting or any postponements or adjournments thereof. The merger will occur only
if the proposal is approved.
 
    THE MEGABIOS BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE BY THE STOCKHOLDERS OF MEGABIOS
FOR APPROVAL OF THE ISSUANCE OF SHARES OF MEGABIOS COMMON STOCK PURSUANT TO THE
REORGANIZATION AGREEMENT.
 
PROXIES
 
    The form of proxy accompanying this joint proxy statement/prospectus is
being solicited on behalf of the Megabios Board of Directors for use at the
Megabios special meeting. Each of the persons named in the Megabios proxy as a
proxy holder is an officer of Megabios. All shares of Megabios common stock that
are entitled to vote and are represented at the Megabios special meeting either
in person or by properly executed proxies received prior to or at the Megabios
special meeting and not duly and timely revoked will be voted at the Megabios
special meeting in accordance with the instructions indicated on such proxies.
If no such instructions are indicated, such proxies will be voted for the
approval of the issuance of shares of Megabios common stock pursuant to the
reorganization agreement.
 
    If any other matters are properly presented for consideration at the
Megabios special meeting, including a motion to adjourn the Megabios special
meeting to another time or place (including for purposes of soliciting
additional proxies), unless otherwise indicated on a proxy, the person named as
proxy and acting thereunder will have the discretion to vote on such matters in
accordance with his best judgment.
 
DATE, TIME AND PLACE OF MEETING
 
    The Megabios special meeting will be held at Megabios' principal offices,
located at 863A Mitten Road, Burlingame, California, on [            ], 1999, at
[        ], local time.
 
VOTING RIGHTS AND OUTSTANDING SHARES
 
    Only holders of record of Megabios common stock at the close of business on
the record date will be entitled to notice of and to vote at the Megabios
special meeting. At the close of business on the record date there were
[        ] shares of Megabios common stock outstanding and entitled to vote.
 
    Each holder of record of Megabios common stock on the record date will be
entitled to one vote for each share held on all matters to be voted upon at the
Megabios special meeting.
 
SOLICITATION
 
    This joint proxy statement/prospectus was mailed to all Megabios
stockholders of record as of the record date and constitutes notice of the
Megabios special meeting in conformity with the requirements of the Delaware
General Corporation Law ("DGCL").
 
    Regardless of whether the merger is consummated, each of Megabios and
GENEMEDICINE will pay its own costs and expenses incurred in connection with the
reorganization agreement and the transactions contemplated by the reorganization
agreement, except that fees and expenses (other than attorneys' fees) incurred
in connection with the printing, filing and mailing of the registration
statement and this joint proxy statement/prospectus will be shared equally by
Megabios and GENEMEDICINE. See "The Reorganization Agreement--Expenses and
Termination Fees" on page 60.
 
                                       25
<PAGE>
    Subject to the foregoing, the cost of the solicitation of proxies from
holders of Megabios common stock and all related costs will be borne by
Megabios. In addition, Megabios may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of Megabios. No
additional compensation will be paid to directors, officers or other regular
employees for such services. In addition, Megabios has retained Corporate
Investor Communications ("CIC") to assist in the solicitation of proxies from
brokers, nominees, institutions and individual stockholders at an estimated fee
of $2,000 plus reimbursement of its reasonable solicitation expenses.
 
VOTE REQUIRED
 
    The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Megabios common stock entitled to vote at
the Megabios special meeting is necessary to constitute a quorum.
 
    Approval of the proposal requires the approval of a majority of the shares
present in person or represented by proxy and entitled to vote at the Megabios
special meeting. All votes will be tabulated by the inspector of election
appointed for the meeting, who will separately tabulate affirmative and negative
votes, abstentions and broker non-votes. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes on each proposal. Broker non votes are
counted towards a quorum, but are not counted for any purpose in determining
whether the proposal has been approved.
 
REVOCABILITY OF PROXIES
 
    Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
corporate secretary of Megabios at Megabios' principal executive offices, a
written notice of revocation or a duly executed proxy bearing a later date, or
it may be revoked by attending the meeting and voting in person. Attendance at
the meeting will not, by itself, revoke a proxy.
 
                        THE GENEMEDICINE SPECIAL MEETING
 
PURPOSE OF THE GENEMEDICINE SPECIAL MEETING
 
    The purpose of the GENEMEDICINE special meeting is to consider and vote upon
the approval and adoption of the reorganization agreement and approval of the
merger. Holders of GENEMEDICINE common stock may also consider and vote upon
such other matters as may properly come before the GENEMEDICINE special meeting
or any postponements or adjustments thereof. The merger will occur only if the
proposal is approved.
 
    THE GENEMEDICINE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE REORGANIZATION
AGREEMENT AND THE MERGER, AND RECOMMENDS A VOTE BY THE STOCKHOLDERS OF
GENEMEDICINE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND FOR
APPROVAL OF THE MERGER.
 
PROXIES
 
    The form of proxy accompanying this joint proxy statement/prospectus is
being solicited on behalf of the GENEMEDICINE Board of Directors for use at the
GENEMEDICINE special meeting. Each of the persons named in the GENEMEDICINE
proxy as a proxy holder is an officer of GENEMEDICINE. All shares of
GENEMEDICINE common stock that are entitled to vote and are represented at the
GENEMEDICINE special meeting either in person or by properly executed proxies
received prior to or at the GENEMEDICINE special meeting and not duly and timely
revoked will be voted at the GENEMEDICINE special meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such
 
                                       26
<PAGE>
proxies will be voted for the approval and adoption of the reorganization
agreement and approval of the merger.
 
    If any other matters are properly presented for consideration at the
GENEMEDICINE special meeting, including a motion to adjourn the GENEMEDICINE
special meeting to another time or place (including for purposes of soliciting
additional proxies), unless otherwise indicated on a proxy, the person named as
proxy and acting thereunder will have the discretion to vote on such matters in
accordance with his best judgment.
 
DATE, TIME AND PLACE OF MEETING
 
    The GENEMEDICINE special meeting will be held at
                    ,            , on [            ], 1999, at [            ],
local time.
 
VOTING RIGHTS AND OUTSTANDING SHARES
 
    Only holders of record of GENEMEDICINE common stock at the close of business
on the record date will be entitled to notice of, and to vote at, the
GENEMEDICINE special meeting. At the close of business on the record date there
were [        ] shares of GENEMEDICINE common stock outstanding and entitled to
vote.
 
    Each holder of record of GENEMEDICINE common stock on the record date will
be entitled to one vote for each share held on all matters to be voted upon at
the GENEMEDICINE special meeting.
 
SOLICITATION
 
    This joint proxy statement/prospectus was mailed to all GENEMEDICINE
stockholders of record as of the record date and constitutes notice of the
GENEMEDICINE special meeting in conformity with the requirements of the DGCL.
 
    Regardless of whether the merger is consummated, each of Megabios and
GENEMEDICINE will pay its own costs and expenses incurred in connection with the
reorganization agreement and the transactions contemplated by the reorganization
agreement, except that fees and expenses (other than attorneys' fees) incurred
in connection with the printing, filing and mailing of the registration
statement and this joint proxy statement/prospectus and will be shared equally
by Megabios and GENEMEDICINE. See "The Reorganization Agreement--Expenses and
Termination Fees" on page 60.
 
    Subject to the foregoing, the cost of the solicitation of proxies from
holders of GENEMEDICINE common stock and all related costs will be borne by
GENEMEDICINE. In addition, GENEMEDICINE may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of
GENEMEDICINE. No additional compensation will be paid to directors, officers or
other regular employees for such services. In addition, GENEMEDICINE has
retained Morrow & Co. to assist in the solicitation of proxies from brokers,
nominees, institutions and individual stockholders at an estimated fee of $6,000
plus reimbursement of its reasonable solicitation expenses.
 
VOTE REQUIRED
 
    The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of GENEMEDICINE common stock entitled to vote
at the GENEMEDICINE special meeting is necessary to constitute a quorum.
 
    Approval of the proposal requires approval of a majority of the outstanding
shares of GENEMEDICINE common stock as of the record date. All votes will be
tabulated by the inspector of election appointed for the meeting, who will
separately tabulate affirmative and negative votes, abstentions and broker
non-votes. Abstentions and broker non-votes will be counted towards the
tabulation of votes cast on the proposal
 
                                       27
<PAGE>
presented to the stockholders, but will have the effect of a vote against
approval of the matters being voted upon.
 
REVOCABILITY OF PROXIES
 
    Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
corporate secretary of GENEMEDICINE at the GENEMEDICINE principal offices, a
written notice of revocation or a duly executed proxy bearing a later date, or
it may be revoked by attending the meeting and voting in person. Attendance at
the meeting will not, by itself, revoke a proxy.
 
                                       28
<PAGE>
          COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND POLICY
 
    Since September 15, 1997, Megabios common stock has been quoted on Nasdaq
under the symbol "MBIO." Since July 13, 1994, the GENEMEDICINE common stock has
been quoted on Nasdaq under the symbol "GMED." The table below sets forth, for
the quarters indicated, the reported high and low sale prices of Megabios common
stock and GENEMEDICINE common stock as reported on Nasdaq.
 
<TABLE>
<CAPTION>
                                                                              MEGABIOS            GENEMEDICINE
                                                                            COMMON STOCK          COMMON STOCK
                                                                        --------------------  --------------------
                                                                          HIGH        LOW       HIGH        LOW
                                                                        ---------  ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>        <C>
 
1996 CALENDAR YEAR
First Quarter.........................................................  $  --      $  --      $   9.250  $   5.875
Second Quarter........................................................     --         --          7.375      5.375
Third Quarter.........................................................     --         --          5.750      3.375
Fourth Quarter........................................................     --         --          5.688      3.125
 
1997 CALENDAR YEAR
First Quarter.........................................................     --         --          9.500      5.375
Second Quarter........................................................     --         --          9.250      5.375
Third Quarter.........................................................     17.750     12.250      7.750      3.625
Fourth Quarter........................................................     18.625     10.125      6.312      3.750
 
1998 CALENDAR YEAR
First Quarter.........................................................     14.125      8.500      5.562      2.625
Second Quarter........................................................      9.250      6.125      4.250      2.250
Third Quarter.........................................................      8.000      2.875      3.438      1.562
Fourth Quarter (through [NOVEMBER   ], 1998)..........................    [  ]       [  ]       [  ]       [  ]
</TABLE>
 
    As of the record date, there were approximately [      ] record holders of
Megabios common stock. As of the record date, there were approximately [      ]
record holders of GENEMEDICINE common stock. Neither Megabios nor GENEMEDICINE
has ever paid cash dividends on its common stock. The policies of Megabios and
GENEMEDICINE are to retain earnings for use in their respective businesses.
 
    The following table sets forth the closing sale price per share of Megabios
and GENEMEDICINE common stock as reported on Nasdaq and the equivalent per share
price of GENEMEDICINE common stock on October 23, 1998, the last trading day
preceding the announcement of the merger, and on [            ], 1998:
 
<TABLE>
<CAPTION>
                                                                                                  EQUIVALENT
                                                      MEGABIOS COMMON      GENEMEDICINE        GENEMEDICINE PER
                                                        STOCK PRICE     COMMON STOCK PRICE      SHARE PRICE(1)
                                                     -----------------  -------------------  ---------------------
<S>                                                  <C>                <C>                  <C>
October 23, 1998...................................      $   4.188           $   2.000             $   2.391
[            ] 1998................................        [  ]                [  ]                  [  ]
</TABLE>
 
- ------------------------
 
(1) The equivalent GENEMEDICINE per share price represents 0.5710 of the price
    of one share of Megabios common stock.
 
    MEGABIOS STOCKHOLDERS AND GENEMEDICINE STOCKHOLDERS ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR MEGABIOS COMMON STOCK AND GENEMEDICINE COMMON
STOCK.
 
                                       29
<PAGE>
                APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
 
BACKGROUND OF THE MERGER
 
    Beginning in early 1998, the Megabios Board of Directors evaluated Megabios'
long-term strategy and decided to explore a consolidation of technologies in the
gene therapy industry. The Megabios Board believed that the broader
biotechnology industry would increasingly consolidate. The Megabios Board also
believed that by hiring additional scientists and acquiring complementary
technologies it could expand its existing core competencies in plasmid-based
gene therapy. In May 1998, Megabios assigned a team of senior level management
and formed a committee of the Megabios Board to conduct a preliminary
investigation of the viability of expanding Megabios' scientific expertise,
intellectual property portfolio and product development efforts to enhance its
core platform technologies and attract additional corporate partnerships.
Megabios confirmed its strategic commitment to acquiring a complementary
biotechnology company to expand its core technologies in a series of meetings of
the Megabios Board and its acquisition committee held from May 1998 through July
1998. As a result of this commitment, Megabios contacted Hambrecht & Quist LLC
to discuss engaging the investment bank to provide financial services in
connection with a potential merger with a biotechnology company in certain
industry segments, including gene therapy.
 
    In January, 1998, the GENEMEDICINE Board formed a strategic opportunities
committee to explore and review strategic business opportunities for
GENEMEDICINE. This committee met several times during the ensuing months to
consider various possible business strategies and opportunities, and methods by
which to explore and evaluate various alternatives. On May 26, 1998, retained
PaineWebber Incorporated to act as financial advisor to the GENEMEDICINE Board
in connection with a possible acquisition transaction and, in the event of such
a transaction, to render a fairness opinion to the GENEMEDICINE Board regarding
the consideration to be paid or issued to the GENEMEDICINE stockholders.
Thereafter, PaineWebber contacted 46 potential merger candidates and distributed
information packets to the 26 candidates which expressed an interest in a
transaction with GENEMEDICINE.
 
    During April and early May, 1998, Benjamin F. McGraw III, Chief Executive
Officer and Chairman of the Board of Megabios, placed telephone calls to certain
members of GENEMEDICINE'S management. Eric Tomlinson, Vice Chairman of
GENEMEDICINE'S Board of Directors, subsequently called Dr. McGraw. Dr. McGraw
met with Dr. Tomlinson and other representatives of GENEMEDICINE on May 6, 1998
to discuss consolidation in the biotechnology industry and the potential
strategic, cultural and operational synergies between the two companies. Drs.
McGraw and Tomlinson subsequently met on June 17, 1998 and discussed strategic
issues relating to a possible combination of the two companies. At the
conclusion of that meeting, Drs. McGraw and Tomlinson concluded that additional
discussions and due diligence were warranted and that a combination of
GENEMEDICINE and Megabios might potentially be in the best interests of the
stockholders and employees of both companies.
 
    On July 31, 1998, Dr. Tomlinson reported to GENEMEDICINE'S strategic
opportunities committee on his discussions with Dr. McGraw. The committee
considered, among other things, the possibility of a business combination with
Megabios, including such matters as the relative positions of GENEMEDICINE and
Megabios in intellectual property, management, cash and cash equivalents and
market visibility, the possible synergies resulting from, and the proposed terms
of, a transaction with Megabios. The committee authorized its the financial
advisor to respond to, and engage, Megabios in further discussions regarding the
terms of a possible combination of the two companies, while the committee
continued to explore other potential strategic opportunities.
 
    Representatives of Megabios conducted formal due diligence on GENEMEDICINE
from August 17 to 19, 1998. On August 24, 1998 and August 26, 1998, Dr. McGraw
met with Norman Hardman, GENEMEDICINE'S President and Chief Operating Officer,
and Dr. Tomlinson, respectively, to further discuss due diligence and other
matters relating to a possible combination.
 
                                       30
<PAGE>
    From August 7 to September 8, 1998, GENEMEDICINE'S strategic opportunities
committee met weekly and reviewed potential merger candidates and the status of
discussions with Megabios. The strategic opportunities committee continued to
evaluate potential opportunities, while authorizing further discussions and
negotiations with Megabios over matters relating, among other things, to the
management of the combined company, research and development focus, financing
and corporate alliance opportunities, and GENEMEDICINE stockholders' interest in
the combined company.
 
    On September 15, 1998, the GENEMEDICINE Board met to consider, among other
things, the status of the strategic opportunities committee's activities,
including the nature and extent of discussions with various potential merger
candidates, and a proposed mutual confidential disclosure agreement to be
entered into between Megabios and GENEMEDICINE. After receiving reports from
senior management and members of its strategic opportunities committee, the
GENEMEDICINE Board approved the mutual confidential disclosure agreement,
authorized its senior management, legal counsel and financial advisor to conduct
extensive due diligence on Megabios' businesses, assets, liabilities, financial
condition, patent position, legal affairs and prospects, and authorized senior
management to continue further discussions and negotiations with Megabios.
 
    On September 16, 1998, the Megabios Board met for a regularly scheduled
meeting. During this meeting, certain members of management, including Dr.
McGraw and Rodney Pearlman, Senior Vice President, Research and Development of
Megabios, led a discussion regarding a potential acquisition of GENEMEDICINE.
During this meeting the Megabios Board approved the mutual confidential
nondisclosure agreement to be entered into between Megabios and GENEMEDICINE and
authorized and directed senior management to continue discussions and
negotiations with GENEMEDICINE. In addition, the Megabios Board ratified and
approved the engagement of Hambrecht & Quist as financial advisor to the
Megabios Board in connection with a possible acquisition of GENEMEDICINE and, in
the event of such a transaction, to render a fairness opinion to the Megabios
Board regarding the consideration to be paid or issued by Megabios to
GENEMEDICINE stockholders. The Megabios Board also directed such senior
management to begin the due diligence process as soon as practicable. A mutual
non-disclosure agreement, including a "no shop" agreement effective through
October 2, 1998, was executed on September 17, 1998.
 
    On September 17, 1998, Cooley Godward LLP, counsel to Megabios, delivered
the initial draft of the reorganization agreement and related exhibits to Heller
Ehrman White & McAuliffe, counsel to GENEMEDICINE. Beginning on September 17 and
continuing through September 19, 1998, Drs. McGraw and Tomlinson and other
representatives of Megabios and GENEMEDICINE met in Texas. Representatives of
Hambrecht & Quist, PaineWebber and Heller Ehrman were also present at this
meeting. Drs. McGraw and Tomlinson discussed the historical and prospective
financial and operational performance of each company and outlined the key terms
of a potential transaction. Representatives of Megabios and GENEMEDICINE
conducted due diligence with respect to financial and operational matters.
During these meetings, numerous interviews and discussions took place among the
senior management of both companies. Drs. McGraw and Tomlinson agreed that any
transaction would be subject to the successful completion of comprehensive due
diligence and execution of a definitive merger agreement.
 
    Beginning on September 22, and continuing through October 12, 1998,
representatives of Cooley Godward and Heller Ehrman met at the Palo Alto,
California offices of Cooley Godward and Heller Ehrman, respectively, to conduct
due diligence with respect to legal matters of Megabios and GENEMEDICINE,
respectively. During this period, representatives of Megabios, GENEMEDICINE,
Heller Ehrman and Cooley Godward also met to negotiate the reorganization
agreement and related exhibits. At the conclusion of these meetings, certain
issues relating to the representations and warranties, covenants and termination
provisions in the reorganization agreement remained unresolved.
 
    On September 26, 1998, the Megabios Board held a special telephonic meeting
at which Megabios' senior management updated the Board on the status of the
potential transaction with GENEMEDICINE.
 
                                       31
<PAGE>
    On September 28, 1998, the GENEMEDICINE Board met to discuss a potential
transaction with Megabios. At that meeting, the GENEMEDICINE Board reviewed the
terms of a draft reorganization agreement submitted by Megabios and various
aspects of Megabios' business, patent portfolio, research and development
efforts and focus, including the status its strategic alliances, financial
condition and management, as well as potential synergies with GENEMEDICINE.
After the GENEMEDICINE Board recessed for the day, Dr. McGraw made a scheduled
presentation to the directors of GENEMEDICINE regarding his plans for, and
vision of, a combined company. When the directors reconvened on September 29,
1998, the Board considered the potential for a merger with other candidates and
the prospects for remaining independent, and instructed senior management to
continue its due diligence efforts with respect to Megabios and to negotiate
various changes in the reorganization agreement delivered by Megabios.
 
    On October 12, 1998, at a special meeting of the Megabios Board, certain
members of senior management and representatives of Hambrecht & Quist and Cooley
Godward reviewed the terms of the proposed merger and reported on the results of
the due diligence review of GENEMEDICINE. In particular, Hambrecht & Quist made
a presentation regarding the financial terms of the proposed merger. In
addition, the terms of the reorganization agreement and related exhibits were
discussed in detail with the Megabios Board. At the conclusion of these
meetings, certain issues relating to the representations and warranties and
termination provisions in the reorganization agreement remained unresolved. The
meeting was concluded with the expectation that the Megabios Board would meet
again on October 23, 1998 to consider and vote on the proposed merger with
GENEMEDICINE.
 
    From October 12 to October 21, certain senior management from Megabios and
GENEMEDICINE and representatives of Cooley Godward and Heller Ehrman engaged in
several discussions regarding the reorganization agreement and the terms of the
proposed merger. These discussions resulted in the resolution of certain
outstanding issues relating to the representations and warranties and
termination provisions of the reorganization agreement.
 
    On October 23, 1998, in a special meeting of the Megabios Board, certain
members of senior management and representatives of Hambrecht & Quist and Cooley
Godward reviewed the terms of the definitive reorganization agreement and
finalized terms of the proposed merger and reported on the results of the due
diligence review of GENEMEDICINE. In particular, Hambrecht & Quist made a
presentation regarding the analysis described under "Approval of the Merger and
Related Transactions-- Opinion of Financial Advisor to Megabios." In addition,
the terms of the reorganization agreement and related exhibits, the potential
benefits of the proposed merger and the financial and other effects the proposed
merger would have on Megabios and its stockholders were discussed in detail with
the Megabios Board. After these discussions, Hambrecht & Quist rendered its oral
opinion, subsequently confirmed in writing, that, as of such date, the exchange
ratio was fair from a financial point of view to Megabios. After such
presentations and discussions, the Megabios Board voted unanimously: (1) to
approve the merger with GENEMEDICINE, the reorganization agreement and related
exhibits as presented to them; and (2) to recommend that the Megabios
stockholders vote to approve the issuance of Megabios common stock in the
merger.
 
    The GENEMEDICINE Board met on the morning of October 24, 1998, to consider
the definitive reorganization agreement and the finalized terms of the proposed
merger. After a review of the changes negotiated in the reorganization
agreement, discussions regarding the potential benefits of the proposed merger,
the financial and other effects the proposed merger would have on GENEMEDICINE
and its stockholders, and the presentation of PaineWebber's fairness opinion,
the GENEMEDICINE Board unanimously approved the reorganization agreement and the
merger, and unanimously recommended approval of the reorganization agreement and
the merger to the GENEMEDICINE stockholders.
 
                                       32
<PAGE>
    Following the approval of the GENEMEDICINE Board and the Megabios Board, the
reorganization agreement in its definitive form was executed as of October 24,
1998, and jointly announced on the morning of October 26, 1998.
 
    On November 24, 1998, following the approval of the GENEMEDICINE Board and
the Megabios Board, an amendment to the reorganization agreement was executed,
amending certain covenants regarding the assumption of GENEMEDICINE warrants and
the treatment of the GENEMEDICINE employee stock purchase plan.
 
    JOINT REASONS FOR THE MERGER
 
    The Boards of Directors of Megabios and GENEMEDICINE believe that the
proposed merger will afford to each company the complementary strengths of the
two individual companies, will provide the combined company significant
potential advantages and better enable the combined company to address emerging
strategic opportunities more quickly and effectively.
 
    The potential benefits to the combined company include principally the
following:
 
    - Enhanced ability to attract new corporate partners
 
    - Stronger intellectual property position
 
    - Improved financial resources
 
    - Complementary core technologies and synergistic applications
 
    - Diversified product base through an increase in clinical programs
 
    GENEMEDICINE'S REASONS FOR THE MERGER
 
    In the course of reaching its decision to approve the reorganization
agreement and the merger, the GENEMEDICINE Board considered and reviewed with
senior management a number of factors relevant to the merger, including the
strategic overview, prospects and finances of GENEMEDICINE. The GENEMEDICINE
Board also considered, among other matters:
 
    - The GENEMEDICINE Board's view that the intellectual property of the
      combined company would strengthen the combined company's ability to
      compete in the plasmid gene therapy field
 
    - The GENEMEDICINE Board's view that the science of the combined company has
      the potential to be highly competitive in plasmid-based gene therapy
 
    - The GENEMEDICINE Board's view that the combined company would be expected
      to have a more diversified product base with seven potential products in
      Phase I/Phase II clinical trials by the end of 1998 and 24 therapeutic
      genes in research or pre-clinical development
 
    - The shared strategic thinking of GENEMEDICINE and Megabios of utilizing
      genes as drugs
 
    - The GENEMEDICINE Board's view that the combined company would have greater
      resources to pursue research in plasmid-based gene therapy
 
    - The GENEMEDICINE Board's view that the combined company would have a
      greater opportunity to attract new collaborative partners than either
      company independently
 
    - The complementary core technologies of GENEMEDICINE and Megabios
 
    - The GENEMEDICINE Board's view that the merger would enable the companies
      to combine their respective research and development programs and thereby
      achieve greater diversification and operating synergies
 
    - The GENEMEDICINE Board's assessment of GENEMEDICINE'S strategic
      alternatives, including remaining an independent company or merging with a
      party other than Megabios
 
                                       33
<PAGE>
    - Financial analysis of the combined company, including the effect of the
      merger and planned rationalization on its burn rate and survivability
 
    - Financial impact of the manufacturing collaboration recently announced by
      Megabios
 
    - The status of GENEMEDICINE'S current research collaborations, current
      negotiations with potential corporate partners and other possible
      financing opportunities
 
    - Information regarding historical market prices and other information with
      respect to GENEMEDICINE'S stock and Megabios' stock, and the financial
      performance and condition, assets, liabilities, business operations and
      prospects of each of GENEMEDICINE and Megabios and their projected future
      values and prospects as separate entities and on a combined basis
 
    - The presentation delivered by PaineWebber to the GENEMEDICINE Board and
      the written opinion of PaineWebber to the effect that the exchange ratio
      was fair, from a financial point of view, to the GENEMEDICINE stockholders
 
    - A comparison of selected recent acquisition and merger transactions in the
      industry, as well as the trading performance for comparable companies in
      the industry
 
    - The expected tax treatment of the merger
 
    - Reports from management, financial advisors and legal advisors as to the
      results of their investigation of Megabios
 
    - The ability of the GENEMEDICINE Board to enter into discussions with a
      person or entity in response to an unsolicited superior offer (as defined
      in the reorganization agreement) that is submitted by such person or
      entity if, among other things, the GENEMEDICINE Board believes in good
      faith , after consultation with its outside legal counsel, that such
      action is required in order for the GENEMEDICINE Board to comply with its
      fiduciary obligations
 
    The GENEMEDICINE Board also considered a number of potentially negative
factors in its deliberations concerning the merger, including, but not limited
to:
 
    - The loss of control over the future operations of GENEMEDICINE following
      the merger
 
    - The risk that the benefits sought to be achieved in the merger will not be
      achieved
 
    - The fixed nature of the exchange ratio and the resulting risk that, should
      there be a decrease in the market value of Megabios common stock, the
      value of the consideration to be received by GENEMEDICINE'S stockholders
      would be reduced
 
    - The other risks described above under "Risk Factors"
 
    The GENEMEDICINE Board discussed with senior management the prospects for
combinations with companies other than Megabios, the possibility that the
benefits described above could be achieved through any such other combinations
and the risks and benefits of remaining an independent company.
 
    The foregoing discussion of information and factors considered by the
GENEMEDICINE Board is not intended to be exhaustive but is believed to include
all material factors considered by the GENEMEDICINE Board. In view of the
complexity and the variety of factors considered by the GENEMEDICINE Board, the
GENEMEDICINE Board did not find it practicable to quantify or otherwise assign
relative weight to the specific factors considered. However, after taking into
account all of the factors set forth above, the GENEMEDICINE Board unanimously
agreed that the reorganization agreement and the consummation of the merger were
fair to, and in the best interests of, GENEMEDICINE and its stockholders and
that GENEMEDICINE should proceed with the merger.
 
MEGABIOS' REASONS FOR THE MERGER
 
    At meetings convened on September 16, 1998, October 12, 1998 and October 23,
1998, the Megabios Board determined that the terms of the reorganization
agreement and the transactions contemplated
 
                                       34
<PAGE>
thereby were in the best interests of Megabios and its stockholders, approved
and adopted the reorganization agreement and the merger, and unanimously
recommended that the Megabios stockholders approve the issuance of Megabios
common stock in connection with the merger pursuant to the reorganization
agreement. In reaching the foregoing conclusions and recommendations, the
Megabios Board considered a number of factors, including the following:
 
    - The Megabios Board's view that the combined company would have greater
      opportunity to attract new collaborative partners than an independent
      company
 
    - The Megabios Board's view that the intellectual property of the combined
      company would strengthen the combined company's ability to compete in the
      non-viral gene therapy field
 
    - The Megabios Board's view that the combined company would be expected to
      have a more diversified product base with seven potential products in
      Phase I/Phase II clinical trials by the end of 1998 and 24 therapeutic
      genes in research or pre-clinical development
 
    - The Megabios Board's view that the combined company would have greater
      financial resources to pursue research in plasmid-based gene therapy
 
    - The Megabios Board's view that the merger will enable the companies to
      combine their respective research and development programs and should
      thereby enable the companies to achieve greater diversification and
      operating synergies
 
    - The complementary core technologies of Megabios and GENEMEDICINE
 
    In addition to the factors set forth above, in the course of its meetings
during September and October 1998, the Megabios Board reviewed and considered a
wide variety of information relevant to the merger including:
 
    - The Megabios Board's view that the science of the combined company has the
      potential to be highly competitive in plasmid-based gene therapy
 
    - The shared strategic thinking of Megabios and GENEMEDICINE of utilizing
      genes as drugs
 
    - Financial analysis of the combined company, including the effect of the
      merger and planned rationalization on its burn rate and survivability
 
    - The status of Megabios' current negotiations with potential corporate
      partners and other possible financing opportunities
 
    - Information regarding historical market prices and other information with
      respect to Megabios' stock and GENEMEDICINE'S stock, and the financial
      performance and condition, assets, liabilities, business operations and
      prospects of each of Megabios and GENEMEDICINE and their projected future
      values and prospects as separate entities and on a combined basis
 
    - The presentation delivered by Hambrecht & Quist to the Megabios Board and
      the written opinion of Hambrecht & Quist addressed to the Megabios Board
      to the effect that as of the date thereof and based upon and subject to
      the matters set forth in the opinion, the exchange ratio was fair, from a
      financial point of view, to Megabios
 
    - A comparison of selected recent acquisition and merger transactions in the
      industry as well as trading performance for comparable companies in the
      industry
 
    - The expected tax treatment of the merger
 
    - Reports from management, financial advisors and legal advisors as to the
      results of their investigation of GENEMEDICINE
 
    The Megabios Board also considered a number of potentially negative factors
in its deliberations concerning the merger, including, but not limited to:
 
    - The possibility that the merger would not be consummated
 
                                       35
<PAGE>
    - The potential disruption to the business of both companies following
      announcement of the merger, including the effects of employee uncertainty,
      the possibility that key employees may leave Megabios or GENEMEDICINE, and
      the possibility that key corporate partners may not approve of the merger
      or may determine to terminate their relationship with the combined
      company, if their agreements permit termination as a result of the merger
 
    - The dilutive effects of the issuance of shares in the merger and the
      higher level of expenses that will be borne by the combined company
 
    - Additional potential problems and costs associated with the integration of
      both companies into a single enterprise
 
    - Cash payments to be made to certain employees and management in connection
      with the merger and cash payments, benefits and accelerated option vesting
      certain employees and management may be entitled to if they are terminated
      after the merger
 
    - The other risks described above under "Risk Factors"
 
    After due consideration, the Megabios Board concluded that the benefits of
the transaction to Megabios and its stockholders outweighed the risks associated
with the foregoing factors.
 
    The foregoing discussion of the factors considered by the Megabios Board is
not intended to be exhaustive but is intended to include all of the material
factors considered by the Megabios Board. In view of the complexity and variety
of factors considered by the Megabios Board, the Megabios Board did not consider
it practical to quantify or otherwise attempt to assign any relative or specific
weights to the specific factors considered, and individual directors may have
given differing weights to different factors.
 
OPINION OF FINANCIAL ADVISOR TO GENEMEDICINE
 
    GENEMEDICINE retained PaineWebber as its financial advisor in connection
with the merger. In connection with such engagement, GENEMEDICINE requested
PaineWebber to render an opinion as to whether or not the exchange ratio is
fair, from a financial point of view, to the holders of GENEMEDICINE common
stock. THE FULL TEXT OF THE OPINION OF PAINEWEBBER, DATED OCTOBER 24, 1998,
WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B-1 TO THIS
JOINT PROXY STATEMENT/PROSPECTUS. GENEMEDICINE STOCKHOLDERS ARE URGED TO READ
SUCH OPINION CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE PAINEWEBBER
OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
 
    In connection with the GENEMEDICINE Board's consideration of the
reorganization agreement, PaineWebber delivered its written opinion, dated
October 24, 1998, to the effect that, as of such date, and based upon its review
and assumptions and subject to the limitations summarized below, the exchange
ratio is fair, from a financial point of view, to the holders of GENEMEDICINE
common stock. The opinion was directed to, and prepared at the request and for
the information of, the GENEMEDICINE Board and does not constitute a
recommendation to any holder of GENEMEDICINE common stock as to how any such
stockholder should vote with respect to the merger.
 
    In arriving at its opinion, PaineWebber, among other things: (i) reviewed,
among other public information, GENEMEDICINE'S Annual Reports, Forms 10-K and
related financial information for the three fiscal years ended December 31, 1997
and GENEMEDICINE'S Form 10-Q and the related unaudited financial information for
the six months ended June 30, 1998; (ii) reviewed, among other public
information, Megabios' Form 10-K and related financial information for the three
fiscal years ended June 30, 1998
 
                                       36
<PAGE>
and Registration Statement on Form S-1 (including the prospectus contained
therein) dated September 15, 1997; (iii) reviewed certain information, including
financial forecasts internally prepared by management of GENEMEDICINE and
Megabios, respectively (the "projections"), relating to the business, earnings,
cash flow, assets and prospects of GENEMEDICINE and Megabios, furnished to
PaineWebber by or on behalf of GENEMEDICINE and Megabios, respectively; (iv)
conducted discussions with members of senior management of GENEMEDICINE and
Megabios concerning their respective businesses and prospects; (v) conducted
discussions with members of senior management of GENEMEDICINE and Megabios
concerning information relating to certain strategic, financial and operational
benefits anticipated by such management to result from the merger; (vi) compared
the historical market prices and trading activity for
GENEMEDICINE common stock and Megabios common stock with those of certain other
publicly traded companies which PaineWebber deemed relevant; (vii) compared the
financial position and operating results of GENEMEDICINE and Megabios with those
of certain other publicly traded companies which PaineWebber deemed relevant;
(viii) compared the financial terms of the merger with the financial terms of
certain other business combinations which PaineWebber deemed relevant; (ix)
reviewed a draft of the reorganization agreement in the form presented to the
GENEMEDICINE Board; and (x) reviewed such other financial studies and analyses
and performed such other investigations and took into account such other matters
as PaineWebber deemed necessary, including PaineWebber's assessment of general
economic, market and monetary conditions.
 
    In preparing its opinion, PaineWebber relied on the accuracy and
completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by or on behalf of GENEMEDICINE and
Megabios, and PaineWebber did not assume any responsibility to independently
verify such information. With respect to the projections, PaineWebber assumed,
with GENEMEDICINE'S and Megabios' consent, that they were reasonably prepared on
bases reflecting the best currently available estimates as to the future
performance of GENEMEDICINE and Megabios, respectively. PaineWebber did not
undertake an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of GENEMEDICINE or Megabios, nor was PaineWebber
furnished with any such evaluations or appraisals. PaineWebber also assumed,
with the consent of GENEMEDICINE and Megabios, that (i) the merger will be a
tax-free reorganization, (ii) all outstanding shares of GENEMEDICINE'S Series B
preferred stock will be converted into GENEMEDICINE common stock, and (iii) all
material assets and liabilities (contingent or otherwise) of GENEMEDICINE and
Megabios are as set forth in their respective financial statements. The opinion
is based upon economic, monetary and market conditions existing on the date
thereof. Furthermore, PaineWebber expressed no opinion as to the price or
trading ranges at which the GENEMEDICINE common stock or Megabios common stock
will trade after the date of the opinion. The opinion does not address the
relative merits of the merger and any other transactions or business strategies
that may have been discussed by the GENEMEDICINE Board as alternatives to the
merger, or the decision of the GENEMEDICINE Board to proceed with the merger.
GENEMEDICINE did not place any limitations upon PaineWebber with respect to the
procedures followed or factors considered in rendering the opinion.
 
    The following paragraphs summarize the significant analyses performed by
PaineWebber in arriving at its opinion:
 
    HISTORICAL STOCK PERFORMANCE.  PaineWebber reviewed trading prices for the
shares of the GENEMEDICINE common stock. This stock performance review indicated
that for GENEMEDICINE'S latest twelve months ended October 20, 1998, the low and
high closing prices were $1.75 and $5.94, respectively. PaineWebber also
reviewed the GENEMEDICINE common stock price on October 20, 1998 and averages
over the following periods prior to October 20, 1998: (i) October 20,
1998--$2.00 (ii) latest 10 trading day average--$1.96, (iii) latest 20 trading
day average--$2.15, (iv) latest 30 trading day average--$2.11, (v) latest 60
trading day average--$2.20, (vi) latest 90 day trading day average--$2.47, and
(vii) latest 180 day trading average--$2.82.
 
    PaineWebber also reviewed trading prices for the shares of Megabios common
stock. This stock performance review indicated that for Megabios' latest twelve
months ended October 20, 1998, the low and
 
                                       37
<PAGE>
high closing prices were $4.25 and $17.13, respectively. PaineWebber also
reviewed the Megabios common stock price on October 20, 1998 and averages over
the following periods prior to October 20, 1998: (i) October 20, 1998--$4.63,
(ii) latest 10 trading day average--$4.79, (iii) latest 20 trading day average--
$4.93, (iv) latest 30 trading day average--$5.15, (v) latest 60 trading day
average--$5.58, (vi) latest 90 day trading day average--$6.25, and (vii) latest
180 day trading average--$7.85.
 
    EXCHANGE RATIO ANALYSIS.  PaineWebber calculated exchange ratios based on
the trading price relationship between the GENEMEDICINE common stock and
Megabios common stock. This calculated exchange ratio review indicated that for
GENEMEDICINE'S and Megabios' latest twelve months ended October 20, 1998, the
low GENEMEDICINE/Megabios exchange ratio was 0.2188 and the high GENEMEDICINE/
Megabios exchange ratio was 0.5132. PaineWebber also reviewed the
GENEMEDICINE/Megabios exchange ratio on October 20, 1998 and averages over the
following periods prior to October 20, 1998: (i) October 20, 1998--0.4324, (ii)
latest 10 trading day average--0.4090, (iii) latest 20 trading day
average--0.4365, (iv) latest 30 trading day average--0.4098, (v) latest 60
trading day average--0.3943, (vi) latest 90 day trading day average--0.3958 and
(vii) latest 180 day trading average--0.3593.
 
    SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS.  Using publicly available
information, PaineWebber compared selected historical financial, operating and
stock market performance data of GENEMEDICINE and Megabios to the corresponding
data of certain publicly traded companies that PaineWebber deemed relevant for
GENEMEDICINE and Megabios, respectively. The GENEMEDICINE comparable companies
consisted of Avigen, Cell Genesys, Megabios, Targeted Genetics, Transgene and
Vical. The Megabios comparable companies consisted of each of the GENEMEDICINE
comparable companies (other than Megabios) and GENEMEDICINE. With respect to
both the GENEMEDICINE and the Megabios comparable companies, PaineWebber
analyzed a number of different data items including the market value of the
total outstanding equity (the "equity market value") and the equity market value
plus debt and capitalized leases minus cash, cash equivalents and marketable
securities.
 
    PaineWebber also examined the product portfolios and operations of
GENEMEDICINE relative to the GENEMEDICINE comparable companies and the product
portfolios and operations of Megabios relative to the Megabios comparable
companies. However, because of the inherent differences between the product
portfolios and operations of GENEMEDICINE and Megabios and the GENEMEDICINE and
Megabios comparable companies, PaineWebber believed that a purely quantitative
analysis would be insufficient and not adequately reliable to render a fairness
opinion. As PaineWebber informed the GENEMEDICINE Board, an appropriate use of
comparable company analysis in this instance would involve qualitative judgments
concerning differences between the financial and operating characteristics and
products under development which would effect the public trading values of the
GENEMEDICINE and Megabios comparable companies and GENEMEDICINE and Megabios.
 
    SELECTED COMPARABLE TRANSACTION ANALYSIS.  PaineWebber reviewed publicly
available financial information for selected mergers and acquisitions of
biotechnology companies by/with other biotechnology companies in two categories.
The categories analyzed by PaineWebber were acquisitions of selected smaller
public biotechnology companies and acquisitions of selected larger biotechnology
companies. The selected smaller biotechnology mergers and acquisitions
PaineWebber analyzed included (acquiror/target): T Cell/Virus Research,
Ligand/Seragen, Arris/Sequana, Cell Genesys/Somatix, NA Biologicals/Univax
Biologicals, Cytogen/CellCor, Ligand/Glycomed, NeXagen/Vestar and
Genzyme/Biosurface. The selected larger biotechnology mergers and acquisitions
PaineWebber analyzed included (acquiror/target): Baxter/ Somatogen, Elan/Athena
and Chiron/Viagene. With respect to both the smaller biotechnology comparable
transactions and the larger biotechnology transactions, PaineWebber analyzed a
number of different data items including the equity purchase price plus net
debt.
 
    Because the reasons for and the circumstances surrounding each of the
transactions analyzed were specific to each transaction and because of the
inherent differences between the businesses, operations and prospects of
GENEMEDICINE and Megabios compared to the businesses, operations and prospects
of the
 
                                       38
<PAGE>
companies that were parties to the smaller biotechnology comparable transactions
and the larger biotechnology comparable transactions, PaineWebber believed it
was inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly also made qualitative judgments
concerning differences between the characteristics of these transactions. These
qualitative judgments did not lead to specific conclusions regarding the
fairness of the merger consideration, but rather were part of PaineWebber's
evaluation of the relevance of this analysis under the particular circumstances
of the merger.
 
    DISCOUNTED CASH FLOW ANALYSIS.  PaineWebber analyzed GENEMEDICINE based on
an unleveraged discounted cash flow analysis of the projected financial
performance of GENEMEDICINE. Such projected financial performance was based upon
a six-year forecast for GENEMEDICINE provided by GENEMEDICINE management. The
discounted cash flow analysis determined the discounted present value of the
unleveraged after-tax cash flows generated over the six-year period and then
added a terminal value based upon a range of net income multiples from 20.0x to
35.0x, respectively. The unleveraged after-tax cash flows and terminal value
were discounted using a range of discount rates from 35.0% to 45.0%.
 
    With respect to Megabios, PaineWebber analyzed Megabios based on an
unleveraged discounted cash flow analysis of the projections. The discounted
cash flow analysis determined the discounted present value of the unleveraged
after-tax cash flow generated over the seven-year period and then added a
terminal value based upon a range of net income multiples from 20.0x to 35.0x.
The unleveraged after-tax cash flows and terminal value were discounted using a
range of discount rates from 35.0% to 50.0%.
 
    PREMIUMS PAID ANALYSIS.  PaineWebber reviewed purchase price per share
premiums paid in publicly-disclosed cash and stock merger transactions in
non-financial industries announced and completed since January 1, 1995,
including purchase of the entire target with market value between $25.0 million
and $100.0 million. This analysis indicated median premiums to the target's
closing stock price one day, one week and one month prior to the announcement of
the transaction of 24.8%, 28.0% and 36.8%, respectively.
 
    The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. Accordingly, PaineWebber believes that its analysis must be
considered as a whole and that considering any portion of such analysis and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion. In
its analyses, PaineWebber made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of GENEMEDICINE and Megabios. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the value
of businesses do not purport to be appraisals or to reflect the prices at which
businesses may actually be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty and neither GENEMEDICINE nor
PaineWebber assume responsibility for the accuracy of such analyses and
estimates.
 
    GENEMEDICINE selected PaineWebber to be its financial advisor in connection
with the merger because PaineWebber is a prominent investment banking and
financial advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations for corporate purposes.
 
    Pursuant to an engagement letter between GENEMEDICINE and PaineWebber dated
May 26, 1998, PaineWebber earned a fee of $350,000 for rendering its opinion. In
addition, PaineWebber will receive a fee, payable upon completion of the merger,
equal to its customary fee for a transaction of this nature less the $350,000
payable upon rendering the opinion, and will be reimbursed for certain of its
related
 
                                       39
<PAGE>
expenses. PaineWebber will not be entitled to any additional fees or
compensation in the event the merger is not approved or otherwise consummated.
GENEMEDICINE also agreed, under separate agreement, to indemnify PaineWebber,
its affiliates and each of its directors, officers, agents and employees and
each person, if any, controlling PaineWebber or any of its affiliates against
certain liabilities, including liabilities under federal securities laws.
 
    In the ordinary course of PaineWebber's business, PaineWebber may actively
trade the securities of GENEMEDICINE and Megabios for its own account and for
the accounts of its customers and, accordingly, may at any time hold long or
short positions in such securities.
 
OPINION OF FINANCIAL ADVISOR TO MEGABIOS
 
    Megabios engaged Hambrecht & Quist to act as its financial advisor in
connection with potential acquisitions and to render its opinion as to the
fairness to Megabios, from a financial point of view, of the consideration that
Megabios would pay in an acquisition. The Megabios Board selected Hambrecht &
Quist based on its qualifications, expertise and reputation. On October 23,
1998, at a meeting of the Megabios Board, Hambrecht & Quist rendered its oral
opinion (subsequently confirmed in writing) that, as of that date, the
consideration that Megabios would pay in the merger was fair to Megabios from a
financial point of view. A copy of Hambrecht & Quist's written opinion dated
October 23, 1998, which sets forth the assumptions made, matters considered, the
scope and limitations of the review undertaken and the procedures it followed,
is attached as Appendix B-2 to this joint proxy statement/prospectus. Megabios
stockholders should read the opinion in its entirety. The Megabios Board placed
no limitations on Hambrecht & Quist's investigation or the procedures it
followed in preparing and rendering its opinion.
 
    In reviewing the merger and arriving at its opinion, Hambrecht & Quist,
among other things:
 
    - reviewed Megabios' publicly available historical financial statements for
      recent periods and other relevant financial and operating data that
      Hambrecht & Quist obtained from published sources and from Megabios'
      management;
 
    - discussed Megabios' business, financial condition and prospects with
      Megabios' senior management;
 
    - reviewed GENEMEDICINE'S publicly available historical financial statements
      for recent periods and other relevant financial and operating data that
      Hambrecht & Quist obtained from published sources and from GENEMEDICINE'S
      management;
 
    - discussed GENEMEDICINE'S business, financial condition and prospects with
      GENEMEDICINE'S senior management;
 
    - reviewed the recent reported prices and trading activity for the common
      stocks of Megabios and GENEMEDICINE and compared this and certain Megabios
      and GENEMEDICINE financial information with similar information for
      companies engaged in businesses that Hambrecht & Quist considered
      comparable;
 
    - reviewed the financial terms, to the extent publicly available, of certain
      comparable merger and acquisition transactions;
 
    - reviewed the reorganization agreement and discussed the tax and accounting
      treatment of the merger with Megabios and Cooley Godward; and
 
    - performed other analyses and examinations and considered other
      information, financial studies, analyses and investigations and financial,
      economic and market data that Hambrecht & Quist deemed relevant.
 
    Hambrecht & Quist did not independently verify any of the information about
Megabios or GENEMEDICINE that it considered in connection with its review of the
merger. For purposes of its opinion,
 
                                       40
<PAGE>
Hambrecht & Quist assumed and relied upon the accuracy and completeness of all
this information. In connection with its opinion, Hambrecht & Quist did not
prepare or obtain any independent evaluation or appraisal of any of the assets
or liabilities of Megabios or GENEMEDICINE, nor did it conduct a physical
inspection of their properties and facilities. In connection with its analysis,
Hambrecht & Quist used certain financial forecasts prepared by the management of
both Megabios and GENEMEDICINE. Hambrecht & Quist assumed that these financial
forecasts reflected the best available estimates and judgments of the expected
future financial performance of Megabios and the pro forma combined company.
Hambrecht & Quist also assumed that neither Megabios nor GENEMEDICINE was a
party to any pending transactions, including external financings,
recapitalizations or merger discussions, other than the merger and those in the
ordinary course of conducting their respective businesses. For purposes of its
opinion, Hambrecht & Quist assumed that the merger would be accounted for as a
purchase. Hambrecht & Quist's opinion was based upon market, economic, financial
and other conditions as they existed on the date of the opinion. Any subsequent
change in conditions would require a reevaluation of the opinion.
 
    The preparation of a fairness opinion is a complex process. It is not
necessarily susceptible to partial analysis or summary description. The
following summary of Hambrecht & Quist's analysis is not a complete description
of its presentation to the Megabios Board. In arriving at its opinion, Hambrecht
& Quist did not attribute any particular quantitative weight to any analyses or
factors that it considered. Rather, it made qualitative judgments about the
significance and relevance of each analysis and factor. Hambrecht & Quist
believes that these analyses and the following summary must be considered as a
whole. Selecting portions of these analyses, without considering all of them, or
considering only the following summary, without considering all factors and
analyses, could create an incomplete view of the processes underlying these
analyses in Hambrecht & Quist's presentation to the Megabios Board and its
opinion. In performing its analyses, Hambrecht & Quist made numerous assumptions
about industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Megabios and GENEMEDICINE. The
analyses that Hambrecht & Quist performed (which are summarized below) are not
necessarily indicative of actual values or actual future results, which may be
significantly different than those suggested by the analyses. Additionally,
analyses about the values of a business for purposes of a fairness opinion are
not appraisals and do not reflect the prices at which the business may actually
be acquired.
 
    The following is a brief summary of certain financial analyses that
Hambrecht & Quist performed in connection with providing its oral and written
opinion to the Megabios Board on October 23, 1998:
 
    PREMIUM ANALYSIS/ANALYSIS OF SELECTED MERGER AND ACQUISITION
TRANSACTIONS.  Hambrecht & Quist compared the merger with selected comparable
merger and acquisition transactions. This analysis included 25 comparable public
company biotechnology transactions since June 1993. The selected transactions
analyzed included comparable biotechnology transactions such as Oncormed,
Inc./Gene Logic Inc. (July 1998), Virus Research Institute, Inc./T Cell
Sciences, Inc. (May 1998), Elan Corp. plc/Neurex Corporation (April 1998),
Somatogen, Inc./Baxter International Inc. (February 1998), Sequana Therapeutics,
Inc./Arris Pharmaceutical Corporation (November 1997), Somatix Therapy
Corporation/Cell Genesys, Inc. (January 1997), Genetic Therapy/Sandoz (July
1995) and Viagene, Inc./Chiron Corporation (April 1995). Analysis of certain
income statement and balance sheet parameters was not meaningful. Hambrecht &
Quist performed a premium analysis to demonstrate the historical premiums paid
in comparable merger and acquisition transactions. It compared the premiums
resulting from the comparison of the implied price per share of Megabios common
stock to be issued in the merger as of October 22, 1998 to the last sale price
of GENEMEDICINE common stock on both October 22, 1998 and October 1, 1998
(twenty trading days prior) to premiums paid in the above transactions.
Hambrecht & Quist observed that the one-day premiums for comparable
biotechnology transactions ranged from approximately -16% to 105% with an
average premium of 38% and four-week premiums ranged from -18% to 95% with an
average premium of 45%. Hambrecht & Quist also observed that the one-day
premiums to technology value (equal to equity value plus debt, less cash and
cash equivalents) for comparable biotechnology
 
                                       41
<PAGE>
transactions ranged from approximately -4 to 329% with an average premium of
82%. Megabios' offer implied an equity value of $36.4 million and implied a
technology value of $14.7 million for GENEMEDICINE in the merger, as based on
the closing price of Megabios common stock on October 22, 1998, the day before
the Megabios Board meeting. This offer represents 14% and 7% premiums to the
one-day and twenty-day average closing prices for GENEMEDICINE'S common stock,
and a 44% premium to GENEMEDICINE'S one-day technology value.
 
    DISCOUNTED CASH FLOW ANALYSIS OF MEGABIOS BASED ON MEGABIOS' MANAGEMENT
PROJECTIONS.  Hambrecht & Quist analyzed Megabios' theoretical valuation based
on an unleveraged discounted cash flow analysis of management's stand-alone
income statement projections. Megabios' implied equity value in the
management-provided case ranged from approximately $48.2 million to $70.9
million assuming discount rates ranging from 35% to 50% and terminal value
multiples ranging from 20.0x to 35.0x projected 2004 net income. These values
compared with an implied equity value of $52.4 million of Megabios, based on the
closing price of Megabios common stock on October 22, 1998.
 
    DISCOUNTED CASH FLOW ANALYSIS OF MEGABIOS BASED ON HAMBRECHT & QUIST'S
ADJUSTED PROJECTIONS.  Hambrecht & Quist analyzed Megabios' theoretical
valuation based on an unleveraged discounted cash flow analysis of adjusted
stand-alone income statement projections prepared by Hambrecht & Quist.
Hambrecht & Quist's income statement projections included certain reductions in
milestone payments and the royalty streams associated with corporate
partnerships, a decrease in the number of additional corporate partnerships and
a decrease in research and development expenses. Megabios' implied equity value
in the adjusted stand-alone case ranged from approximately $24.2 million to
$40.3 million assuming discount rates ranging from 35% to 50% and terminal value
multiples ranging from 20.0x to 35.0x projected 2004 net income. These values
compared with an implied equity value of $52.4 million of Megabios, based on the
closing price of Megabios common stock on October 22, 1998.
 
    DISCOUNTED CASH FLOW VALUE OF THE PRO FORMA COMBINED COMPANY BASED ON
MEGABIOS' AND GENEMEDICINE'S MANAGEMENT'S PROJECTIONS.  Hambrecht & Quist
analyzed the implied equity value of the pro forma combined company based on the
unleveraged discounted cash flow of Megabios' and GENEMEDICINE'S management's
projections of the pro forma combined company. The pro forma combined company's
implied equity value ranged from approximately $79.6 million to $119.4 million
assuming discount rates ranging from 25% to 40% and terminal value multiples
ranging from 20.0x to 35.0x projected 2004 net income. This compared with an
implied equity value of $52.4 million of Megabios, based on the closing price of
Megabios common stock on October 22, 1998.
 
    PUBLICLY TRADED COMPARABLE COMPANY ANALYSIS.  Hambrecht & Quist compared
selected financial information of GENEMEDICINE to three publicly traded gene
therapy companies that Hambrecht & Quist considered comparable. Hambrecht &
Quist reviewed and compared selected historical financials, operating and stock
market performance data of Megabios and GENEMEDICINE to the corresponding data
of these comparable gene therapy companies, which consisted of Targeted Genetics
Corporation, Transgene S.A. and Vical Incorporated. Hambrecht & Quist compared
the market value, discount to 52-week high stock price, cash, technology value
(consisting of equity value plus debt, less cash), net income for the latest
available 12 month period ("LTM"), LTM net revenues, as well as their "survival
index" (calculated as cash divided by LTM net income in order to determine the
number of consecutive annual periods that such company could continue to fund
losses at the rate experienced in the LTM period from the most recently
available reported cash without obtaining additional capital) and compared such
information with Megabios and GENEMEDICINE. On average, the comparable gene
therapy companies were trading at a discount of 51% to their 52-week high stock
price, compared to Megabios, which was trading at a discount of 79% to its
52-week high and GENEMEDICINE which was trading at a discount of 68% to its
52-week high stock price. Megabios' survival index was 5.8 years and
GENEMEDICINE'Ssurvival index was 1.6 years, compared to an average of 3.9 years
for the comparable gene therapy companies.
 
                                       42
<PAGE>
    None of the companies or transactions that Hambrecht & Quist used in its
analyses are identical to GENEMEDICINE or Megabios or the merger. Accordingly,
an analysis of the foregoing results is not purely mathematical. It involves
complex considerations and judgments about differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values of the companies used in the comparisons.
 
    Megabios stockholders should read this description of Hambrecht & Quist's
opinion along with the full text of its opinion that is attached as Appendix B-2
to this joint proxy statement/prospectus.
 
    Hambrecht & Quist, as part of its investment banking services, regularly
conducts valuations of businesses and securities in connection with mergers and
acquisitions, corporate restructurings, strategic alliances, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and for corporate and other purposes. In the ordinary course
of business, Hambrecht & Quist acts as a market maker and broker in Megabios and
GENEMEDICINE common stock and receives customary compensation for these
activities. It also provides research coverage on both Megabios and
GENEMEDICINE. In the ordinary course of business, Hambrecht & Quist also
actively trades for its own account and for the accounts of its customers in the
equity and derivative securities of Megabios. Accordingly, it may at any time
hold a long or short position in such securities. In the past, Hambrecht & Quist
acted as financial adviser to GENEMEDICINE and made an investment in
GENEMEDICINE before it went public. At the time Megabios engaged Hambrecht &
Quist to act as its financial advisor for this transaction, Hambrecht & Quist no
longer held any of the securities that comprised this investment.
 
    Upon completion of the merger, Megabios will pay Hambrecht & Quist a fee
equal to $750,000. Megabios paid Hambrecht & Quist a $25,000 retainer fee at the
time of the initial engagement. A $250,000 fee for the fairness opinion became
payable to Hambrecht & Quist when it delivered the opinion. These amounts are
not contingent upon the completion of the merger but they will be credited
against the fee that is payable upon completion of the merger. Megabios also has
agreed to reimburse Hambrecht & Quist for its reasonable out-of-pocket expenses
and to indemnify Hambrecht & Quist against certain liabilities, including
liabilities under the federal securities laws or relating to or arising out of
Hambrecht & Quist's engagement as financial advisor.
 
INTERESTS OF CERTAIN PERSONS IN THE MERGER
 
    Certain members of GENEMEDICINE'S management and the GENEMEDICINE Board may
be deemed to have certain interests in the merger that are in addition to their
interests as stockholders of GENEMEDICINE generally. The GENEMEDICINE Board was
aware of these interests and considered them, among other matters, in approving
the reorganization agreement and the transactions contemplated thereby.
 
    THE 1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN.  GENEMEDICINE'S 1994
Non-Employee Directors' Stock Option Plan, as amended, provides that upon the
occurrence of certain events, which includes the merger, the vesting of options
outstanding under this plan will be accelerated to permit the optionee to
exercise all such options in full prior to such event. The names of those
directors whose options are accelerated and the number of underlying shares
accelerated for each are set forth below:
 
<TABLE>
<CAPTION>
                                                                                      OPTION
                                                                                      SHARES
DIRECTOR                                                                            ACCELERATED
- ----------------------------------------------------------------------------------  -----------
<S>                                                                                 <C>
Edward L. Cahill..................................................................      16,250
Stanley T. Crooke.................................................................      12,500
David F.J. Leathers...............................................................      12,500
Bert W. O'Malley..................................................................      30,000
Arthur M. Pappas..................................................................      11,250
</TABLE>
 
                                       43
<PAGE>
    CHANGE OF CONTROL SEVERANCE PLAN.  In May 1996, GENEMEDICINE adopted a
Change of Control Severance Plan, as amended January 30, 1998. Under the plan,
upon termination of employment following the merger, eligible employees are
entitled to certain severance benefits, which include severance pay,
acceleration of options and COBRA benefits, based upon the position held by the
employee at GENEMEDICINE and the number of years employed. Pursuant to this
plan, members of GENEMEDICINE'S management are entitled to receive severance
benefits as set forth below in the event their employment with GENEMEDICINE is
terminated, either voluntarily with good reason or involuntarily without cause,
within twelve months following the effective date of the merger:
 
<TABLE>
<CAPTION>
                                                                                                       OPTION
                                                                            PAYROLL       OTHER        SHARES
OFFICER                                                        SEVERANCE   TAXES (1)    BENEFITS     ACCELERATED
- ------------------------------------------------------------  -----------  ---------  -------------  -----------
<S>                                                           <C>          <C>        <C>            <C>
Norman Hardman..............................................     $310,650    $11,491    $  27,473(2)    186,400
Alain Rolland...............................................      201,400      9,033        7,473(3)     99,349
Richard A. Waldron..........................................      198,748      8,973        7,473(3)     97,075
Josef F. Bossart............................................      198,550      8,969        7,473(3)    101,182
Kathryn N. Stankis..........................................      147,404      7,818        2,566(3)     42,525
John M. Dodson..............................................      128,293      7,388        7,473(3)     40,859
</TABLE>
 
- ------------------------
 
(1) Represents GENEMEDICINE'S portion of payroll taxes, including FICA, FUTA and
    Medicare tax.
 
(2) Represents Consolidated Omnibus Reconciliation Act of 1985 ("COBRA")
    benefits plus $20,000 for moving expenses.
 
(3) Represents COBRA benefits.
 
    ERIC TOMLINSON'S EMPLOYMENT AGREEMENT.  The Amended and Restated Employment
Agreement between GENEMEDICINE and Eric Tomlinson, dated June 11, 1998, provides
that, upon the voluntary or involuntary termination of Dr. Tomlinson's
employment with GENEMEDICINE, Dr. Tomlinson will receive $465,192 (18 months
salary) and all of his unvested options to purchase up to 82,865 shares of
GENEMEDICINE common stock will vest and become exercisable. In addition, Dr.
Tomlinson's options to purchase up to 210,000 shares of GENEMEDICINE common
stock will remain exercisable for two years from the date of termination and Dr.
Tomlinson will be paid a sum of $765.07 per month for 18 months for reasonable
health benefits. Dr. Tomlinson also shall receive $30,000 for moving costs and
taxes related thereto, and country club dues for the severance period.
 
    MANAGEMENT CHANGE OF CONTROL INCENTIVE PLAN.  On July 1, 1998, GENEMEDICINE
adopted the Management Change of Control Incentive Plan for the purpose of
retaining key employees through the date of closing in the event of a change in
control transaction. The plan provides that upon a change in control, certain
key employees of GENEMEDICINE and Dr. Tomlinson will share in an acquisition
pool equal to three percent of the net proceeds received by GENEMEDICINE or its
stockholders in connection with such
 
                                       44
<PAGE>
transaction. The amount each person is entitled to receive upon consummation of
the merger are set forth below:
 
<TABLE>
<CAPTION>
                                                                         PAYMENT UNDER
                                                                  MANAGEMENT CHANGE OF CONTROL
NAME                                                                   INCENTIVE PLAN (1)
- ----------------------------------------------------------------  ----------------------------
<S>                                                               <C>
Norman Hardman..................................................           $  364,455
Alain Rolland...................................................              190,905
Josef F. Bossart................................................              138,840
Richard A. Waldron..............................................              138,840
Kathryn N. Stankis..............................................              121,485
Eric Tomlinson..................................................              520,650
Other key employees.............................................              260,325
</TABLE>
 
- ------------------------
 
(1) Based on the aggregate value of Megabios common stock to be issued to
    GENEMEDICINE stockholders as of the effective time of the merger. This
    aggregate value is currently estimated to be $57.8 million.
 
    INDEMNIFICATION AND INSURANCE.  Pursuant to Section 6.7 of the
reorganization agreement, all rights to indemnification existing in favor of the
current directors and officers of GENEMEDICINE for acts and omissions occurring
prior to the effective date of the merger, as provided in GENEMEDICINE'S Amended
and Restated Certificate of Incorporation and Bylaws and as provided in any
indemnification agreements between GENEMEDICINE and said officers and directors
as of October 24, 1998, will survive the merger and will be observed for a
period of not less than six years from the effective date of the merger. For a
period of not less than three years from the effective date of the merger, the
surviving corporation or Megabios, in certain instances, will maintain in
effect, for the benefit of the current officers and directors of GENEMEDICINE
with respect to acts or omissions occurring prior to the effective date of the
merger, the lesser of (i) the existing amount of coverage of the existing policy
of directors' and officers' liability insurance maintained by GENEMEDICINE as of
the date of the reorganization agreement and (ii) the amount of coverage
purchased by 150% of the amount of the last annual premium paid by GENEMEDICINE
prior to the date of the reorganization agreement for the existing policy;
provided, however, that GENEMEDICINE may substitute for the existing policy a
policy or policies of comparable coverage. Any successors or assigns of the
surviving corporation will assume the obligations of the surviving corporation
set forth in Section 6.7 of the reorganization agreement.
 
    BOARD OF DIRECTORS SEATS.  Pursuant to the reorganization agreement,
Megabios has agreed to appoint Arthur M. Pappas, Stanley T. Crooke and Bert W.
O'Malley to the Megabios Board as members of Class I, Class II and Class III,
respectively, to serve until the annual meeting of stockholders to be held in
the years 2001, 1999, and 2000, respectively.
 
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
 
    The following discussion summarizes the material federal income tax
consequences of the merger that are generally applicable to holders of
GENEMEDICINE common stock. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended, existing and
proposed U.S. Treasury Regulations thereunder and current administrative rulings
and court decisions, all of which are subject to change. Any such change, which
may or may not be retroactive, could alter the tax consequences to Megabios,
GENEMEDICINE or the GENEMEDICINE stockholders as described herein.
 
    GENEMEDICINE stockholders should be aware that this discussion does not deal
with all U.S. federal income tax considerations that may be relevant to
particular GENEMEDICINE stockholders in light of their particular circumstances,
such as stockholders who are dealers in securities, banks, insurance companies
or tax-exempt organizations, who are subject to the alternative minimum tax
provisions of the Internal
 
                                       45
<PAGE>
Revenue Code, who are non-U.S. persons, who acquired their shares in connection
with stock option or stock purchase plans or in other compensatory transactions
or who hold their shares as a hedge or as part of a hedging, straddle,
conversion or other risk reduction transaction. In addition, the following
discussion does not address the tax consequences of the merger under foreign,
state or local tax laws or the tax consequences of transactions effectuated
prior to or after the merger, whether or not such transactions are in connection
with the merger.
 
    GENEMEDICINE stockholders are urged to consult their own tax advisors as to
the specific consequences to them of the merger in their particular
circumstances, including the applicable federal, state, local and foreign tax
consequences.
 
    Neither Megabios nor GENEMEDICINE has requested or will request a ruling
from the Internal Revenue Service with regard to any of the U.S. federal income
tax consequences of the merger. Heller Ehrman and Cooley Godward have each
rendered a tax opinion that the merger will be a reorganization under Section
368(a) of the Internal Revenue Code (a "Reorganization"). As a condition to
consummation of the merger, Heller Ehrman and Cooley Godward will each render a
tax opinion to GENEMEDICINE and Megabios, respectively, that the merger will
constitute a Reorganization. Such tax opinions are, and will be, based on
certain assumptions and management representations, and will be subject to
certain limitations. Moreover, such tax opinions will not be binding on the
Internal Revenue Service nor preclude the Internal Revenue Service from adopting
a contrary position. The discussion below assumes that the merger will qualify
as a Reorganization.
 
    The tax opinions assume and are conditioned upon (1) the truth and accuracy
of the statements, covenants, representations and warranties contained in the
reorganization agreement, in the tax representations received from Megabios,
Merger Sub and GENEMEDICINE to support the tax opinions and in all other
instruments and documents related to the formation, organization and operation
of Megabios, Merger Sub and GENEMEDICINE examined by and relied upon by Cooley
Godward and Heller Ehrman in connection with the merger; (2) that original
documents submitted to such counsel are authentic, documents submitted to such
counsel as copies conform to the original documents, and that all such documents
have been (or will be by the effective time) duly and validly executed and
delivered where due execution and delivery are a prerequisite to the
effectiveness thereof; (3) that all convenants contained in the reorganization
agreement and the tax representations, described above, are performed without
waiver or breach of any material provision thereof; (4) that the merger will be
reported by Megabios and GENEMEDICINE on their respective federal income tax
returns in a manner consistent with the tax opinions; and (5) that any
representation or statement made "to the best of knowledge" or similarly
qualified is correct without such qualification.
 
    Subject to the limitations and qualifications referred to herein and in the
tax opinions, and assuming the merger is treated as a Reorganization in
accordance with the tax opinions, the following U.S. federal income tax
consequences will result:
 
    - No gain or loss will be recognized for federal income tax purposes by the
      holders of GENEMEDICINE common stock upon the receipt of Megabios common
      stock solely in exchange for such GENEMEDICINE common stock in the merger
      (except to the extent, if any, of cash received in lieu of fractional
      shares)
 
    - The aggregate tax basis of the Megabios common stock so received by
      GENEMEDICINE stockholders in the merger (including any fractional share of
      Megabios common stock not actually received) will be the same as the
      aggregate tax basis of the GENEMEDICINE common stock surrendered in
      exchange therefor
 
    - The holding period of Megabios common stock so received by each
      GENEMEDICINE stockholder in the merger will include the period for which
      the GENEMEDICINE common stock surrendered in
 
                                       46
<PAGE>
      exchange therefor was considered to be held, provided that the
      GENEMEDICINE common stock so surrendered is held as a capital asset at the
      effective time
 
    - Cash payments received by holders of GENEMEDICINE common stock in lieu of
      a fractional share will be treated as if such fractional share of Megabios
      common stock had been issued in the merger and then redeemed by Megabios.
      A GENEMEDICINE stockholder receiving such cash will recognize gain or loss
      upon such payment, measured by the difference, if any, between the amount
      of cash received and the basis in such fractional share. The gain or loss
      should be capital gain or loss provided that each share of GENEMEDICINE
      common stock surrendered in exchange for such fractional share of Megabios
      common stock was held as a capital asset at the effective time
 
    - Neither Megabios nor GENEMEDICINE will recognize gain solely as a result
      of the merger
 
    A successful IRS challenge to the Reorganization status of the merger would
result in significant adverse tax consequences to the GENEMEDICINE stockholders.
A GENEMEDICINE stockholder would recognize gain or loss with respect to each
share of GENEMEDICINE common stock surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
effective time, of the Megabios common stock received in exchange therefor and
cash received in lieu of a fractional share of Megabios common stock. In such
event, a stockholder's aggregate basis in the Megabios common stock so received
would equal its fair market value, and the stockholder's holding period for such
stock would begin the day after the closing date of the merger.
 
    Even if the merger qualifies as a Reorganization, a recipient of Megabios
common stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the GENEMEDICINE
common stock surrendered. In addition, to the extent that a GENEMEDICINE
stockholder were treated as receiving, directly or indirectly, consideration
other than Megabios common stock in exchange for such stockholder's GENEMEDICINE
common stock, gain, if any, would have to be recognized.
 
    Certain noncorporate GENEMEDICINE stockholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Megabios common stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
and certifies that he, she or it is not subject to backup withholding on the
substitute Form W-9 included in the letter of transmittal, who provides a
certificate of foreign status on Form W-8, or who is otherwise exempt from
backup withholding. A stockholder who fails to provide the correct taxpayer
identification number on Form W-9 may be subject to a $50 penalty imposed by the
Internal Revenue Service.
 
    Each GENEMEDICINE stockholder will be required to retain records and file
with such holder's U.S. federal income tax return a statement setting forth
certain facts relating to the merger.
 
ANTICIPATED ACCOUNTING TREATMENT
 
    The merger will be accounted for as a purchase for financial reporting
purposes. Under such accounting method, the purchase price will be allocated
based on the fair value of the GENEMEDICINE assets acquired, including
in-process research and development, and liabilities assumed. See "Unaudited Pro
Forma Condensed Combined Financial Statements" on page 61 for further
discussion.
 
REGULATORY MATTERS
 
    ANTITRUST.  The merger is not subject to the premerger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. However, the FTC or the Antitrust Division of the U.S. Department of
Justice could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin consummation of
the merger or seeking to cause divestiture of significant assets of Megabios or
GENEMEDICINE or their subsidiaries. There can be no
 
                                       47
<PAGE>
assurance that a challenge to the merger on antitrust grounds will not be made,
or, if such challenge is made, of what the result would be. Consummation of the
merger is conditioned upon, among other things, the absence of any temporary
restraining order, preliminary or permanent injunction, or other order issued by
any federal or state court in the U.S. which prevents the consummation of the
merger.
 
    FILING WITH THE DELAWARE SECRETARY OF STATE.  A Certificate of Merger must
be filed with the Secretary of State of the State of Delaware in order to
consummate the merger.
 
    SECURITIES LAWS.  Megabios and GENEMEDICINE must comply with the federal
securities laws and applicable securities laws of various states.
 
NO APPRAISAL RIGHTS
 
    Under Section 262 of the DGCL, stockholders who do not vote in favor of or
consent to a merger are not entitled to appraisal rights if the stock subject to
such merger is designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. and the
consideration to be received in such merger consists of stock listed on a
national securities exchange or designated as a National Market System Security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. Because the Nasdaq National Market is designated as such a system
and the GENEMEDICINE common stock and Megabios common stock are quoted on the
Nasdaq National Market, holders of GENEMEDICINE common stock are not entitled to
appraisal rights with respect to the merger.
 
    Holders of Megabios common stock are not entitled to appraisal rights under
the DGCL because Megabios is not a constituent corporation to the merger under
the DGCL.
 
RESALE OF MEGABIOS COMMON STOCK
 
    Megabios common stock issued in connection with the merger will be freely
transferable, except that shares issued to any GENEMEDICINE stockholder who is
an affiliate of GENEMEDICINE or who becomes an affiliate of Megabios are subject
to certain restrictions on resale under federal securities laws. An "affiliate"
is defined generally as including, without limitation, directors, certain
executive officers and certain other persons who control a company.
 
                                       48
<PAGE>
                          THE REORGANIZATION AGREEMENT
 
GENERAL
 
    The following is a summary of the material provisions of the reorganization
agreement, a copy of which is attached as Appendix A to this joint proxy
statement/prospectus and is incorporated herein by reference. However, the
following is not a complete statement of all provisions of the reorganization
agreement and related agreements. Statements made in this joint proxy
statement/prospectus with respect to the terms of the reorganization agreement
and such related agreements are qualified in their respective entireties by
reference to the more detailed information set forth in the reorganization
agreement and such related agreements. Capitalized terms used in this summary
but not defined in this joint proxy statement/ prospectus shall have the
meanings ascribed to them in the reorganization agreement.
 
    The reorganization agreement provides for the merger of Merger Sub with and
into GENEMEDICINE. As a result of the merger, Merger Sub will cease to exist,
GENEMEDICINE will become a wholly-owned subsidiary of Megabios and the former
stockholders of GENEMEDICINE will become stockholders of Megabios. GENEMEDICINE,
as the surviving corporation, will retain all of its separate corporate
existence, with all its purposes, objects, rights, privileges, powers and
franchises unaffected by the merger. Merger Sub has been formed solely for the
purpose of effecting the merger, and there will be no other activity in Merger
Sub. The merger will become effective upon the filing of a Certificate of Merger
with the Delaware Secretary of State or such later time as may be specified in
the Certificate of Merger. The effective time of the merger shall occur no later
than the second day after the satisfaction or waiver of all the conditions to
closing set forth in the reorganization agreement. It is currently anticipated
that the effective time will occur on or before February 28, 1999. There can be
no assurance, however, that the required approvals will be obtained, that the
other conditions to the merger will be satisfied by such date, or at all, or
that the reorganization agreement will not be terminated. See "--Conditions to
the Merger."
 
MERGER CONSIDERATION
 
    GENEMEDICINE COMMON STOCK.  At the effective time, each share of
GENEMEDICINE common stock then outstanding will be converted into the right to
receive Megabios common stock based on the exchange ratio. The exchange ratio is
currently 0.5710 and will be adjusted for any subsequent stock split, stock
dividend, reverse stock splits, reclassification, recapitalization or similar
transaction.
 
    NO FRACTIONAL SHARES.  No fractional shares of Megabios common stock will be
issued in connection with the merger. In lieu of such fractional shares, any
holder of GENEMEDICINE common stock (after aggregating all fractional shares of
Megabios common stock issuable to such holder) will, upon surrender of such
holder's stock certificate(s) representing GENEMEDICINE common stock to the
exchange agent, be paid in cash the dollar amount (rounded to the nearest whole
cent), without interest, determined by multiplying such fraction by the closing
price of a share of Megabios common stock on Nasdaq on the "closing date" (as
defined herein).
 
STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN
 
    STOCK OPTIONS AND WARRANTS.  At the effective time, all outstanding options
with respect to GENEMEDICINE common stock under GENEMEDICINE'S 1993 Stock Option
Plan and 1994 Non-Employee Directors' Stock Option Plan (collectively,
"GENEMEDICINE Options") and all outstanding warrants ("GENEMEDICINE Warrants")
to purchase GENEMEDICINE common stock will be assumed by Megabios. From and
after the effective time:
 
    - each GENEMEDICINE Option and GENEMEDICINE Warrant assumed by Megabios may
      be exercised solely for shares of Megabios common stock;
 
    - the number of shares of Megabios common stock subject to each such
      GENEMEDICINE Option and GENEMEDICINE Warrant will be equal to the number
      of shares of GENEMEDICINE common stock
 
                                       49
<PAGE>
      subject to such GENEMEDICINE Option and GENEMEDICINE Warrant immediately
      prior to the effective time multiplied by the exchange ratio, rounding
      down to the nearest whole share (with cash, less the applicable exercise
      price, being payable for any fraction of a share);
 
    - the per share exercise price under each such GENEMEDICINE Option and
      GENEMEDICINE Warrant will be adjusted by dividing the per share exercise
      price under such GENEMEDICINE Option and GENEMEDICINE Warrant by the
      exchange ratio and rounding up to the nearest cent; and
 
    - any restriction on the exercise of any such GENEMEDICINE Option or
      GENEMEDICINE Warrant will continue in full force and effect. The term,
      exercisability, vesting schedule and other provisions of such GENEMEDICINE
      Option or GENEMEDICINE Warrant will remain unchanged unless amended or
      modified by existing severance or employment agreements in connection with
      the merger.
 
    EMPLOYEE STOCK PURCHASE PLAN.  At the effective time of the merger, all
outstanding rights to purchase GENEMEDICINE common stock under the GENEMEDICINE
Employee Stock Purchase Plan will be settled and all participants' rights in
offerings under the GENEMEDICINE Employee Stock Purchase Plan will terminate.
 
STOCK OWNERSHIP FOLLOWING THE MERGER
 
    Based upon the number of shares of GENEMEDICINE common stock issued and
outstanding as of the record date, an aggregate of approximately 8.9 million
shares of Megabios common stock will be issued to holders of GENEMEDICINE common
stock. Based upon the number of shares of Megabios common stock issued and
outstanding as of the record date, (assuming no exercise of outstanding options
or other rights to purchase Megabios common stock,), the former holders of
GENEMEDICINE common stock would hold and have voting power with respect to
approximately 41.0% of Megabios' total issued and outstanding shares after
consummation of the merger.
 
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
 
    As soon as practicable after the effective time, the exchange agent will
mail to the registered holders of GENEMEDICINE common stock (1) a letter of
transmittal and (2) instructions for use in effecting the surrender of the
GENEMEDICINE stock certificates in exchange for certificates representing
Megabios common stock. Upon surrender of a GENEMEDICINE stock certificate to the
exchange agent for exchange, together with a duly executed letter of transmittal
and such other documents as may reasonably be required by the exchange agent or
Megabios, the holder of such GENEMEDICINE stock certificate will be entitled to
receive in exchange therefor a certificate representing the whole number of
shares of Megabios common stock that such holder has the right to receive plus
cash for any fractional shares of Megabios common stock. See "--Merger
Consideration--No Fractional Shares".
 
    If any GENEMEDICINE stock certificate has been lost, stolen or destroyed,
Megabios may require the owner of such lost, stolen or destroyed GENEMEDICINE
stock certificate to provide an appropriate affidavit and to deliver a bond as
indemnity against any claim that may be made against the exchange agent,
Megabios or GENEMEDICINE with respect to such GENEMEDICINE stock certificate.
 
    GENEMEDICINE STOCKHOLDERS SHOULD NOT SURRENDER THEIR GENEMEDICINE STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT.
 
EFFECT ON CERTIFICATES
 
    At the effective time, (1) all shares of GENEMEDICINE common stock
outstanding immediately prior to the effective time will automatically be
canceled and retired and will cease to exist, and all holders of certificates
representing shares of GENEMEDICINE common stock that were outstanding
immediately prior to the effective time will cease to have any rights as
stockholders of GENEMEDICINE except the right to receive Megabios common stock
and cash in lieu of fractional shares, if any, into which such
 
                                       50
<PAGE>
GENEMEDICINE common stock shall have been converted, and (2) the stock transfer
books of GENEMEDICINE will be closed with respect to all shares of GENEMEDICINE
common stock outstanding immediately prior to the effective time. No further
transfer of any such shares of GENEMEDICINE common stock will be made on such
stock transfer books after the effective time. If, after the effective time, a
GENEMEDICINE stock certificate is presented to the exchange agent (or to
GENEMEDICINE or Megabios), such GENEMEDICINE stock certificate will be canceled
and will be exchanged as provided above under the caption "--Conversion of
Shares; Procedure for Exchange of Certificates;" and "--Merger Consideration."
 
CORPORATE MATTERS
 
    As of the effective time, the Certificate of Incorporation of the surviving
corporation will be amended and restated to conform to the Certificate of
Incorporation of Merger Sub as in effect immediately prior to the effective time
with the exception that the name of the surviving corporation will be
[          ,] and the Bylaws of the surviving corporation will be amended and
restated to conform to the Bylaws of the Merger Sub as in effect immediately
prior to the effective time. Immediately after the effective time, the directors
and officers of the surviving corporation will be the directors and officers of
Merger Sub immediately prior to the effective time.
 
CONDITIONS TO THE MERGER
 
    MEGABIOS AND MERGER SUB.  The obligations of Megabios and Merger Sub to
effect the merger and otherwise consummate the transactions contemplated by the
reorganization agreement are subject to the satisfaction, at or prior to the
closing of the merger, of conditions, among others, to the following general
effect:
 
    - The representations and warranties of GENEMEDICINE contained in the
      reorganization agreement shall be accurate in all material respects as of
      the date of the reorganization agreement and as of the closing date as if
      made on and as of the closing date except, among other things, that any
      inaccuracies shall be disregarded if they do not individually or
      collectively constitute a "material adverse effect" (as defined in the
      reorganization agreement) on GENEMEDICINE.
 
    - Each covenant or obligation that GENEMEDICINE is required to comply with
      or to perform at or prior to the closing shall have been complied with and
      performed in all material respects.
 
    - The registration statement shall have become effective in accordance with
      the provisions of the Securities Act, and no stop order shall have been
      issued by the SEC with respect to the registration statement.
 
    - The reorganization agreement and the merger shall have been duly approved
      by the necessary vote of the GENEMEDICINE stockholders, and the issuance
      of Megabios common stock in the merger shall have been duly approved by
      the necessary vote of the Megabios stockholders.
 
    - GENEMEDICINE shall have obtained all third party consents identified in
      the reorganization agreement.
 
    - Megabios shall have received the following agreements and documents: (A) a
      statement from GENEMEDICINE conforming to the requirements of Section
      1.897-2(h)(1)(i) of the Treasury Regulations; (B) a legal opinion of
      Cooley Godward that the merger will constitute a Reorganization; (C) a
      certificate executed on behalf of GENEMEDICINE by one of its executive
      officers confirming that certain conditions have been duly satisfied.
 
    - There shall have been no material adverse change in the business, assets,
      liabilities, financial condition or results of operations of GENEMEDICINE
      since the date of the reorganization agreement.
 
                                       51
<PAGE>
    - GENEMEDICINE shall have filed with the Internal Revenue Service a
      notification required under Section 1.897-2(h)(2) of the Treasury
      Regulations.
 
    - The shares of Megabios common stock to be issued in the merger shall have
      been authorized for listing on Nasdaq, subject to notice of issuance.
 
    - There shall not be pending or threatened any action, suit or litigation
      brought by any governmental entity: (A) challenging or seeking to restrain
      or prohibit the consummation of the merger; (B) relating to the merger and
      seeking to obtain from Megabios or any of its subsidiaries any material
      damages; (C) seeking to prohibit or limit Megabios' ability to vote,
      receive dividends or otherwise exercise ownership rights with respect to
      the stock of the surviving corporation; or (D) which would materially and
      adversely affect the right of Megabios, the surviving corporation or any
      subsidiary of Megabios to own the assets or operate the business of
      GENEMEDICINE.
 
    - No temporary restraining order, preliminary or permanent injunction or
      other order preventing the consummation of the merger shall have been
      issued by any court of competent jurisdiction.
 
    - All outstanding shares of GENEMEDICINE Series B preferred stock shall have
      been converted into GENEMEDICINE common stock.
 
    GENEMEDICINE.  The obligations of GENEMEDICINE to effect the merger and
otherwise consummate the transactions contemplated by the reorganization
agreement are subject to the satisfaction, at or prior to the closing of
conditions, among others, to the following general effect:
 
    - The representations and warranties of Megabios and Merger Sub contained in
      the reorganization shall be accurate in all material respects as of the
      date of the reorganization agreement and as of the closing date as if made
      on and as of the closing date, except, among other things, that any
      inaccuracies shall be disregarded and if they do not individually or
      collectively constitute a material adverse effect on Megabios.
 
    - All of the covenants and obligations that Megabios and Merger Sub are
      required to comply with or to perform at or prior to the closing shall
      have been complied with and performed in all material respects.
 
    - The registration statement shall have become effective in accordance with
      the provisions of the Securities Act, and no stop order shall have been
      issued by the SEC with respect to the registration statement.
 
    - The reorganization agreement and the merger shall have been duly approved
      by the necessary vote of the GENEMEDICINE stockholders, and the issuance
      of Megabios common stock in the merger shall have been duly approved by
      the necessary vote of the Megabios stockholders.
 
    - GENEMEDICINE shall have received the following agreements and documents:
      (A) a legal opinion of Heller Ehrman that the merger will constitute a
      Reorganization; and (B) a certificate executed on behalf of Megabios by
      its Chief Executive Officer, confirming that certain conditions have been
      satisfied.
 
    - There shall have been no material adverse change in the business, assets,
      liabilities, financial condition or results of operations of Megabios
      since the date of the reorganization agreement.
 
    - The shares of Megabios common stock to be issued in the merger shall have
      been authorized for listing on Nasdaq, subject to notice of issuance.
 
    - There shall not be pending or threatened any action, suit or litigation
      brought by any governmental entity: (a) challenging or seeking to restrain
      or prohibit the consummation of the merger; (b) relating to the merger and
      seeking to obtain from GENEMEDICINE any material damages; (c) seeking to
      prohibit or limit Megabios' ability to vote, receive dividends or
      otherwise exercise
 
                                       52
<PAGE>
      ownership rights with respect to the stock of the surviving corporation;
      or (d) which would materially and adversely affect the right of Megabios,
      the surviving corporation or any subsidiary of Megabios to own the assets
      or operate the business of GENEMEDICINE.
 
    - No temporary restraining order, preliminary or permanent injunction or
      other order preventing the consummation of the merger shall have been
      issued by any court of competent jurisdiction.
 
    - Megabios shall have increased the size of its Board to nine and appointed
      Mr. Pappas, and Drs. Crooke and O'Malley to its Board.
 
    For purposes of the reorganization agreement, an event, violation,
inaccuracy, circumstance or other matter will be deemed to have a "material
adverse effect" on GENEMEDICINE if such event, violation, inaccuracy,
circumstance or other matter would have a material adverse effect on (1) the
business, financial condition, assets, liabilities or results of operations of
GENEMEDICINE taken as a whole, (2) the ability of GENEMEDICINE to consummate the
merger, or (3) Megabios' ability to vote, receive dividends with respect to or
otherwise exercise ownership rights with respect to the stock of the surviving
corporation. An event, violation, inaccuracy, circumstance or other matter will
be deemed to have a "material adverse effect" on Megabios if such event,
violation, inaccuracy, circumstance or other matter would have a material
adverse effect (a) on the business, financial condition, assets, liabilities or
results of operations of Megabios and its subsidiaries taken as a whole, (b) the
ability of Megabios to consummate the merger, or (c) Megabios' ability to vote,
receive dividends with respect to or otherwise exercise ownership rights with
respect to the stock of the surviving corporation.
 
REPRESENTATIONS AND WARRANTIES
 
    The reorganization agreement contains customary representations and
warranties, including, without limitation, representations and warranties by
each of Megabios and GENEMEDICINE as to:
 
    - due organization and subsidiaries;
 
    - the certificate of incorporation and the bylaws of Megabios and Merger Sub
      and GENEMEDICINE;
 
    - capitalization;
 
    - filings with the SEC and financial statements;
 
    - absence of certain changes;
 
    - real property, equipment and leaseholds;
 
    - payments under corporate partnering agreements;
 
    - proprietary assets;
 
    - material contracts;
 
    - year 2000 liabilities;
 
    - compliance with legal requirements;
 
    - certain business practices;
 
    - governmental authorizations;
 
    - tax matters;
 
    - employee and labor matters and benefit plans;
 
    - environmental matters;
 
    - insurance;
 
                                       53
<PAGE>
    - transactions with affiliates;
 
    - legal proceedings and orders;
 
    - the authority and binding nature of the reorganization agreement;
 
    - non-contravention and consents;
 
    - financial advisor fees or commissions; and
 
    - disclosure.
 
    The reorganization agreement contains further representations and warranties
by GENEMEDICINE as to:
 
    - the absence of existing discussions or negotiations concerning other
      acquisition proposals;
 
    - the vote required to approve the merger and reorganization agreement;
 
    - the receipt of a fairness opinion from PaineWebber; and
 
    - the GENEMEDICINE rights agreement.
 
    The reorganization agreement contains further representations and warranties
by Megabios and Merger Sub as to:
 
    - the vote required to approve the issuance of Megabios common stock
      pursuant to the merger;
 
    - valid issuance of the Megabios common stock to be issued pursuant to the
      merger;
 
    - receipt of a fairness opinion from Hambrecht & Quist; and
 
    - interim operations of Merger Sub.
 
COVENANTS
 
    CONDUCT OF GENEMEDICINE'S BUSINESS.  The reorganization agreement requires
that during the pre-closing period, GENEMEDICINE shall use commercially
reasonable efforts to conduct its business and operations (A) in the ordinary
course, (B) in a commercially reasonable manner and (C) in compliance with all
applicable legislation and regulations, except to the extent that any failure to
comply with any applicable legislation or regulations would not have a material
adverse effect on GENEMEDICINE. The reorganization agreement also requires
GENEMEDICINE to cause its officers to report regularly to Megabios concerning
the status of GENEMEDICINE'S business to the extent requested by Megabios.
 
    During the pre-closing period without the prior written consent of Megabios,
GENEMEDICINE shall not:
 
    - declare or pay any dividend or make any other distribution;
 
    - repurchase, redeem or otherwise reacquire any shares of capital stock or
      other securities;
 
    - sell, issue, grant or authorize the issuance or grant of (A) any capital
      stock or other security, (B) any option, call, warrant or right to acquire
      any capital stock or other security, or (C) any instrument convertible
      into or exchangeable for any capital stock or other security, except that
      GENEMEDICINE may issue GENEMEDICINE common stock upon the valid exercise
      of GENEMEDICINE stock options and warrants, and pursuant to other employee
      benefit plans;
 
    - amend or waive any of its rights under, or accelerate the vesting under,
      any provision of any of GENEMEDICINE'S stock option plans, any provision
      of any agreement evidencing any outstanding stock option or any restricted
      stock purchase agreement, or otherwise modify any of the terms of any
      outstanding option, warrant or other security or any related contract;
 
                                       54
<PAGE>
    - amend the GENEMEDICINE Certificate of Incorporation or GENEMEDICINE Bylaws
      or become a party to any merger, consolidation, share exchange, business
      combination, recapitalization, reclassification of shares, stock split,
      reverse stock split or similar transaction;
 
    - form any subsidiary or acquire any equity interest or other interest in
      any other entity;
 
    - make any capital expenditures in excess of $100,000 in the aggregate;
 
    - enter into or become bound by, or waive or exercise any material right
      under, a material contract;
 
    - acquire, lease or license any material right or other asset from any other
      person or sell, lease, license, encumber or otherwise dispose of any
      material right or other asset to any other person (except in each case for
      material rights or assets acquired, leased, licensed or disposed of in the
      ordinary course of business and consistent with past practices), or waive
      or relinquish any material right or otherwise extend the term of any
      agreement with respect to, amend or modify in any material respect any
      material rights, including rights to material propriety assets, other than
      non-exclusive licenses and distribution rights in the ordinary course of
      business consistent with past practices;
 
    - subject to certain limitations and exceptions, incur any indebtedness for
      borrowed money;
 
    - establish, adopt or amend in any material respect any employee benefit
      plan, pay any bonus except in accordance with the terms of existing
      employee benefit plans or pursuant to commitments made prior to the date
      of the reorganization agreement, or make any profit-sharing or similar
      employee benefit payment to, or increase the amount of the wages, salary,
      commissions, fringe benefits or other compensation or remuneration payable
      to, any of its directors, officers or employees except for normal periodic
      increases in wages and salaries made in the ordinary course of business
      and consistent with past practices;
 
    - grant any severance or termination pay to any officer or employee except
      payments in amounts consistent with policies and past practices or
      pursuant to written agreements outstanding, or policies existing, on the
      date of the reorganization agreement and as previously disclosed in
      writing or made available to Megabios, or adopt any new severance plan;
 
    - hire any new employee having an annual base salary in excess of $120,000,
      or engage any consultant or independent contractor for a period exceeding
      60 days;
 
    - change the status, title or responsibilities of any officer, or promote
      any employee to an officer position;
 
    - change any of its methods of accounting or accounting practices in any
      respect;
 
    - make any material election with respect to taxes;
 
    - commence or settle any legal proceeding;
 
    - enter into any material transaction or take any other material action
      outside the ordinary course of business or inconsistent with past
      practices;
 
    - enter into any agreement requiring the consent or approval of any third
      party with respect to the merger; or
 
    - agree or commit to take any of the actions described above.
 
    During the pre-closing period, each of GENEMEDICINE and Megabios is required
to promptly notify the other in writing of the discovery by GENEMEDICINE or
Megabios, respectively, of any event, condition, fact or circumstance that would
make the timely satisfaction of any condition to closing impossible or unlikely
or that has had or could reasonably be expected to have a material adverse
effect on GENEMEDICINE or Megabios, respectively. No notification so given will
limit or otherwise affect any
 
                                       55
<PAGE>
representations, warranties, covenants or obligations of GENEMEDICINE or
Megabios contained in the reorganization agreement.
 
    CONDUCT OF MEGABIOS' BUSINESS.  During the pre-closing period without the
prior written consent of GENEMEDICINE, Megabios shall not:
 
    - declare or pay any dividend or make any other distribution;
 
    - repurchase, redeem or otherwise reacquire any shares of its capital stock
      or other securities;
 
    - sell, issue, grant or authorize the issue or grant of (A) any capital
      stock or other security, (B) any option, call, warrant or right to acquire
      any capital stock or other security, or (C) any instrument convertible
      into or exchangeable for any capital stock or other security, except for
      the issuance of common stock upon the valid exercise of outstanding stock
      options and pursuant to other stock-based plans;
 
    - amend the Megabios certificate of incorporation or Megabios bylaws or
      become a party to any merger, consolidation, share exchange, business
      combination, recapitalization, reclassification of shares, stock split,
      reverse stock split or similar transaction;
 
    - subject to certain limitations and exceptions, incur any indebtedness for
      borrowed money;
 
    - acquire, lease or license any material right or other asset from any other
      person or sell or otherwise dispose of, or lease or license or encumber
      any material right or other asset to any other person except in each case
      for material rights or assets acquired, leased, licensed or disposed of in
      the ordinary course of business and consistent with past practices, or
      waive or relinquish any material right or otherwise extend the term of any
      agreement with respect to, amend or modify in any material respect any
      material rights, including rights to material propriety assets, other than
      non-exclusive licenses and distribution rights in the ordinary course of
      business consistent with past practices; or
 
    - agree or commit to take any of the actions described above.
 
    NON-SOLICITATION.  GENEMEDICINE has agreed that it will not, directly or
indirectly, and will not authorize or permit any representative of GENEMEDICINE
to:
 
    - solicit, initiate, encourage or induce the making, submission or
      announcement of any acquisition proposal or take any action that could be
      reasonably expected to lead to an acquisition proposal;
 
    - furnish any nonpublic information regarding GENEMEDICINE to any person in
      connection with or in response to an acquisition proposal;
 
    - engage in discussions with any person with respect to any acquisition
      proposal;
 
    - approve, endorse or recommend any acquisition proposal; or
 
    - enter into any letter of intent or similar document or any contract
      contemplating or otherwise relating to any acquisition transaction.
 
    GENEMEDICINE is not prevented, however, from furnishing nonpublic
information regarding GENEMEDICINE to, or entering into discussions with, any
person in response to a superior offer if: (1) neither GENEMEDICINE nor any
representative of GENEMEDICINE has breached its obligations concerning
non-solicitation, (2) the GENEMEDICINE Board determines in good faith, after
consultation with its outside legal counsel, that such action is required in
order for the GENEMEDICINE Board to comply with its fiduciary duties under
applicable law, (3) prior to furnishing any nonpublic information to, or
entering discussions with such person, GENEMEDICINE gives Megabios written
notice of the identity of such person and of GENEMEDICINE'S intention to furnish
nonpublic information to, or enter into discussions with, such person, (4)
GENEMEDICINE receives from such person an executed confidentiality agreement
that is at least as restrictive as that between GENEMEDICINE and Megabios with
respect to the
 
                                       56
<PAGE>
use and disclosure of all nonpublic written and oral information furnished to
such person by GENEMEDICINE, and (5) prior to furnishing any such nonpublic
information to such person, GENEMEDICINE furnishes such nonpublic information to
Megabios (to the extent such nonpublic information has not been previously
furnished by GENEMEDICINE to Megabios). In addition to the foregoing,
GENEMEDICINE is required to (A) provide Megabios with at least 24 hours prior
notice of any meeting of the GENEMEDICINE Board at which the GENEMEDICINE Board
is reasonably expected to consider a superior offer, and (B) not recommend a
superior offer to its stockholders for a period of not less than the greater of
two business days or 48 hours after Megabios receives a copy of such superior
offer. GENEMEDICINE must promptly advise Megabios orally and in writing of any
acquisition proposal and shall inform Megabios of any modification or proposed
modification to any such acquisition proposal. Notwithstanding the foregoing,
the GENEMEDICINE Board may make a statement of position to its stockholders as
contemplated by Rules 14(d)(9) and 14e-2(a) promulgated under the Exchange Act.
GENEMEDICINE agreed to cease and terminate any discussions existing on the date
of the reorganization agreement with any person relating to any acquisition
proposal.
 
    An "acquisition proposal" is any offer or proposal contemplating or
otherwise relating to any "acquisition transaction." An "acquisition
transaction" is any transaction or series of related transactions involving: (a)
any merger, consolidation, share exchange, business combination, issuance of
securities, acquisition of securities, tender offer, exchange offer or other
similar transaction (1) in which GENEMEDICINE is a constituent corporation, (2)
in which a person or "group" (as defined in the Exchange Act and the rules and
regulations thereunder) of persons directly or indirectly acquires GENEMEDICINE
or more than 50% of GENEMEDICINE'S business or directly or indirectly acquires
beneficial or record ownership of securities representing more than 20% of the
outstanding securities of any class of voting securities of GENEMEDICINE, or (3)
in which GENEMEDICINE issues securities representing more than 20% of the
outstanding securities of any class of voting securities; (b) any sale, lease,
exchange, transfer, license (other than in the ordinary course of business),
acquisition or disposition of more than 50% of the assets of GENEMEDICINE; or
(c) any liquidation or dissolution of GENEMEDICINE.
 
    A "superior offer" is an unsolicited, bona fide written offer made by a
third party to consummate any of the following transactions: (A) the purchase of
more than 50% of the outstanding shares of GENEMEDICINE common stock or (B) a
sale or other disposition by GENEMEDICINE of all or substantially all of its
assets, on terms that the GENEMEDICINE Board determines, in its reasonable
judgment, after consultation with its financial advisor, to be more favorable to
the GENEMEDICINE stockholders than the terms of the merger; PROVIDED, HOWEVER,
that any such offer will not be deemed to be a "superior offer" if any financing
required to consummate the transaction contemplated by such offer is not
committed or is not likely to be obtained by such third party on a timely basis.
 
    MEETINGS OF STOCKHOLDERS.  GENEMEDICINE will take all action necessary in
accordance with applicable law to convene and hold the GENEMEDICINE special
meeting to vote upon the approval of the reorganization agreement and the
merger; provided, however, that GENEMEDICINE is not required to hold such
meeting if, subject to its compliance with the non-solicitation provisions of
the reorganization agreement, the GENEMEDICINE Board withdraws, amends or
modifies its unanimous recommendation in favor of the merger and accepts or
recommends to its stockholders a superior offer. Megabios will take all action
necessary in accordance with applicable law to convene and hold the Megabios
special meeting to vote upon the issuance of Megabios common stock in the
merger.
 
    Neither the board of directors of GENEMEDICINE or Megabios nor any committee
thereof is permitted to withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify, in a manner adverse to the other party, its
recommendations in favor of the reorganization agreement and the merger in the
case of GENEMEDICINE, and the issuance of Megabios common stock in the case of
Megabios. However, notwithstanding the foregoing, the GENEMEDICINE Board will
not be prevented from withholding, withdrawing, amending or modifying its
unanimous recommendation in favor of the merger if (1) a superior offer is made
to GENEMEDICINE and is not withdrawn, (2) neither GENEMEDICINE nor any of its
representatives has violated the covenants given by them concerning
non-solicitation, and (3) the
 
                                       57
<PAGE>
GENEMEDICINE Board concludes in good faith, after consultation with outside
counsel, that, in light of such superior offer, the withholding, withdrawal,
amendment or modification of such recommendation is required in order for the
GENEMEDICINE Board to comply with its fiduciary obligations.
 
    FORM S-8.  Megabios has agreed to file a registration statement on Form S-8
for the shares of Megabios common stock issuable with respect to assumed
GENEMEDICINE Options as soon as reasonably practicable after the effective time.
 
    TAX-FREE REORGANIZATION.  Each of GENEMEDICINE and Megabios has agreed not
to take any action either prior to or after the effective time that would
reasonably be expected to cause the merger to fail to qualify as a tax-free
reorganization.
 
    INDEMNIFICATION AND INSURANCE.  All rights to indemnification existing in
favor of GENEMEDICINE directors or officers for acts and omissions occurring
prior to the effective time, as provided in the GENEMEDICINE Certificate of
Incorporation or GENEMEDICINE Bylaws and as provided in any indemnification
agreements between GENEMEDICINE and said directors and officers, will survive
the merger and Megabios will cause the surviving corporation to perform all of
its obligations arising thereunder for a period of not less than six years from
the effective time. The reorganization agreement also provides that for a period
of three years Megabios will cause the surviving corporation to maintain in
effect, for the benefit of the persons serving as directors and officers of
GENEMEDICINE as of the date of the reorganization agreement with respect to acts
or omissions occurring prior to the effective time, the existing policy of
directors' and officers' liability insurance maintained by GENEMEDICINE (the
"existing policy"); provided, however, that (1) the surviving corporation may
substitute for the existing policy a policy or policies of comparable coverage,
and (2) the surviving corporation shall not be required to pay an annual premium
for the existing policy (or for any substitute policies) in excess of 150% of
the last annual premium paid by GENEMEDICINE for such insurance and shall be
entitled to reduce the coverage of the existing policy to the amount of coverage
that can be obtained for a premium equal to 150% of the last annual premium paid
by GENEMEDICINE.
 
    CERTAIN OTHER COVENANTS.  The reorganization agreement contains certain
other covenants including covenants relating to:
 
    - information and access;
 
    - preparation and filing of the registration statement;
 
    - obtaining regulatory approvals;
 
    - tax qualification and opinion back-up certificates;
 
    - resignation of the officers and directors of GENEMEDICINE;
 
    - FIRPTA;
 
    - financial statements;
 
    - listing of the Megabios common stock to be issued pursuant to the merger
      on Nasdaq; and
 
    - appointment of Mr. Pappas and Drs. Crooke and O'Malley to the Megabios
      Board.
 
TERMINATION
 
    The reorganization agreement may be terminated prior to the effective time
whether before or after approval of the reorganization agreement and the merger
by the GENEMEDICINE stockholders under the following circumstances:
 
    (1) by mutual written consent of the Boards of Directors of Megabios and
       GENEMEDICINE;
 
                                       58
<PAGE>
    (2) by either Megabios or GENEMEDICINE if the merger is not consummated by
       February 28, 1999 unless the failure to consummate the merger is
       substantially attributable to an action or failure to act on the part of
       the party seeking to terminate the reorganization agreement and such
       action or failure to act constitutes a material breach of the
       reorganization agreement;
 
    (3) by either Megabios or GENEMEDICINE if a court or other governmental body
       issues a final and non-appealable order, decree or ruling, or takes any
       other action, having the effect of permanently restraining, enjoining or
       otherwise prohibiting the merger;
 
    (4) by either Megabios or GENEMEDICINE if (A) the GENEMEDICINE special
       meeting has been held and (B) the reorganization agreement and the merger
       was not approved and adopted at such meeting by the necessary vote of the
       GENEMEDICINE stockholders;
 
    (5) by Megabios (at any time prior to the approval and adoption of the
       reorganization agreement and the merger by the necessary vote of the
       GENEMEDICINE stockholders) if a triggering event (as defined herein) has
       occurred;
 
    (6) by GENEMEDICINE at any time prior to the approval and adoption of the
       reorganization agreement and the merger by the GENEMEDICINE stockholders
       if the GENEMEDICINE Board withdraws, amends or modifies its
       recommendation in favor of the merger and accepts or recommends to its
       stockholders a superior offer;
 
    (7) by either Megabios or GENEMEDICINE if (A) the Megabios special meeting
       has been held and (B) issuance of the Megabios common stock in the merger
       was not approved at such meeting by the Megabios stockholders; or
 
    (8) by Megabios or GENEMEDICINE if the other party's representations and
       warranties contained in the reorganization agreement shall be or shall
       have become materially inaccurate, or if any of the other party's
       covenants contained in the reorganization agreement shall have been
       breached in any material respect and such inaccuracy or breach
       (individually and collectively) will cause a material adverse effect on
       the other party; provided, however, that if an inaccuracy in any
       representations and warranties or a breach of any covenant is curable by
       such other party and the breaching party is continuing to exercise all
       reasonable efforts to cure such inaccuracy or breach, then other party
       may not terminate the reorganization agreement on this basis on account
       of such inaccuracy or breach.
 
    A "triggering event" is deemed to occur if:
 
    - the GENEMEDICINE Board withdraws or amends or modifies in a manner adverse
      to Megabios its unanimous recommendation in favor of, the approval and
      adoption of the reorganization agreement or the merger;
 
    - GENEMEDICINE fails to include in this joint proxy statement/prospectus the
      unanimous recommendation of the GENEMEDICINE Board in favor of the
      approval and adoption of the reorganization agreement and the merger;
 
    - the GENEMEDICINE Board fails to reaffirm its unanimous recommendation in
      favor of the approval and adoption of the reorganization agreement and the
      merger within five business days after a request in writing by Megabios;
 
    - the GENEMEDICINE Board approves or publicly recommends another acquisition
      proposal;
 
    - GENEMEDICINE enters into any letter of intent or similar document or any
      contract accepting another acquisition proposal;
 
    - GENEMEDICINE fails to hold the GENEMEDICINE special meeting as promptly as
      practicable and in any event within 45 days after the registration
      statement is declared effective under the Securities Act;
 
                                       59
<PAGE>
    - a tender or exchange offer relating to securities of GENEMEDICINE is
      commenced and GENEMEDICINE has not sent to its securityholders within five
      business days after the commencement of such tender or exchange offer, a
      statement disclosing that GENEMEDICINE recommends rejection of such tender
      or exchange offer;
 
    - an acquisition proposal is publicly announced and GENEMEDICINE (A) fails
      to issue a press release announcing its opposition to such acquisition
      proposal within five business days after its announcement or (B) otherwise
      fails to actively oppose such acquisition proposal; or
 
    - GENEMEDICINE breaches in any material respect any of its obligations
      regarding non-solicitation.
 
EXPENSES AND TERMINATION FEES
 
    All fees and expenses incurred in connection with the reorganization
agreement and the transactions contemplated by the reorganization agreement will
be paid by the party incurring such expenses, whether or not the merger is
consummated. However, Megabios and GENEMEDICINE will share equally all fees and
expenses, other than attorneys' fees, incurred in connection with the filing,
printing and mailing of the registration statement and this joint proxy
statement/prospectus and any amendments or supplements thereto.
 
    If the reorganization agreement is terminated by Megabios pursuant to item
five listed under the caption "--Termination" above, then GENEMEDICINE will be
required to pay to Megabios, in cash, a nonrefundable fee of $1,400,000 (the
"termination fee") within three business days of such termination.
 
    If the reorganization agreement is terminated by GENEMEDICINE or Megabios
pursuant to item four listed under the caption "--Termination" above and an
acquisition transaction is publicly announced within six months after the date
of termination and consummated within twelve months after the date of
termination, GENEMEDICINE will be required to pay to Megabios a nonrefundable
fee equal to three percent of the aggregate consideration received by
GENEMEDICINE in such transaction contemporaneously with the consummation of such
acquisition transaction.
 
    If the reorganization agreement is terminated by GENEMEDICINE pursuant to
item six listed under the caption "--Termination" above, then GENEMEDICINE shall
pay to Megabios the termination fee contemporaneously with the written notice of
termination.
 
                                       60
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
          UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
    The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the merger using the purchase method of
accounting.
 
    The unaudited pro forma condensed combined balance sheet as of September 30,
1998 gives effect to the merger as if it had occurred on such date, and reflects
the allocation of the purchase price to the GENEMEDICINE assets acquired,
including in-process research and development, and liabilities assumed. The
unaudited pro forma condensed combined balance sheet includes an adjustment for
severance related liabilities of approximately $2.3 million.
 
    The unaudited pro forma condensed combined statements of operations combine
the historical statements of operations of Megabios and GENEMEDICINE as if the
merger had occurred at the beginning of the earliest period presented. The
historical statements of operations for GENEMEDICINE have been recast to conform
to the June 30 fiscal year end used by Megabios. The unaudited pro forma
condensed combined statement of operations for the three-month period ended
September 30, 1998 combines the historical unaudited statements of operations of
Megabios and GENEMEDICINE for such period. It is expected that following the
merger, Megabios will incur additional costs, which cannot currently be
estimated, in connection with integrating the operations of the two companies.
Integration-related costs are not included in the accompanying unaudited pro
forma condensed combined financial statements.
 
    The Megabios statement of operations for the period in which the merger
occurs will include a significant charge for acquired in-process research and
development, currently estimated to be approximately $26 million (or 65% of the
purchase price). This amount represents the values determined by management,
using a discounted cash flow methodology, to be attributable to the in-process
research and development programs of GENEMEDICINE based on a preliminary
valuation of such programs. Such amount is subject to significant change pending
completion of the final valuation analysis. The charge relates to six specific
on-going research and development programs. The projected future research and
development expenditures related to these programs is approximatetely $80
million (excluding the cost of research and development which may be performed
by corporate collaborators) and the programs are forecasted to be completed at
various times between 2004-2008. If Megabios would have allocated less of the
purchase price to these programs, the value would have been recorded as goodwill
on the balance sheet and amortized over the expected benefit period, resulting
in increased amortization expense during that period.
 
    Management of Megabios believes that the allocation of the purchase price to
these programs is appropriate given the future potential of these programs to
contribute to the operations of Megabios. If, at a later date, management of
Megabios decides to no longer pursue one or all of these in-process programs,
decides to indefinitely postpone the research effort related to one or all of
the programs or determines that the discounted cash flows will no longer meet
the projections underlying the valuations, it will disclose that fact to
investors in the appropriate Form 10-K or 10-Q--explaining why it will not
pursue commercialization or why research has been postponed (and when research
is expected to resume). In addition, should Megabios revise its estimate of the
anticipated date of regulatory approval for a particular product, this fact will
be disclosed in the appropriate Form 10-K or 10-Q and the reasons for (and
potential implications of) the change in estimate will be explained.
 
    Unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the respective historical financial statements of Megabios and
GENEMEDICINE and do not incorporate, nor do they assume, any benefits from cost
savings or synergies of operations of the combined company.
 
                                       61
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
 
              UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
 
                               SEPTEMBER 30, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                         HISTORICAL
                                                 --------------------------
                                                  MEGABIOS   GENEMEDICINE,    PRO FORMA   REFERENCES    PRO FORMA
                                                   CORP.          INC.       ADJUSTMENTS   (NOTE 2)     COMBINED
                                                 ----------  --------------  -----------  -----------  -----------
<S>                                              <C>         <C>             <C>          <C>          <C>
ASSETS
Current Assets:
  Cash and cash equivalents....................  $   10,657    $    1,201     $  --                     $  11,858
  Short-term investments.......................      17,033        17,218        --                        34,251
  Other receivables............................       1,004        --            --                         1,004
  Prepaid expenses and other current assets....         754           242        --                           996
                                                 ----------  --------------  -----------               -----------
Total current assets...........................      29,448        18,661        --                        48,109
 
Property and equipment, net....................       8,350         2,778        --                        11,128
Long-term investments..........................      17,241        --            --                        17,241
Other receivables..............................         130        --            --                           130
Intangible assets..............................      --            --             3,164          (A)        3,164
Deposits and other assets......................          39             4        --                            43
                                                 ----------  --------------  -----------               -----------
Total Assets...................................  $   55,208    $   21,443     $   3,164                 $  79,815
                                                 ----------  --------------  -----------               -----------
                                                 ----------  --------------  -----------               -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable and accrued liabilities.....  $    2,089    $      958     $   2,989          (B)    $   6,036
  Obligations due upon close of merger.........      --            --             4,050          (C)        4,050
  Current portion of long-term debt and capital
    lease obligations..........................         805           108        --                           913
                                                 ----------  --------------  -----------               -----------
Total current liabilities......................       2,894         1,066         7,039                    10,999
 
Deferred contract revenue......................      --             3,670        --                         3,670
Long-term debt.................................       4,808        --            --                         4,808
 
Commitments....................................
 
Stockholders' Equity:..........................
  Preferred stock..............................      --                 4            (4)         (D)       --
  Common stock.................................          13            14           (14)     (D),(E)
                                                     --            --                 9          (F)           22
  Additional paid-in capital...................      80,041        74,263       (74,263)         (E)
                                                                                 38,823          (F)      118,864
 
  Deferred compensation, net of amortization...        (899)       --            --                          (899)
  Accumulated other comprehensive income.......         136        --            --                           136
  Accumulated deficit..........................     (31,785)      (57,574)       57,574          (E)
                                                                                (26,000)         (G)      (57,785)
                                                 ----------  --------------  -----------               -----------
Total stockholders' equity.....................      47,506        16,707        (3,875)                   60,338
                                                 ----------  --------------  -----------               -----------
Total liabilities and stockholders' equity.....  $   55,208    $   21,443     $   3,164                 $  79,815
                                                 ----------  --------------  -----------               -----------
                                                 ----------  --------------  -----------               -----------
</TABLE>
 
      The accompanying notes to the unaudited pro forma condensed combined
             balance sheet are an integral part of this statement.
 
                                       62
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
 
        UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
 
                        FISCAL YEAR ENDED JUNE 30, 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                           PRO FORMA    PRO FORMA
                                                               MEGABIOS    GENEMEDICINE   ADJUSTMENTS   COMBINED
                                                              ----------  --------------  -----------  -----------
<S>                                                           <C>         <C>             <C>          <C>
REVENUE:
  Contract revenue..........................................  $    8,083    $    4,023     $  --        $  12,106
  Research and development grant revenue....................      --               509        --              509
                                                              ----------  --------------  -----------  -----------
      Total revenue.........................................       8,083         4,532        --           12,615
EXPENSES:
  Research and development..................................      15,111        15,078        --           30,189
  General and administrative................................       3,561         4,451        --            8,012
  Amortization of purchased intangible assets...............      --            --             1,055        1,055
                                                              ----------  --------------  -----------  -----------
      Total operating expenses..............................      18,672        19,529         1,055       39,256
                                                              ----------  --------------  -----------  -----------
Operating loss..............................................     (10,589)      (14,997)       (1,055)     (26,641)
Interest income.............................................       2,651         1,449        --            4,100
Interest expense............................................        (440)          (41)       --             (481)
                                                              ----------  --------------  -----------  -----------
Net loss....................................................  $   (8,378)   $  (13,589)    $  (1,055)   $ (23,022)
                                                              ----------  --------------  -----------  -----------
                                                              ----------  --------------  -----------  -----------
Net loss per share--basic and diluted.......................  $    (0.83)   $    (0.96)                 $   (1.21)
                                                              ----------  --------------               -----------
                                                              ----------  --------------               -----------
Shares used in computing basic and diluted net loss per
  share.....................................................      10,088        14,115                     19,024
                                                              ----------  --------------               -----------
                                                              ----------  --------------               -----------
</TABLE>
 
   See accompanying notes to unaudited pro forma combined condensed financial
                                  statements.
 
                                       63
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
 
        UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
 
                     THREE MONTHS ENDED SEPTEMBER 30, 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                              PRO FORMA     PRO FORMA
                                                                MEGABIOS     GENEMEDICINE    ADJUSTMENTS    COMBINED
                                                               -----------  --------------  -------------  -----------
<S>                                                            <C>          <C>             <C>            <C>
REVENUE:
  Contract revenue...........................................   $     773     $    1,045      $  --             1,818
 
EXPENSES:
  Research and development...................................       3,429          3,789         --             7,218
  General and administrative.................................       1,076          1,173         --             2,249
  Amortization of purchased intangible assets................      --             --                264           264
                                                               -----------       -------          -----    -----------
    Total operating expenses.................................       4,505          4,962            264         9,731
                                                               -----------       -------          -----    -----------
Operating loss...............................................      (3,732)        (3,917)          (264)       (7,913)
Interest Income..............................................         679            286         --               965
Interest expense, net........................................        (146)            (5)        --              (151)
                                                               -----------       -------          -----    -----------
Net loss.....................................................   $  (3,199)    $   (3,636)     $    (264)    $  (7,099)
                                                               -----------       -------          -----    -----------
                                                               -----------       -------          -----    -----------
Net loss per share--basic and diluted........................   $  (0.251)    $    (0.25)                   $   (0.33)
                                                               -----------       -------                   -----------
                                                               -----------       -------                   -----------
Shares used in computing basic and diluted net loss per
  share......................................................      12,736         14,579                       21,672
                                                               -----------       -------                   -----------
                                                               -----------       -------                   -----------
</TABLE>
 
   See accompanying notes to unaudited pro forma combined condensed financial
                                  statements.
 
                                       64
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
 
                          NOTES TO UNAUDITED PRO FORMA
 
                    CONDENSED COMBINED FINANCIAL STATEMENTS
 
NOTE 1
 
    The unaudited pro forma condensed combined financial statements reflect the
conversion of all of the outstanding shares of GENEMEDICINE common stock and
preferred stock into approximately 8,936,500 shares of Megabios common stock
pursuant to the merger. This calculation is based on GENEMEDICINE's
capitalization at September 30, 1998 using the conversion ratio of 0.5710 of a
share of Megabios common stock for each share of GENEMEDICINE common stock
 
    Certain options and warrants to purchase approximately 4,222,173 shares of
GENEMEDICINE common stock with a weighted average exercise price of $8.92 will
be assumed by Megabios pursuant to the merger and converted into options and
warrants to purchase approximately 2,410,860 shares of Megabios common stock.
The total cost of the proposed merger is estimated to be approximately $40.2
million, determined as follows (in thousands):
 
<TABLE>
<CAPTION>
Fair value of Megabios shares (calculated using the per share
  fair value at the date of the merger agreement)..............   $  37,980
<S>                                                              <C>
Value of GENEMEDICINE warrants and options assumed.............         852
Megabios transaction costs, consisting primarily of financial
  advisory, legal and accounting fees..........................       1,400
                                                                 -----------
                                                                  $  40,232
                                                                 -----------
                                                                 -----------
</TABLE>
 
    Based upon a preliminary valuation of tangible and intangible assets
acquired and liabilities assumed, Megabios has allocated the total cost of the
merger to the net assets of GENEMEDICINE as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 30,
                                                                                     1998
                                                                                 -------------
<S>                                                                              <C>
Tangible assets acquired.......................................................   $    21,443
In-process research and development............................................        26,000
Intangible assets--assembled workforce and goodwill............................         3,164
Liabilities assumed (including GENEMEDICINE transaction costs and other
  obligations due upon the close of the merger)................................       (10,375)
                                                                                 -------------
                                                                                  $    40,232
                                                                                 -------------
                                                                                 -------------
</TABLE>
 
    Pursuant to Regulation S-X, the in-process research and development has been
written off against the combined retained earnings and has not been reflected in
the pro forma condensed combined statements of operations. Such charge will be
included in the Megabios statement of operations in the quarter in which the
merger is consummated. The intangible assets will be amortized over their
estimated useful lives of 3 years.
 
NOTE 2
 
    The pro forma condensed combined balance sheet includes the adjustments
necessary to give effect to the merger as if it had occurred on September 30,
1998 and to reflect the allocation of the acquisition cost to the fair value of
tangible and intangible assets acquired and liabilities assumed as noted above,
including a charge to retained earnings for acquired in-process research and
development and the elimination of
 
                                       65
<PAGE>
                     MEGABIOS CORP. AND GENEMEDICINE, INC.
 
                          NOTES TO UNAUDITED PRO FORMA
 
              CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 2 (CONTINUED)
GENEMEDICINE's equity accounts. Adjustments included in the pro forma condensed
combined balance sheet are summarized as follows (in thousands except share and
per share amounts):
 
    (A) Valuation of assembled work force and goodwill of $3,614.
 
    (B) Accrual of transaction-related costs of approximately $1,400 for
       Megabios and $1,589 for GENEMEDICINE.
 
    (C) Accrual for severance and other payouts associated with severance plans
       ($2,315) and incentive plans ($1,735) of GENEMEDICINE of $4,050.
 
    (D) Conversion of GENEMEDICINE preferred stock to common stock.
 
    (E) Elimination of the GENEMEDICINE equity accounts.
 
    (F) Issuance of Megabios common stock, $0.001 par value, and assumption of
       options and warrants to purchase common stock, as discussed in Note 1.
       The value of Megabios common stock is equal to the product of 8,936,500
       shares multiplied by approximately $4.25 per share, while the options and
       warrants have been assigned a value of approximately $852.
 
    (G) Charge to operations for in-process research and development of
       approximately $26,000.
 
NOTE 3
 
    The pro forma condensed combined statements of operations include the
adjustments necessary to give effect to the merger as if it had occurred on July
1, 1997. Adjustments consist of the amortization of acquired intangible assets
using the following estimated useful lives:
 
<TABLE>
<CAPTION>
Assembled workforce.........................................         3 years
<S>                                                           <C>
Goodwill....................................................         3 years
</TABLE>
 
NOTE 4
 
    Pro forma basic and diluted net loss per share amounts for the year ended
June 30, 1998 and the three-month period ended September 30, 1998, are based
upon the historical weighted-average number of Megabios common shares
outstanding adjusted to reflect the issuance, as of July 1, 1997, of
approximately 8,936,500 shares of Megabios common stock, which amount excludes
outstanding shares subject to repurchase in accordance with SFAS No. 128. The
impact of outstanding options and warrants, including GENEMEDICINE options and
warrants assumed, is not included in the calculation of basic and diluted net
loss per share as the effect would be antidilutive.
 
                                       66
<PAGE>
                        INFORMATION RELATING TO MEGABIOS
 
MEGABIOS BUSINESS
 
OVERVIEW
 
    Megabios develops proprietary gene delivery systems and provides preclinical
and early clinical development expertise to create gene-based therapeutics
designed for the treatment or prevention of genetic and acquired diseases.
Megabios has developed several in vivo, plasmid delivery systems to address a
number of potential therapeutic applications using a variety of therapeutic
genes. Plasmids are circular segments of DNA that contain a therapeutic gene and
components that regulate its expression. Megabios' delivery systems consist
primarily of these negatively charged DNA plasmids that are combined with
positively-charged cationic lipids and/or non-lipid agents to form tight
complexes that facilitate the delivery of the DNA plasmids into target cells.
Megabios' clinical development and commercialization strategy is to enter into
collaborative research and development agreements or "corporate partnerships"
with pharmaceutical and biotechnology companies. Megabios has corporate
partnerships with Glaxo Wellcome plc ("Glaxo Wellcome") to develop a treatment
for cystic fibrosis using the CFTR gene and with Eli Lilly & Co. ("Lilly") to
develop treatments for breast and ovarian cancer using the BRCA1 gene.
 
MEGABIOS' IN VIVO, PLASMID DELIVERY APPROACH
 
    Megabios' IN VIVO, plasmid delivery systems are designed to avoid the
significant limitations of EX VIVO (whether viral or non-viral) and IN VIVO,
viral gene delivery. Megabios' proprietary gene delivery systems consist
primarily of two components: (1) DNA plasmids that contain and control the
proper expression of a therapeutic gene; and (2) lipids and other agents that
facilitate the delivery of the DNA plasmids into target cells. In most of its
gene delivery systems, Megabios combines negatively charged DNA with novel,
positively charged lipids and neutral lipids to form DNA:lipid complexes. These
complexes are the active ingredients in Megabios' gene delivery systems. Certain
of Megabios' other gene delivery systems may utilize polymers or peptides to
facilitate the delivery of DNA plasmids.
 
    Megabios believes its proprietary, plasmid delivery systems may have the
following benefits:
 
        THERAPEUTICALLY RELEVANT GENE EXPRESSION.  Megabios has developed DNA
    plasmids that, following their formulation with lipids and administration to
    animals, produce therapeutically relevant protein levels. Following
    intravenous administration to mice of the gene for a commercially available
    cytokine, the cytokine was detected in the blood at levels consistent with
    those required for therapeutic effect. Similarly, following aerosol
    administration to primates of the therapeutic gene to treat cystic fibrosis,
    the resulting protein was produced in the correct cell type (lung epithelial
    cells) at levels believed to be therapeutic.
 
        TISSUE-SPECIFIC GENE DELIVERY AND EXPRESSION.  Megabios believes that
    its gene delivery systems can target specific tissues and cell types. In
    preclinical studies, Megabios has demonstrated that various formulations are
    taken up selectively by (1) ciliated epithelial cells lining the airways of
    the lungs following aerosol administration, (2) vascular endothelial cells
    lining the blood vessels of several tissues, including lung, heart, spleen
    and lymphatic tissues, following intravenous administration, (3) delivery to
    angiogenic endothelial cells, (4) solid tumors following direct
    administration into the tumor, (5) circulating macrophages following
    intravenous administration, (6) cells in the central nervous system
    following direct injection, (7) solid tumor cells following intraperitoneal
    administration, and (8) corrective tissue cells following intra-articular
    administration. In a preclinical study to test the pattern of uptake of two
    intravenous formulations, one formulation resulted in over 90% of observable
    gene expression in the vascular endothelial cells of the lungs, while the
    other formulation resulted in over 90% of observable gene expression in the
    spleen. In addition, following direct injection in animals, Megabios'
    formulations have been demonstrated to result in transfection of solid
    tumors, muscle and brain tissue.
 
                                       67
<PAGE>
        EASE OF HANDLING AND ADMINISTRATION, STABILITY AND SCALABLE
    MANUFACTURING METHODS.  Megabios' gene delivery systems are designed to be
    handled and administered like traditional pharmaceuticals. These gene
    delivery systems are also designed to be stable when refrigerated and are
    intended to be distributed like other pharmaceuticals. Megabios has
    demonstrated that it can produce clinical-grade DNA plasmids, DNA:lipid
    complexes and formulations under controlled conditions without the expense
    and handling requirements associated with viral gene delivery systems. In
    addition, Megabios has developed manufacturing and production methods
    designed to be scaled to meet commercial requirements and has produced DNA
    plasmids at a contract manufacturer at the 1,000 liter scale.
 
        IMPROVED SAFETY PROFILE.  Megabios has tested its gene delivery systems
    in hundreds of IN VIVO, preclinical experiments. In animal models, Megabios'
    aerosol gene delivery systems do not appear to cause the same inflammation
    that has been seen following the aerosol administration of other companies'
    lipid-based gene delivery systems. As a result, Megabios believes that its
    gene delivery systems may allow for repeat administration of gene-based
    therapeutics for the treatment of chronic diseases, such as asthma and other
    inflammatory conditions.
 
        Megabios has also developed techniques that allow it to screen genes for
    potential therapeutic utility. Because Megabios believes that IN VITRO gene
    expression experiments do not correlate well with IN VIVO results, Megabios
    tests its gene delivery systems in animals. Megabios has developed a
    methodology to test therapeutic genes IN VIVO in rapid succession. For
    example, Megabios can prepare plasmids containing different therapeutic
    genes, formulate them in an appropriate lipid-based delivery system and
    administer the formulations to animals. By testing several different genes,
    Megabios can facilitate the development and selection of the gene-based
    therapeutic to be developed. In addition, Megabios has expertise in the
    selection of appropriate animal models, as well as in the development of
    various assays and analytical techniques, to assess the performance of
    gene-based formulations. While, the results of preclinical animal studies
    may not predict safety or efficacy in humans, when, and if, further clinical
    trials are conducted, Megabios believes that its gene screening capability
    and its experience in preclinical and early clinical development will enable
    it to accelerate the development of gene-based therapeutics and thereby
    attract corporate partners.
 
                                       68
<PAGE>
MEGABIOS' GENE DELIVERY SYSTEMS
 
    Megabios has developed several gene delivery systems and has identified a
number of potential therapeutic applications for each of these systems using a
variety of therapeutic genes. Megabios classifies its portfolio of gene delivery
systems by the mode of administration and the cell type to which the gene-based
therapeutic is delivered, with each formulation within a series having distinct
specifications and potential applications. For example, one gene delivery system
in the MB100 Series has been optimized for the aerosol delivery of the CFTR gene
to ciliated epithelial cells in the lungs. In addition, the MB100 Series is also
being investigated for use in delivering genes for other pulmonary applications
such as the treatment of asthma. To date, Megabios has developed nine series of
gene delivery systems. Megabios expects to design additional gene delivery
systems to expand the scope of its commercial opportunities. The table below
summarizes Megabios' gene delivery systems, potential applications and
agreements with corporate partners:
 
<TABLE>
<CAPTION>
DELIVERY SYSTEM (MODE OF
ADMINISTRATION)               CELL TYPE(S) TRANSFECTED      POTENTIAL APPLICATIONS              STATUS(1)
<S>                          <C>                          <C>                          <C>
MB100 Series (Inhalation)    Ciliated epithelial cells    Cystic fibrosis              Phase I/II with Glaxo
                             in the lungs and                                          Wellcome
                             respiratory tract            Asthma                       Research
                                                          Inflammation of the lungs    Research
                                                          Mucosal immunization         Research
                                                          Infectious diseases of the   Research
                                                          lungs
 
MB200 Series (Intravenous    Vascular endothelial cells   Angiogenesis inhibition      Preclinical
injection)                   in the lungs, heart, spleen  (cancer)
                             and lymph nodes              Angiogenesis inhibition      Preclinical
                                                          (non-cancer)
                                                          Metastatic cancer            Preclinical
                                                          Protein replacement therapy  Research
                                                          Cardiovascular diseases      Research
                                                          Inflammatory diseases        Research
 
MB300 Series (Direct         Solid tumor cells            Cancer (two-gene             Phase I/II with University
injection)                                                combination)                 of Colorado Health Sciences
                                                                                       Center
                                                          Cancer (other genes)         Preclinical
 
MB400 Series                 Various cells involved in    Preventive vaccines          Research
(Intramuscular,              antigen presentation         Therapeutic vaccines         Research
intradermal, subcutaneous                                 Immunotherapy (cancer,       Research
and intravenous injection)                                infectious diseases,
                                                          autoimmune diseases)
 
MB500 Series (Intravenous    Circulating macrophages      Infectious diseases          Research
injection)                                                Hyperlipidemia               Research
 
MB600 Series (Direct         Cells in the central         Neurodegenerative diseases   Research
injection)                   nervous system               Cancer                       Research
 
MB700 Series                 Solid tumor cells            Cancer (using BRCA1)         Preclinical with Lilly
(Intraperitoneal injection)                               Cancer (other genes)         Research
 
MB800 Series                 Connective tissue cells      Rheumatoid arthritis         Preclinical
(Intraarticular injection)                                Osteoarthritis               Research
                                                          Cartilage repair             Research
 
MB900 Series (Intramuscular  Skeletal muscle              Ischemia                     Preclinical
injection)                   Cardiac muscle
</TABLE>
 
(1) "Phase I/II" indicates that the compound is being tested in humans for
    safety and preliminary indications of biological activity in a limited
    patient population.
 
                                       69
<PAGE>
   "Preclinical" indicates that Megabios is conducting efficacy, pharmacology
    and/or toxicology testing of a gene delivery system in
    animal models or biochemical or cell culture assays.
 
   "Research" includes the development of animal models and assay systems,
    discovery of prototype gene delivery systems and evaluation and refinement
    of prototype gene delivery systems IN VITRO and IN VIVO testing.
 
    MB100 SERIES
 
    Megabios has developed a class of gene delivery systems, the MB100 Series,
which, following aerosol administration to animals, results in genes being taken
up and expressed primarily by ciliated epithelial cells in the lungs and
respiratory tract. Megabios believes that the MB100 Series may be useful in the
delivery of therapeutic genes for the treatment of cystic fibrosis, asthma,
inflammatory conditions, infectious diseases of the lungs, as well as for
mucosal immunization. One of these gene delivery systems is the subject of
Megabios' corporate partnership with Glaxo Wellcome to develop a gene-based
therapeutic for the treatment of cystic fibrosis. See "--Corporate
Partners--Glaxo Wellcome."
 
    Megabios is seeking a corporate partnership to develop the MB100 Series for
the treatment of asthma. Asthma, characterized by obstruction of airways in the
lung, is estimated to affect 5% of the population in the U.S., or approximately
13 million people. Certain genes believed to be associated with the onset and
progression of asthma have been identified. Various companies are investing
heavily in further understanding the genetic cause of asthma.
 
    MB200 SERIES
 
    The MB200 Series, for intravenous administration, delivers genes which are
taken up preferentially by vascular endothelial cells in the lungs and other
tissues. Megabios believes that gene delivery systems in the MB200 Series, in
combination with various genes, may be useful in the treatment of several
diseases that are associated with angiogenesis, including non-small cell lung
cancer, macular degeneration, diabetic retinopathy, rheumatoid arthritis and
psoriasis. In addition, Megabios believes that gene delivery systems in the
MB200 Series may be useful for protein replacement therapy and to treat other
medical disorders such as cardiovascular and inflammatory diseases.
 
    In preclinical studies, administration of a gene delivery system in the
MB200 Series in animals resulted in expression levels of a therapeutic protein
consistent with those required for a therapeutic effect. This suggests that the
MB200 Series could be used for protein replacement therapy, in which the gene
coding for a therapeutic protein is administered rather than the protein itself.
Megabios believes that the use of gene-based therapeutics in this manner may be
a viable alternative when therapeutic levels of a protein are difficult to
sustain or when a therapeutic protein is difficult or expensive to manufacture.
 
    Megabios also believes that the ability to target certain cell types with
gene delivery systems in the MB200 Series may be useful in developing gene-based
therapeutics for certain cardiovascular diseases, such as restenosis and
atherosclerosis, both of which may result in the blockage of blood vessels,
leading to heart attacks and strokes.
 
    MB300 SERIES
 
    Megabios has developed a class of gene delivery systems, the MB300 Series,
which, following direct injection into tumors, are taken up by cancer cells.
Megabios believes that gene delivery systems in the MB300 Series may be useful
for the treatment of certain solid tumors. In preclinical studies involving a
canine model of spontaneously occurring oral melanoma, a gene delivery system in
the MB300 Series was used to deliver a combination of two therapeutic genes. The
data from this study indicated that a majority of the dogs that received the
treatment regimen exceeded their expected median survival period. These dogs
also had a higher number of activated white blood cells compared to untreated
animals. This effect suggests that the therapeutic genes augmented the immune
response to the tumor cells resulting in an increased survival rate for these
animals. Megabios believes that these results support the potential utility
 
                                       70
<PAGE>
of the gene delivery systems in the MB300 Series to facilitate immunotherapy
approaches for the treatment of multiple forms of cancer.
 
    In June 1998 Megabios began a Phase I/II clinical study with the University
of Colorado Health Sciences Center for evaluation of a MB300 Series and a
two-gene combination as a treatment for melanoma. The Phase I/II trial is
underway to examine the safety of a gene-based therapeutic, injected directly
into tumors and will evaluate preliminary indications of biological activity.
 
    MB400 SERIES
 
    Megabios is developing a class of gene delivery systems, the MB400 Series,
designed to administer genetic immunotherapeutics by intramuscular, intradermal,
subcutaneous or intravenous injection. To date, the use of DNA for
immunotherapeutic purposes has been limited by inadequate levels of expression
of the antigen in the appropriate cell type. Megabios has designed and screened
many delivery systems, some of which may have improved targeting and expression
characteristics. If successful, these efforts could result in novel formulations
that may allow for the treatment or prevention of certain diseases, including
infections, autoimmune diseases and certain forms of cancer.
 
    OTHER GENE DELIVERY SYSTEMS
 
    Megabios is developing five other classes of gene delivery systems. Megabios
believes that the MB500 Series, which is designed to deliver genes to
circulating macrophages, has potential utility in various infectious diseases
and hyperlipidemia. The MB600 Series is designed to deliver genes to cells in
the central nervous system for the potential treatment of neurodegenerative
diseases, including Parkinson's and Alzheimer's disease. The MB700 Series is
designed to deliver genes to solid tumor cells following intraperitoneal
administration. Megabios has entered into a corporate partnership with Lilly to
develop gene-based therapeutics using the MB700 Series as well as other gene
delivery systems, to deliver the BRCA1 gene to treat ovarian cancer. See
"--Corporate Partners--Lilly." Megabios intends to pursue additional corporate
partnerships to develop gene-based therapeutics to treat cancer using other
(non-BRCA1) therapeutic genes. The MB800 Series is designed to result in the
delivery of genes to connective tissue cells after injection into a joint. The
MB800 Series is the subject of a collaboration with researchers at the
University of Pittsburgh Medical Center for the research and development of
gene-based therapeutics for rheumatoid arthritis, osteoarthritis and cartilage
repair. The MB900 Series is designed for intramuscular injection, in particular,
for injection into skeletal and cardiac muscle, for delivery of angiogenic genes
for treating ischemia associated with peripheral vascular disease (PVD) and
coronary artery disease (CAD), respectively.
 
    Megabios cannot be certain that its gene delivery systems will have the
performance attributes to justify their further development or to attract
corporate partners. While Megabios has demonstrated some evidence of the utility
of its gene delivery systems in preclinical animal studies, these results do not
predict safety or efficacy in humans, when and if further clinical trials are
conducted. Megabios' products may prove to have undesirable and unintended side
effects or other characteristics that may prevent or limit their use. Megabios'
products may not obtain FDA or other regulatory or foreign marketing approval
for any indication. Megabios' products are also subject to risks particular to
the development of gene-based therapeutics. Gene-based therapy is a new and
rapidly evolving technology and is expected to undergo significant technological
changes in the future. As a result of the limited clinical data available
regarding the safety and efficacy of gene-based therapeutics and other factors,
clinical trials relating to gene-based therapeutics may take longer to complete
than clinical trials involving traditional pharmaceuticals. In addition,
Megabios or its corporate partners may be unable to manufacture such gene-based
therapeutics on a commercial scale or in an economical manner.
 
                                       71
<PAGE>
CORPORATE PARTNERS
 
    Megabios has two ongoing collaborative research and development agreements
or "corporate partnerships." Megabios is actively seeking additional
partnerships with pharmaceutical and biotechnology companies. Many of these
potential partners have identified therapeutic genes, but Megabios believes many
such companies do not possess the technology or the know-how to develop
gene-based therapeutics. Megabios seeks license fees, equity investments,
funding for research and development, milestone payments and royalties on
product sales in exchange for commercial licenses to Megabios' gene delivery
technologies and access to its development expertise.
 
    GLAXO WELLCOME
 
    In April 1994, Megabios entered into a corporate partnership with Glaxo
Wellcome (the "Glaxo Wellcome Agreement") to develop a gene-based therapeutic
for the treatment of cystic fibrosis. Cystic fibrosis is the most common fatal
genetic disease in Caucasians, occurring in about 1 in 3,000 live births. The
disease is believed to afflict approximately 55,000 patients in the U.S. and
Europe. Cystic fibrosis is caused by a defect in the CFTR gene. This defect
results in production of defective CFTR protein, leading to the build-up of
mucus in the lungs that often results in infection, loss of lung function and
premature death. The median life expectancy of a patient with cystic fibrosis is
approximately 30 years. Patients with cystic fibrosis typically incur annual
medical costs ranging from $15,000 to $55,000. Megabios believes that a
gene-based therapeutic which results in increased levels of normal CFTR protein
on the surface of ciliated epithelial cells may slow or halt the progression of
this disease while reducing the total cost of patient care.
 
    Megabios has conducted preclinical testing of a gene delivery system in the
MB100 Series as a carrier for the CFTR gene. Data from these studies, including
the administration of the gene to primates via inhalation, have demonstrated
expression of the human form of the CFTR gene in the lungs in the appropriate
cell type with no evidence of inflammation. In addition, approximately 20% of
the target cells were shown to produce CFTR protein six weeks after a single
administration. This exceeds the level believed to be required for achieving a
therapeutic effect. Megabios believes these results suggest that this product
may be useful in the treatment of cystic fibrosis. In June 1997, Glaxo Wellcome
commenced a Phase I/II clinical trial in cystic fibrosis patients using a gene
delivery system in the MB100 Series as a carrier for the CFTR gene. The results
of this trial were presented in the fourth calendar quarter of 1998 and
demonstrated no evidence of inflammation associated with the delivery system.
 
    The terms of the Glaxo Wellcome agreement provide Glaxo Wellcome with the
exclusive rights to manufacture, market and sell gene-based therapeutics
incorporating Megabios' gene delivery systems for the treatment of cystic
fibrosis. Glaxo Wellcome is responsible for clinical trials, large-scale
clinical and commercial manufacturing, and sales and marketing of any potential
gene-based therapeutics resulting from the corporate partnership. Glaxo-Wellcome
provided funding for Megabios to conduct research and preclinical development
activities for a three-year period ended April 1997. In addition to having
received $5.3 million in research funding, Megabios is entitled to receive a
milestone payment from Glaxo Wellcome upon the commencement of a Phase III
clinical trial. A portion of this milestone payment will be credited against
future royalties. Megabios is also entitled to receive royalties on the sales of
products resulting from the corporate partnership. Megabios has completed all of
its obligations under the Glaxo Wellcome Agreement and will receive future
payments, if any, only through the achievement of the milestone and royalties
earned on sales of the resulting products.
 
    LILLY
 
    In May 1997, Megabios entered into a corporate partnership with Lilly to
develop gene-based therapeutics using BRCA1, a gene that has been identified as
a putative tumor suppressor. In normal cells, tumor suppressor genes act to
inhibit cell division. When a tumor suppressor gene, such as BRCA1, is
 
                                       72
<PAGE>
missing or defective, a cell may replicate uncontrollably, resulting in the
formation of a tumor. Various scientific publications have associated defects in
BRCA1 with breast, ovarian and prostate cancers. Increased expression of the
BRCA1 gene in diseased tissue may inhibit or prevent the uncontrolled cell
growth associated with cancer, without causing any adverse effect in normal
cells. BRCA1 will be developed as a gene-based therapeutic using gene delivery
systems in the MB300 Series, which are administered via direct injection. BRCA1
will also be developed using gene delivery systems in the MB700 Series, which
are administered into the intraperitoneal cavity. Megabios' gene-based
therapeutic under development with Lilly is initially focused on the delivery
and expression of BRCA1 in diseased cells in breast and ovarian tissue.
 
    Under the agreement with Lilly, Lilly receives the exclusive rights to
develop, make, use and sell gene-based therapeutics incorporating BRCA1
resulting from the corporate partnership. Lilly will be responsible for clinical
trials, large-scale clinical and commercial manufacturing, and sales and
marketing of any gene-based therapeutics resulting from the corporate
partnership. Megabios will conduct research and preclinical development
activities and will be entitled to receive at least $7.0 million in research and
development funding during the first two years of the agreement. To date, $4.3
million in research and development funding has been received. If Lilly and
Megabios agree on an appropriate level of research and development efforts,
funding may be extended for up to two additional years. In addition, Megabios
may receive up to an additional $27.5 million in payments upon the achievement
of certain preclinical and clinical milestones. If a product receives marketing
approval from the FDA or an equivalent foreign agency, Megabios is entitled to
receive royalties on sales of products resulting from the corporate partnership.
In connection with the execution of the Lilly agreement, Lilly purchased 285,714
shares of Megabios' Series F preferred stock for $3.0 million in 1997. Such
shares converted into 285,714 shares of common stock upon the initial public
offering, representing approximately 2 2/10% of Megabios' outstanding common
stock at September 30, 1998. The Lilly agreement permits Lilly to terminate the
program for any reason, including reasons unrelated to such program, after May
1999 upon three months prior notice.
 
    PFIZER INC.
 
    In May 1996, Megabios entered into a corporate partnership with Pfizer Inc.
to develop a gene-based therapeutic for the treatment of solid tumors using gene
delivery systems of the MB200 Series which are designed to deliver genes that
inhibit angiogenesis. In December 1997, Pfizer decided to discontinue its
research and development program to develop gene-based therapeutics to treat
cancer via angiogenesis inhibition. Under the terms of the agreement with
Pfizer, Pfizer continued funding the program through May 31, 1998. Megabios
intends to continue to advance the anti-angiogenesis program and is actively
seeking a new corporate partner.
 
    Megabios is highly dependent upon its corporate partnerships with Glaxo
Wellcome and Lilly. Megabios cannot be certain that the Lilly agreement will be
extended. Research funds under the Lilly agreement or milestone payments
contemplated by any of Megabios' corporate partnerships may not be received.
Megabios cannot be certain that any of these corporate partnerships will result
in successfully commercialized products and that Megabios will receive related
royalty revenues. Should Megabios fail to receive research funds or should
milestones not be achieved, or should Glaxo Wellcome or Lilly breach or
terminate their respective agreements, Megabios' business, financial condition
and results of operations will be materially adversely affected.
 
    Megabios will need to enter into additional corporate partnerships. Megabios
cannot be certain that it will be able to do so on favorable terms, or at all.
Should any corporate partner fail to develop or commercialize successfully any
product to which it has obtained rights from Megabios, Megabios' business,
financial condition and results of operations may be materially adversely
affected.
 
                                       73
<PAGE>
TECHNOLOGY LICENSES
 
    Megabios actively investigates technologies under development at academic
and other research institutions. Megabios believes that such institutions are an
important source of breakthrough technologies and has entered into, and intends
to enter into, additional licensing arrangements to expand its core
technologies.
 
    Megabios has an exclusive license to certain patents and patent applications
held by The Regents of the University of California ("The Regents") related to
in vivo, non-viral delivery of genes using positively charged lipids, including
delivery by various modes of administration and for use in the treatment of
cystic fibrosis ("The Regents License"). Three patents have issued in the U.S.
with respect to these patent applications and two patents have issued in a
foreign country. Under the terms of The Regents License, Megabios paid a license
fee to the Regents and is obligated to make payments upon the achievement of
certain clinical milestones. Megabios is also required to make royalty payments
on sales of products, if any. Megabios has certain obligations regarding the
process and timing of clinical activities and seeking FDA approval for the
development, manufacture and sale of products based on the claims contained in
such patent applications. The Regents may terminate the license or convert it to
a nonexclusive license upon 60 days notice if Megabios fails to meet certain
milestones. However, the date by which such milestones must be completed may be
extended by Megabios for up to three years upon payment of a specified fee for
each year the date is extended. In addition, the Regents may also terminate the
license upon 60 days notice for a material violation or material failure to
perform any covenant under the license.
 
    Megabios has obtained an exclusive license from the National Jewish Medical
Research Center ("NJMRC") for patent rights related to the non-plasmid delivery
of a cytokine gene and a superantigen gene for the treatment of cancer (the
"NJMRC License"). One patent has issued in the U.S. and related applications are
pending in the U.S. and worldwide. Under the terms of the NJMRC License,
Megabios has paid a license fee and is obligated to make payments upon the
completion of certain clinical milestones. Megabios is also required to make
royalty payments on sales of products, if any. Megabios has certain obligations
regarding the process and timing of clinical activities and seeking FDA approval
in the pursuit of development, manufacture and sale of products based on the
claims contained in such patent applications. NJMRC may terminate the license or
convert it to a nonexclusive license if Megabios fails to meet certain
milestones. However, the date by which such milestones must be completed may be
extended by Megabios for up to 3 years upon payment of a specified fee for each
year a date is extended. In addition, NJMRC may also terminate the license for a
material violation or material failure to perform any covenant under the
license.
 
    In March of 1998, Megabios entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which Megabios obtained an exclusive license to certain patent rights held by
UPMC in the field of viral and plasmid-based therapy for rheumatology (the "UPMC
License and Collaboration Agreement"). Of these patent rights, one patent has
issued in the U.S., and related applications are pending in the U.S. and
worldwide. Under the terms of the UPMC License and Collaboration Agreement,
Megabios issued 117,555 shares of common stock in exchange for the exclusive
license to these patent rights. Under the terms of the UPMC License and
Collaboration Agreement, Megabios is obligated to make payments upon the
completion of certain milestones. Megabios is not obligated to pay additional
royalty payments upon the sale of products, if any, in the field of
plasmid-based therapy. Megabios is required to share revenue with UPMC at a
specified rate upon sublicense of rights in the field of viral gene therapy.
Certain of the license rights may revert back to UPMC in the event that Megabios
fails to commit resources to the development of products in the field of
rheumatology. In addition, the UPMC License and Collaboration Agreement
established collaborations between Megabios and several researchers at UPMC for
the research and development of gene-based therapies in the field of
rheumatology. Intellectual property developed by UPMC under the collaboration
will be included in the exclusive license to Megabios described above at no
additional cost to Megabios.
 
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    Megabios has obtained an option to exclusively license patent rights from
Stanford University relating to the use of a nitric oxide synthetase gene for
certain cardiovascular applications (the "Stanford Option"). Under the terms of
the Stanford Option, Megabios has paid an option fee. In November 1998, Megabios
exercised the Stanford Option. Megabios will be obligated to pay a license fee,
milestone fees upon completion of certain clinical milestones and to make
royalty payments on sales of products, if any. Megabios will have certain
obligations regarding the process and timing of clinical activities and seeking
FDA approval in the pursuit of development, manufacture and sale of products
based on the claims contained in such patent applications. In addition, Stanford
University will have the ability to terminate the license for a material
violation or material failure to perform any covenant under the license.
 
PATENTS AND PROPRIETARY TECHNOLOGY
 
    Patents and other proprietary rights are important to Megabios' business.
Megabios' policy is to file patent applications to protect technology,
inventions and improvements to inventions that are commercially important to the
development of its business. Megabios also relies on trade secrets,
confidentiality agreements and other measures to protect its technology and
proposed products. Megabios' failure to obtain patent protection or otherwise
protect its proprietary technology or proposed products may have a material
adverse effect on Megabios' competitive position and business prospects.
 
    Megabios has rights under its licenses with The Regents, NJMRC, and UPMC to
five issued U.S. patents and several U.S. and foreign pending patent
applications. In addition, Megabios itself has six issued patents in the U.S. as
well as several pending patent applications in the U.S. and worldwide. The
patent application process takes several years and entails considerable expense.
There is no assurance that additional patents will issue from these applications
or, if patents do issue, that the claims allowed will be sufficient to protect
Megabios' technology.
 
    A number of the gene sequences that Megabios and its corporate partners are
investigating or may use in its products are or may become patented by others.
As a result, Megabios or its corporate partners may be required to obtain
licenses to such gene sequences or other technology in order to use or market
such products. In addition, some of the products based on Megabios' gene
delivery systems may require the use of multiple proprietary technologies.
Consequently, Megabios or its corporate partners may be required to make
cumulative royalty payments to several third parties. Such cumulative royalties
could reduce amounts paid to Megabios or be commercially prohibitive. In
connection with Megabios' efforts to obtain rights to such gene sequences or
other proprietary technology, Megabios may find it necessary to convey rights to
its technology to others. There can be no assurance that Megabios or its
corporate partners will be able to obtain any required licenses on commercially
reasonable terms or at all.
 
    The patent positions of pharmaceutical and biotechnology firms are often
uncertain and involve complex legal and factual questions. Further, the breadth
of claims allowed in biotechnology patents is unpredictable. Patent applications
in the U.S. are maintained in secrecy until a patent issues. As a result,
Megabios cannot be certain that others have not filed patent applications for
technology covered by Megabios' pending applications or that Megabios was the
first to invent the technology that is the subject of such patent application.
Competitors may have filed applications for, or may have received patents and
may obtain additional patents and proprietary rights relating to, compounds,
products or processes that block or compete with those of Megabios. While
Megabios is aware of patent applications filed and patents issued to third
parties relating to genes, gene delivery technologies and gene-based
therapeutics, it is unable to determine what effect, if any, these patents and
patent applications will have on products Megabios or its corporate partners are
developing or may seek to develop in the future. Third parties may assert patent
or other intellectual property infringement claims against Megabios with respect
to its products or technology or other matters.
 
    Patent litigation is widespread in the biotechnology industry. Litigation
may be necessary to defend against or assert claims of infringement, to enforce
patents issued to Megabios, to protect trade secrets or
 
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know-how owned or licensed by Megabios, or to determine the scope and validity
of the proprietary rights of third parties. Although no third party has asserted
that Megabios is infringing such third party's patent rights or other
intellectual property, Megabios cannot be certain that litigation asserting such
claims will not be initiated. Megabios may not prevail in any such litigation.
If the results of any litigation are adverse, Megabios may not be able to obtain
any necessary licenses on reasonable terms, or at all. Any such claims against
Megabios, with or without merit, as well as claims initiated by Megabios against
third parties, can be time-consuming and expensive to defend or prosecute and to
resolve. If other companies prepare and file patent applications in the U.S.
that claim technology also claimed by Megabios, Megabios may have to participate
in interference proceedings to determine priority of invention, which could
result in substantial cost to Megabios even if the outcome is favorable to
Megabios.
 
    Megabios also relies on proprietary information and trade secrets, including
its proprietary database of preclinical in vivo experiments, to develop and
maintain its competitive position. Third parties may independently develop
equivalent proprietary information or techniques, gain access to Megabios' trade
secrets or disclose such technology to the public. Megabios typically requires
its employees, consultants, collaborators, advisors and corporate partners to
execute confidentiality agreements upon commencement of employment or other
relationships with Megabios. These agreements may not provide meaningful
protection or adequate remedies for Megabios' technology in the event of
unauthorized use or disclosure of such information. In addition, the parties to
such agreements may breach such agreements or Megabios' trade secrets may
otherwise become known or be discovered independently by its competitors.
 
MANUFACTURING AND COMMERCIALIZATION
 
    Megabios' focused commercialization strategy is based on entering corporate
partnerships with pharmaceutical and biotechnology companies. Under these
corporate partnerships, Megabios will primarily pursue preclinical and early
clinical development of gene-based therapeutics, while corporate partners will
be responsible for late stage clinical trials, sales, marketing, and large-scale
clinical and commercial manufacturing. Under the terms of the Glaxo Wellcome
Agreement and Lilly Agreement, Megabios' corporate partners have received
exclusive rights for large-scale, clinical and commercial manufacturing of the
gene-based therapeutics for use in the areas covered by these agreements.
 
    Megabios has demonstrated that its DNA plasmids, DNA:lipid complexes and
formulations can be produced at pilot scale. Megabios believes that commercial
quantities of material may be prepared using conventional and proprietary
fermentation and purification processes. Megabios currently operates a pilot
manufacturing facility and has produced DNA plasmids at a contract manufacturer
at the 1,000 liter scale. The lipid components of Megabios' gene delivery
systems can be synthesized using readily scalable, organic synthesis procedures.
To date, Megabios has obtained access to lipid manufacturing through
arrangements with contract manufacturers. Preparation of DNA:lipid complexes has
been carried out at Megabios' pilot manufacturing facility.
 
    Megabios has supplied clinical-grade material to Glaxo Wellcome for use in a
Phase I/II clinical trial of a gene-based therapeutic to treat cystic fibrosis.
Glaxo Wellcome is in the process of scaling up its production capabilities using
Megabios' proprietary processes and methods to meet clinical requirements. Under
the Lilly Agreement, Megabios is obligated to provide material used in
preclinical testing and may supply material for clinical trials.
 
    Under the terms of the Glaxo Wellcome Agreement and Lilly Agreement, the
corporate partners have received exclusive rights to market and sell Megabios'
gene-based therapeutics that are developed pursuant to these corporate
partnerships. Megabios is highly dependent upon each of its corporate
partnerships with Glaxo Wellcome and Lilly. Megabios cannot control whether
Glaxo Wellcome or Lilly will devote sufficient resources to the
commercialization of Megabios' potential products on a timely basis, and such
resources could vary due to factors unrelated to Megabios' products. If such
corporate partners fail to conduct these activities in a timely manner or at
all, the commercialization of Megabios' products
 
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could be delayed or terminated. Megabios cannot be certain that any of these
corporate partnerships will result in successfully manufactured or
commercialized products or that Megabios will receive related royalty revenues.
Failure of Megabios' corporate partners to manufacture successfully the
potential products for large-scale clinical trials or commercial use, or to
commercialize successfully the potential products, would have a material adverse
effect on Megabios' business, financial condition and results of operations.
 
    In September 1998, Megabios and DSM Biologics ("DSM") announced the
formation of a broad, strategic partnership focused on the manufacture and
supply of DNA plasmids and lipid:DNA complexes to the entire gene therapy
industry. Plasmids are circular pieces of DNA that contain a therapeutic gene
and instructional elements that regulate the activity of the gene. The
manufacturing process can be used to produce any plasmid. Under the agreement,
Megabios has exclusively licensed its proprietary manufacturing technology to
DSM for use in its facility in Montreal, Canada and may be extended to include
DSM's facility in Groningen, The Netherlands. In return, DSM will pay license
and milestone fees to Megabios, and DSM and Megabios will share in the profits
generated by the sale of material produced using Megabios' process. The term of
the exclusive partnership is at least three years, after which either party has
the option to terminate if the venture is not profitable.
 
    The Megabios--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Glaxo Wellcome,
and a Phase I/II study for metastatic melanoma, conducted by Megabios and its
academic collaborators at the University of Colorado Health Sciences Center. The
partnership has the potential to create the first manufacturing facility that
can produce high-quality, ultrapure material for plasmid-based therapeutics on
every scale, from preclinical toxicology studies to commercial products. DSM
will have full responsibility for manufacturing material to be marketed to any
company or institution working in the field of gene therapy. The partnership
will use Megabios' proprietary methods for the manufacture of DNA plasmids and
complexing that DNA with lipids.
 
    Megabios will be dependent on DSM for commercial-scale manufacturing of its
products. Successful large-scale manufacturing of gene-based therapeutics has
not been demonstrated by DSM or any third parties. Megabios cannot be certain
that DSM will be able to develop adequate manufacturing capabilities for
production of commercial-scale quantities of gene-based therapeutics. In
addition Megabios cannot be certain that, in the event DSM cannot provide such
quantities of gene-based therapeutics, Megabios will be able to obtain the
products from a third party.
 
GOVERNMENT REGULATION
 
    The production and marketing of Megabios' products and its research and
development activities are subject to extensive regulation for safety, efficacy
and quality by numerous governmental authorities in the U.S. and other
countries. In the U.S., pharmaceutical products are subject to rigorous
regulation by the FDA. Megabios believes that the FDA and comparable foreign
regulatory bodies will regulate the commercial uses of its products as
biologics. Biologics are regulated under certain provisions of the Public Health
Service Act and the Federal Food, Drug, and Cosmetic Act. These laws and the
related regulations govern, among other things, testing, manufacturing, safety,
efficacy, labeling, storage, record keeping, and the promotion, marketing and
distribution of biological products. At the FDA, the Center for Biologics
 
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Evaluation and Research is responsible for the regulation of biological products
and has handled FDA's regulation of most gene-based therapeutics to date.
Gene-based therapy, however, is a relatively new technology and the regulatory
requirements governing gene-based therapeutics are uncertain. Megabios is not
aware of any gene-based therapeutics that have received marketing approval from
the FDA or any comparable foreign authorities.
 
    The necessary steps before a new biological product may be marketed in the
U.S. include:
 
    - preclinical laboratory tests and in vivo preclinical studies;
 
    - the submission to the FDA of an IND for clinical testing, which must
      become effective before clinical trials commence;
 
    - under certain circumstances, approval by a special advisory committee
      convened to review INDs involving gene-based therapeutics;
 
    - adequate and well-controlled clinical trials to establish the safety and
      efficacy of the product;
 
    - the submission to the FDA of a product license application and
      establishment license application ("PLA/ELA"); and
 
    - FDA approval of the PLA/ELA prior to any commercial sale or shipment of
      the biologic.
 
    The FDA has eliminated the requirement of a separate ELA for certain
categories of biotechnology products, including, for example, therapeutic
recombinant DNA-derived products and gene-based therapeutics. Furthermore, the
FDA has announced that it will review all new biologic products under a single
biologics license application.
 
    Manufacturing facilities in the U.S. are subject to periodic inspection by
the FDA and state authorities, and must comply with GMP. Manufacturers of
biologics also must comply with FDA general biological product standards and
also may be subject to state regulation. Failure to comply with GMP or other
applicable regulatory requirements may result in withdrawal of marketing
approval, criminal prosecution, civil penalties, recall or seizure of products,
warning letters, total or partial suspension of production, FDA refusal to
review pending marketing approval applications or supplements to approved
applications, or injunctions, as well as other legal or regulatory action
against Megabios or its corporate partners.
 
    Clinical trials are conducted in three sequential phases, but the phases may
overlap. In Phase I, the initial introduction of the product into healthy human
subjects or patients, the drug is tested to assess safety, metabolism,
pharmacokinetics and pharmacological actions associated with increasing doses.
Phase II usually involves studies in a limited patient population to (1)
determine the efficacy of the potential product for specific, targeted
indications, (2) determine dosage tolerance and optimal dosage, and (3) further
identify possible adverse effects and safety risks. If a compound is found to be
effective and to have an acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to evaluate further clinical efficacy and to
test further for safety within a broader patient population at geographically
dispersed clinical sites. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of Megabios' or its corporate partners'
products subject to such testing. In addition, after marketing approval is
granted, the FDA may require post-marketing clinical studies which typically
entail extensive patient monitoring and may result in restricted marketing of
the product for an extended period of time.
 
    The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of a PLA/ELA for approval
of the manufacture, marketing and commercial shipment of the biological product.
The testing and approval process is likely to require substantial time, effort
and financial and human resources. Megabios cannot be certain that any approval
will be granted on a timely basis, or at all. Data obtained from preclinical
studies and clinical trials are subject to interpretations that could delay,
limit or prevent regulatory approval. The FDA may deny the PLA/ELA if applicable
 
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regulatory criteria are not satisfied or require additional testing or
information. Moreover, if regulatory approval of a biological product is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing.
 
    For clinical investigation and marketing outside the U.S., Megabios and its
corporate partners may be subject to FDA as well as regulatory requirements of
other countries. The FDA regulates the export of biological products, whether
for clinical investigation or commercial sale. In Europe, the approval process
for the commencement of clinical trials varies from country to country. The
regulatory approval process in other countries includes requirements similar to
those associated with FDA approval set forth above. Approval by the FDA does not
ensure approval by the regulatory authorities of other countries.
 
    Megabios' research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials, and produce waste
products. Megabios is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and waste products. Although Megabios believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated completely. In the event of such an
accident, Megabios could be held liable for any damages that result and any such
liability could exceed the resources of Megabios. Although Megabios believes
that it is in compliance in all material respects with applicable environmental
laws and regulations, there can be no assurance that it will not be required to
incur significant costs to comply with environmental laws and regulations in the
future, or that any the operations, business or assets of Megabios will not be
materially adversely affected by current or future environmental laws or
regulations.
 
COMPETITION
 
    Gene delivery and gene-based therapies are relatively new, rapidly evolving
areas of science in which significant and unexpected technological advances are
likely. Rapid technological development could result in Megabios' products or
technologies becoming obsolete before Megabios recovers a significant portion of
its related research, development and capital expenditures. Megabios is aware
that several pharmaceutical and biotechnology companies are actively engaged in
research and development in areas related to gene-based therapy, or have
commenced clinical trials of gene-based therapeutics. Many of these companies
are addressing diseases that have been targeted by Megabios or its corporate
partners. Megabios also may experience competition from companies that have
acquired or may acquire gene-based technology from universities and other
research institutions. As competitors develop their technologies, they may
develop proprietary positions in certain aspects of gene delivery and gene-based
therapeutics that may materially and adversely affect Megabios. In addition,
Megabios faces and will continue to face competition from other companies for
corporate partnerships with pharmaceutical and biotechnology companies, for
establishing relationships with academic and research institutions, and for
licenses to proprietary technology, including intellectual property related to
gene delivery systems. Corporate partners may also elect to internally develop
gene-based therapeutics which compete with Megabios' products. In addition, many
other companies are developing non-gene-based therapies to treat these same
diseases.
 
    Many of Megabios' competitors and potential competitors have substantially
greater product development capabilities and financial, scientific,
manufacturing, managerial and human resources than Megabios. Research and
development by others may render Megabios' delivery systems or the products
developed by corporate partners using Megabios' delivery systems obsolete or
non-competitive. In addition, any product developed by Megabios or its corporate
partners may not be preferred to any existing or newly developed technologies.
Megabios' competitors may develop safer, more effective or less costly gene
delivery systems, gene-based therapeutics or non-gene based therapies, achieve
superior patent protection or obtain regulatory approval or product
commercialization earlier than Megabios.
 
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PRODUCT LIABILITY INSURANCE
 
    The manufacture and sale of human therapeutic products involve an inherent
risk of product liability claims and associated adverse publicity. Megabios
currently has only limited product liability insurance. Megabios cannot be
certain that it will be able to maintain existing or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. An inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products by Megabios. A product liability claim brought
against Megabios in excess of its insurance coverage, if any, or a product
withdrawal, could have a material adverse effect upon Megabios' business,
financial condition and results of operations.
 
EMPLOYEES
 
    As of September 30, 1998 Megabios employed 76 individuals full-time,
including 26 who hold doctoral degrees. Of Megabios' total work force, 62
employees are engaged in or directly support research and development
activities, and 14 are engaged in business development, finance and
administrative activities. Megabios' employees are not represented by a
collective bargaining agreement. Megabios believes its relationships with its
employees are good.
 
FACILITIES
 
    Megabios' currently leases approximately 45,300 square feet in Burlingame,
California, all of which is occupied or under construction. This facility has
been built to Megabios' specifications to accommodate Megabios' laboratory,
support and administrative needs and includes a pilot manufacturing facility
designed to supply material required for preclinical research and development.
The term of the lease for the 34,700 square feet in use expires in 2004, at
which time Megabios has the option to renew the lease. Approximately 10,600
square feet is being built-out for use as a pilot manufacturing facility. The
term of the lease for this portion of the facility expires in 2007, at which
time Megabios has the option to renew the lease. Megabios believes that the
facility and its expansion will be adequate to meet Megabios' needs for the
foreseeable future.
 
LEGAL PROCEEDINGS
 
    From time to time, Megabios may be involved in claims or litigation that
arise in the normal course of business. As of the date of this prospectus,
Megabios is not a party to any legal proceedings which, if decided adversely to
Megabios, would have a material adverse effect on Megabios' business, financial
condition or results of operations.
 
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                      MEGABIOS MANAGEMENT'S DISCUSSION AND
           ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    The following discussion and analysis should be read in conjunction with
"Megabios Corp. Selected Historical Financial Information" and the consolidated
financial statements and notes thereto contained elsewhere in this joint proxy
statement/prospectus. Except for the historical information contained herein,
the discussion in this joint proxy statement/prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of Megabios' plans, objectives, expectations and intentions. The
cautionary statements made in this joint proxy statement/prospectus should be
read as being applicable to all related forward-looking statements wherever they
appear in this prospectus. Megabios' actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include those discussed in this section and the sections entitled "Risk Factors"
on page 13 and "Information Relating to Megabios--Megabios Business" on page 67,
as well as those discussed elsewhere in this joint proxy statement/prospectus.
 
OVERVIEW
 
    Megabios develops proprietary gene delivery systems and provides preclinical
development expertise to create gene-based therapeutics designed for the
treatment or prevention of genetic and acquired diseases. Megabios has developed
several IN VIVO, non-viral gene delivery systems to address a number of
potential therapeutic applications using a variety of therapeutic genes.
Megabios' clinical development and commercialization strategy is to enter into
corporate partnerships with pharmaceutical and biotechnology companies. Megabios
has established corporate partnerships with Glaxo Wellcome, Pfizer and Lilly. In
December 1997, Pfizer decided to discontinue its research and development
program to develop gene-based therapeutics to treat cancer via angiogenesis
inhibition. Under the terms of the agreement with Pfizer, Pfizer continued
funding the program through May 31, 1998. Megabios intends to continue to
advance the angiogenesis inhibition program and is actively seeking a new
corporate partner. The corporate partnerships with Glaxo Wellcome and Lilly are
ongoing.
 
    In March 1998, Megabios acquired patent rights and a technology portfolio in
the area of rheumatology via an exclusive license agreement with the University
of Pittsburgh Medical Center and established a collaboration with key scientists
at the University.
 
    To date, substantially all revenue has been generated by collaborative
research and development agreements from corporate partners, and no revenue has
been generated from product sales. Under the terms of its corporate partnerships
Megabios receives research and development funding on a quarterly basis in
advance of associated research and development costs. Megabios expects that
future revenue will be derived in the short-term from research and development
agreements and milestone payments and in the long-term from royalties on product
sales.
 
    Megabios has incurred significant losses since inception and expects to
incur substantial losses for the foreseeable future, primarily due to the
expansion of its research and development programs and because Megabios does not
expect to generate revenue from the sale of products in the foreseeable future,
if at all. Megabios expects that operating results will fluctuate from quarter
to quarter and that such fluctuations may be substantial. As of September 30,
1998, Megabios' accumulated deficit was approximately $31.8 million.
 
RESULTS OF OPERATIONS
 
    REVENUE
 
    Megabios' collaborative research and development revenue totaled
approximately $8.1 million, $5.8 million, and $1.9 million for the years ended
June 30, 1998, 1997 and 1996, respectively. Megabios' collaborative research and
development revenue totaled approximately $773,000 and $2.3 million for the
quarters ended September 30, 1998 and 1997, respectively. The revenue for the
year ended June 30, 1998 was attributable to amounts earned for research and
development performed under Megabios' corporate
 
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partnerships with Pfizer and Lilly, totalling approximately $4.0 million each.
The revenue for the year ended June 30, 1997 was primarily attributable to
amounts earned for research and development performed under Megabios' corporate
partnerships with Glaxo Wellcome, Pfizer and Lilly totalling approximately $2.0
million, $3.4 million and $270,000, respectively. The revenue for the year ended
June 30, 1996 was primarily attributable to amounts earned for research and
development performed under Megabios' corporate partnerships with Glaxo Wellcome
and Pfizer of approximately $1.6 million and $265,000, respectively. Revenue for
the three months ended September 30, 1998 was attributable to amounts earned for
research and development performed under the Company's corporate collaboration
with Lilly. Revenue for the three months ended September 30, 1997 was primarily
attributable to amounts earned for research and development performed under the
Company's corporate collaborations with Pfizer and Lilly totaling approximately
$1.2 million and $1.1 million, respectively. No revenue from milestones or
royalties from product sales have been earned under any corporate partnership to
date.
 
    EXPENSES
 
    Research and development expenses increased to $15.1 million for the year
ended June 30, 1998 from $8.6 million in 1997 and $6.5 million in 1996. Research
and development expenses increased to $3.4 million for the three months ended
September 30, 1998 from $2.8 million for the same period in 1997. The increases
in each period were primarily attributable to increased headcount expenses,
increased purchases of laboratory supplies and materials, increased depreciation
from additional equipment and leasehold improvements and the increased use of
consultants and other services to support Megabios' research and development
activities. In addition, in March 1998, Megabios purchased patent rights and an
exclusive license to certain technology from the University of Pittsburgh. In
partial consideration for this exclusive license, Megabios issued 117,555 shares
of its common stock to the University of Pittsburgh. The value of the common
stock issued in the transaction was $1.5 million, which was expensed to research
and development during the period. Megabios expensed the value of this common
stock as the technology was under development and had not reached technological
feasibility at the date of acquisition. Megabios expects research and
development expenses to increase as Megabios continues to expand its independent
and collaborative research and development programs.
 
    General and administrative expenses increased to $3.6 million for the year
ended June 30, 1998 from $2.4 million in 1997 and $2.2 million in 1996. General
and administrative expenses increased to $1.1 million for the three months ended
September 30, 1998 from $675,000 in the corresponding period of 1997. The
increase in 1998 compared to 1997 was primarily attributable to increased
administrative headcount and costs associated with being a newly public company.
The increase in 1997 compared to 1996 was primarily attributable to increased
headcount and expenses associated with increased business development
activities. Megabios expects general and administrative expenses to increase due
to business development activities and to expenses incurred as a publicly traded
company.
 
    INTEREST INCOME(EXPENSE), NET
 
    Interest income(expense), net increased to $2.2 million in 1998 compared
with $0.3 million in 1997 and ($0.1) million in 1996. Interest income increased
to $679,000 for the three months ended September 30, 1998 compared with $398,000
for the same period in 1997. The increase in interest income(expense), net in
1998 compared to 1997 resulted primarily from the increase in average cash and
investment balances as a result of $31.4 million in net proceeds from Megabios'
initial public offering in September 1997 partially offset by higher outstanding
balances on an equipment financing line of credit. The increase in interest
income(expense), net in 1997 compared to 1996 resulted from the increase in
average cash and investment balances as a result of sales of equity securities
of Megabios partially offset by a bank term loan acquired in 1997 and higher
outstanding balances on an equipment financing line of credit.
 
                                       82
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
 
    As of September 30, 1998, Megabios had $44.9 million in cash, cash
equivalents and investments compared to $48.4 million at June 30, 1998, $24.3
million at June 30, 1997 and $5.3 million at June 30, 1996.
 
    Net cash used in Megabios' operations was $5.6 million in 1998, $3.0 million
in 1997, and $5.5 million in 1996. Net cash used in Megabios' operations was
$3.3 million for the quarter ended September 30, 1998, compared to $1.3 million
for the same period in 1997. This cash was used primarily to fund increasing
levels of research and development and the general and administrative
activities. Megabios' capital expenditures were $2.7 million in 1998, $1.7
million in 1997 and $1.1 million in 1996.
 
    In June 1998, Megabios obtained an $8.0 million line of credit from a
commercial bank. As of June 30, 1998, Megabios had drawn and converted $1.0
million of this line of credit into a term loan bearing interest at the prime
rate plus 0.5%. The loan is payable in 42 equal monthly installments beginning
July 31, 1998. An additional $2.5 million was drawn from the line of credit in
the quarter ended September 30, 1998. Interest on this amount is accrued and
paid monthly and will be converted into a term loan bearing interest at the
prime rate plus 0.5% on December 31, 1998. The $2.5 million draw will be payable
in 42 monthly installments beginning January 31, 1998. The remaining $4.5
million is available to Megabios through December 31, 1998.
 
    On September 15, 1997, Megabios completed an initial public offering of
2,500,000 shares of common stock at $12.00 per share. In addition, on September
29, 1997, Megabios' underwriters exercised their over-allotment option and
purchased an additional 375,000 shares of Megabios' common stock at $12.00 per
share. The combined net proceeds raised from the initial public offering and the
exercise of the over-allotment option were approximately $31.4 million.
 
    In May 1996, Megabios entered into an equipment financing agreement for up
to $2.7 million. As of September 30, 1998 Megabios had borrowed approximately
$2.7 million under this agreement for equipment purchases structured as loans.
These loans are being repaid over 48 months at interest rates ranging from 15.2%
to 16.2% per annum.
 
    In December 1993, Megabios entered into a financing agreement for up to $2.3
million with a financing company. As of September 30, 1998, Megabios had
borrowed $1.9 million under the agreement for equipment purchases and tenant
improvements structured as loans. These loans are being repaid over 42 months at
interest rates ranging from 13.8% to 16.2% per annum.
 
    Megabios anticipates that its cash and cash equivalents, committed funding
from existing corporate partnerships, lines of credit and projected interest
income, will enable Megabios to maintain its current and planned operations
through fiscal 2000. However, there can be no assurance that Megabios will not
require additional funding prior to such time. Megabios' future capital
requirements will depend on many factors, including scientific progress in its
research and development programs, the size and complexity of such programs, the
scope and results of preclinical studies and clinical trials, the ability of
Megabios to establish and maintain corporate partnerships, the time and costs
involved in obtaining regulatory approvals, the time and costs involved in
filing, prosecuting and enforcing patent claims, competing technological and
market developments, the cost of manufacturing preclinical and clinical
materials and other factors not within Megabios' control. Megabios is seeking
additional collaborative agreements with corporate partners and may seek
additional funding through public or private equity or debt financing. There can
be no assurance, however, that any such agreements may be entered into or that
they will reduce Megabios' funding requirements or that additional funding will
be available. Megabios expects that additional equity or debt financing may be
required to fund its operations. There can be no assurance that additional
financing to meet Megabios' funding requirements will be available on acceptable
terms or at all.
 
    If additional funds are raised by issuing equity securities, substantial
dilution to existing stockholders may result. Insufficient funds may require
Megabios to delay, scale back or eliminate some or all of its
 
                                       83
<PAGE>
research or development programs or to relinquish greater or all rights to
products at an earlier stage of development or on less favorable terms than
Megabios would otherwise seek to obtain, which could materially adversely affect
Megabios' business, financial condition and results of operations.
 
IMPACT OF THE YEAR 2000
 
    A major issue currently faced by all industries is the Y2K computer issue.
The problem arises from the use in computer hardware and software of the last
two digits rather than four digits to define the year. As a result, computer
programs are unable to distinguish a year which begins with "20" or "19". This,
can then cause failures in computer systems and applications, or create
erroneous results unless steps are taken to prevent such failures and errors.
The Y2K problem is also compounded by the fact that many computer and
telecommunication systems are interdependent, both within the United States and
throughout the world. Thus, due to interdependence, the failure of one system
may lead other systems to fail, even if these systems are themselves Y2K
compliant.
 
    In order to address this issue, Megabios has put a Y2K plan in place to
identify, evaluate and modify its current systems or replace and implement new
systems. Identification includes reviewing and assessing the potential systems
within Megabios and at key third party vendors that would be affected by the Y2K
issue. A Y2K Committee, comprised of members of all Megabios' departments and
senior management, has been established to evaluate, assess and prioritize
Megabios' internal systems and key vendors' systems.
 
    Megabios is in the evaluation stage and has determined that it will be
required to upgrade or replace a portion of its accounting software and a
program is underway to evaluate existing or new financial software and
applications.
 
    Completion of Megabios' Y2K plan is targeted for the calendar fourth quarter
of 1999. Megabios believes that, with upgrades of existing software and/or
conversions to new software, the Y2K issue will not pose significant operational
problems for its business activities. However, if such upgrades or conversions
are not made, or are not completed in a timely fashion, the Y2K issue could have
a material impact on the operations of Megabios, the precise degree of which
cannot be known at this time. Megabios currently has no contingency plans to
deal with major Y2K failures, though such plans will be developed over the
coming quarters.
 
    Megabios has also initiated communications with its significant suppliers to
determine the extent to which Megabios' operations are vulnerable to those third
parties' failure to solve their own Y2K issues. When evaluation is completed,
Megabios will modify, or replace if necessary, any other internal systems and
enter into new business relationships with Y2K compliant vendors in the ordinary
course of business. Contingency plans are to be established to utilize vendors
whose systems are Y2K compliant in the event that Megabios' primary vendors fail
to adequately address their Y2K issues. However, if such suppliers or other
third parties with which Megabios transacts business experience failures in
their computer systems or equipment due to Y2K non-compliance, it could effect
Megabios' ability to process transactions or engage in ordinary business
activities.
 
    The financial impact of the required upgrades and/or conversion of computer
software relating to the Y2K issue cannot be known precisely at this time, but
Megabios currently anticipates that the cost will be less than $100,000. The
actual financial impact could, however, exceed this estimate. Also, the
estimated costs of implementing the Y2K plan do not take into account the costs,
if any, that might be incurred as a result of Y2K related failures that occur
despite Megabios' implementation of its Y2K plan.
 
    Although Megabios is not aware of any material operational issues associated
with preparing its internal systems for the Year 2000, or material issues with
respect to the adequacy of third party systems, Megabios could experience
material unanticipated negative consequences and/or material costs caused by
undetected errors or defects in such systems or by Megabios' failure to
adequately prepare for the results of such errors or defects, including the
costs of related litigation, if any. The impact of such consequences could have
a material adverse effect on Megabios' business, financial condition or results
of operations.
 
                                       84
<PAGE>
                      MEGABIOS MANAGEMENT AFTER THE MERGER
 
EXECUTIVE OFFICERS AND DIRECTORS
 
    The executive officers and directors of Megabios (including directors to be
appointed after consummation of the merger) and their ages as of November 19,
1998, are as follows:
 
<TABLE>
<CAPTION>
NAME                                                    AGE                           POSITION
- ---------------------------------------------------  ---------  -----------------------------------------------------
<S>                                                  <C>        <C>
Benjamin F. McGraw III, Pharm.D. ..................     49      Chairman of the Board, Chief Executive Officer and
                                                                  President,
Rodney Pearlman, Ph.D. ............................     47      Senior Vice President, Research and Development
 
Bennet L. Weintraub................................     44      Vice President, Finance and Chief Financial Officer
 
Frank J. Caufield(1)...............................     59      Director
 
Patrick G. Enright.................................     36      Director
 
A. Grant Heidrich(2)...............................     46      Director
 
Russell C. Hirsch, M.D., Ph.D.(1)..................     36      Director
 
Raju Kucherlapati, Ph.D.(2)........................     55      Director
 
Arthur M. Pappas(3)................................     50      Director
 
Stanley T. Crooke, M.D., Ph.D.(3)..................     53      Director
 
Bert W. O'Malley, M.D.(3)..........................     61      Director
</TABLE>
 
- ------------------------
 
(1) Member of Audit Committee.
 
(2) Member of Compensation Committee.
 
(3) Under the terms of the reorganization agreement, as soon as practicable
    after the closing date, Megabios shall use reasonable efforts to nominate
    and appoint (a) Mr. Pappas to Class I of the Megabios Board to serve until
    the annual meeting of stockholders to be held in 2001; (b) Dr. Crooke to
    Class II of the Megabios Board to serve until the annual meeting of
    stockholders to be held in 1999; and (c) Dr. O'Malley to Class III of the
    Megabios Board to serve until the annual meeting of stockholders to be held
    in 2000.
 
    BENJAMIN F. MCGRAW, III, PHARM.D., joined Megabios as President, Chief
Executive Officer and director in September 1994 and became Chairman of the
Board of Directors in February 1997. From April 1993 to September 1994, Dr.
McGraw was Corporate Vice President for Corporate Development for Allergan,
Inc., a pharmaceutical company. From November 1990 to April 1993, he served as
President of MedTech Trends, Inc., an investment advisory company. From November
1991 to April 1993, Dr. McGraw was President of Carerra Capital Management,
Inc., an investment company, where he was the fund manager for a limited
partnership that invested in health care companies. From July 1989 to November
1990, Dr. McGraw was Vice President, Development at Marion Merrell Dow, Inc., a
pharmaceutical company. From November 1987 to July 1989, he was Vice President,
Development at Marion Laboratories, Inc., a pharmaceutical company. Dr. McGraw
received his Doctor of Pharmacy from the University of Tennessee Center for the
Health Sciences.
 
    RODNEY PEARLMAN PH.D., has served as Megabios' Senior Vice President,
Research and Development since July 1998. From January 1995 until the time of
this appointment, Dr. Pearlman served as Megabios' Vice President, Research and
Development. From January 1988 to December 1994, Dr. Pearlman was Director of
Pharmaceutical Research Development and at Genentech, Inc. ("Genentech"), a
biotechnology company. At Genentech, he was a Project Team Leader for Human
Growth Hormone from
 
                                       85
<PAGE>
March 1992 to June 1994. From September 1987 to December 1994, Dr. Pearlman was
a senior scientist at Genentech. Dr. Pearlman joined Genentech as a scientist in
September 1984. Prior to joining Genentech, he was an Assistant Professor of
Pharmaceutics at the University of Texas at Austin. From 1978 to 1981, Dr.
Pearlman was a Senior Scientist at Lilly. Dr. Pearlman received his Ph.D. in
Pharmaceutical Chemistry from the University of Kansas.
 
    BENNET L. WEINTRAUB, has served as Megabios' Chief Financial Officer and
Vice President Finance since May 1998. From March 1996 to May 1998, Mr.
Weintraub was Chief Financial Officer and Vice President Finance and
Administration for Technology Modeling Associates, a software company. From
September 1993 to March 1996, he was employed as Director of Finance by Metra
Biosystems, a bone diagnostics company, and from September 1987 to September
1993, he was Controller at Advanced Polymer Systems, a drug delivery company.
Mr. Weintraub received his M.B.A. from Harvard Business School and his B.A. from
Pomona College, and is a CPA in California.
 
    FRANK J. CAUFIELD, has served as a director of Megabios since November 1992.
Since 1978 he has held the position of partner of Kleiner Perkins Caufield &
Byers, a venture capital partnership. He serves on the Board of Directors of
America Online, Inc., an internet service company. He received his M.B.A. from
the Harvard Business School and his B.S. in engineering from the United States
Military Academy.
 
    PATRICK G. ENRIGHT, is a partner at Diaz & Altschul Group, LLC, a privately
held merchant bank, and has been a director of Megabios since March 1998. From
March 1995 to February 1998, Mr. Enright served in various executive positions
at Megabios, including Senior Vice President, Corporate Development and Chief
Financial Officer. From September 1993 to June 1994, Mr. Enright was Senior Vice
President of Finance and Business Development for Boehringer Mannheim
Therapeutics, a pharmaceutical company and a subsidiary of Corange Ltd. From
September 1989 to September 1993, Mr. Enright was employed at PaineWebber
Incorporated, an investment banking firm, where he became a Vice President in
January 1992. Mr. Enright received his M.B.A. from The Wharton School of
Business at the University of Pennsylvania and his B.S. in biological sciences
from Stanford University.
 
    A. GRANT HEIDRICH, III, has served as a director of Megabios since August
1993. Mr. Heidrich joined Mayfield Fund, a venture capital firm, in 1982 and has
been a general partner or managing member of several venture capital funds
affiliated with Mayfield Fund since 1983. Mr. Heidrich serves on the Board of
Directors of Millennium Pharmaceuticals, Inc., a biopharmaceutical company and
Vivus, Inc. a biotechnology company. Mr. Heidrich received his M.B.A. from
Columbia University Graduate School of Business and his B.A. in human biology
from Stanford University.
 
    RUSSELL C. HIRSCH, M.D., PH.D., has served as a director of Megabios since
August 1993. He joined Mayfield Fund, a venture capital firm, in 1992, and has
been a managing member of several venture capital funds affiliated with Mayfield
Fund since 1995. From 1984 to 1992, Dr. Hirsch conducted research in the
laboratories of Nobel Laureate Harold Varmus, M.D., and Don Ganem, M.D., at the
University of California, San Francisco. Dr. Hirsch received his M.D. and Ph.D.
in biochemistry from the University of California, San Francisco.
 
    RAJU KUCHERLAPATI, PH.D., has served as a director of Megabios since March
1995 and also serves on Megabios' Scientific Advisory Board. Dr. Kucherlapati
has served as the Lola and Saul Kramer Professor and Chairman of the Department
of Molecular Genetics at Albert Einstein College of Medicine since 1989. He was
a founder of and serves on the Board of Directors of both Cell Genesys, Inc., a
biotechnology company and Millennium Pharmaceuticals, Inc., a biopharmaceutical
company. Dr. Kucherlapati received his Ph.D. from the University of Illinois.
 
                                       86
<PAGE>
    ARTHUR M. PAPPAS, has served as a director of GENEMEDICINE since January
1995. Mr. Pappas is Chairman and Chief Executive Officer of A.M. Pappas &
Associates, LLC., an international management and consulting services company
and investor in the high technology life science industries. From 1989 until
1994, Mr. Pappas held executive and board positions with Glaxo Holdings plc, a
pharmaceutical company, where his most recent position was as a member of the
main Board of Directors with responsibilities for operations in Asia Pacific,
Latin America and Canada. Mr. Pappas' 27 years of experience in the health care
industry also includes positions with the pharmaceutical companies of Merrell
Dow Pharmaceuticals and Abbott Laboratories International, Inc. Mr. Pappas is a
member of the Board of Directors of Quintiles Transnational Corp., KeraVision,
Inc., Embrex, Inc., and one private company. Mr. Pappas received a B.S. degree
in Biology from the Ohio State University and a M.B.A. degree in Finance from
Xavier University.
 
    STANLEY T. CROOKE, M.D., PH.D., has served as a director of GENEMEDICINE
since March 1992 and its Chairman of the Board since March 1996. Dr. Crooke has
been Chief Executive Officer and a director of Isis Pharmaceuticals, Inc.
("Isis"), a biotechnology company, since he co-founded Isis in January 1989, and
he has served as Chairman of the Board of Isis since February 1991. From 1980
until January 1989, Dr. Crooke was employed by SmithKline Beckman Corporation
("SmithKline"), a pharmaceutical company, most recently as President of Research
and Development of SmithKline & French Laboratories. Prior to joining
SmithKline, he served as Vice President and Associate Research Director of
Bristol Laboratories, a subsidiary of Bristol-Myers Squibb Company, a
pharmaceutical company. Dr. Crooke is a member of the Board of Directors of
SIBIA Neurosciences, Inc., EPIX Medical Inc., Idun Pharmaceuticals, Inc., and
Biotechnology Industry Organization. Dr. Crooke received a Ph.D. degree in
Pharmacology and an M.D. degree from Baylor College of Medicine, where he served
for a number of years as Adjunct Professor of Pharmacology. He currently serves
as Adjunct Professor of Pharmacology at the University of California, San Diego.
 
    BERT W. O'MALLEY, M.D., one of GENEMEDICINE'S founders, has served as a
director of GENEMEDICINE since April 1998. Dr. O'Malley has been Chairman of the
Department of Cell Biology at Baylor College of Medicine and a Director of the
Baylor Center for Population Research and Reproductive Biology since 1973. He is
a member of the National Academy of Science and the Institute of Medicine and
the author of more than 500 scientific publications. Dr. O'Malley's scientific
work has included major achievements in the areas of medical endocrinology and
reproduction with potentially broad application to the diagnosis of human
genetic diseases and the treatment of breast and prostatic cancer. His work
includes the invention of GENEMEDICINE'S proprietary GeneSwitch-TM- technology
that allows for the greater control of the level and duration of the expression
of the therapeutic protein produced by a gene medicine. Dr. O'Malley holds a
B.S. and a M.D. degree from the University of Pittsburgh.
 
BOARD COMPOSITION
 
    Megabios currently has authorized eight directors; however, under the terms
of the reorganization agreement, Megabios shall, prior to the closing date of
the merger, cause the number of authorized directors to be increased to nine to
accommodate the appointment of Mr. Pappas and Drs. Crooke and O'Malley to the
Megabios Board, as described below. In accordance with the terms of the Megabios
Certificate of Incorporation, the terms of office of the Megabios Board are
divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 2001; Class II, whose term will expire at
the annual meeting of stockholders to be held in 1999; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2000. The Class
I directors are Benjamin F. McGraw, III and Frank J. Caufield, the Class II
directors are A. Grant Heidrich and Patrick G. Enright, and the Class III
directors are Raju Kucherlapati and Russell C. Hirsch. As a condition to the
consummation of the merger, Megabios shall have taken all corporate action
necessary to nominate and appoint (1) Mr. Pappas to Class I of the Megabios
Board to serve until the annual meeting of stockholders to be held in 2001; (2)
Dr. Crooke to Class II of the Megabios Board to serve until the annual meeting
of
 
                                       87
<PAGE>
stockholders to be held in 1999; and (3) Dr. O'Malley to Class III of the
Megabios Board to serve until the annual meeting of stockholders to be held in
2000. At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the Megabios Certificate of Incorporation
provides that the authorized number of directors may be changed only by
resolution of the Megabios Board. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This classification of the Megabios Board may have the effect of
delaying or preventing changes in control or management of Megabios. Although
directors of Megabios may be removed for cause by the affirmativ e vote of the
holders of a majority of the Megabios common stock, the Megabios Certificate of
Incorporation provides that holders of two-thirds of the Megabios common stock
must vote to approve the removal of a director without cause.
 
BOARD COMMITTEES
 
    The Audit Committee of the Megabios Board reviews the results of the annual
audit, discusses the financial statements, recommends to the Megabios Board the
independent auditors to be retained, and receives and considers the accountants'
comments as to controls, adequacy of staff and management performance and
procedures in connection with audit and financial controls. The Audit Committee
is composed of two non-employee directors: Mr. Caufield and Dr. Hirsch.
 
    The Compensation Committee of the Megabios Board makes recommendations
concerning salaries and incentive compensation, awards stock options to
employees and consultants under Megabios' stock option plans and otherwise
determines compensation levels and performs such other functions regarding
compensation as the Megabios Board may delegate. The Compensation Committee is
composed of two non-employee directors: Mr. Heidrich and Dr. Kucherlapati.
 
DIRECTOR COMPENSATION
 
    During fiscal year ended June 30, 1998, Megabios did not have a compensation
program for its non-employee directors. Megabios could at its discretion grant
non-statutory stock options under Megabios' 1997 Equity Incentive Plan to the
non-employee directors.
 
    At the May 27, 1998 Megabios Board meeting, a compensation program for
non-employee directors of Megabios was approved. Under such compensation
program, and beginning on January 1, 1999 each non-employee director of Megabios
receives a quarterly retainer of $3,000 and a per meeting fee of $1,000. The
members of the Megabios Board are also eligible for reimbursement for their
expenses incurred in connection with attendance at Board of Directors' meetings
in accordance with Megabios' policies.
 
    Under the new compensation program, on the date of the annual stockholders'
meeting of each year, each member of Megabios Board who is not an employee of
Megabios will automatically be granted under Megabios' 1998 Non-Employee
Directors' Stock Option Plan, an option to purchase 10,000 shares of common
stock of Megabios. In addition, each new non-employee director will receive a
one time grant to purchase 25,000 shares of Megabios common stock upon the date
of his or her initial election or appointment to be a Non-Employee Director by
the Megabios Board or stockholders of Megabios. The exercise price of the
options granted to the non-employee directors is 100% of the fair market value
of the Megabios common stock subject to the option on the date of the option
grant.
 
    In February 1998, Patrick Enright entered into a consulting agreement with
Megabios. Pursuant to the agreement, Mr. Enright performs consulting services of
at least five hours per month in consideration of the continued vesting of his
unvested stock options over the term of his consulting agreement.
 
                                       88
<PAGE>
EXECUTIVE COMPENSATION
 
                           SUMMARY COMPENSATION TABLE
 
    The following table shows for the fiscal year ended June 30, 1998, the
compensation awarded or paid to, or earned by, Megabios' Chief Executive Officer
and its other two most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000, including one former executive officer who
departed from Megabios during fiscal year 1998 (the "Named Executive Officers"):
 
<TABLE>
<CAPTION>
                                                                     ANNUAL COMPENSATION(1)
                                                          --------------------------------------------
                                                                                        ALL OTHER
NAME AND PRINCIPAL POSITION                                 SALARY       BONUS       COMPENSATION(2)
- --------------------------------------------------------  ----------  -----------  -------------------
<S>                                                       <C>         <C>          <C>
Benjamin F. McGraw III, Pharm.D.
  Chairman, Chief Executive
  Officer and President.................................  $  275,002      --            $     656
Patrick G. Enright(3)
  Former Senior Vice President
  and Chief Financial Officer...........................     138,564      --                   76
Rodney Pearlman, Ph.D.
  Senior Vice President, Research and Development.......     179,999      --                  279
</TABLE>
 
- ------------------------
 
(1) In accordance with SEC rules, other annual compensation in the form of
    perquisites and other personal benefits has been omitted where the aggregate
    amount of such perquisites and other personal benefits constitutes less than
    the lesser of $50,000 or 10% of the total annual salary and bonus for the
    Named Executive Officer for the fiscal year.
 
(2) Represents insurance premiums paid by Megabios with respect to group life
    insurance for the benefit of the Named Executive Officers.
 
(3) Mr. Enright resigned as Senior Vice President and Chief Financial Officer in
    February 1998.
 
    Megabios grants options to its executive officers under its 1997 Equity
Incentive Plan. As of November 19, 1998, options to purchase a total of 974,367
shares were outstanding under this plan and options to purchase 171,249 shares
remained available for grant thereunder.
 
                                       89
<PAGE>
                       OPTION GRANTS IN LAST FISCAL YEAR
 
    The following table shows for the fiscal year ended June 30, 1998, certain
information regarding options granted to stock options granted to Named
Executive Officers:
 
<TABLE>
<CAPTION>
                                                                                                      POTENTIAL
                                                         INDIVIDUAL GRANTS                        REALIZABLE VALUE
                                      --------------------------------------------------------       AT ASSUMED
                                                      % OF TOTAL                                   ANNUAL RATES OF
                                        NUMBER OF       OPTIONS                                      STOCK PRICE
                                       SECURITIES     GRANTED TO                                   APPRECIATION OF
                                       UNDERLYING    EMPLOYEES IN    EXERCISE OR                   OPTION TERM(1)
                                         OPTIONS        FISCAL       BASE PRICE    EXPIRATION   ---------------------
NAME                                   GRANTED(#)       YEAR(2)     ($/SH)(#)(3)      DATE        5%($)      10%($)
- ------------------------------------  -------------  -------------  -------------  -----------  ---------  ----------
<S>                                   <C>            <C>            <C>            <C>          <C>        <C>
Benjamin F. McGraw III, Pharm. D....       --             --             --            --          --          --
Patrick G. Enright(4)...............       50,000            9.1%         15.50      11/03/07     488,250   1,232,250
Rodney Pearlman, Ph.D...............       --             --             --            --          --          --
</TABLE>
 
- ------------------------
 
(1) Reflects the value of the stock option on the date of grant assuming (i) for
    the 5% column, a five-percent annual rate of appreciation in Megabios common
    stock over the ten-year term of the option and (ii) for the 10% column, a
    ten-percent annual rate of appreciation in the Megabios' common stock over
    the ten-year term of the option, in each case without discounting to net
    present value and before income taxes associated with the exercise. The 5%
    and 10% assumed rates of appreciation are based on the rules of the SEC and
    do not represent Megabios' estimate or projection of the future common stock
    price. The amounts in this table may not necessarily be achieved.
 
(2) Based on options to purchase 550,722 shares of Megabios' common stock
    granted in the fiscal year ended June 30, 1998.
 
(3) All options were granted at the fair market value at the date of grant.
 
(4) Options vest over a four year period with 25% of the total vesting after one
    year and one thirty-sixth (1/36) of the remaining 75% vesting at the end of
    each additional one-month period thereafter. Mr. Enright resigned as Senior
    Vice President and Chief Financial Officer of Megabios in February 1998.
 
                 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
 
    The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options, and
the number of shares underlying unexercised stock options and the value of
unexercised in-the-money stock options (exercisable and unexercisable), during
the fiscal year ended June 30, 1998:
 
<TABLE>
<CAPTION>
                                                                         NUMBER OF
                                                                        SECURITIES
                                                                        UNDERLYING
                                                                    UNEXERCISED OPTIONS     VALUE OF UNEXERCISED
                                           SHARES        VALUE      AT JUNE 30, 1998(#)     IN-THE-MONEY OPTIONS
                                         ACQUIRED ON   REALIZED        EXERCISABLE/        AT JUNE 30, 1998(2)($)
NAME                                     EXERCISE(#)    ($)(1)         UNEXERCISABLE       EXERCISABLE/UNEXERCISABLE
- --------------------------------------  -------------  ---------  -----------------------  -----------------------
<S>                                     <C>            <C>        <C>                      <C>
Benjamin F. McGraw III, Pharm.D.......       73,333      689,937                0/0                      0/0
Patrick G. Enright....................       --           --               80,000/0                183,750/0
Rodney Pearlman, Ph.D.................       --           --               25,000/0                153,125/0
</TABLE>
 
- ------------------------
 
(1) Fair market value of Megabios common stock on date of exercise minus the
    exercise price.
 
(2) Fair market value of Megabios common stock on June 30, 1998 ($7.625) minus
    the exercise price of the options.
 
                                       90
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
    The Megabios Bylaws provide that Megabios will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. Megabios is also
empowered under the Megabios Bylaws to enter into indemnification contracts with
its directors and officers and to purchase insurance on behalf of any person it
is required or permitted to indemnify. Pursuant to this provision, Megabios
expects to enter into indemnification agreements with each of its directors and
executive officers.
 
    Megabios has obtained officer and director liability insurance with respect
to liabilities arising out of certain matters, including matters arising under
the Securities Act. In addition, the Megabios Certificate of Incorporation
provides that, to the fullest extent permitted by Delaware law, Megabios'
directors will not be liable for monetary damages for breach of the directors'
fiduciary duty of care to Megabios and its stockholders. This provision in the
Megabios Certificate of Incorporation does not eliminate the duty of care, and
in appropriate circumstances, equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under Delaware law. Under
current Delaware law, a director's liability to Megabios or its stockholders may
not be limited with respect to any breach of the director's duty of loyalty to
Megabios or its stockholders, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, for
improper transactions between the director and Megabios and for improper
distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws such as the federal securities laws or state or federal environmental laws.
 
    There is no pending litigation or proceeding involving a director or officer
of Megabios as to which indemnification is being sought, nor is Megabios aware
of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
 
                        CERTAIN TRANSACTIONS OF MEGABIOS
 
    On May 18, 1998, Megabios entered into an employment agreement with Bennet
L. Weintraub to employ Mr. Weintraub as Vice President and Chief Financial
Officer. Under the terms of this agreement, Mr. Weintraub receives an annual
salary of $170,000. In addition, the agreement provides that Mr. Weintraub will
receive a cash incentive bonus, in addition to any bonus Mr. Weintraub may be
eligible for under other Megabios bonus programs, in the amount of $70,000 upon
the achievement of certain performance criteria established by Megabios. Mr.
Weintraub also received two stock option grants covering an aggregate of 80,000
shares of Megabios common stock, subject to standard employee stock option
requirements. Megabios also committed to extend a loan to Mr. Weintraub in the
amount of $160,000 for the purpose of exercising his stock options.
 
    On April 22, 1998, Megabios entered into an employment agreement with John
F. Warner, Ph.D. to employ Dr. Warner as Vice President, Research Technology.
Under the terms of the employment agreement, Dr. Warner receives an annual
salary of $170,000. In addition, this agreement provides that Dr. Warner be paid
a one time bonus in the amount of $30,000 for joining Megabios. Dr. Warner also
received a stock option to purchase 65,000 shares of Megabios common stock,
subject to standard employee stock option requirements. Pursuant to the
employment agreement, Megabios also paid Dr. Warner relocation expenses, paid
him six months of temporary housing, covered medical and dental insurance costs
for up to six months and provided Dr. Warner with an additional two weeks of
paid time off during 1998.
 
    On May 22, 1998, Megabios entered into a Loan Agreement with Dr. Warner in
connection with a promissory note in the amount of $130,000 for the purpose of
purchasing a new principal residence.
 
                                       91
<PAGE>
    Megabios has entered into indemnity agreements with certain officers and
directors which provide, among other things, that Megabios will indemnify such
officer or director, under the circumstances and to the extent provided for
therein, for expenses, damages, judgments, fines and settlements he may be
required to pay in actions or proceedings which he is or may be made a party by
reason of his position as a director, officer or other agent of Megabios, and
otherwise to the full extent permitted under Delaware law and the Megabios
Bylaws.
 
                        MEGABIOS PRINCIPAL STOCKHOLDERS
 
    The following table sets forth certain information, based on review of
information on file with the SEC and Megabios stock records, with respect to
beneficial ownership of Megabios' voting stock as of November 19, 1998 (1) by
each person (or group of affiliated persons) who is known by Megabios to own
beneficially more than five percent of Megabios' voting stock, (2) by each of
Megabios' directors, (3) by the Named Executive officers, and (4) by all
directors and executive officers as a group. Except as indicated in the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Megabios common stock shown as
beneficially owned by them, subject to community property laws where applicable.
Unless otherwise indicated, the stockholder's address is c/o Megabios Corp.,
863A Mitten Road, Burlingame, California 94010.
 
<TABLE>
<CAPTION>
                                                                                                SHARES BENEFICIALLY
                                                                                                     OWNED (1)
                                                                                              -----------------------
BENEFICIAL OWNER                                                                                NUMBER      PERCENT
- --------------------------------------------------------------------------------------------  ----------  -----------
<S>                                                                                           <C>         <C>
Entities Affiliated with Mayfield Fund(2)
  2800 Sand Hill Road
  Menlo Park, CA 94025......................................................................     848,668        6.58%
Lombard Odier & Cie
  11 Rue de la Corraterie
  1211 Geneva Switzerland...................................................................     693,332        5.38
Frank J. Caufield...........................................................................     335,289        2.60
Patrick G. Enright(3).......................................................................     194,499        1.50
A. Grant Heidrich(4)........................................................................     852,776        6.61
Russell C. Hirsch, M.D., Ph.D...............................................................       1,633       *
Raju Kucherlapati(5)........................................................................      26,666       *
Benjamin F. McGraw, III, Pharm. D.(6).......................................................     406,703        3.15
Rodney Pearlman, Ph.D.(7)...................................................................     137,499        1.06
All executive officers and directors as a group (8 persons)(8)..............................   1,955,065       15.01
</TABLE>
 
- ------------------------
 
*   Less than one percent.
 
(1) This table is based upon information supplied by officers, directors and
    principal stockholders and Schedules 13D and 13G if any filed with the SEC.
    Unless otherwise indicated in the footnotes to this table and subject to
    community property laws where applicable, Megabios believes that each of the
    stockholders named in this table has sole voting and investment power with
    respect to the shares indicated as beneficially owned. Applicable
    percentages are based on 12,895,650 shares outstanding on November 19, 1998,
    adjusted as required by rules promulgated by the SEC.
 
(2) Includes 817,505 shares held by Mayfield VII and 31,163 shares held by
    Mayfield Associates Fund II.
 
(3) Includes 2,000 shares held by Enright Capital Advisors, an investment
    partnership of which Mr. Enright is a partner. Mr. Enright disclaims
    beneficial ownership of all such shares owned by the foregoing partnership
    except to the extent of his proportionate pecuniary interest therein. Also
    includes 80,000 shares Mr. Enright has the right to acquire pursuant to an
    option exercisable within 60 days, 61,130 of which will be subject to
    repurchase by Megabios at such date, if issued.
 
                                       92
<PAGE>
(4) Includes 210 shares held by A. Grant Heidrich III Trustee of the A. Grant
    Heidrich III Separate Property Trust U/A 5/31/84, 3,898 shares held by the
    Heidrich Family Partners I Mayfield Fund, 817,505 held by Mayfield VII and
    31,163 shares held by Mayfield Associates Fund II. Mr. Heidrich is a member
    of Mayfield Fund, the general partner of Mayfield Associates Fund II and
    Mayfield VII. Mr. Heidrich disclaims beneficial ownership of all of such
    shares held by Mayfield VII or Mayfield Associates Fund II, except to the
    extent of his proportionate pecuniary interest therein
 
(5) Includes 26,666 shares Dr. Kucherlapati has the right to acquire pursuant to
    options exercisable within 60 days, 7,223 of which will be subject to
    repurchase by Megabios at such date, if issued.
 
(6) Includes 373,333 shares Dr. McGraw acquired pursuant to the exercise of
    stock options, 53,265 of which will be subject to repurchase by Megabios as
    of January 18, 1999.
 
(7) Includes 112,499 shares Dr. Pearlman acquired pursuant to the exercise of
    stock options, 7,900 of which will be subject to repurchase by Megabios as
    of January 18, 1999. Also includes 25,000 shares Dr. Pearlman has the right
    to acquire pursuant to option exercisable within 60 days, 13,542 which will
    be subject to repurchase by Megabios on such date, if issued.
 
(8) Includes 848,668 shares held by entities affiliated with certain directors
    of Megabios as described in footnote (2) above and 131,666 shares subject to
    options exercisable within 60 days.
 
                                       93
<PAGE>
                      INFORMATION RELATING TO GENEMEDICINE
 
GENEMEDICINE BUSINESS
 
    GENEMEDICINE is engaged in the discovery and development of a new class of
pharmaceutical products that incorporate genes ("gene medicines") for the
treatment or prevention of serious diseases. GENEMEDICINE'S gene medicines are
designed to be well-characterized pharmaceutical products that are directly
administered to patients through convenient and conventional routes, including
intramuscular injection, inhalation and intravenous injection. Gene medicines
are designed to deliver genetic instructions to targeted cells in the body to
produce therapeutic proteins or desired immune responses. Gene medicines may
also incorporate novel DNA sequences that may be used to control the
tissue-specificity, duration and level of functioning of administered genes.
 
    GENEMEDICINE'S business focus is the development of gene medicines for
treating cancers, cardiovascular disease, pulmonary diseases and neuromuscular
disorders, as well as in the development of genetic vaccines for therapeutic and
prophylactic treatment of viral and bacterial infections. GENEMEDICINE'S
strategy has been to develop and commercialize its products through corporate
alliances with major pharmaceutical and biotechnology companies.
 
    GENEMEDICINE has established a broad proprietary position in non-viral gene
therapy that includes: several key gene delivery and gene expression
technologies; technology related to the manufacture of gene medicines; and the
use of certain genes to treat certain disease indications. In October 1997,
GENEMEDICINE announced issuance both in the U.S. and in Europe of a patent that
covers the use for gene therapy of any cationic lipid combined with DNA and
administered by injection or inhalation, the most common routes of
administration. GENEMEDICINE has an exclusive worldwide license to the
technology covered by this patent. GENEMEDICINE has also developed patented
GeneSwitch-TM- technology that may be used to activate or to deactivate the
expression of previously administered therapeutic genes in specific cells.
GENEMEDICINE has created high-yield, low-cost and scaleable integrated
manufacturing processes for the production of its gene medicines for clinical
use.
 
    GENEMEDICINE'S current efforts in the development of gene medicines for the
treatment of cancer are focused on its Interleukin-2 ("IL-2"), Interferon-alpha
("IFN-a"), and Interleukin-12 ("IL-12") Gene Medicines. These three gene
medicines are being developed through a corporate alliance with certain
Boehringer Mannheim subsidiaries ("Boehringer Mannheim") of Corange
International Ltd. ("Corange") which was acquired by Roche Holding Ltd.
("Roche") in March 1998. The IL-2 Gene Medicine has been shown to be safe and
well-tolerated in head and neck cancer patients at all dose levels studied in
the Phase I human clinical trials. Phase II clinical trials IL-2 Gene Medicine
are expected to commence by first quarter 1999. Phase I/II clinical trials with
GENEMEDICINE'S IFN-a Gene Medicine and IL-12 Gene Medicine are expected to
commence in the first quarter and second quarter of 1999, respectively.
 
    In March 1998, GENEMEDICINE announced that a vascular endothelial growth
factor ("VEGF") gene medicine employing GENEMEDICINE'S proprietary cationic
lipid gene delivery system is the subject of two physician initiated Phase II
angioplasty clinical trials, one for treating peripheral vascular disease and
one for treating coronary artery disease. In May 1998, GENEMEDICINE announced
positive results of a physician initiated Phase I clinical trail for an alpha-1
antitrypsin ("AAT") gene medicine. The AAT gene medicine was well tolerated and
all five participants in the study had sustained elevated levels of the AAT
protein following intranasal administration of the gene medicine.
 
    In January 1998, GENEMEDICINE announced that it was re-examining potential
target indications for its Insulin-like Growth Factor-I ("IGF-I") gene medicine
and would not start a previously scheduled Phase I clinical trial for this
product. GENEMEDICINE received clearance from the FDA late in the fourth quarter
of 1996 to commence the Phase I clinical trial to study the safety and
tolerability of the IGF-I Gene Medicine, but no healthy volunteers had been
enrolled in the trial. The reasons for GENEMEDICINE'S decision not to proceed
with the trial were the restrictive criteria placed on the participants'
qualifications
 
                                       94
<PAGE>
for enrollment in this trial and GENEMEDICINE'S assessment of the relative
market opportunities for the product. Subsequently, GENEMEDICINE has identified
female urinary incontinence as the primary target indication for the IGF-I Gene
Medicine. GENEMEDICINE intends to proceed with clinical trials with the IGF-I
Gene Medicine only if it can find a corporate partner to undertake those trials.
The IGF-I Gene Medicine may also have broad application in the treatment of
muscle disorders and neuropathies that afflict large patient populations and are
not adequately addressed by current therapies, if at all.
 
    GENEMEDICINE is developing gene delivery systems based on three broad
classes of materials: lipids, polymers and peptides. GENEMEDICINE has shown that
gene delivery systems containing cationic lipid combined with neutral lipids
enhance the cellular uptake of plasmid-based gene expression systems in animals.
These lipid-based gene delivery systems have been demonstrated to enhance the
entry of genes into tumor cells after intratumoral administration and also to
deliver genes to the endothelium and epithelium of the lung after intravenous
administration and inhalation, respectively. GENEMEDICINE is using its
proprietary cationic lipid gene delivery systems in its three gene medicines
intended for the treatment of cancer. In addition, GENEMEDICINE'S academic
collaborators are employing cationic lipid gene delivery systems in three
physician-initiated clinical trials: a completed Phase I clinical trial to
deliver genes to cells lining the airways; and two Phase II clinical trials to
deliver genes to endothelium cells lining the blood vessels of muscle tissue and
of the heart. GENEMEDICINE also is pursuing the discovery and development of
several novel classes of lipid molecules for enhancing gene delivery to a
variety of tissues.
 
    GENEMEDICINE has also developed gene delivery systems that employ certain
polymers which, in certain formulations for conventional drugs, are approved for
human use. GENEMEDICINE has shown that these polymers interact with plasmids and
facilitate the delivery of genes into muscle cells in vivo after intramuscular
administration. GENEMEDICINE is employing its proprietary polymeric PINC-TM-
(Protective, Interactive, Non-Condensing) gene delivery system in its IGF-I Gene
Medicine. GENEMEDICINE'S scientists have demonstrated in animal models that the
use of polymeric PINC gene delivery systems can lead to a significant increase
in both the level and the reproductability of proteins produced in muscle
compared to the administration of plasmids formulated in saline (so-called
"naked" DNA).
 
    GENEMEDICINE is also creating and developing gene delivery systems made up
of short synthetic peptides and peptides containing simple sugars
(glycopeptides). The peptides are designed to bind to gene expression systems to
form a tightly compacted complex, which GENEMEDICINE believes is important for
gene expression systems to gain access to certain types of cells. The
glycopeptides are designed to interact specifically with natural receptors
present on the surfaces of target cells and to effect the entry of the gene
expression system through the membrane and into those cells. GENEMEDICINE has
also developed certain gene delivery systems designed to enhance the movement of
the gene expression system to the cell nucleus where gene expression occurs.
GENEMEDICINE is developing glycopeptide gene delivery systems for gene medicines
targeting the hepatocyte cells in the liver after intravenous administration. In
addition, GENEMEDICINE'S peptides can be utilized in combination with other
materials such as cationic lipids. GENEMEDICINE has certain exclusive and
co-exclusive rights to materials in each of the foregoing classes used for gene
delivery systems.
 
                                       95
<PAGE>
           GENEMEDICINE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
    The following discussion and analysis should be read in conjunction with the
"GENEMEDICINE, INC. Selected Financial Information" and related notes contained
elsewhere in this joint proxy statement/ prospectus.
 
RESULTS OF OPERATIONS
 
    OVERVIEW
 
    Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, the early stage of GENEMEDICINE'S development and technological
uncertainty, dependence on collaborative partners and licenses, the failure of
existing or future partnerships to be successful, future capital needs and
uncertainty of additional funding, uncertainty of patent protection, uncertainty
of government regulatory requirements, level of competition and rapid
technological change, as well as those set forth in this section and in the
section entitled "Risk Factors."
 
    Since its inception in January 1992, GENEMEDICINE has devoted its resources
primarily to fund its research and development programs. GENEMEDICINE has been
unprofitable since inception and to date has not received any revenues from the
sale of products. No assurance can be given that GENEMEDICINE will be able to
generate sufficient product revenues to attain profitability on a sustained
basis or at all. GENEMEDICINE expects to incur substantial losses for the next
several years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At September 30,
1998, GENEMEDICINE'S accumulated deficit was approximately $57.6 million.
 
    NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
 
    Revenues of $4.3 million were recorded for the nine months ended September
30, 1998, which consisted of contract revenue of $3.1 million, interest income
of $1.0 million and research and development grant revenue of $0.2 million.
These results compare with revenues of $5.3 million for the nine months ended
September 30, 1997, which consisted of contract revenue of $3.5 million,
interest income of $1.3 million and research and development grant revenue of
$0.5 million. Contract revenues in respective periods primarily resulted from a
corporate partnership with certain Boehringer Mannheim subsidiaries of Corange,
which was acquired by Roche Holding Ltd. in March 1998, to develop non-viral
gene medicines using certain genes to treat human cancer indications. The
decrease in contract revenue for the first nine months of 1998 compared to the
same period in 1997 was due to the recognition in 1997 of a $0.5 million
milestone payment from Boehringer Mannheim for achieving clearance from the FDA
to commence a Phase I clinical trial using GENEMEDICINE'S IL-2 Gene Medicine,
which GENEMEDICINE is developing for the treatment of head and neck cancer.
 
    GENEMEDICINE'S research and development expenses for the nine months ended
September 30, 1998 increased to $11.5 million from $10.1 million for the same
period in 1997. This increase was generally due to the expansion of
GENEMEDICINE'S research and development activities, resulting in staffing
increases and the related salary and benefit costs, as well as additional
laboratory supplies and other support costs. The expansion of GENEMEDICINE'S
research and development activities has been driven primarily by the progression
of research in the field of genetic vaccines and clinical development efforts in
the field of cancer. GENEMEDICINE anticipates that research and development
expenditures will increase over the next several years as it continues to expand
its research and product development efforts.
 
    General and administrative expenses remained relatively unchanged at $3.4
million for the nine months ended September 30, 1998, compared to the same
period in 1997.
 
                                       96
<PAGE>
    Loss per share for the nine months ended September 30, 1998 was $0.74, as
compared to a loss per share of $0.60 for the same period in 1997. The increase
in GENEMEDICINE'S net loss per share for the nine months ended September 30,
1998 was primarily the result of decreased contract revenue and increased
research and development expenses as described above.
 
    YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
 
    Revenues and other income for the year ended December 31, 1997 were $6.8
million, which consisted of contract revenue of $4.5 million, interest income of
$1.6 million and research and development grant revenue of $0.7 million. This
compares with revenues and other income of $6.6 million in 1996 and $5.1 million
in 1995. The contract revenues in each period resulted from a corporate
partnership with Boehringer Mannheim, which was acquired by Roche Holding Ltd.
in March 1998, to develop certain non-viral gene medicines for application in
the field of cancer. As a component of contract revenues, in February 1997
GENEMEDICINE received a milestone payment of $500,000 from Boehringer Mannheim
for achievement of FDA clearance to commence a Phase I clinical trial for
GENEMEDICINE'S IL-2 Gene Medicine. Higher interest income for 1996, as compared
to 1995 and 1997, was primarily the result of higher average cash, cash
equivalents and short-term investments balances due to GENEMEDICINE'S follow-on
public offering in October 1995.
 
    Research and development expenses for the year ended December 31, 1997 were
$14.1 million, compared to $13.7 million in 1996 and $11.3 million in 1995. The
year-to-year increases in research and development expense were generally due to
the expansion of GENEMEDICINE'S research and development activities, staffing
increases and the related salary and benefit costs as well as additional
laboratory supplies and other support costs. The expansion of research and
development activities resulted primarily from the commencement and continued
expansion of research in the field of cancer, offset in 1997 by decreased
research and development activities in the fields of asthma and arthritis
following termination of GENEMEDICINE'S corporate alliance with Syntex, which
ended in accordance with its terms in April 1997. In February 1995, GENEMEDICINE
commenced research and development efforts in the field of cancer, which is the
focus of a multi-year corporate partnership with Boehringer Mannheim.
GENEMEDICINE anticipates that expenditures will increase over the next several
years as it expands its research and product development efforts.
 
    General and administrative expenses were approximately $4.4 million in 1997,
compared to $3.4 million and $3.7 million in 1996 and 1995, respectively. The
increase from 1996 to 1997 was primarily due to (i) expanded efforts focused on
corporate development to obtain new corporate and strategic alliances, including
costs for additional personnel and related recruiting, relocation and salary and
benefit costs, (ii) legal and consulting costs associated with expanded
corporate development efforts and (iii) enhancement of technology systems and
increased efforts for investor relations. The slight decrease in 1996 from 1995
was due primarily to lower legal costs in 1996. GENEMEDICINE expects that
general and administrative expenses will increase in the future as a result of
additional corporate development activities.
 
    GENEMEDICINE has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1997, GENEMEDICINE has
generated net operating loss (NOL) carryforwards of approximately $39 million
and approximately $1.2 million of research and development credits available to
reduce future income taxes. These carryforwards begin to expire in 2007. For
financial reporting purposes, a valuation allowance has been established as of
December 31, 1996 and 1997, to offset fully GENEMEDICINE'S net deferred tax
assets, including those relating to its carryforwards. GENEMEDICINE'S ability to
utilize these carryforwards to reduce future taxable income may be limited due
to ownership changes.
 
                                       97
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
 
    Since its inception, GENEMEDICINE has financed its operations primarily
through private and public sales of its equity securities, interest income on
invested funds and revenues from corporate alliances. Through September 30,
1998, GENEMEDICINE had received approximately $70.6 million in net proceeds from
sales of its equity securities. At September 30, 1998, GENEMEDICINE had working
capital of $17.6 million and cash, cash equivalents and short-term investments
of $18.4 million. In addition, in October 1998 GENEMEDICINE received a $1.25
million, scheduled contract research payment from Boehringer Mannheim.
 
    GENEMEDICINE expects its cash requirements to increase significantly in
future periods. GENEMEDICINE will require substantial funds to conduct research
and development programs, preclinical studies and clinical trials of its
potential products and to market with its partners any products that are
developed. In addition, GENEMEDICINE currently plans to manufacture clinical
scale quantities of its products, which will require GENEMEDICINE to expend
substantial additional capital. GENEMEDICINE'S future capital requirements will
depend on many factors, including the ability to maintain existing and establish
additional corporate partnerships, continued scientific progress in its research
and development programs, the scope and results of preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing, and scale-up and
effective commercialization activities and arrangements. Based on its current
plans, GENEMEDICINE believes that its available cash, including proceeds from
projected interest income and anticipated funding from its corporate alliance
with Boehringer Mannheim, will enable GENEMEDICINE to maintain its current and
planned operations into the first quarter of 2000. There can be no assurance,
however, that changes in GENEMEDICINE'S research and development plans or other
changes affecting GENEMEDICINE'S operating expenses will not result in the
expenditure of such resources before such time. If the merger with Megabios is
not consummated, GENEMEDICINE intends to seek additional funding through public
or private financing, research and development arrangements with potential
corporate partners, or from other sources to augment its current cash position.
There can be no assurance that additional financing will be available on
favorable terms, if at all. In the event that adequate funding is not available,
GENEMEDICINE may be required to delay, reduce or eliminate one or more of its
research or development programs or obtain funds through arrangements with
corporate collaborators or others that may require GENEMEDICINE to relinquish
greater or all rights to product candidates at an earlier stage of development
or on less favorable terms than GENEMEDICINE would otherwise seek. Insufficient
financing may also require GENEMEDICINE to relinquish rights to certain of its
technologies that GENEMEDICINE would otherwise develop or commercialize itself.
GENEMEDICINE'S business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners. Although
GENEMEDICINE'S products may appear promising at an early stage of development,
they may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure by GENEMEDICINE to obtain
patent protection for its products may make certain of its products commercially
unattractive. There can be no assurance that any collaboration will be continued
or result in successful commercialized products.
 
IMPACT OF YEAR 2000 ON INFORMATION SYSTEMS
 
    Y2K exposure is the result of computer programs using two instead of four
digits to represent the year. These computer programs may erroneously interpret
dates beyond the year 1999, which could cause system failures or other computer
errors, leading to disruptions in operations.
 
                                       98
<PAGE>
    GENEMEDICINE is currently developing and executing a plan to ensure that its
system and software infrastructure are Y2K compliant. GENEMEDICINE is in the
process of conducting an internal review to identify financial information and
operations systems and applications from which it has exposure to Y2K
disruptions in operations. Given the relatively small size of GENEMEDICINE'S
information systems and GENEMEDICINE'S predominantly new hardware, software and
operating systems, management expects to be Y2K compliant by the end of the
fourth quarter of 1999.
 
    Additionally, GENEMEDICINE has contacted key vendors and other third-parties
with which GENEMEDICINE has a significant relationship to determine their
readiness with respect to Y2K issues. GENEMEDICINE has been assured that such
third parties are either Y2K compliant or will be compliant by the end of the
fourth quarter of 1999. GENEMEDICINE is unable to control whether its current
and future strategic partners' and vendors' systems are or will be Y2K
compliant.
 
    GENEMEDICINE has prepared a preliminary estimate of total Y2K remediation
expenses of $10,000. These anticipated expenses are primarily for training and
education of information systems personnel and upgrades of certain software.
 
    GENEMEDICINE has not yet evaluated the consequences of its most reasonably
likely worst case Y2K scenario nor has GENEMEDICINE completed Y2K contingency
planning to address the question of what GENEMEDICINE will do if Y2K compliance
is not achieved. However at this time, management does not believe that any
systems, applications or third-party relationships will have a material impact
on GENEMEDICINE'S business, financial condition or results of operations if
GENEMEDICINE is not Y2K compliant prior to the end of the fourth quarter of
1999.
 
                                       99
<PAGE>
                 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                    ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
    In April 1998, GeneMedicine appointed a new director who had a familial
relationship with an accountant at Arthur Andersen LLP ("Arthur Andersen").
After discussion and analysis of the relationship, it was determined that Arthur
Andersen could no longer continue to serve as GENEMEDICINE'S independent
accountants. Accordingly, GENEMEDICINE'S audit committee on July 21, 1998
formally dismissed Arthur Andersen as GENEMEDICINE'S independent accountants and
engaged KPMG Peat Marwick LLP ("KPMG") as GENEMEDICINE'S independent
accountants.
 
    The reports of Arthur Andersen on GENEMEDICINE'S financial statements as of
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. During GENEMEDICINE'S two most recent fiscal years and through July
21, 1998, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Arthur Andersen would have caused it to make a reference to the subject matter
of the disagreements in connection with its report. Furthermore, during such
period there were no reportable events (as defined in Item 304(a)(1) (v) of
Regulation S-K).
 
    During the two most recent fiscal years and through July 21, 1998,
GENEMEDICINE has not consulted with KPMG regarding (1) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on GENEMEDICINE'S financial
statements, or (2) the subject matter of a disagreement or reportable event with
the former accountants (as described in Item 304(a)(2) of Regulation S-K).
 
                                      100
<PAGE>
                     DESCRIPTION OF MEGABIOS CAPITAL STOCK
 
    The authorized capital stock of Megabios consists of 30,000,000 shares of
common stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001
par value. As of the record date, there were [      ] shares of Megabios common
stock outstanding held of record by approximately 1,000 stockholders; no shares
of preferred stock were outstanding.
 
MEGABIOS COMMON STOCK.
 
    The holders of Megabios common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. The
holders of Megabios common stock are entitled to receive ratably such dividends
as may be declared by the Megabios Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of Megabios,
holders of Megabios common stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Megabios common stock have no
preemptive rights and no right to convert their Megabios common stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the Megabios common stock. All outstanding shares of Megabios common stock
are, and all shares of Megabios common stock to be outstanding after the
completion of the merger will be, fully-paid and nonassessable.
 
MEGABIOS PREFERRED STOCK.
 
    The Megabios Board has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Megabios preferred stock, in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by stockholders. The issuance of Megabios
preferred stock could adversely affect the voting power of holders of Megabios
common stock and the likelihood that such holders will receive dividend payments
and payments upon liquidation and could have the effect of delaying, deferring
or preventing a change in control of Megabios. Megabios has no present plan to
issue any shares of Megabios preferred stock.
 
DELAWARE GENERAL CORPORATION LAW AND CERTAIN CHARTER PROVISIONS.
 
    Megabios is subject to the provisions of Section 203 of the DGCL, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
employees, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
 
    The Megabios Certificate of Incorporation and Megabios Bylaws also require
that any action required or permitted to be taken by stockholders of Megabios
must be effected at a duly called annual or special meeting of the stockholders
and may not be effected by a consent in writing. In addition, special meetings
of the stockholders of Megabios may be called only by the Megabios Board, the
Chairman of the Megabios Board, the President of Megabios, or by any person or
persons holding shares representing at least 10% of the outstanding capital
stock of Megabios. The Megabios Certificate of Incorporation also provides for a
classified board and specifies that the authorized number of directors may be
changed only by resolution of the Megabios Board. These provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of Megabios. See "Megabios Management After the Merger--Board
Composition."
 
TRANSFER AGENT AND REGISTRAR.
 
    Boston Equiserve L.P. has been appointed as the transfer agent and registrar
for the Megabios common stock.
 
                                      101
<PAGE>
                       COMPARISON OF STOCKHOLDERS' RIGHTS
 
    Upon consummation of the merger, the holders of GENEMEDICINE common stock
will become holders of Megabios common stock. There are certain material
differences between the rights and privileges of the holders of GENEMEDICINE
common stock and the holders of Megabios common stock.
 
PERCENTAGE OF VOTING STOCK; INFLUENCE OVER AFFAIRS
 
    Upon completion of the merger, the percentage ownership of Megabios by each
former GENEMEDICINE stockholder will be substantially less than such
stockholder's current percentage ownership of GENEMEDICINE. Accordingly, former
GENEMEDICINE stockholders will have a significantly smaller voting influence
over the affairs of Megabios than they currently enjoy over the affairs of
GENEMEDICINE.
 
POWER TO CALL SPECIAL STOCKHOLDERS' MEETINGS
 
    Pursuant to GENEMEDICINE'S Bylaws, special meetings of stockholders may only
be called by the Chairman of GENEMEDICINE Board, the President, the GENEMEDICINE
Board or by written order of a majority of the GENEMEDICINE Board. Megabios'
Bylaws, on the other hand, provide that special meetings of stockholders may be
called by the Chairman of the Megabios Board, the Chief Executive Officer, the
Megabios Board pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is presented
to the Megabios Board for adoption), or by the holders of shares entitled to
cast not less than ten percent of the votes at the meeting. Accordingly, former
GENEMEDICINE stockholders will have the opportunity to call special meetings of
stockholders of Megabios, a right they do not currently possess as GENEMEDICINE
stockholders.
 
INTERESTED STOCKHOLDER TRANSACTIONS
 
    The Certificate of Incorporation of GENEMEDICINE provides that certain
mergers, asset sales or other business combinations (a "Business Combination")
with third parties who beneficially own 10% or more of the outstanding voting
stock of GENEMEDICINE ("Interested Stockholders") require the affirmative vote
of the holders of at least 66 2/3% of the outstanding voting stock of
GENEMEDICINE unless: (i) such Business Combination is approved by a majority
vote of the directors who are unaffiliated with the Interested Stockholders and
who were members of the GENEMEDICINE Board prior to the time that the Interested
Stockholder involved in the Business Combination became an Interested
Stockholder; or (ii) the aggregate consideration per share to be received in the
Business Combination by GENEMEDICINE stockholders is at least equal to the
higher of certain alternative per share valuations based upon (a) the highest
price paid in a given period by the Interested Stockholder in acquiring any of
its holdings of GENEMEDICINE voting stock, (b) the fair market value per share
of GENEMEDICINE voting stock on given dates, or (c) the highest preferential
amount per share to which the holders of shares of any class of GENEMEDICINE
voting stock would be entitled to receive in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the corporation. Megabios
does not have similar provisions in its Certificate of Incorporation, but is
subject to the provisions of Section 203 of the DGCL. See "Description of
Megabios Capital Stock-- Delaware General Corporation Law and Certain Charter
Provisions" on page 101.
 
AMENDMENT OF BYLAWS
 
    Under the Megabios Bylaws, the Megabios Bylaws may be altered or amended or
new Bylaws adopted by the affirmative vote of at least 66 2/3% of the voting
power of all of the then-outstanding shares of Megabios common stock. The
Megabios Board also has the power to adopt, amend or repeal Bylaws.
Alternatively, the GENEMEDICINE Bylaws may be altered or repealed by a majority
of the number of directors constituting the GENEMEDICINE Board at any regular
meeting of the GENEMEDICINE Board without prior notice, or at any special
meeting of the GENEMEDICINE Board if notice of such alteration,
 
                                      102
<PAGE>
amendment or repeal is contained in the notice of such special meeting.
Accordingly, former GENEMEDICINE stockholders will have the opportunity to alter
or amend the Bylaws of Megabios, a right they do not currently possess as
GENEMEDICINE stockholders.
 
RIGHTS PLAN
 
    GENEMEDICINE has adopted a Stockholder Preferred Stock Purchase Rights Plan
(the "Rights Plan") whereby the GENEMEDICINE Board declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share of
GENEMEDICINE common stock and every outstanding 3 1/2 shares of GENEMEDICINE
Series B preferred stock. Each Right represents the right to purchase at a given
price (the "Exercise Price") one one-hundredth of a share of Series A Junior
Participating preferred stock. The Rights Plan provides that: (i) if a third
party acquires more than 15% of the outstanding shares of GENEMEDICINE common
stock, each holder of a Right, other than such third party, would have the right
to purchase for the Exercise Price that number of shares of GENEMEDICINE common
stock having a market value of two times the Exercise Price, and (ii) if a third
party acquires GENEMEDICINE in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power of
GENEMEDICINE are sold to a third party, each holder of a Right, other than such
third party, would have the right to acquire for the Exercise Price that number
of shares of common stock of the acquiring company having a value of two times
the Exercise Price. Megabios does not have a stockholder rights plan.
 
                                    EXPERTS
 
    The financial statements of Megabios as of June 30, 1998 and 1997 and for
each of the three years in the period ended June 30, 1998, included in the joint
proxy statement of Megabios and GENEMEDICINE which is referred to and made a
part of this prospectus and registration statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon and
included elsewhere herein, and are included in reliance upon such report, given
upon the authority of such firm as experts in accounting and auditing.
 
    The financial statements of GENEMEDICINE as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997, included
in this joint proxy statement/prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance and upon the authority of said firm
as experts in accounting and auditing in giving said report.
 
                                 LEGAL MATTERS
 
    The validity of the shares of Megabios common stock offered hereby and other
legal matters will be passed upon for Megabios by Cooley Godward LLP, Palo Alto,
California. Cooley Godward LLP and certain members and associates in such firm
own an aggregate of approximately 650 shares of Megabios common stock.
 
    Certain legal matters in connection with the merger will be passed upon for
GENEMEDICINE by Heller Ehrman White & McAuliffe, Palo Alto, California.
 
                         MEGABIOS STOCKHOLDER PROPOSALS
 
    Stockholder proposals for inclusion in the proxy statement of Megabios to be
issued in connection with the 1999 annual meeting of Megabios stockholders must
be delivered to or mailed and received at the principal executive offices of
Megabios not later than on the close of business on the sixtieth day nor earlier
than the close of business on the ninetieth day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the event
public announcement of the date of such annual meeting is first made by Megabios
fewer than seventy days prior to the date of such annual meeting, the
 
                                      103
<PAGE>
close of business on the tenth day following the day on which public
announcement is first made by Megabios.
 
                       GENEMEDICINE STOCKHOLDER PROPOSALS
 
    GENEMEDICINE will hold a 1999 Annual Meeting of Stockholders only if the
merger is not consummated. In the event that such a meeting is held, any
proposal of a GENEMEDICINE stockholder intended to be presented at the 1999
Annual Meeting of Stockholders must be received by the corporate secretary of
GENEMEDICINE no later than January 3, 1999, in order to be included in the proxy
materials. Any such proposal will be subject to Rule 14a-8 of the Rules and
Regulations under the Exchange Act.
 
                                      104
<PAGE>
                      WHERE YOU CAN FIND MORE INFORMATION
 
    Megabios Corp. is a Delaware corporation. Megabios' principal executive
offices are located at 863A Mitten Road, Burlingame, California 94010, and its
telephone number is (650) 697-1900.
 
    GENEMEDICINE, INC. is a Delaware corporation. GENEMEDICINE'S principal
executive offices are located at 8301 New Trails Drive, The Woodlands, Texas
77381, and its telephone number is (281) 364-1150.
 
    Megabios and GENEMEDICINE each file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may inspect and copy
such material at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SEC's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. You may also
obtain copies of such material from the SEC at prescribed rates by writing to
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549.
 
    Please call the SEC at 1-800-SEC-0330 for more information on the public
reference rooms. You can also find our SEC filings at the SEC's website at
www.sec.gov.
 
    THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS
RELATING TO GENEMEDICINE BY REFERENCE. THESE DOCUMENTS ARE AVAILABLE TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE,
TO GENEMEDICINE, INC., 8301 NEW TRAILS DRIVE, THE WOODLANDS, TEXAS 77381-4248
(TELEPHONE NUMBER (281) 364-1150), ATTENTION: INVESTOR RELATIONS. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY
        , 1998.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
    The SEC's rules permit GENEMEDICINE to "incorporate by reference" the
information it files with the SEC which means that GENEMEDICINE can disclose
important information to you by referring you to documents GENEMEDICINE has
previously filed with the SEC. The information incorporated by reference is
considered to be a part of this joint proxy statement/prospectus, and any later
information that GENEMEDICINE files with the SEC will automatically update and
supersede this information. GENEMEDICINE incorporates by reference the documents
listed below, and any further filings made with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act until the offering of the securities is
terminated. This joint proxy statement/prospectus is part of a registration
statement on Form S-4 filed by Megabios with the SEC (Registration No.
        ). The documents GENEMEDICINE incorporates by reference are:
 
    1.  GENEMEDICINE'S Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
 
    2.  Those portions of GENEMEDICINE's definitive proxy statement, dated April
        30, 1998, incorporated by reference in Part III of GENEMEDICINE's Annual
        Report on Form 10-K for the year ended December 31, 1997;
 
    3.  GENEMEDICINE'S Quarterly Report on Form 10-Q for the quarter ended March
31, 1998;
 
    4.  GENEMEDICINE'S Quarterly Report on Form 10-Q for the quarter ended June
30, 1998;
 
    5.  GENEMEDICINE'S Current Report on Form 8-K dated July 27, 1998;
 
    6.  GENEMEDICINE'S Current Report on Form 8-K dated October 26, 1998; and
 
    7.  GENEMEDICINE'S Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
 
                                      105
<PAGE>
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
    This joint proxy statement/prospectus contains and incorporates by reference
certain statements that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include all statements regarding the intent, belief
or current expectations regarding the matters discussed or incorporated by
reference in this joint proxy statement/prospectus (including statements as to
beliefs, expectations, anticipations, intentions or similar words) and all
statements which are not statements of historical fact. Such statements are
subject to risks, uncertainties and assumptions, including, but not limited to,
risks to the realization of anticipated revenues, profitability and cost
synergies of the combined companies, risks related to the business and
operations of Megabios and GENEMEDICINE, including trends affecting their
continued growth, the development and regulatory approval of products and other
risks and uncertainties described in "Risk Factors" or in the other SEC filings
of GENEMEDICINE and Megabios. Should one or more of these risks or uncertainties
affect the business of the companies or should underlying assumptions prove
incorrect, Megabios' or GENEMEDICINE'S actual results, performance or
achievements in 1999 and beyond could differ materially from those expressed in,
or implied by, such forward-looking statements.
 
    The Megabios common stock and the GENEMEDICINE common stock are each quoted
on the Nasdaq National Market ("Nasdaq"). The trading symbol for Megabios is
"MBIO." The trading symbol for GENEMEDICINE is "GMED." You may inspect reports
and other information concerning Megabios and GENEMEDICINE at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
 
    YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY
REFERENCE INTO THIS JOINT PROXY STATEMENT/PROSPECTUS. WE HAVE AUTHORIZED NO ONE
TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT COVER OF THIS DOCUMENT.
 
    This joint proxy statement/prospectus contains separate trademarks of
Megabios and GENEMEDICINE as well as trademarks of other companies.
 
                                      106
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                             ---------
<S>                                                                                                          <C>
MEGABIOS CORP.
 
Report of Independent Auditors.............................................................................        F-2
 
Financial Statements
 
  Balance Sheets as of June 30, 1998 and 1997..............................................................        F-3
 
  Statements of Operations for the years ended June 30, 1998, 1997 and 1996................................        F-4
 
  Statement of Stockholders' Equity for the three years ended June 30, 1998................................        F-5
 
  Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996................................        F-6
 
  Notes to Financial Statements............................................................................        F-7
 
Interim Financial Statements (Unaudited)
 
  Condensed Balance Sheets as of September 30 and June 30, 1998............................................       F-21
 
  Condensed Statements of Operations for the three months ended September 30, 1998 and 1997................       F-22
 
  Condensed Statements of Cash Flows for the three months ended September 30, 1998 and 1997................       F-23
 
  Notes to Condensed Financial Statements..................................................................       F-24
 
GENEMEDICINE, INC.
 
Report of Independent Public Accountants...................................................................       F-27
 
Financial Statements
 
  Balance Sheets as of December 31, 1996 and 1997..........................................................       F-28
 
  Statements of Operations for the years ended December 31, 1995, 1996 and 1997, and the period from
    Inception (January 2, 1992) through December 31, 1997..................................................       F-29
 
  Statements of Stockholders' Equity for the period from Inception (January 2, 1992) through December 31,
    1997...................................................................................................       F-30
 
  Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997, and the period from
    Inception (January 2, 1992) through December 31, 1997..................................................       F-32
 
  Notes to Financial Statements............................................................................       F-33
 
Interim Financial Statements (Unaudited)
 
  Balance Sheets as of September 30, 1998 and December 31, 1997............................................       F-44
 
  Statements of Operations for the three- and nine-month periods ended September 30, 1998 and 1997 and for
    the period from Inception (January 2, 1992) through December 31, 1997..................................       F-45
 
  Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 and for the period from
    Inception (January 2, 1992) through December 31, 1997..................................................       F-46
 
  Notes to Financial Statements............................................................................       F-47
</TABLE>
 
                                      F-1
<PAGE>
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Megabios Corp.
 
    We have audited the accompanying balance sheets of Megabios Corp. as of June
30, 1998 and 1997, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Megabios Corp. as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
 
                                          /s/ ERNST & YOUNG, LLP
 
Palo Alto, California
 
July 31, 1998
 
                                      F-2
<PAGE>
                                 MEGABIOS CORP.
 
                                 BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                   JUNE 30,
                                                                                            ----------------------
                                                                                               1998        1997
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
                                                      ASSETS
Current assets:
Cash and cash equivalents.................................................................  $   15,172  $    9,044
Short-term investments....................................................................       7,794      15,225
Other receivables.........................................................................         616         238
Prepaid expenses and other current assets.................................................         539         390
                                                                                            ----------  ----------
    Total current assets..................................................................      24,121      24,897
Property and equipment, net...............................................................       6,151       4,733
Long-term investments.....................................................................      25,460      --
Other receivables.........................................................................         130          27
Deposits and other assets.................................................................          39         321
                                                                                            ----------  ----------
                                                                                            $   55,901  $   29,978
                                                                                            ----------  ----------
                                                                                            ----------  ----------
 
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..........................................................................  $      898  $      694
Accrued compensation......................................................................         595         170
Accrued construction-in-progress..........................................................         589         249
Other accrued liabilities.................................................................          56          35
Deferred revenue..........................................................................      --             887
Current portion of long-term debt.........................................................       1,017       1,233
                                                                                            ----------  ----------
    Total current liabilities.............................................................       3,155       3,268
Long-term debt............................................................................       2,464       1,487
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series; 10,000,000 shares authorized; none and
  8,420,720 convertible shares issued and outstanding at June 30, 1998 and 1997,
  respectively............................................................................      --          44,700
Common stock, $.001 par value, 30,000,000 shares authorized; 12,880,978 and 1,567,727
  shares issued and outstanding at June 30, 1998 and 1997, respectively...................          13       1,410
Additional paid-in capital................................................................      79,838      --
Deferred compensation, net of amortization................................................        (976)       (679)
Net unrealized loss on available-for-sale securities......................................          (7)     --
Accumulated deficit.......................................................................     (28,586)    (20,208)
                                                                                            ----------  ----------
    Total stockholders' equity............................................................      50,282      25,223
                                                                                            ----------  ----------
                                                                                            $   55,901  $   29,978
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
                            See accompanying notes.
 
                                      F-3
<PAGE>
                                 MEGABIOS CORP.
 
                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED JUNE 30,
                                                                                  --------------------------------
                                                                                     1998       1997       1996
                                                                                  ----------  ---------  ---------
<S>                                                                               <C>         <C>        <C>
Collaborative research and development revenue..................................  $    8,083  $   5,793  $   1,890
Operating expenses:
  Research and development......................................................      15,111      8,598      6,487
  General and administrative....................................................       3,561      2,417      2,169
                                                                                  ----------  ---------  ---------
    Total operating expenses....................................................      18,672     11,015      8,656
                                                                                  ----------  ---------  ---------
Loss from operations............................................................     (10,589)    (5,222)    (6,766)
Interest income.................................................................       2,651        656        230
Interest expense and other......................................................        (440)      (381)      (365)
                                                                                  ----------  ---------  ---------
Net loss........................................................................  $   (8,378) $  (4,947) $  (6,901)
                                                                                  ----------  ---------  ---------
                                                                                  ----------  ---------  ---------
Basic and diluted net loss per share............................................  $    (0.83) $   (4.40) $   (9.86)
                                                                                  ----------  ---------  ---------
                                                                                  ----------  ---------  ---------
Shares used in computing net loss per share.....................................      10,088      1,126        700
                                                                                  ----------  ---------  ---------
                                                                                  ----------  ---------  ---------
</TABLE>
 
                            See accompanying notes.
 
                                      F-4
<PAGE>
                                 MEGABIOS CORP.
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                              PREFERRED STOCK          COMMON STOCK       ADDITIONAL
                                            --------------------  ----------------------    PAID-IN       DEFERRED
                                             SHARES     AMOUNT     SHARES      AMOUNT       CAPITAL     COMPENSATION
                                            ---------  ---------  ---------  -----------  -----------  ---------------
<S>                                         <C>        <C>        <C>        <C>          <C>          <C>
Balance at June 30, 1995..................  3,441,501  $  10,342    682,105   $     237    $  --          $  --
Issuance of Series C convertible preferred
  stock, net of issuance costs of $36.....  1,827,871      7,063     --          --           --             --
Issuance of Series D convertible preferred
  stock...................................    484,697      3,500     --          --           --             --
Exercise of stock options.................     --         --        693,543         208       --             --
Repurchase of common stock from employee..     --         --         (7,500)         (3)      --             --
Net loss..................................     --         --         --          --           --             --
                                            ---------  ---------  ---------  -----------  -----------         -----
 
Balance at June 30, 1996..................  5,754,069     20,905  1,368,148         442       --             --
Issuance of Series E convertible preferred
  stock, net of issuance costs of $15.....  1,333,325      9,985     --          --           --             --
Issuance of Series F convertible preferred
  stock, net of issuance costs of $11.....  1,333,326     13,989     --          --           --             --
Issuance of common stock in lieu of cash
  payment of Series E and F stock offering
  commissions.............................     --           (179)   119,046         179       --             --
Exercise of stock options.................     --         --        116,517          56       --             --
Repurchase of common stock from
  employees...............................     --         --        (35,984)        (17)      --             --
Deferred compensation related to grant of
  certain stock options, net of
  amortization............................     --         --         --             750       --               (750)
Amortization of deferred compensation.....     --         --         --          --           --                 71
Net loss..................................     --         --         --          --           --             --
                                            ---------  ---------  ---------  -----------  -----------         -----
 
Balance at June 30, 1997..................  8,420,720     44,700  1,567,727       1,410       --               (679)
Reincorporation in Delaware with par
  value...................................     --         --         --          (1,408)       1,408         --
Issuance of common stock in initial public
  offering, September 1997, net of
  offering costs of $3,124................     --         --      2,875,000           3       31,373         --
Conversion of convertible preferred stock
  into common stock.......................  (8,420,720)   (44,700) 8,154,779          8       44,692         --
Issuance of common stock for technology
  license.................................     --         --        117,555      --            1,500         --
Exercise of stock options and warrants....     --         --        184,346      --              237         --
Repurchase of common stock from
  employees...............................     --         --        (18,429)     --               (8)        --
Deferred compensation related to grant of
  certain stock options, net of
  amortization............................     --         --         --          --              636           (636)
Amortization of deferred compensation.....     --         --         --          --           --                339
Net unrealized loss on available-for-sale
  securities..............................     --         --         --          --           --             --
Net loss..................................     --         --         --          --           --             --
                                            ---------  ---------  ---------  -----------  -----------         -----
 
Balance at June 30, 1998..................     --         --      12,880,978  $      13    $  79,838      $    (976)
                                            ---------  ---------  ---------  -----------  -----------         -----
                                            ---------  ---------  ---------  -----------  -----------         -----
 
<CAPTION>
                                                 NET
                                             UNREALIZED                      TOTAL
                                               LOSS ON     ACCUMULATED   STOCKHOLDERS'
                                             SECURITIES      DEFICIT        EQUITY
                                            -------------  ------------  -------------
<S>                                         <C>            <C>           <C>
Balance at June 30, 1995..................    $  --         $   (8,360)    $   2,219
Issuance of Series C convertible preferred
  stock, net of issuance costs of $36.....       --             --             7,063
Issuance of Series D convertible preferred
  stock...................................       --             --             3,500
Exercise of stock options.................       --             --               208
Repurchase of common stock from employee..       --             --                (3)
Net loss..................................       --             (6,901)       (6,901)
                                                    ---    ------------  -------------
Balance at June 30, 1996..................       --            (15,261)        6,086
Issuance of Series E convertible preferred
  stock, net of issuance costs of $15.....       --             --             9,985
Issuance of Series F convertible preferred
  stock, net of issuance costs of $11.....       --             --            13,989
Issuance of common stock in lieu of cash
  payment of Series E and F stock offering
  commissions.............................       --             --            --
Exercise of stock options.................       --             --                56
Repurchase of common stock from
  employees...............................       --             --               (17)
Deferred compensation related to grant of
  certain stock options, net of
  amortization............................       --             --            --
Amortization of deferred compensation.....       --             --                71
Net loss..................................       --             (4,947)       (4,947)
                                                    ---    ------------  -------------
Balance at June 30, 1997..................       --            (20,208)       25,223
Reincorporation in Delaware with par
  value...................................       --             --            --
Issuance of common stock in initial public
  offering, September 1997, net of
  offering costs of $3,124................       --             --            31,376
Conversion of convertible preferred stock
  into common stock.......................       --             --            --
Issuance of common stock for technology
  license.................................       --             --             1,500
Exercise of stock options and warrants....       --             --               237
Repurchase of common stock from
  employees...............................       --             --                (8)
Deferred compensation related to grant of
  certain stock options, net of
  amortization............................       --             --            --
Amortization of deferred compensation.....       --             --               339
Net unrealized loss on available-for-sale
  securities..............................           (7)        --                (7)
Net loss..................................       --             (8,378)       (8,378)
                                                    ---    ------------  -------------
Balance at June 30, 1998..................    $      (7)    $  (28,586)    $  50,282
                                                    ---    ------------  -------------
                                                    ---    ------------  -------------
</TABLE>
 
                            See accompanying notes.
 
                                      F-5
<PAGE>
                                 MEGABIOS CORP.
 
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED JUNE 30,
                                                                                 ---------------------------------
                                                                                    1998        1997       1996
                                                                                 ----------  ----------  ---------
<S>                                                                              <C>         <C>         <C>
Cash flows from operating activities
  Net loss.....................................................................  $   (8,378) $   (4,947) $  (6,901)
  Adjustments to reconcile net loss to net cash used in operations:
    Depreciation and amortization..............................................       2,044       1,294      1,101
    Amortization of deferred compensation......................................         339          71     --
    Purchase of in-process research and development............................       1,500      --         --
    Changes in operating assets and liabilities:
      Other receivables........................................................        (481)       (214)        93
      Prepaid expenses and other assets........................................        (149)       (115)       (87)
      Deferred revenue.........................................................        (887)        356        281
      Accounts payable.........................................................         204         546        (33)
      Accrued liabilities......................................................         197         (23)        95
                                                                                 ----------  ----------  ---------
        Net cash used in operating activities..................................      (5,611)     (3,032)    (5,451)
                                                                                 ----------  ----------  ---------
Cash flows from investing activities
  Purchase of property and equipment...........................................      (2,719)     (1,687)    (1,111)
  Deposits and other assets....................................................         282         (35)       (12)
  Purchases of available-for-sale investments..................................     (41,890)    (15,725)    --
  Maturities of available-for-sale investments.................................      23,700         500     --
                                                                                 ----------  ----------  ---------
        Net cash used in investing activities..................................     (20,627)    (16,947)    (1,123)
                                                                                 ----------  ----------  ---------
Cash flows from financing activities
  Proceeds from issuance of long-term debt.....................................       2,128         894      1,683
  Payments on long-term debt...................................................      (1,367)     (1,137)      (906)
  Proceeds from issuance of convertible preferred stock, net of issuance
    costs......................................................................      --          23,974     10,563
  Proceeds from issuance of common stock, net of repurchases...................      31,605          39        205
                                                                                 ----------  ----------  ---------
        Net cash provided by financing activities..............................      32,366      23,770     11,545
                                                                                 ----------  ----------  ---------
Net increase in cash and cash equivalents......................................       6,128       3,791      4,971
Cash and cash equivalents, beginning of year...................................       9,044       5,253        282
                                                                                 ----------  ----------  ---------
Cash and cash equivalents, end of year.........................................  $   15,172  $    9,044  $   5,253
                                                                                 ----------  ----------  ---------
                                                                                 ----------  ----------  ---------
Interest paid..................................................................  $      423  $      381  $     357
                                                                                 ----------  ----------  ---------
                                                                                 ----------  ----------  ---------
  Construction-in-progress included in accrued liabilities.....................  $      589  $      249  $  --
                                                                                 ----------  ----------  ---------
                                                                                 ----------  ----------  ---------
  Net exercise of warrants to purchase 14,629 shares of common stock...........  $       84  $   --      $  --
                                                                                 ----------  ----------  ---------
                                                                                 ----------  ----------  ---------
</TABLE>
 
                            See accompanying notes.
 
                                      F-6
<PAGE>
                                 MEGABIOS CORP.
 
                         NOTES TO FINANCIAL STATEMENTS
 
                                 JUNE 30, 1998
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    ORGANIZATION AND BASIS OF PRESENTATION
 
    Megabios Corp. ("Megabios" or the "Company") develops proprietary gene
delivery systems and provides preclinical development expertise to create
gene-based therapeutics designed for the treatment or prevention of genetic and
acquired diseases. The Company has developed several IN VIVO, non-viral gene
delivery systems to address a number of potential therapeutic applications using
a variety of therapeutic genes. The Company's clinical development and
commercialization strategy is to enter into collaborative research and
development agreements or "corporate partnerships" with pharmaceutical and
biotechnology companies.
 
    In September 1997, the Company completed its initial public offering and
reincorporation in the State of Delaware. The Company may require additional
financial resources to complete development and commercialization of its
products. Management plans to continue to finance the Company primarily through
issuances of equity securities, collaborative research and development
arrangements and debt financing. Prior to product commercialization, if the
financing arrangements contemplated by management are not consummated, the
Company may have to seek other sources of capital or re-evaluate its operating
plans.
 
    REVENUE RECOGNITION
 
    Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. The Company
is reimbursed based on the costs associated with the number of full time
equivalent employees working on each specific contract over the term of the
agreement. Research and development expenses under the collaborative research
agreements approximate or exceeds the revenue recognized under such agreements
over the term of the respective agreements. Deferred revenue may result when the
Company does not incur the required level of effort during a specific period in
comparison to funds received under the respective contracts. Milestone payments,
if any, will be recognized pursuant to collaborative agreements upon the
achievement of specified milestones, such as the filing of Investigational New
Drug Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognized to date.
 
    RESEARCH AND DEVELOPMENT EXPENSES
 
    Research and development expenses consist of costs incurred for independent
and collaborative research and development. These costs include direct and
research-related overhead expenses.
 
    CASH, CASH EQUIVALENTS AND INVESTMENTS
 
    Cash equivalents consist of highly liquid investments with maturities from
date of purchase of 90 days or less. Short-term investments consist of
investments with original maturities greater than three months, but less than
one year, while long-term investments have maturities greater than one year.
 
    The Company accounts for its cash equivalents and investments under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under the provisions of
SFAS 115, the Company has classified its cash equivalents and
 
                                      F-7
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments as "available-for-sale." Such investments are recorded at fair
value, determined based on quoted market prices, and unrealized gains and
losses, which are considered to be temporary, are recorded as a separate
component of stockholders' equity until realized.
 
    At June 30, 1997, all investments were classified as held-to-maturity.
However, in fiscal year 1998, the Company reassessed its investment portfolio
and determined it is more appropriate to classify all investments as
available-for-sale. The difference between the amortized cost and the estimated
fair value of the investments on the date of the redesignation was immaterial.
 
    DEPRECIATION AND AMORTIZATION
 
    Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets (generally five years). Leasehold
improvements are amortized over the shorter of five years or the estimated
useful life of the assets.
 
    LONG-LIVED ASSETS
 
    The Company accounts for its long-lived assets under Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("SFAS 121"). In accordance with
SFAS 121, the Company identifies and records impairment losses, as circumstances
dictate, on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No such events have occurred with respect to the Company's
long-lived assets, which consist primarily of machinery and equipment and
leasehold improvements.
 
    STOCK-BASED COMPENSATION
 
    The Company generally grants stock options to employees for a fixed number
of shares with an exercise price equal to the fair value of the shares at the
date of grant. In accordance with the provisions of Statements of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS
123"), the Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related
interpretations in accounting for option grants to employees under its employee
stock option plan and to adopt the pro forma disclosure alternative as described
in SFAS 123 (see Note 9). Option grants to all others are accounted for using
the fair value method prescribed by SFAS 123.
 
    COMPREHENSIVE INCOME
 
    In June 1997, the FASB released Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements and is effective for the Company's
fiscal year 1999. The Company believes that adoption of SFAS 130 will not have a
material impact on the Company's financial statements.
 
                                      F-8
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    USE OF ESTIMATES
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
    NET LOSS PER SHARE
 
    Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings Per Share," ("SFAS 128") and Securities
and Exchange Commission Staff Accounting Bulletin No.98 ("SAB 98"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if dilutive, for all periods presented. Basic
earnings per share is computed by dividing income or loss applicable to common
stockholders by the weighted-average number of common shares outstanding for the
period net of certain common shares outstanding which are subject to continued
vesting and the Company's right of repurchase. Basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
net loss per share has not been presented separately as, given the Company's net
loss position, the result would be anti-dilutive. SAB 98 eliminates the
inclusion in the calculation of net loss per share of common and common
equivalent shares (stock options, warrants, convertible notes and preferred
stock) issued during the 12 month period prior to an initial public offering at
prices below the initial public offering price as if they were outstanding for
all periods presented. All loss per share amounts for all periods presented have
been presented and, where appropriate, restated to conform to SFAS 128 and SAB
98.
 
    The following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately 220,455
common shares which are outstanding but are subject to the Company's right of
repurchase which expires ratably over 4 years; and options to purchase
approximately 808,100 shares of common stock at a weighted average price of
$5.72 per share. The repurchasable shares and options will be included in the
calculation at such time as the effect is no longer antidilutive, as calculated
using the treasury stock method.
 
    For comparison purposes, the pro forma net loss per share amounts have been
presented for fiscal year 1998 and 1997 in the reconciliation below. Pro forma
net loss per share has been computed as described above and also gives effect to
the conversion of the convertible Preferred Stock that automatically converted
upon completion of the Company's initial public offering (using the if converted
method) from the original date of issuance.
 
                                      F-9
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                              -------------------------------
                                                                1998       1997       1996
                                                              ---------  ---------  ---------
                                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                                           DATA)
<S>                                                           <C>        <C>        <C>
Net loss....................................................  $  (8,378) $  (4,947) $  (6,901)
BASIC AND DILUTED
Weighted average shares of common stock outstanding used in
  computing net loss per share..............................     10,088      1,126        700
                                                              ---------  ---------  ---------
                                                              ---------  ---------  ---------
Basic and diluted net loss per share........................  $   (0.83) $   (4.40) $   (9.86)
                                                              ---------  ---------  ---------
                                                              ---------  ---------  ---------
PRO FORMA
Shares used in computing net loss per share.................     10,088      1,126
Adjusted to reflect the effect of the assumed conversion of
  preferred stock from the date of issuance.................      1,810      6,650
                                                              ---------  ---------
Shares used in computing pro forma net loss per share.......     11,898      7,776
                                                              ---------  ---------
                                                              ---------  ---------
Pro forma net loss per share................................  $   (0.70) $   (0.64)
                                                              ---------  ---------
                                                              ---------  ---------
</TABLE>
 
2.  INVESTMENTS
 
    Investments consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                           AMORTIZED    UNREALIZED     ESTIMATED
                                                              COST      GAIN/(LOSS)   FAIR VALUE
                                                           ----------  -------------  -----------
<S>                                                        <C>         <C>            <C>
JUNE 30, 1998
Money market funds.......................................  $   15,509    $  --         $  15,509
Corporate debt securities................................       7,766           28         7,794
                                                           ----------        -----    -----------
  Total..................................................      23,275           28        23,303
Less amounts classified as cash equivalents..............     (15,509)      --           (15,509)
                                                           ----------        -----    -----------
Total short-term investments.............................       7,766           28         7,794
                                                           ----------        -----    -----------
Long-term investments (corporate debt securities)........      25,495          (35)       25,460
                                                           ----------        -----    -----------
Total investments........................................  $   33,261    $      (7)    $  33,254
                                                           ----------        -----    -----------
                                                           ----------        -----    -----------
 
JUNE 30, 1997
Money market funds.......................................  $    8,041    $  --         $   8,041
Corporate debt securities................................      15,225           (8)       15,217
                                                           ----------        -----    -----------
  Total..................................................      23,266           (8)       23,258
Less amounts classified as cash equivalents..............      (8,041)      --            (8,041)
                                                           ----------        -----    -----------
Total short-term investments.............................  $   15,225    $      (8)    $  15,217
                                                           ----------        -----    -----------
                                                           ----------        -----    -----------
</TABLE>
 
                                      F-10
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
2.  INVESTMENTS (CONTINUED)
    Unrealized gains were not material and have therefore been netted against
unrealized losses.
 
    At June 30, 1998, the contractual maturities of short-term investments were
all due in one year or less, while all long-term investments have contractual
maturities of one to two years.
 
3.  COLLABORATIVE AGREEMENTS
 
    ELI LILLY AND COMPANY
 
    In May 1997, the Company entered into a two-year collaborative research
agreement with Eli Lilly and Company ("Lilly") to develop gene-based
therapeutics using BRCA1, a gene that has been identified as a putative tumor
suppressor. The agreement provides for research and development funding as well
as funding to support manufacturing and process development efforts. If Lilly
and the Company agree on an appropriate level of research and development
efforts, funding may be extended for up to an additional two years. However,
after 21 months from the commencement date of the collaborative research
agreement, Lilly can, at its options, cancel the collaborative research
agreement upon three-months advance notice to the Company. The agreement
provides for certain royalty and milestone payments to the Company upon the
occurrence of specified events as set forth in the agreement. Lilly will be
responsible for clinical development and regulatory functions, as well as
large-scale clinical and commercial manufacturing and sales and marketing.
Revenue recognized under the collaborative research agreement with Lilly was
$4,041,000 (50% of total revenues) and $270,000 (5% of total revenues) for the
years ended June 30, 1998 and 1997, respectively.
 
    In June 1997, in connection with the Lilly agreement, Lilly purchased
285,714 shares of the Company's Series F convertible preferred stock at $10.50
per share.
 
    PFIZER INC
 
    In May 1996, the Company entered into a four-year collaborative research
agreement, as well as a license and royalty agreement, with Pfizer Inc
("Pfizer") to develop a gene-based therapeutic for the treatment of solid tumors
via angiogenesis inhibition. Under the terms of the collaborative research
agreement, the Company conducted research and preclinical development
activities. In December 1997, Pfizer exercised the option as stated in the
agreement to discontinue its research and development program. Under the terms
of the agreement, Pfizer continued funding the program through May 31, 1998.
Megabios intends to continue to advance the angiogenesis inhibition program and
is actively seeking a new corporate partner. Revenue recognized under the
collaborative research agreement with Pfizer was $4,042,000 (50% of total
revenues), $3,352,000 (58% of total revenues) and $265,000 (14% of total
revenues) for the years ended June 30, 1998, 1997 and 1996, respectively.
 
    In May 1996, in connection with the above agreements, Pfizer purchased
484,697 shares of the Company's Series D convertible preferred stock at $7.22
per share.
 
    GLAXO WELLCOME PLC
 
    In April 1994, the Company entered into a five-year collaborative agreement
with Glaxo Wellcome plc ("Glaxo Wellcome") to develop a gene-based therapeutic
for the treatment of cystic fibrosis. In May 1996, the agreement was amended
such that the research and development portion of the agreement expired as
 
                                      F-11
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
3.  COLLABORATIVE AGREEMENTS (CONTINUED)
of April 1, 1997. The agreement provided for quarterly nonrefundable research
and development fees. The Company has completed all of its obligations under the
Glaxo Wellcome agreement and will receive future payments, if any, only through
the achievement of a certain clinical milestone and the payment of royalties.
Revenue for research and development was recorded as earned in accordance with
the agreement. For the years ended June 30, 1997 and 1996, respectively, revenue
recognized under agreement with Glaxo Wellcome was $1,971,000 (34% of total
revenues), and $1,625,000 (86% of total revenues). No revenue was recognized
under the agreement for the fiscal year ended June 30, 1998.
 
4.  LICENSE AND RESEARCH AGREEMENTS
 
    The Company has entered into several research agreements with universities
and other organizations. These agreements are generally cancelable by either
party upon written notice and may be extended by mutual consent of both parties.
Research and development expenses are recognized as the related services are
performed, generally ratably over the period of service. Expenses under these
agreements were approximately $1,077,000, $865,000, and $1,100,000 for the years
ended June 30, 1998, 1997 and 1996, respectively.
 
    In March of 1998 the Company entered into a licensing and collaboration
agreement with the University of Pittsburgh Medical Center ("UPMC") through
which the Company obtained an exclusive license to certain patent rights held by
UPMC in the field of viral and non-viral gene-based therapy for rheumatology. Of
these patent rights, one patent has issued in the United States and related
applications are pending in the U.S. and worldwide. Under the terms of the
license and collaboration agreement the Company issued 117,555 shares of common
stock in payment for the exclusive license to these patent rights. The value of
the common stock issued in the transaction was $1.5 million, which was expensed
to research and development during the period. The Company expensed the value of
this common stock as the technology was not complete at the date of acquisition.
Under the terms of the license agreement, the Company is not obligated to pay
additional royalty payments upon the sale of products, if any, in the field of
non-viral gene therapy, but is required to share revenue with UPMC at a
specified rate upon sub-license of rights in the field of viral gene therapy.
Megabios is obligated to make payments upon the completion of certain
milestones. Certain of the license rights may revert back to UPMC in the event
that the Company fails to commit resources to the development of products in the
field of rheumatology. In addition, the license and collaboration agreement with
UPMC established exclusive collaborations between the Company and several
researchers at UPMC for the research and development of gene-based therapies in
the field of rheumatology. Intellectual property developed by UPMC under the
collaboration will be included in the exclusive license to the Company described
above at no additional cost to the Company.
 
                                      F-12
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
5.  PROPERTY AND EQUIPMENT
 
    Property and equipment consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                                 JUNE 30,
                                                                           --------------------
                                                                             1998       1997
                                                                           ---------  ---------
<S>                                                                        <C>        <C>
Machinery and equipment..................................................  $   4,417  $   3,239
Furniture and fixtures...................................................        836        481
Leasehold improvements...................................................      5,121      3,235
Construction-in-progress.................................................        818        954
                                                                           ---------  ---------
                                                                              11,192      7,909
Less accumulated depreciation............................................     (5,041)    (3,176)
                                                                           ---------  ---------
Property and equipment, net..............................................  $   6,151  $   4,733
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>
 
6.  LONG-TERM DEBT
 
    OPERATING LINES OF CREDIT
 
    In June 1998, the Company established a line of credit for $8,000,000 with a
commercial bank. As of June 30, 1998, the Company had drawn $1,016,000 under the
line of credit. In accordance with the terms of the agreement, the entire
balance was converted into a term loan bearing interest at prime plus 1/2% (9%
at June 30, 1998) due in 42 equal monthly installments. Additional draws under
the credit line will be converted into a term loan on December 31, 1998. The
loan is secured by all tangible personal property, accounts receivable and funds
on deposit, other than the assets securing the equipment financing. As a
condition of the credit line, the Company must maintain a minimum cash and
short-term investments balance of not less than the greater of the prior two
quarters net cash usage or 90% of the total principal drawn under the line of
credit.
 
    In 1995, the Company established a line of credit for $1,500,000 with a
commercial bank which was fully utilized by August 1995, and, in accordance with
the terms of the agreement, the Company elected to convert the entire balance to
a term loan bearing interest at prime plus 2% due in 36 equal monthly
installments. The loan is secured by all tangible personal property, accounts
receivable and funds on deposit, other than the assets securing the equipment
financing. As a condition of the term loan, the Company must maintain a minimum
net worth of $3,000,000 and is prohibited from paying dividends. In conjunction
with this financing arrangement, the Company issued the bank a warrant to
purchase 24,140 shares of the Company's common stock at $3.88 per share (see
Note 9).
 
    The carrying amounts of these obligations approximate their fair value
determined using a discounted cash flow model and the Company's current
incremental borrowing rate.
 
    EQUIPMENT FINANCING
 
    In May 1996, the Company entered into an equipment financing agreement for
up to $2,700,000 with a financing company. As of June 30, 1998 and 1997, the
Company had financed $2,700,000 and $1,587,000, respectively, in equipment
purchases under this agreement structured as loans. The equipment loans are to
be repaid over 48 months at interest rates ranging from 15.2% to 16.2% and are
secured by the related
 
                                      F-13
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
6.  LONG-TERM DEBT (CONTINUED)
equipment. In conjunction with this equipment financing agreement, the Company
issued a warrant to purchase 38,238 shares of common stock at $3.88 per share
(see Note 9).
 
    In December 1993, the Company entered into an equipment financing agreement
for up to $2,300,000 with a financing company. As of June 30, 1998 and 1997, the
Company had financed $1,922,000 in equipment purchases under this agreement
structured as loans. The equipment loans are to be repaid over 42 months at
interest rates ranging from 13.8% to 16.2% and are secured by the related
equipment. In conjunction with the original agreement, the Company issued the
financing company a warrant to purchase 21,630 shares of Company's common stock
at $3.88 per share (see Note 9).
 
    Following is a schedule of future minimum principal payments under the term
loans and equipment financing arrangements at June 30, 1998 (in thousands):
 
<TABLE>
<CAPTION>
<S>                                                                                    <C>
Year ended June 30,
1999.................................................................................  $   1,017
2000.................................................................................      1,084
2001.................................................................................        935
2002.................................................................................        445
                                                                                       ---------
                                                                                       $   3,481
                                                                                       ---------
                                                                                       ---------
</TABLE>
 
7.  FACILITY LEASE
 
    The Company leases its facilities under two operating leases. These leases
expire in November 2004 and October 2007 with renewal options at the end of the
initial terms of the leases. Minimal annual rental commitments under the
operating leases at June 30, 1998 are as follows (in thousands):
 
<TABLE>
<CAPTION>
<S>                                                                                    <C>
Year ended June 30,
1999.................................................................................  $     512
2000.................................................................................        527
2001.................................................................................        540
2002.................................................................................        544
2003.................................................................................        567
Thereafter...........................................................................      1,547
                                                                                       ---------
                                                                                       $   4,237
                                                                                       ---------
                                                                                       ---------
</TABLE>
 
    Rent expense for the years ended June 30, 1998, 1997 and 1996 was
approximately $526,000, $295,000, and $273,000, respectively.
 
8.  RELATED PARTY TRANSACTIONS
 
    The Company has issued loans to certain employees, of which $130,000 was
outstanding at June 30, 1998 and $27,500 as of June 30, 1997. The loan
outstanding as of June 30, 1998 bears an interest rate of 5.68%. The loan is due
and payable on the fifth anniversary of the date of the loan. Accrued interest
is forgiven annually and recorded as income to the employee. The loan amount
outstanding as of June 30, 1997 has been repaid. Both loans were classified as
other receivables on the balance sheet.
 
                                      F-14
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
9.  STOCKHOLDERS' EQUITY
 
    INITIAL PUBLIC OFFERING
 
    On September 15, 1997, the Company completed its initial public offering of
2,500,000 shares of common stock at $12.00 per share. In addition, on September
29, 1997, the Company's underwriters exercised their over-allotment option and
purchased an additional 375,000 shares of the Company's common stock at $12.00
per share. The combined net proceeds raised from the offering was approximately
$31.4 million. Upon the completion of the initial public offering, all of the
Series A, B, C, D, E and F preferred stock outstanding were converted into
8,154,779 shares of common stock. Also, upon the completion of the offering, the
Company's Certificate of Incorporation was amended to authorize 10,000,000
shares of preferred stock, none of which are issued or outstanding and
30,000,000 of common stock.
 
    WARRANTS
 
    In connection with the equipment financing agreement entered into in
December 1993, the Company issued a warrant to purchase 21,630 shares of common
stock at an exercise price of $3.88 per share. In September 1997, the Company
issued 14,629 shares of its common stock upon the exercise of the warrant, in
accordance with the terms stated in the warrant agreement.
 
    The Company issued a warrant to purchase 28,969 shares of common stock at
$3.88 per share to the commercial bank providing a line of credit to the
Company. In accordance with the terms of the warrant, the number of shares
subject to the warrant was reduced from 28,969 to 24,140 in July 1995. The
warrant provided for a reduction in the number of shares upon securing a
commitment of at least $7,000,000 in sales of Series C preferred stock. The
warrant is exercisable immediately and expires at the earlier of June 1, 2000,
or in the event of a merger or sale of substantially all of the assets of the
Company.
 
    In connection with the equipment financing agreement in May 1996, the
Company issued a warrant to purchase 38,238 shares of common stock at $3.88 per
share. The warrant is exercisable immediately and expires at the earlier of ten
years from the date of issuance or five years after the Company's initial public
offering.
 
    The value ascribed to warrants issued by the Company as noted above, both
individually and in the aggregate, was immaterial.
 
    1997 STOCK PURCHASE PLAN
 
    In July 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan") covering an aggregate of 200,000 shares of
common stock. The Purchase Plan was approved by shareholders in September 1997.
The Purchase Plan is designed to allow eligible employees of the Company to
purchase shares of common stock through periodic payroll deductions. The price
of common stock purchased under the Purchase Plan must be equal to at least 85%
of the lower of the fair market value of the common stock on the commencement
date of each offering period or the specified purchase date. At June 30, 1998,
no shares had been issued under the Purchase Plan.
 
                                      F-15
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
9.  STOCKHOLDERS' EQUITY (CONTINUED)
    EQUITY INCENTIVE PLAN
 
    In July 1997, the Board of Directors amended and restated the 1993 Stock
Option Plan, renamed it as the 1997 Equity Incentive Plan (the "Incentive Plan")
and reserved 2,100,000 shares of the Company's common stock for issuance under
the Incentive Plan. The Incentive Plan was approved by shareholders in September
1997. The Incentive Plan provides for grants to employees, directors and
consultants of the Company. The exercise price of options granted under the
Incentive Plan is determined by the Board of Directors but cannot be less than
100% of the fair market value of the common stock on the date of the grant.
Options under the Incentive Plan generally vest 25% one year after the date of
grant and on a pro rata basis over the following 36 months.
 
    Activity under all option plans was as follows:
 
<TABLE>
<CAPTION>
                                                         OUTSTANDING STOCK OPTIONS    WEIGHTED
                                               SHARES    --------------------------    AVERAGE
                                             AVAILABLE   NUMBER OF     PRICE PER      EXERCISE
                                             FOR GRANT     SHARES        SHARE          PRICE
                                             ----------  ----------  --------------  -----------
<S>                                          <C>         <C>         <C>             <C>
Balance at June 30, 1995...................     141,682     556,814  $         0.30   $    0.30
Additional authorization...................     320,000      --            --            --
Options granted............................    (387,329)    387,329  $         0.30   $    0.30
Options exercised..........................      --        (693,543) $         0.30   $    0.30
Options canceled...........................      16,582     (16,582) $         0.30   $    0.30
Shares repurchased.........................       7,500      --      $         0.30   $    0.30
                                             ----------  ----------  --------------       -----
 
Balance at June 30, 1996...................      98,435     234,018  $         0.30   $    0.30
Additional authorization...................     353,333      --            --            --
Options granted............................    (388,680)    388,680  $         1.50   $    1.50
Options exercised..........................      --        (116,517) $   0.30-$1.50   $    0.45
Options canceled...........................      26,566     (26,566) $   0.30-$1.50   $    0.51
Shares repurchased.........................      32,045      --      $   0.30-$1.50   $    0.39
                                             ----------  ----------  --------------       -----
 
Balance at June 30, 1997...................     121,699     479,615  $   0.30-$1.50   $    1.22
Additional authorization...................     770,985      --            --            --
Options granted............................    (550,722)    550,722  $  2.70-$15.50   $    8.15
Options exercised..........................      --        (169,719) $   0.30-$2.88   $    1.28
Options canceled...........................      52,518     (52,518) $  0.30-$15.50   $    4.12
Shares repurchased.........................      18,429      --      $   0.30-$1.50   $    0.43
                                             ----------  ----------  --------------       -----
 
Balance at June 30, 1998...................     412,909     808,100  $  0.30-$15.50   $    5.72
                                             ----------  ----------  --------------       -----
                                             ----------  ----------  --------------       -----
</TABLE>
 
                                      F-16
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
9.  STOCKHOLDERS' EQUITY (CONTINUED)
    The options outstanding and exercisable at June 30, 1998 have been
segregated into ranges for additional disclosure as follows:
 
<TABLE>
<CAPTION>
                    OPTIONS
                OUTSTANDING AND  WEIGHTED AVERAGE    WEIGHTED
                  EXERCISABLE        REMAINING        AVERAGE
EXERCISE PRICE    AT JUNE 30,    CONTRACTUAL LIFE    EXERCISE
  PER SHARE          1998           (IN YEARS)         PRICE
- --------------  ---------------  -----------------  -----------
<S>             <C>              <C>                <C>
$         0.30        69,562              7.11       $    0.30
$         1.50       220,164              8.62       $    1.50
$   2.70-$2.88        88,624              9.14       $    2.86
$  7.63-$15.50       429,750              9.76       $    9.35
                     -------
                     808,100
                     -------
                     -------
</TABLE>
 
    The weighted average fair value of options granted in fiscal 1998, 1997 and
1996 was $8.15, $0.199 and $0.037 respectively.
 
    At June 30, 1998, 225,486 shares of common stock at a weighted average price
of $0.76 per share were subject to repurchase.
 
    The Company recorded deferred compensation expense for the difference
between the exercise price and the deemed fair value for financial statement
presentation purposes of the Company's common stock, as determined by the board
of directors, for options granted through the year ended June 30, 1997. Deferred
compensation of $750,000 was recorded on these options based on the deemed fair
value of the common stock at the dates of grant at prices ranging from $1.50 to
$3.75 per share, respectively. In July and August 1997, the Company granted
options to purchase a total of 59,949 shares at exercise prices ranging from
$2.70 to $2.88 per share. Additional deferred compensation of approximately
$636,000 was recorded based on the deemed fair values of common stock ranging
from $9.00 to $9.60 per share. The deferred compensation is being amortized to
expense over the vesting period of the options, generally four years.
Amortization of $339,000 and $71,000 was recorded in 1998 and 1997,
respectively.
 
    The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
requires use of valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
 
    Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair market value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996: risk free interest rate range of 5.3% to 6.2%, 5.7% to 6.5% and
4.8% to 6.4%, respectively; volatility factors of the expected
 
                                      F-17
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
9.  STOCKHOLDERS' EQUITY (CONTINUED)
market price of the Company's common stock of 70%, 0%, and 0%, respectively; no
expected dividends; and a weighted-average expected life of the option of 2.5
years.
 
    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options and employee stock purchase plans have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair market value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options and shares issued pursuant to the employee stock purchase plan.
 
    For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands except for net loss per share
information):
 
<TABLE>
<CAPTION>
                                                                      YEAR ENDED JUNE 30,
                                                                -------------------------------
                                                                  1998       1997       1996
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Net loss-as reported..........................................  $  (8,378) $  (4,947) $  (6,901)
Net loss-pro forma............................................  $  (8,708) $  (4,965) $  (6,903)
Net loss per share-as reported................................  $   (0.83) $   (4.40) $   (9.86)
Net loss per share-pro forma..................................  $   (0.86) $   (4.41) $   (9.86)
</TABLE>
 
    Because SFAS 123 is applicable only to options granted subsequent to June
30, 1995, its pro forma effect will not be fully reflected until fiscal 1999.
 
10.  INCOME TAXES
 
    As of June 30, 1998, the Company had federal net operating loss
carryforwards and federal research credit carryforwards of approximately
$23,900,000 and $600,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 2007 through 2012, if
not utilized.
 
    Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
 
                                      F-18
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
10.  INCOME TAXES (CONTINUED)
    Significant components of the Company's deferred tax assets and liabilities
for federal income taxes as of June 30 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                             1998       1997
                                                                          ----------  ---------
<S>                                                                       <C>         <C>
Net operating loss carryforwards........................................  $    8,200  $   5,425
Research and development credits........................................         600        625
Manufacturing and research equipment credit carryforward................         200     --
Capitalized research and development....................................       1,600        724
Depreciation............................................................       1,300        840
Other, net..............................................................        (600)       467
                                                                          ----------  ---------
Net deferred tax assets.................................................      11,300      8,081
Valuation allowance.....................................................     (11,300)    (8,081)
                                                                          ----------  ---------
                                                                          $   --      $  --
                                                                          ----------  ---------
                                                                          ----------  ---------
</TABLE>
 
    The net valuation allowance increased by $3,219,000 and $2,005,000 during
the years ended June 30, 1998 and 1997, respectively.
 
11.  SUBSEQUENT EVENTS (UNAUDITED)
 
    DSM BIOLOGICS AGREEMENT
 
    In September, 1998, Megabios and DSM Biologics ("DSM") announced the
formation of a broad, strategic partnership focused on the manufacture and
supply of DNA plasmids and lipid:DNA complexes to the entire gene therapy
industry. Plasmids are circular pieces of DNA that contain a therapeutic gene
and instructional elements that regulate the activity of the gene. The
manufacturing process can be used to produce any plasmid.
 
    Under the agreement, Megabios has exclusively licensed its proprietary
manufacturing technology to DSM for use in its facility in Montreal, Canada and
may be extended to include DSM's facility in Gronigen, The Netherlands. In
return, DSM will pay license and milestone fees to Megabios, and DSM and
Megabios will share in the profits generated by the sale of material produced
using Megabios' process. The term of the exclusive partnership is at least three
years, and will continue for as long as the venture is profitable.
 
    The Megabios--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Megabios'
partner, Glaxo Wellcome, and a Phase I/II study for metastatic melanoma,
conducted by Megabios and its academic collaborators at the University of
Colorado Health Sciences Center.
 
    The partnership will create the first manufacturing facility that can
produce high-quality, ultrapure material for plasmid-based therapeutics on every
scale, from preclinical toxicology studies to commercial products. DSM will have
full responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. The partnership will use
Megabios' proprietary methods for the manufacture of DNA plasmids and complexing
that DNA with lipids. This arrangement could provide revenue for Megabios in
advance of the launch of commercial gene-based products.
 
                                      F-19
<PAGE>
                                 MEGABIOS CORP.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                                 JUNE 30, 1998
 
11.  SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
    PROPOSED MERGER WITH GENEMEDICINE
 
    On October 26, 1998, Megabios and GeneMedicine Inc. announced the signing of
a definitive merger agreement. Under the terms of the agreement, which was
unanimously approved by the boards of both companies, each outstanding share of
GeneMedicine common stock will be exchanged, at a fixed exchange ratio of
0.5710, for newly issued shares of common stock of Megabios. This will result in
the issuance of approximately 8.9 million additional Megabios shares, valued at
about $38 million based on Megabios' closing price on Friday, October 23, 1998.
In addition, all outstanding warrants and employee stock options of GeneMedicine
will convert into Megabios warrants and options at the same exchange ratio. The
Board of Directors of the combined company will consist of nine directors, three
of whom will be current directors of GeneMedicine, and Benjamin F. McGraw III
will remain as chairman, president and CEO of the combined entity.
 
    The proposed transaction will be accounted for as a purchase. A significant
portion of the excess purchase price is expected to be charged to in-process
research and development in the Company's statement of operations for the
quarter in which the transaction is completed. The merger is subject to the
approval of stockholders of both companies. The transaction is expected to close
in the first calendar quarter of 1999.
 
                                      F-20
<PAGE>
                                 MEGABIOS CORP.
 
                            CONDENSED BALANCE SHEETS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 30,   JUNE 30,
                                                                                             1998          1998
                                                                                         -------------  ----------
                                                                                          (UNAUDITED)    (NOTE 1)
<S>                                                                                      <C>            <C>
                                                      ASSETS
Current assets:
  Cash and cash equivalents............................................................   $    10,657   $   15,172
  Short-term investments...............................................................        17,033        7,794
  Other receivables....................................................................         1,004          616
  Prepaid expenses and other current assets............................................           754          539
                                                                                         -------------  ----------
    Total current assets...............................................................        29,448       24,121
 
  Property and equipment, net..........................................................         8,350        6,151
  Long-term investments................................................................        17,241       25,460
  Other receivables....................................................................           130          130
  Deposits and other assets............................................................            39           39
                                                                                         -------------  ----------
                                                                                          $    55,208   $   55,901
                                                                                         -------------  ----------
                                                                                         -------------  ----------
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.....................................................................   $       564   $      898
  Accrued compensation.................................................................           573          595
  Accrued construction-in-progress.....................................................           766          589
  Other accrued liabilities............................................................           186           56
  Current portion of long-term debt....................................................           805        1,017
                                                                                         -------------  ----------
    Total current liabilities..........................................................         2,894        3,155
 
Long-term debt.........................................................................         4,808        2,464
 
Commitments
 
Stockholders' equity:
  Common stock.........................................................................            13           13
  Additional paid-in capital...........................................................        80,041       79,838
  Deferred compensation................................................................          (899)        (976)
  Accumulated other comprehensive income (loss)........................................           136           (7)
  Accumulated deficit..................................................................       (31,785)     (28,586)
                                                                                         -------------  ----------
    Total stockholders' equity.........................................................        47,506       50,282
                                                                                         -------------  ----------
                                                                                          $    55,208   $   55,901
                                                                                         -------------  ----------
                                                                                         -------------  ----------
</TABLE>
 
                             See accompanying notes
 
                                      F-21
<PAGE>
                                 MEGABIOS CORP.
 
                       CONDENSED STATEMENTS OF OPERATIONS
 
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                             THREE MONTHS ENDED
                                                                                               SEPTEMBER 30,
                                                                                          ------------------------
                                                                                             1998         1997
                                                                                          -----------  -----------
                                                                                          (UNAUDITED)  (UNAUDITED)
<S>                                                                                       <C>          <C>
Collaborative research and development revenue..........................................   $     773    $   2,287
 
Operating expenses:
  Research and development..............................................................       3,429        2,758
  General and administrative............................................................       1,076          675
                                                                                          -----------  -----------
    Total operating expenses............................................................       4,505        3,433
                                                                                          -----------  -----------
Loss from operations....................................................................      (3,732)      (1,146)
Interest income.........................................................................         679          398
Interest expense and other..............................................................        (146)         (98)
                                                                                          -----------  -----------
Net loss................................................................................   $  (3,199)   $    (846)
                                                                                          -----------  -----------
                                                                                          -----------  -----------
Basic and diluted net loss per share....................................................   $   (0.25)   $   (0.29)
                                                                                          -----------  -----------
                                                                                          -----------  -----------
Shares used in computing basic and diluted net loss per share...........................      12,736        2,902
                                                                                          -----------  -----------
                                                                                          -----------  -----------
</TABLE>
 
                             See accompanying notes
 
                                      F-22
<PAGE>
                                 MEGABIOS CORP.
 
                       CONDENSED STATEMENTS OF CASH FLOWS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                             THREE MONTHS ENDED
                                                                                               SEPTEMBER 30,
                                                                                          ------------------------
                                                                                             1998         1997
                                                                                          -----------  -----------
                                                                                          (UNAUDITED)  (UNAUDITED)
<S>                                                                                       <C>          <C>
Cash flows from operating activities
  Net loss..............................................................................   $  (3,199)   $    (846)
  Adjustments to reconcile net loss to net cash used in operations:
    Depreciation and amortization.......................................................         584          425
    Amortization of deferred compensation...............................................          78           73
    Changes in operating assets and liabilities:
      Other receivables.................................................................        (388)        (155)
      Prepaid expenses and other........................................................        (215)        (116)
      Deferred revenue..................................................................      --             (186)
      Accounts payable..................................................................        (334)        (607)
      Accrued liabilities...............................................................         108          105
                                                                                          -----------  -----------
        Net cash used in operating activities...........................................      (3,366)      (1,307)
                                                                                          -----------  -----------
Cash flows from investing activities
  Purchase of property and equipment....................................................      (2,544)      (1,163)
  Deposits and other assets.............................................................      --               (2)
  Purchase of available-for-sale investments............................................      (2,010)      (4,073)
  Maturities of available-for-sale investments..........................................       1,070        5,500
                                                                                          -----------  -----------
        Net cash provided by (used in) investing activities.............................      (3,484)         262
                                                                                          -----------  -----------
Cash flows from financing activities
  Proceeds from issuance of long-term debt..............................................       2,502          872
  Payments on long-term debt............................................................        (370)        (334)
  Proceeds from issuance of common stock, net of repurchases............................         203       31,770
                                                                                          -----------  -----------
        Net cash provided by financing activities.......................................       2,335       32,308
                                                                                          -----------  -----------
Net increase (decrease) in cash and cash equivalents....................................      (4,515)      31,263
Cash and cash equivalents, beginning of period..........................................      15,172        9,044
                                                                                          -----------  -----------
Cash and cash equivalents, end of period................................................   $  10,657    $  40,307
                                                                                          -----------  -----------
                                                                                          -----------  -----------
Supplemental disclosure of cash flow information:
  Interest paid.........................................................................   $     143    $      98
Schedule of non-cash transactions:
  Construction in progress included in accrued liabilities..............................   $     177    $  --
</TABLE>
 
                             See accompanying notes
 
                                      F-23
<PAGE>
                                 MEGABIOS CORP.
 
                  NOTES TO THE CONDENSED FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND BASIS OF PRESENTATION
 
    The accompanying condensed financial statements are unaudited and have been
prepared by Megabios Corp. (the "Company") in accordance with the rules and
regulations of the Securities and Exchange Commission for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Certain information and footnote disclosures normally
included in the Company's annual financial statements as required by generally
accepted accounting principles have been condensed or omitted. The interim
financial statements, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair statement of the
results for the interim periods ended September 30, 1998 and 1997. The balance
sheet at June 30, 1998 is derived from the audited financial statements at that
date but does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
 
    The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year,
although the Company expects to incur a substantial loss for the year ended June
30, 1999. These interim financial statements should be read in conjunction with
the audited financial statements for the year ended June 30, 1998, which are
contained elsewhere herein and in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
 
2.  REVENUE RECOGNITION
 
    Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development activities
as specified in each respective agreement on a best-efforts basis. The Company
is reimbursed based on the costs associated with the number of full time
equivalent employees working on each specific contract over the term of the
agreement. Research and development expenses under the collaborative research
agreements approximate or exceed the revenue recognized under such agreements
over the term of the respective agreements. Deferred revenue may result when the
Company does not incur the required level of effort during a specific period in
comparison to funds received under the respective contracts. Milestone payments,
if any, will be recognized pursuant to collaborative agreements upon the
achievement of specified milestones, such as the filing of Investigational New
Drug Applications, commencement of clinical trials or receipt of regulatory
approvals. No milestone payments have been earned or recognized to date.
 
3.  NET LOSS PER SHARE
 
    Basic earnings per share is computed by dividing income or loss applicable
to common stockholders by the weighted-average number of common shares
outstanding for the period net of certain common shares outstanding which are
subject to continued vesting and the Company's right of repurchase. Basic
earnings per share excludes any dilutive effects of options.
 
    Diluted net loss per share has not been presented separately as, given the
Company's net loss position, the result would be anti-dilutive.
 
    The following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately 136,418
common shares which are outstanding but are subject to the Company's right of
repurchase which expires ratably over 4 years, and options to purchase
approximately 1,068,408 shares of common stock at a weighted average price of
$5.93 per share. The
 
                                      F-24
<PAGE>
                                 MEGABIOS CORP.
 
            NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
3.  NET LOSS PER SHARE (CONTINUED)
repurchasable shares and options will be included in the calculation at such
time as the effect is no longer antidilutive, as calculated using the treasury
stock method.
 
    A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows:
 
<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                             SEPTEMBER 30,
                                                                          --------------------
                                                                            1998       1997
                                                                          ---------  ---------
                                                                             (IN THOUSANDS,
                                                                            EXCEPT PER SHARE
                                                                                 DATA)
<S>                                                                       <C>        <C>
Net loss................................................................  $  (3,199) $    (846)
                                                                          ---------  ---------
                                                                          ---------  ---------
BASIC AND DILUTED
Weighted average shares of common stock.................................     12,872      3,248
Common shares subject to repurchase.....................................       (136)      (346)
                                                                          ---------  ---------
Weighted average shares of common stock used in computing net loss per
  share.................................................................     12,736      2,902
                                                                          ---------  ---------
                                                                          ---------  ---------
Basic and diluted net loss per share....................................  $   (0.25) $   (0.29)
                                                                          ---------  ---------
                                                                          ---------  ---------
 
PRO FORMA
Shares used in computing net loss per share.............................                 2,902
Adjustment to reflect the effect of the assumed conversion from the date
  of issuance of preferred stock which automatically converted to common
  stock upon the Company's initial public offering......................                 7,180
                                                                                     ---------
Shares used in computing pro forma net loss per share...................                10,082
                                                                                     ---------
                                                                                     ---------
Pro forma net loss per share............................................             $   (0.08)
                                                                                     ---------
                                                                                     ---------
</TABLE>
 
4.  COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS
 
    In September 1998, Megabios and DSM Biologics ("DSM") announced the
formation of a broad, strategic partnership focused on the manufacture and
supply of DNA plasmids and DNA:lipid complexes. Plasmids are circular pieces of
DNA that contain a therapeutic gene and instructional elements that regulate the
activity of the gene. The manufacturing process can be used to produce any
plasmid.
 
    The partnership will create the first manufacturing facilities that can
produce high-quality, ultrapure material for plasmid-based therapeutics on every
scale, from preclinical toxicology studies to commercial products. DSM will have
full responsibility for manufacturing material to be marketed to any company or
institution working in the field of gene therapy. The partnership will use
Megabios' proprietary methods for the manufacture of plasmid DNA and complexing
that DNA with lipids. This arrangement could provide revenue for Megabios in
advance of the launch of commercial gene-based products.
 
    Under the agreement, Megabios has exclusively licensed its proprietary
manufacturing technology to DSM for use in its facility in Montreal, Canada and
may be extended to include DSM's facility in Gronigen, The Netherlands. In
return, DSM will pay license and milestone fees to Megabios, and DSM
 
                                      F-25
<PAGE>
                                 MEGABIOS CORP.
 
            NOTES TO THE CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
4.  COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS (CONTINUED)
and Megabios will share in the profits generated by the sale of material
produced using Megabios' process. The initial term of the exclusive partnership
is at least three years and maybe extended.
 
    The Megabios--DSM manufacturing method has already been used to produce
material for a Phase I/II trial for cystic fibrosis conducted by Megabios'
partner, Glaxo Wellcome plc ("Glaxo Wellcome"), and a Phase I/II study for
metastatic melanoma, conducted by Megabios and its academic collaborators at the
University of Colorado Health Sciences Center.
 
5.  SUBSEQUENT EVENT
 
    On October 26, 1998, Megabios and GeneMedicine Inc. announced the signing of
a definitive merger agreement. Under the terms of the agreement, which was
unanimously approved by the boards of both companies, each outstanding share of
GeneMedicine common stock will be exchanged, at a fixed exchange ratio of
0.5710, for newly issued shares of common stock of Megabios. This will result in
the issuance of approximately 8.9 million additional Megabios shares, valued at
about $38 million based on Megabios' closing price on Friday, October 23, 1998.
In addition, all outstanding warrants and employee stock options of GeneMedicine
will convert into Megabios warrants and options at the same exchange ratio. The
Board of Directors of the combined company will consist of nine directors, three
of whom will be current directors of GeneMedicine, and Benjamin F. McGraw III
will remain as chairman, president and CEO of the combined entity.
 
    The proposed transaction will be accounted for as a purchase. A significant
portion of the excess purchase price is expected to be charged to in-process
research and development in the Company's statement of operations for the
quarter in which the transaction is completed. The merger is subject to the
approval of stockholders of both companies. The transaction is expected to close
in the first calendar quarter of 1999.
 
                                      F-26
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
TO GENEMEDICINE, INC.
 
    We have audited the accompanying balance sheets of GENEMEDICINE, INC. (a
Delaware corporation in the development stage) as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1995, 1996 and 1997, and for the period from
inception (January 2, 1992) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. As 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 GENEMEDICINE, INC. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1995, 1996 and 1997, and for the period from
inception (January 2, 1992) through December 31, 1997, in conformity with
generally accepted accounting principles.
 
                                          /s/ ARTHUR ANDERSEN LLP
 
The Woodlands, Texas
February 17, 1998
 
                                      F-27
<PAGE>
                               GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,    DECEMBER 31,
                                                                                         1996            1997
                                                                                    --------------  --------------
<S>                                                                                 <C>             <C>
                                                      ASSETS
Current Assets:
  Cash and cash equivalents.......................................................  $    2,145,404  $      873,180
  Short-term investments..........................................................      28,726,602      23,708,845
  Prepaid expenses and other......................................................         170,453         175,128
                                                                                    --------------  --------------
    Total current assets..........................................................      31,042,459      24,757,153
                                                                                    --------------  --------------
Equipment, furniture and leasehold improvements, net..............................       2,998,416       3,220,987
Deposits and other assets.........................................................           8,395           9,195
                                                                                    --------------  --------------
Total Assets......................................................................  $   34,049,270  $   27,987,335
                                                                                    --------------  --------------
                                                                                    --------------  --------------
 
                                       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Accounts payable and accrued liabilities........................................  $    1,352,762  $    1,454,986
  Deferred grant revenue..........................................................         179,489          89,737
  Current portion of capital lease obligations....................................         408,387         270,166
                                                                                    --------------  --------------
    Total current liabilities.....................................................       1,940,638       1,814,889
                                                                                    --------------  --------------
Long-term Liabilities:
  Deferred contract revenue.......................................................       1,919,970       2,919,970
  Capital lease obligations, net of current portion...............................         259,393          54,814
                                                                                    --------------  --------------
    Total long-term liabilities...................................................       2,179,363       2,974,784
                                                                                    --------------  --------------
Commitments
 
Stockholders' Equity:
  Convertible preferred stock, $.001 par value; 20,000,000 shares authorized;
    3,750,000 issued and outstanding..............................................           3,750           3,750
  Common stock, $.001 par value; 40,000,000 shares authorized; 13,077,369 and
    13,911,422 shares issued and outstanding......................................          13,077          13,911
  Additional paid-in capital......................................................      65,485,846      70,097,651
  Deferred compensation...........................................................        (465,803)        (56,348)
  Deficit accumulated during the development stage................................     (35,107,601)    (46,861,302)
                                                                                    --------------  --------------
    Total stockholders' equity....................................................      29,929,269      23,197,662
                                                                                    --------------  --------------
Total Liabilities and Stockholders' Equity........................................  $   34,049,270  $   27,987,335
                                                                                    --------------  --------------
                                                                                    --------------  --------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-28
<PAGE>
                               GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                                    INCEPTION
                                                                                                   (JANUARY 2,
                                                        FOR THE YEAR ENDED DECEMBER 31,           1992) THROUGH
                                                 ----------------------------------------------    DECEMBER 31,
                                                      1995            1996            1997             1997
                                                 --------------  --------------  --------------  ----------------
<S>                                              <C>             <C>             <C>             <C>
Revenues and other income:
  Contract revenue.............................  $    3,680,000  $    4,000,000  $    4,500,000   $   12,180,000
  Research and development grant revenue.......        --               722,644         678,753        1,526,397
  Interest income..............................       1,383,546       1,861,818       1,634,392        5,698,071
                                                 --------------  --------------  --------------  ----------------
                                                      5,063,546       6,584,462       6,813,145       19,404,468
Expenses:
  Research and development.....................      11,337,688      13,727,587      14,124,813       49,487,748
  General and administrative...................       3,735,918       3,405,660       4,379,730       16,281,966
  Interest expense.............................         139,651         104,187          62,303          496,056
                                                 --------------  --------------  --------------  ----------------
  Total expenses...............................      15,213,257      17,237,434      18,566,846       66,265,770
                                                 --------------  --------------  --------------  ----------------
  Net loss.....................................  $  (10,149,711) $  (10,652,972) $  (11,753,701)  $  (46,861,302)
                                                 --------------  --------------  --------------  ----------------
                                                 --------------  --------------  --------------  ----------------
  Loss per share...............................  $        (1.10) $        (0.84) $        (0.86)
Shares used in computing basic and diluted loss
  per share....................................       9,195,489      12,753,301      13,702,835
</TABLE>
 
                                      F-29
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
   FOR THE PERIOD FROM INCEPTION (JANUARY 2, 1992) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                        CONVERTIBLE
                                                      PREFERRED STOCK      COMMON STOCK
                                                    -------------------  -----------------
                                                      SHARES    AMOUNT    SHARES    AMOUNT
                                                    ----------  -------  ---------  ------
<S>                                                 <C>         <C>      <C>        <C>
Balance at inception, January 2,1992..............      --      $ --        --      $--
Issuance of stock for cash, January and October
  1992 ($.04 per share)...........................      --        --       272,268    273
Issuance of stock for license agreement rights,
  September 1992 ($.04 per share).................      --        --       600,000    600
Issuance of stock for services rendered, September
  and November 1992 ($.04 per share)..............      --        --         6,471      6
Net loss..........................................      --        --        --       --
                                                    ----------  -------  ---------  ------
Balance, December 31, 1992........................      --        --       878,739    879
                                                    ----------  -------  ---------  ------
Issuance of stock for cash, January through May
  1993 ($.04 per share)...........................      --        --     1,334,286  1,334
Issuance of Series A Preferred Stock, May 1993,
  for cash ($2.15 per share), net of issuance
  costs of $65,406................................   3,600,462   3,600      --       --
Issuance of Series A Preferred Stock, May 1993,
  for conversion of debt ($2.15 per share)........     409,291     410      --       --
Issuance of stock, July 1993, for cash ($.18 per
  share)..........................................      --        --        11,429     11
Exercise of stock options, December 1993, ($.18
  per share)......................................      --        --         4,857      5
Deferred compensation.............................      --        --        --       --
Amortization of deferred compensation.............      --        --        --       --
Net loss..........................................      --        --        --       --
                                                    ----------  -------  ---------  ------
Balance at December 31, 1993......................   4,009,753   4,010   2,229,311  2,229
                                                    ----------  -------  ---------  ------
Issuance of Series B Preferred Stock, April 1994,
  for cash ($4.00 per share), net of issuance
  costs of $420,123...............................   3,750,000   3,750      --       --
Issuance of stock upon conversion of debt, April
  1994 ($10.56 per share).........................      --        --        85,714     86
Issuance of stock in initial public offering, July
  1994 ($7.50 per share), net of offering costs of
  $1,705,625......................................      --        --     1,933,333  1,933
Conversion of Series A Preferred Stock into common
  stock upon the closing of the initial public
  offering, July 1994.............................  (4,012,610) (4,013 ) 4,012,610  4,013
Exercise of stock options and warrants, January
  through December 1994 ($.18 - $2.15 per
  share)..........................................       2,857       3      74,285     74
Issuance of stock under employee stock purchase
  plan, December 1994 ($2.66 per share)...........      --        --         9,426      9
Deferred compensation.............................      --        --        --       --
Amortization of deferred compensation.............      --        --        --       --
Net loss..........................................      --        --        --       --
                                                    ----------  -------  ---------  ------
Balance at December 31,1994.......................   3,750,000  $3,750   8,344,679  $8,344
                                                    ----------  -------  ---------  ------
 
<CAPTION>
                                                                   DEFICIT
                                                                 ACCUMULATED
                                                    ADDITIONAL    DURING THE                      TOTAL
                                                      PAID-IN    DEVELOPMENT     DEFERRED     STOCKHOLDERS'
                                                      CAPITAL       STAGE      COMPENSATION      EQUITY
                                                    -----------  ------------  ------------   -------------
<S>                                                 <C>          <C>           <C>            <C>
Balance at inception, January 2,1992..............  $   --       $   --        $   --          $   --
Issuance of stock for cash, January and October
  1992 ($.04 per share)...........................        9,256      --            --                9,529
Issuance of stock for license agreement rights,
  September 1992 ($.04 per share).................       20,400      --            --               21,000
Issuance of stock for services rendered, September
  and November 1992 ($.04 per share)..............          221      --            --                  227
Net loss..........................................      --        (1,389,275 )     --           (1,389,275)
                                                    -----------  ------------  ------------   -------------
Balance, December 31, 1992........................       29,877   (1,389,275 )     --           (1,358,519)
                                                    -----------  ------------  ------------   -------------
Issuance of stock for cash, January through May
  1993 ($.04 per share)...........................       45,366      --            --               46,700
Issuance of Series A Preferred Stock, May 1993,
  for cash ($2.15 per share), net of issuance
  costs of $65,406................................    7,680,988      --            --            7,684,588
Issuance of Series A Preferred Stock, May 1993,
  for conversion of debt ($2.15 per share)........      880,590      --            --              881,000
Issuance of stock, July 1993, for cash ($.18 per
  share)..........................................        1,989      --            --                2,000
Exercise of stock options, December 1993, ($.18
  per share)......................................          845      --            --                  850
Deferred compensation.............................      210,600      --           (210,600)        --
Amortization of deferred compensation.............      --           --             47,220          47,220
Net loss..........................................      --        (3,742,700 )     --           (3,742,700)
                                                    -----------  ------------  ------------   -------------
Balance at December 31, 1993......................    8,850,255   (5,131,975 )    (163,380)      3,561,139
                                                    -----------  ------------  ------------   -------------
Issuance of Series B Preferred Stock, April 1994,
  for cash ($4.00 per share), net of issuance
  costs of $420,123...............................   14,576,127      --            --           14,579,877
Issuance of stock upon conversion of debt, April
  1994 ($10.56 per share).........................      904,914      --            --              905,000
Issuance of stock in initial public offering, July
  1994 ($7.50 per share), net of offering costs of
  $1,705,625......................................   12,792,439      --            --           12,794,372
Conversion of Series A Preferred Stock into common
  stock upon the closing of the initial public
  offering, July 1994.............................      --           --            --              --
Exercise of stock options and warrants, January
  through December 1994 ($.18 - $2.15 per
  share)..........................................       26,159      --            --               26,236
Issuance of stock under employee stock purchase
  plan, December 1994 ($2.66 per share)...........       25,129      --            --               25,138
Deferred compensation.............................    1,755,400      --         (1,755,400)        --
Amortization of deferred compensation.............      --           --            664,246         664,246
Net loss..........................................      --        (9,172,943 )     --           (9,172,943)
                                                    -----------  ------------  ------------   -------------
Balance at December 31,1994.......................  $38,930,423  $(14,304,918) $(1,254,534)    $23,383,065
                                                    -----------  ------------  ------------   -------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-30
<PAGE>
                               GENEMEDICINE, INC.
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
                 STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
   FOR THE PERIOD FROM INCEPTION (JANUARY 2, 1992) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                                                                                    DEFICIT
                                                      CONVERTIBLE PREFERRED                                       ACCUMULATED
                                                              STOCK                COMMON STOCK       ADDITIONAL   DURING THE
                                                      ----------------------  ----------------------   PAID-IN    DEVELOPMENT
                                                       SHARES      AMOUNT      SHARES      AMOUNT      CAPITAL       STAGE
                                                      ---------  -----------  ---------  -----------  ----------  ------------
<S>                                                   <C>        <C>          <C>        <C>          <C>         <C>
Balance at December 31,1994.........................  3,750,000   $   3,750   8,344,679   $   8,344   $38,930,423 ($14,304,918)
Exercise of stock options, January through December
  1995
  ($.18 - $7.50 per share)..........................     --          --         157,588         158      257,286       --
Issuance of stock under employee stock purchase
  plan, June and December 1995 ($2.66 - $6.48 per
  share)............................................     --          --          69,677          70      218,553       --
Issuance of stock, July 1995, for cash ($9.00 per
  share), net of issuance costs of $411,454.........     --          --         444,444         444    3,588,102       --
Exercise of warrants, July 1995 ($1.73 per share)...     --          --          20,027          20       34,573       --
Issuance of stock, October 1995, for cash ($6.50 per
  share), net of offering costs of $1,560,325.......     --          --       3,000,000       3,000   17,936,675       --
Amortization of deferred compensation...............     --          --          --          --           --           --
Net loss............................................     --          --          --          --           --      (10,149,711)
                                                      ---------  -----------  ---------  -----------  ----------  ------------
Balance at December 31, 1995........................  3,750,000       3,750   12,036,415     12,036   60,965,612  (24,454,629)
                                                      ---------  -----------  ---------  -----------  ----------  ------------
Exercise of stock options, January through December
  1996
  ($.18 - $5.88 per share)..........................     --          --         250,676         251      212,204       --
Issuance of stock under employee stock purchase
  plan, June and December 1996 ($2.66 - $6.48 per
  share)............................................     --          --         108,751         109      311,379       --
Issuance of stock, February 1996, for cash ($9.56
  per share) net of issuance costs of $8,818........     --          --         418,629         418    3,990,764       --
Exercise of warrants, March and May 1996 (Note 6)...     --          --         262,898         263        5,887       --
Amortization of deferred compensation...............     --          --          --          --           --           --
Net loss............................................     --          --          --          --           --      (10,652,972)
                                                      ---------  -----------  ---------  -----------  ----------  ------------
Balance at December 31, 1996........................  3,750,000       3,750   13,077,369     13,077   65,485,846  (35,107,601)
                                                      ---------  -----------  ---------  -----------  ----------  ------------
Exercise of stock options, January through December
  1997
  ($.18 - $6.63 per share)..........................     --          --         197,065         197      470,384       --
Issuance of stock under employee stock purchase
  plan, June and December 1997 ($3.51 - $4.83 per
  share)............................................     --          --          62,259          62      282,036       --
Issuance of stock, February 1997, for cash ($7.50
  per share) net of issuance costs of $10,667.......     --          --         533,333         534    3,988,799       --
Exercise of warrants, September 1997 ($.04 per
  share) (Note 6)...................................     --          --          24,291          24          826       --
Issuance of stock under employee 401(k) plan,
  December 1997
  ($5.06 per share).................................     --          --          17,105          17       86,577       --
Amortization of deferred compensation...............     --          --          --          --           --           --
Cancellation of stock options.......................     --          --          --          --         (216,817)      --
Net loss............................................     --          --          --          --           --      (11,753,701)
                                                      ---------  -----------  ---------  -----------  ----------  ------------
Balance at December 31, 1997........................  3,750,000   $   3,750   13,911,422  $  13,911   $70,097,651 ($46,861,302)
                                                      ---------  -----------  ---------  -----------  ----------  ------------
                                                      ---------  -----------  ---------  -----------  ----------  ------------
 
<CAPTION>
 
                                                                        TOTAL
                                                        DEFERRED     STOCKHOLDERS'
                                                      COMPENSATION      EQUITY
                                                      -------------  ------------
<S>                                                   <C>            <C>
Balance at December 31,1994.........................   $(1,254,534)   $23,383,065
Exercise of stock options, January through December
  1995
  ($.18 - $7.50 per share)..........................       --            257,444
Issuance of stock under employee stock purchase
  plan, June and December 1995 ($2.66 - $6.48 per
  share)............................................       --            218,623
Issuance of stock, July 1995, for cash ($9.00 per
  share), net of issuance costs of $411,454.........       --          3,588,546
Exercise of warrants, July 1995 ($1.73 per share)...       --             34,593
Issuance of stock, October 1995, for cash ($6.50 per
  share), net of offering costs of $1,560,325.......       --         17,939,675
Amortization of deferred compensation...............       394,977       394,977
Net loss............................................       --        (10,149,711)
                                                      -------------  ------------
Balance at December 31, 1995........................      (859,557)   35,667,212
                                                      -------------  ------------
Exercise of stock options, January through December
  1996
  ($.18 - $5.88 per share)..........................       --            212,455
Issuance of stock under employee stock purchase
  plan, June and December 1996 ($2.66 - $6.48 per
  share)............................................       --            311,488
Issuance of stock, February 1996, for cash ($9.56
  per share) net of issuance costs of $8,818........       --          3,991,182
Exercise of warrants, March and May 1996 (Note 6)...       --              6,150
Amortization of deferred compensation...............       393,754       393,754
Net loss............................................       --        (10,652,972)
                                                      -------------  ------------
Balance at December 31, 1996........................      (465,803)   29,929,269
                                                      -------------  ------------
Exercise of stock options, January through December
  1997
  ($.18 - $6.63 per share)..........................       --            470,581
Issuance of stock under employee stock purchase
  plan, June and December 1997 ($3.51 - $4.83 per
  share)............................................       --            282,098
Issuance of stock, February 1997, for cash ($7.50
  per share) net of issuance costs of $10,667.......       --          3,989,333
Exercise of warrants, September 1997 ($.04 per
  share) (Note 6)...................................       --                850
Issuance of stock under employee 401(k) plan,
  December 1997
  ($5.06 per share).................................       --             86,594
Amortization of deferred compensation...............       192,638       192,638
Cancellation of stock options.......................       216,817        --
Net loss............................................       --        (11,753,701)
                                                      -------------  ------------
Balance at December 31, 1997........................   $   (56,348)   $23,197,662
                                                      -------------  ------------
                                                      -------------  ------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-31
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                                   INCEPTION
                                                        FOR THE YEAR ENDED DECEMBER 31,        (JANUARY 2, 1992)
                                                    ----------------------------------------        THROUGH
                                                        1995          1996          1997       DECEMBER 31, 1997
                                                    ------------  ------------  ------------  -------------------
<S>                                                 <C>           <C>           <C>           <C>
Cash flows used in operating activities:
  Net loss........................................  $(10,149,711) $(10,652,972) $(11,753,701)    $(46,861,302)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
    Depreciation and amortization.................       644,544       808,409       962,212        2,777,977
    Issuance of convertible debt for noncash
      consideration...............................       --            --            --               905,000
    Issuance of stock for noncash consideration...       --            --             86,594          107,644
    Compensation expense related to stock plans...       423,502       393,754       192,638        1,721,360
    Loss on equipment retirements.................       --              1,313         2,272            7,565
    Changes in assets and liabilities:
      Decrease (increase) in prepaid expenses and
        other assets..............................        41,290       248,151        (5,474)        (181,195)
      Increase in accounts payable and accrued
        liabilities...............................       254,623       235,519       102,224        1,454,986
      Increase in deferred revenue and deferred
        contract revenue..........................       919,970     1,179,489       910,249        3,009,708
                                                    ------------  ------------  ------------  -------------------
        Net cash used in operating activities.....    (7,865,782)   (7,786,337)   (9,502,986)     (37,058,257)
                                                    ------------  ------------  ------------  -------------------
Cash flows used in investing activities:
    Purchase of equipment, furniture and leasehold
      improvements................................    (1,417,523)     (672,441)   (1,187,057)      (6,009,658)
    Net sales (purchases) of short-term
      investments.................................   (15,779,552)   (8,949,879)    5,017,757      (23,708,845)
                                                    ------------  ------------  ------------  -------------------
      Net cash (used in) provided by investing
        activities................................   (17,197,075)   (9,622,320)    3,830,700      (29,718,503)
                                                    ------------  ------------  ------------  -------------------
Cash flows from financing activities:
    Proceeds from notes payable and capital lease
      obligations.................................       723,991       --            --             2,030,823
    Repayment of notes payable and capital lease
      obligations.................................      (426,074)     (387,986)     (342,800)      (1,574,843)
    Advance on line of credit.....................       --            --            --               750,000
    Proceeds from issuance of preferred stock,
      net.........................................       --            --            --            22,264,465
    Proceeds from issuance of common stock, net...    22,010,356     4,521,275     4,742,862       44,179,495
                                                    ------------  ------------  ------------  -------------------
      Net cash provided by financing activities...    22,308,273     4,133,289     4,400,062       67,649,940
                                                    ------------  ------------  ------------  -------------------
Net increase (decrease) in cash and cash
  equivalents.....................................    (2,754,584)  (13,275,368)   (1,272,224)         873,180
Cash and cash equivalents, beginning of period....    18,175,356    15,420,772     2,145,404        --
                                                    ------------  ------------  ------------  -------------------
Cash and cash equivalents, end of period..........  $ 15,420,772  $  2,145,404  $    873,180     $    873,180
                                                    ------------  ------------  ------------  -------------------
                                                    ------------  ------------  ------------  -------------------
Supplemental disclosure of cash flow information:
    Cash paid during the period for interest......  $    139,651  $    104,187  $     59,132     $    492,185
Supplemental schedule of noncash financing
  activity:
    Conversion of debt to preferred and common
      stock.......................................  $    --       $    --       $    --          $  1,786,000
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-32
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                         NOTES TO FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1997
 
1. ORGANIZATION AND BUSINESS:
 
    GENEMEDICINE, INC. (the "Company") is a Delaware corporation in the
development stage. The Company is developing non-viral gene therapies that may
provide unique clinical benefits in the treatment of a number of human diseases.
The Company intends to develop its products through alliances with major
pharmaceutical and biotechnology companies.
 
    The Company has devoted substantially all of its efforts to research and
product development and has not yet generated any revenues from the sale of
products, nor is there any assurance of future product revenues. In addition,
the Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. The
research and development activities engaged in by the Company involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, technological
uncertainty, the need for additional financing, the reliance on collaborative
arrangements for research and contractual agreements with corporate partners,
and the ability to develop or access manufacturing, sales and marketing
experience. Additional factors include uncertainties as to patents and
proprietary technologies, technological change and risk of obsolescence,
development of products, competition, government regulations and regulatory
approval, and product liability exposure. As a result of the aforementioned
factors and the related uncertainties, there can be no assurance of the
Company's future success. See "Risk Factors," elsewhere herein.
 
2. SIGNIFICANT ACCOUNTING POLICIES:
 
    CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
 
    The Company considers all highly liquid investments with an original
maturity of less than three months when purchased to be cash equivalents.
Short-term investments have maturities greater than three months at the date of
purchase. At December 31, 1996 and 1997 cash equivalents and short-term
investments consisted primarily of U.S. Government obligations. All cash
equivalents and short-term investments have been classified as held-to-maturity
at December 31, 1996 and 1997. Investments in debt securities classified as
held-to-maturity at December 31, 1997, have various maturity dates which do not
exceed one year. These securities are carried at amortized cost which
approximates fair value.
 
    PREPAID EXPENSES AND OTHER
 
    Prepaid expenses and other are mainly comprised of prepayments for
contracted research, building rent, and insurance.
 
    EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
 
    Equipment, furniture and leasehold improvements are carried at cost and are
depreciated on a straight-line basis over the estimated useful economic lives of
the assets involved. The estimated useful lives employed in computing
depreciation are 3 years for computer software, 5 years for equipment, 7 years
for furniture and the remaining life of the building lease for leasehold
improvements (refer to Note 11). When property is retired or otherwise disposed
of, the cost and accumulated depreciation are removed
 
                                      F-33
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
from the accounts and any resulting gain or loss is included in income.
Maintenance and repairs that do not extend the life of assets are charged to
expense when incurred.
 
    RESEARCH AND DEVELOPMENT
 
    Research and development costs are expensed when incurred. These costs
include personnel costs, materials consumed, depreciation on equipment and the
cost of facilities used for research and development. Payments related to the
acquisition and patenting of technology rights, for which development work is in
process, are expensed and considered a component of research and development
costs. Contract revenue and research and development grant revenue include
payments from a corporate partner and a government agency for research and
development performed by the Company and are recognized ratably as the Company
satisfies its obligation under the related agreements. Payments received in
excess of amounts earned are classified as deferred contract revenue.
 
    LOSS PER SHARE
 
    In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The Company
adopted the provisions of SFAS No. 128, changing from its previous method of
accounting for net loss per share as set forth in APB Opinion No. 15. Adoption
of Statement No. 128 required retroactive revision of the presentation of net
loss per share in historical financial statements. Net loss per share amounts as
presented herein have remained unchanged from the adoption of SFAS No. 128 since
the Company's outstanding stock options would not have been included in the
calculation because their effect would have been anti-dilutive. Net loss per
share has been computed by dividing the net loss by the weighted average number
of shares of Common Stock outstanding.
 
    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 reporting 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.
 
                                      F-34
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
 
    Equipment, furniture and leasehold improvements consist of the following:
 
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                  ----------------------------
                                                                      1996           1997
                                                                  -------------  -------------
<S>                                                               <C>            <C>
Laboratory equipment............................................  $   3,292,122  $   3,915,425
Office equipment................................................        338,657        386,107
Furniture.......................................................        350,803        383,338
Computer software...............................................         29,434         63,072
Leasehold improvements..........................................        799,318      1,219,084
                                                                  -------------  -------------
                                                                      4,810,334      5,967,026
Less accumulated depreciation and amortization..................     (1,811,918)    (2,746,039)
                                                                  -------------  -------------
                                                                  $   2,998,416  $   3,220,987
                                                                  -------------  -------------
                                                                  -------------  -------------
</TABLE>
 
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
 
    Accounts payable and accrued liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                    --------------------------
                                                                        1996          1997
                                                                    ------------  ------------
<S>                                                                 <C>           <C>
Professional fees.................................................  $    200,920  $    402,511
Research contracts................................................       334,556       282,329
Compensation and benefits.........................................       162,677       236,941
Other accounts payable and accrued liabilities....................       654,609       533,205
                                                                    ------------  ------------
                                                                    $  1,352,762  $  1,454,986
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>
 
5. CAPITAL LEASE OBLIGATIONS:
 
    In March 1994, the Company entered into an equipment leasing arrangement
with a financing company. Equipment has been financed over forty-two and
forty-eight month periods at implicit interest rates of 8.4 percent and 11.2
percent, respectively. Equipment purchases financed through this agreement are
recorded as capital leases in the accompanying financial statements.
 
    Future principal payments under capital lease obligations as of December 31,
1997 are as follows:
 
<TABLE>
<S>                                                                 <C>
1998..............................................................  $ 270,166
1999..............................................................     54,814
                                                                    ---------
                                                                    $ 324,980
                                                                    ---------
                                                                    ---------
</TABLE>
 
                                      F-35
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
6. STOCKHOLDERS' EQUITY:
 
    In January 1996, the Board of Directors of GENEMEDICINE adopted a Preferred
Share Purchase Rights Plan in which preferred share purchase rights ("Rights")
were distributed for each share of common stock held as of the close of business
on February 1, 1996. The rights will expire on February 1, 2006. Each Right will
entitle stockholders to buy one one-hundredth of a share of a new series of
Series A Junior Preferred Stock at an exercise price of $60.00 per one
one-hundredth of a Preferred Share. Upon the occurrence of certain events, each
Right will entitle its holder to purchase, at the Right's then-current exercise
price, shares of the Company's Common Stock having a market value of two times
the exercise price of the Right.
 
    COMMON STOCK
 
    In July 1994, the Company completed an initial public offering of 1,933,333
shares of Common Stock at $7.50 per share, with the Company receiving net
proceeds of approximately $13,500,000, before payment of offering expenses.
 
    In October 1995, the Company completed a follow-on public offering of
3,000,000 shares of Common Stock at $6.50 per share, with the Company receiving
net proceeds of $18,225,000, before payment of offering expenses.
 
    SERIES A CONVERTIBLE PREFERRED STOCK
 
    On May 17, 1993, the Company issued 3,948,894 shares of Series A Preferred
Stock (the "Series A Preferred"), at a price of $2.1525 per share, for aggregate
consideration of approximately $8,435,000, net of offering costs of
approximately $65,000. The consideration received consisted of cash proceeds of
approximately $7,685,000 and conversion of advances of $750,000. No dividends
were declared or paid to holders of Series A Convertible Stock. Upon completion
of the Company's initial public offering, in July 1994, all Series A Convertible
Stock was converted, on a one for one basis, into 4,012,610 shares of Common
Stock.
 
    SERIES B CONVERTIBLE PREFERRED STOCK/SYNTEX WARRANTS
 
    Upon execution of the Syntex Collaborative Agreement (refer to Note 9),
Syntex Corporation, the then parent company of Syntex (U.S.A.) Inc., purchased
3,750,000 shares of the Company's Preferred Series B Stock (the "Series B
Preferred") and a warrant to purchase 1,071,428 shares of the Company's Common
Stock (the "Common Warrant") for an aggregate purchase price of $15 million. The
Series B Preferred will convert into 1,071,428 shares of Common Stock at the
Company's option (i) upon the Company's Common Stock trading at an average price
of $14.00 per share or more for 30 consecutive days, (ii) upon completion of a
public offering with minimum aggregate proceeds of $10 million and minimum price
of $14.00 per share or (iii) after April 8, 1998. Syntex Corporation may elect
to convert the Series B Preferred into Common Stock at any time. The holders of
the Series B Preferred are entitled to receive a liquidation preference of $4.00
per share, after which remaining assets would be distributed ratably to the
holders of Common Stock. The Common Warrant is exercisable for five years at
$21.00 per share for an aggregate purchase price of $22.5 million. The warrants
have been recorded at zero in the accompanying financial statements as the value
was DE MINIMIS upon issuance. The Company has the right to accelerate the
expiration of the Common Warrant at any time.
 
                                      F-36
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
6. STOCKHOLDERS' EQUITY: (CONTINUED)
    WARRANTS
 
    In connection with the Company's initial public offering in July 1994, the
Company issued a warrant to the underwriter and stockholder to purchase 133,333
shares of Common Stock at an exercise price of $13.50 per share. The warrant
became exercisable for four years beginning July 12, 1995, and has been recorded
at zero in the accompanying financial statements as the value was DE MINIMIS
upon issuance.
 
    In connection with the issuance of the Series A Preferred, the Company
issued warrants to acquire 413,705 shares at $2.1525 per share. These warrants
have been recorded at zero in the accompanying financial statements as the value
was DE MINIMIS upon issuance. The warrants were exercisable over an 18-month
period beginning May 17, 1993, however, in November 1994, in return for the pro
rata expiration of a cashless exercise provision of the warrants, the exercise
provision was extended to November 17, 1995. In July 1995, 21,428 warrants were
exercised of which 16,071 shares were issued for cash and 5,357 warrants were
exercised under a cashless provision, netting to an issuance of 3,956 shares. On
July 11, 1995, in return for an agreement to not sell or otherwise dispose of
any shares of the Company's Common Stock held by the remaining warrant holders,
the exercise provision was extended to May 17, 1996 and the pro rata expiration
of the cashless exercise provision was rescinded. In March and May 1996, the
remaining 392,277 warrants were exercised under a cashless provision, netting to
an issuance of 260,041 shares.
 
    In connection with the advances from D. Blech & Company Incorporated ("D.
Blech"), the Company issued D. Blech and a related party warrants to purchase
28,571 shares of the Company's Common Stock at $.035 per share, exercisable over
a five year period beginning January 1993. The warrants have been recorded at
zero in the accompanying financial statements as the value was DE MINIMIS upon
issuance. In September 1997, 24,291 warrants were exercised for cash and the
remaining warrants expired in December 1997.
 
    In connection with loans from two directors of BCM Technologies, Inc., the
Company issued warrants to purchase 5,714 shares of Series A Preferred Stock at
$2.1525 per share. The warrants have been recorded at zero in the accompanying
financial statements as the value was DE MINIMIS upon issuance. One warrant for
2,857 shares was exercised in 1994 and the remaining warrant for 2,857 shares
was exercised in May 1996.
 
                                      F-37
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
 
    The Company adopted a 401(k) plan in 1994. Under the plan, employees can
contribute up to 15 percent of their compensation subject to limitations as
defined by the Internal Revenue Service. The Company has the option to match an
employee's contribution as determined each year by the Company. An employee
vests in the Company's matching contribution based on years of service. No
matching contribution had been made through December 31, 1996. In 1997, the
Company implemented a 25% match of employee contributions to be made with shares
of the Company's Common Stock at year end based on the year end closing price
per share.
 
    In March 1994, the Board of Directors adopted, and the stockholders
subsequently approved, the 1994 Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). The Directors' Plan, as amended in 1997, reserved 390,000
shares of common stock for issuance thereunder. The plan permits each director
of the Company who is not otherwise employed by the Company who (i) was a
director on July 12, 1994 or (ii) is first elected as a director after the date
of adoption of the Directors' Plan, automatically will be granted an option to
purchase 10,000 and 30,000 shares of common stock, respectively. In addition,
annually on April 26th , each non-employee director who has been a non-employee
director for at least six months shall be granted an option to purchase 5,000
shares of Common Stock of the Company. All options under this plan vest in four
equal annual installments commencing on the date of grant.
 
    In April 1993, the Board of Directors approved the 1993 Stock Option Plan
(the "Option Plan"). The Option Plan, as amended in 1997, provides for the grant
of up to 3,945,714 incentive and nonstatutory options to acquire the Company's
common stock. The option prices for the incentive and nonstatutory options shall
be not less than 100 percent and 85 percent, respectively, of the fair market
value of the stock as determined by the Company's Board of Directors.
 
    In March 1994, the Board of Directors adopted the Employee Stock Purchase
Plan and reserved 857,142 shares of Common Stock for issuance thereunder. The
plan permits full-time employees to purchase Common Stock through payroll
deductions (which cannot exceed 15 percent of each employee's compensation) at
the lower of 85 percent of fair market value at the beginning of each offering
period, as defined, or the fair market value at the end of each six-month
purchase period. In 1996 and 1997, 108,751 and 62,259 shares, respectively, were
purchased by employees under this plan at $2.66 to $6.48 per share.
 
    The Company accounts for its stock based compensation plans under Accounting
Principles Board Opinion No. 25 and the related Interpretations. Accordingly,
deferred compensation is recorded for stock options based on the excess of the
deemed value of the common stock on the date the options were granted over the
aggregate exercise price of the options. This deferred compensation is amortized
over the vesting period of each option. For certain stock options granted prior
to its initial public offering, the Company recorded deferred compensation. Such
deferred compensation totals approximately $2 million, of which $394,977,
$393,754 and $192,638 was recognized as expense during the years ended December
31, 1995, 1996 and 1997, respectively, and the remaining amount at December
31,1997 , $56,348, will be amortized to expense in 1998. As the exercise price
of all options issued since the Company's initial public offering in July 1994
has been equal to or greater than the market price of the Company's stock on the
date of grant, no further deferred compensation was recorded. In 1997, $216,817
of previously recorded deferred compensation was reversed due to the
cancellation of certain options upon termination of the employees. No
compensation cost has been recognized under the Company's stock purchase plan.
 
                                      F-38
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
(CONTINUED)
    In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" which, if fully adopted, requires the Company to record stock
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected not to record related compensation
expense in accordance with this statement. Had compensation expense for its
stock option and stock purchase plans been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below. The compensation costs disclosed here may
not be representative of the effects of pro forma net income in future years.
 
<TABLE>
<CAPTION>
                                                      1995           1996           1997
                                                  -------------  -------------  -------------
<S>                               <C>             <C>            <C>            <C>
Net loss:                            As reported  $  10,149,711  $  10,652,972  $  11,753,701
                                       Pro forma  $  11,028,844  $  12,449,641  $  14,218,819
Basic and diluted net loss per
  share:                             As reported      $1.10          $0.84          $0.86
                                       Pro forma      $1.20          $0.98          $1.04
</TABLE>
 
    The following is a summary of stock option activity:
 
<TABLE>
<CAPTION>
                                          1993 STOCK OPTION PLAN           DIRECTORS PLAN
                                        ---------------------------  ---------------------------
                                                     WEIGHTED-AVG.                WEIGHTED-AVG.
                                         OPTIONS       PRICE ($)      OPTIONS       PRICE ($)
                                        ----------  ---------------  ----------  ---------------
<S>                                     <C>         <C>              <C>         <C>
Balance at December 31, 1994..........   1,230,612          1.76         50,000          7.50
                                        ----------                   ----------
  Granted.............................     477,250          6.54        140,000          4.91
  Exercised...........................    (155,088)         1.54         (2,500)         7.50
  Canceled............................     (74,978)         3.66        (37,500)         7.07
                                        ----------                   ----------
Balance at December 31, 1995..........   1,477,796          3.23        150,000          5.19
                                        ----------                   ----------
  Granted.............................     784,349          4.92         20,000          6.25
  Exercised...........................    (250,676)         0.85         --            --
  Canceled............................    (278,204)         5.80        (30,000)         3.63
                                        ----------                   ----------
Balance at December 31, 1996..........   1,733,265          3.94        140,000          5.68
                                        ----------                   ----------
  Granted.............................     755,943          6.55         25,000          6.88
  Exercised...........................    (197,065)         2.39         --            --
  Canceled............................    (192,237)         5.08         --            --
                                        ----------                   ----------
Balance at December 31, 1997..........   2,099,906          4.91        165,000          5.86
                                        ----------                   ----------
                                        ----------                   ----------
 
Exercisable at December 31, 1995......     645,065          2.15          5,000          7.50
Exercisable at December 31, 1996......     774,465          2.94         35,000          5.86
Exercisable at December 31, 1997......   1,059,727          4.02         70,000          5.77
</TABLE>
 
    At December 31, 1997, 1,163,837 and 222,500 options were available for
future grant under the 1993 Stock Option Plan and Directors Plan, respectively.
The exercise price of options outstanding under the 1993 Stock Option Plan and
Directors' Plan at December 31, 1997 range from $0.18 to $9.88 and $3.63 to
 
                                      F-39
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
7. 401(K) PLAN, STOCK OPTION PLANS, AND EMPLOYEE STOCK PURCHASE PLAN:
(CONTINUED)
$7.50, respectively. The weighted average contractual life of options
outstanding at December 31, 1997 was nine years for both the 1993 Stock Option
Plan and Directors Plan.
 
    The weighted average fair value of options granted in 1995, 1996 and 1997
was $4.78, $3.45 and $4.90, respectively, under the 1993 Stock Option Plan. The
weighted average fair value of options granted in 1995, 1996 and 1997 was $3.70,
$4.30 and $5.28, respectively, under the Directors' Plan. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
1995, 1996 and 1997, respectively: risk-free interest rates of 6.5 percent for
all years; no expected dividend yields for all years; expected lives of 6 years
for all years and expected volatility of 82, 72 and 85 percent.
 
    The weighted average fair value of purchase rights granted in 1995, 1996 and
1997 was $1.33, $1.37 and $3.20, respectively, under the Employee Stock Purchase
Plan. The fair value of employee purchase rights was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1995, 1996 and 1997, respectively: risk-free interest rates of
5.8, 5.6 and 5.8 percent; no expected dividend yields for all years; expected
lives of 1.5 years for all years and expected volatility of 77, 72 and 72
percent.
 
8. FEDERAL INCOME TAXES:
 
    The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of liabilities and assets using exacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation should be provided.
 
    As of December 31, 1997, the Company has generated net operating loss
("NOL") carryforwards of approximately $39 million and research and development
credits of approximately $1.2 million available to reduce future income taxes.
These carryforwards begin to expire in 2007. A change in ownership, as defined
by federal income tax regulations, could significantly limit the Company's
ability to utilize its carryforwards. The Company's ability to utilize its
current and future NOLs to reduce future taxable income and tax liabilities may
be limited. Additionally, because Federal tax regulations limit the time during
which these carryforwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for federal income tax
purposes. As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset at December 31, 1997 and 1996. The valuation
allowance increased $4,443,779 and $3,834,402 for the years ended December 31,
1997 and 1996, respectively,
 
                                      F-40
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
8. FEDERAL INCOME TAXES: (CONTINUED)
primarily due to the Company's losses. The components of the Company's deferred
tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                ------------------------------
                                                                     1996            1997
                                                                --------------  --------------
<S>                                                             <C>             <C>
Net operating loss carryforwards..............................  $    9,714,245  $   13,487,189
Research and development tax credits..........................         645,000       1,172,825
Capitalized start-up costs....................................         363,735         205,014
Technology license............................................         298,168         278,223
Tax basis of equipment, furniture and leasehold
  improvements................................................          97,498         123,720
Contract revenue..............................................         652,790         975,734
Other.........................................................          27,490        --
                                                                --------------  --------------
  Total deferred tax assets...................................      11,798,926      16,242,705
Less valuation allowance......................................     (11,798,926)    (16,242,705)
                                                                --------------  --------------
  Net deferred tax assets.....................................  $     --        $     --
                                                                --------------  --------------
                                                                --------------  --------------
</TABLE>
 
9. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS:
 
    Effective February 1995, the Company and Corange International Ltd., the
parent company of the Boehringer Mannheim entered into a multi-year alliance
agreement to develop gene therapy products to treat selected cancer indications.
Under the terms of the agreement, Boehringer Mannheim has agreed to fund $25
million, plus certain amounts for achievement of milestones, for research and
development at the Company, with payments to the Company of $5 million per year,
plus milestones, for five years. Research and development funding of $4.6, $5.0
and $5.5 million, including a $0.5 million milestone payment in 1997, were
received in 1995, 1996 and 1997, respectively. Because the Company may be
obligated, upon certain circumstances, to conduct research and development in an
amount not to exceed $5 million at the end of the five-year agreement, the
Company has recognized contract revenue at 80 percent of research funding. In
addition, Boehringer Mannheim has agreed to invest $20 million in the common
equity of the Company at $4 million per year. The first four $4 million equity
investments were made in July 1995, February 1996, February 1997 and February
1998 in which 444,444, 418,629, 533,333 and 533,333 common shares were issued at
$9.00, $9.56, $7.50 and $7.50 per share, respectively. The price per share for
common equity investments by Boehringer Mannheim for the years 1996 through 1999
is based upon the 15 consecutive trading days immediately preceding February 1
for each year, with the purchase in 1996 at a 20 percent premium. In no case
shall the purchase price be less than $7.50 per share. All payments to the
Company beginning in 1997 are subject to the achievement of certain milestones.
The Company also granted Boehringer Mannheim a three-year option to expand the
collaboration to include additional cancer indications.
 
    In April 1994, the Company entered into a collaborative agreement with
Syntex (U.S.A.) Inc., now a subsidiary of Roche Holding Ltd. to develop gene
medicines for certain inflammatory and immunological disorders. The
collaborative agreement ended in accordance with its terms in April 1997. Upon
execution
 
                                      F-41
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
9. COLLABORATIVE, LICENSE AND RESEARCH AGREEMENTS: (CONTINUED)
of the collaborative agreement, Syntex Corporation purchased 3,750,000 shares of
the Company's Preferred Series B Stock and a warrant to purchase 1,071,428
shares of the Company's Common Stock. Refer to Note 6.
 
    In 1992, the Company entered into license agreements with Baylor whereby the
Company has exclusive noncancelable worldwide licenses to use certain
technology. In exchange for the grant of this exclusive license, the Company
issued 600,000 shares of its common stock to Baylor. Pursuant to the license
agreement, the Company will pay Baylor, for the longer of 10 years or the life
of the patent, beginning with the first commercial sale of a product
incorporating the licensed technologies, a royalty on net sales by the Company
of products incorporating any of the such technologies.
 
    Effective May 7, 1993, the Company obtained a worldwide, exclusive license
for the gene-switch technology initially developed by Baylor in exchange for
14,286 shares of common stock and future royalty payments on net sales by the
Company of any products incorporating the licensed technologies.
 
    The Company has entered into several sponsored research agreements with a
number of research institutes. During 1995, 1996 and 1997, the Company paid
$1,340,000, $1,442,100 and $1,055,000 respectively, pursuant to these agreements
and has committed to pay an additional $446,000 and $148,000 in 1998 and 1999,
respectively under these research agreements.
 
    In addition, the Company has entered into other licensing agreements with
various universities and research organizations. Under the terms of these
agreements, the Company has received exclusive and nonexclusive licenses to
technology or technology claimed, in certain patents or patent applications. The
Company is required to make payments of nonrefundable license fees and royalties
on future sales of products employing the technology. In 1995, 1996 and 1997,
the Company paid license fees of $250,000, $362,000 and $238,000, respectively,
under these agreements, which have been recorded as a research and development
expense. To retain these licenses in future years the Company has committed to
pay approximately $120,000 through 1998.
 
10. CONSULTING AND RELATED AGREEMENTS:
 
    In 1995, in connection with the execution of the Boehringer Mannheim
alliance agreement, the Company paid a fee of $350,000 to a former chairman and
stockholder of the Company pursuant to a finder's agreement.
 
    The Company has entered into consulting agreements with certain individuals
to assist its clinical and research and development efforts. Pursuant to these
agreements, the Company paid $494,000, $447,000 and $384,000 in 1995, 1996 and
1997, respectively. The fees are recorded as research and development expense as
incurred. In 1996, the Company paid a director of the Company $20,300 under a
consulting agreement.
 
11. COMMITMENTS:
 
    The Company has entered into employment agreements with its chief executive
and other key employees which have initial expiration dates ranging from 1996 to
1999. The agreements are thereafter automatically renewed for successive
twelve-month terms, unless terminated by the Company or employee.
 
                                      F-42
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               DECEMBER 31, 1997
 
11. COMMITMENTS: (CONTINUED)
Such agreements provide that, in the case of termination without cause, the
employees are entitled to payments ranging from 25 percent to 85 percent of
their annual salaries. The aggregate amount charged to expense during 1995, 1996
and 1997 pursuant to these agreements totaled $848,000, $872,000 and $821,000,
respectively.
 
    On October 29, 1993, the Company entered into an agreement to lease building
facilities from a real estate company. This operating lease commenced in January
1995 and continues for a lease term of 10 years. The obligations under this
lease along with other operating leases are as follows:
 
<TABLE>
<S>                                                                 <C>
1998..............................................................  $ 855,000
1999..............................................................    854,000
2000..............................................................    906,000
2001..............................................................    906,000
2002..............................................................    906,000
2003..............................................................    906,000
2004..............................................................    906,000
</TABLE>
 
                                      F-43
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        1998            1997
                                                    -------------   -------------
                                                     (UNAUDITED)
<S>                                                 <C>             <C>
                                     ASSETS
Current Assets:
  Cash and cash equivalents.......................   $  1,201,190    $    873,180
  Short-term investments..........................     17,218,089      23,708,845
  Prepaid expenses and other......................        242,307         175,128
                                                    -------------   -------------
    Total current assets..........................     18,661,586      24,757,153
                                                    -------------   -------------
Equipment, furniture and leasehold improvements,
  net.............................................      2,777,353       3,220,987
Deposits and other assets.........................          3,707           9,195
                                                    -------------   -------------
Total Assets......................................   $ 21,442,646    $ 27,987,335
                                                    -------------   -------------
                                                    -------------   -------------
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable and accrued liabilities........   $    957,654    $  1,454,986
  Deferred grant revenue..........................       --                89,737
  Current portion of capital lease obligations....        108,079         270,166
                                                    -------------   -------------
    Total current liabilities.....................      1,065,733       1,814,889
                                                    -------------   -------------
Long-term Liabilities:
  Deferred contract revenue.......................      3,669,970       2,919,970
  Capital lease obligations, net of current
    portion.......................................       --                54,814
                                                    -------------   -------------
    Total long-term liabilities...................      3,669,970       2,974,784
                                                    -------------   -------------
Commitments
Stockholders' Equity:
  Convertible preferred stock, $.001 par value;
    20,000,000 shares authorized; 3,750,000 issued
    and outstanding...............................          3,750           3,750
  Common stock, $.001 par value; 40,000,000 shares
    authorized;
  14,579,376 and 13,911,422 shares issued and
    outstanding...................................         14,579          13,911
  Additional paid-in capital......................     74,262,669      70,097,651
  Deferred compensation...........................       --               (56,348)
  Deficit accumulated during the development
    stage.........................................    (57,574,055)    (46,861,302)
                                                    -------------   -------------
    Total stockholders' equity....................     16,706,943      23,197,662
                                                    -------------   -------------
Total Liabilities and Stockholders' Equity........   $ 21,442,646    $ 27,987,335
                                                    -------------   -------------
                                                    -------------   -------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-44
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                            STATEMENTS OF OPERATIONS
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                                    INCEPTION
                                                                                                   (JANUARY 2,
                                         THREE MONTHS ENDED             NINE MONTHS ENDED             1992)
                                           SEPTEMBER 30,                  SEPTEMBER 30,              THROUGH
                                    ----------------------------  -----------------------------   SEPTEMBER 30,
                                        1998           1997            1998           1997             1998
                                    -------------  -------------  --------------  -------------  ----------------
<S>                                 <C>            <C>            <C>             <C>            <C>
Revenues:
  Contract revenue................  $   1,045,000  $   1,000,000  $    3,067,500  $   3,500,000   $   15,247,500
  Research and development grant
    revenue.......................       --              120,000         219,181        509,000        1,745,578
  Interest income.................        286,369        406,143         967,288      1,272,552        6,665,359
                                    -------------  -------------  --------------  -------------  ----------------
    Total revenues................      1,331,369      1,526,143       4,253,969      5,281,552       23,658,437
Expenses:
  Research and development........      3,788,791      3,299,805      11,510,386     10,068,103       60,998,134
  General and administrative......      1,172,758      1,192,736       3,435,071      3,384,489       19,717,037
  Interest expense................          5,758         13,394          21,265         50,186          517,321
                                    -------------  -------------  --------------  -------------  ----------------
    Total expenses................      4,967,307      4,505,935      14,966,722     13,502,778       81,232,492
                                    -------------  -------------  --------------  -------------  ----------------
Net loss..........................  $  (3,635,938) $  (2,979,792) $  (10,712,753) $  (8,221,226)  $  (57,574,055)
                                    -------------  -------------  --------------  -------------  ----------------
                                    -------------  -------------  --------------  -------------  ----------------
Loss per share....................  $       (0.25) $       (0.22) $        (0.74) $       (0.60)
                                    -------------  -------------  --------------  -------------
                                    -------------  -------------  --------------  -------------
Shares used in computing loss per
  share...........................     14,578,666     13,800,544      14,469,110     13,656,360
                                    -------------  -------------  --------------  -------------
                                    -------------  -------------  --------------  -------------
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-45
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                            STATEMENTS OF CASH FLOWS
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                                         INCEPTION
                                                                             NINE MONTHS ENDED          (JANUARY 2,
                                                                               SEPTEMBER 30,           1992) THROUGH
                                                                       -----------------------------   SEPTEMBER 30,
                                                                            1998           1997             1998
                                                                       --------------  -------------  ----------------
<S>                                                                    <C>             <C>            <C>
Cash flows from operating activities:
  Net loss...........................................................  $  (10,712,753) $  (8,221,226)  $  (57,574,055)
  Adjustments to reconcile net loss to net cash used in operating
    activities:
    Depreciation and amortization....................................         799,702        727,924        3,577,679
    Issuance of convertible debt for noncash consideration...........        --             --                905,000
    Issuance of stock for noncash consideration......................        --             --                107,644
    Compensation expense related to stock plans......................          56,348        290,866        1,777,708
    Loss on equipment retirements....................................        --             --                  7,565
    Changes in assets and liabilities:
      (Increase) in prepaid expenses and other assets................         (61,691)      (156,235)        (242,886)
      Increase (decrease) in accounts payable and accrued
        liabilities..................................................        (497,332)      (432,627)         957,654
      Increase in deferred revenue and deferred contract revenue.....         660,263        710,000        3,669,971
                                                                       --------------  -------------  ----------------
        Net cash provided by (used in) operating activities..........      (9,755,463)    (7,081,298)     (46,813,720)
                                                                       --------------  -------------  ----------------
Cash flows from investing activities:
  Purchase of equipment, furniture and leasehold improvements........        (356,068)    (1,102,548)      (6,365,726)
  Net sales (purchases) of short-term investments....................       6,490,756      4,010,769      (17,218,089)
                                                                       --------------  -------------  ----------------
        Net cash used in investing activities........................       6,134,688      2,908,221      (23,583,815)
                                                                       --------------  -------------  ----------------
Cash flows from financing activities:
  Proceeds from notes payable and capital lease obligations..........        --             --              2,030,823
  Repayment of notes payable and capital lease obligations...........        (216,901)      (289,434)      (1,791,744)
  Advance on line of credit..........................................        --             --                750,000
  Proceeds from issuance of preferred stock, net.....................        --             --             22,264,465
  Proceeds from issuance of common stock, net........................       4,165,686      4,575,466       48,345,181
                                                                       --------------  -------------  ----------------
        Net cash provided by financing activities....................       3,948,785      4,286,032       71,598,725
                                                                       --------------  -------------  ----------------
Net increase in cash and cash equivalents............................         328,010        112,955        1,201,190
Cash and cash equivalents, beginning of period.......................         873,180      2,145,404         --
                                                                       --------------  -------------  ----------------
Cash and cash equivalents, end of period.............................  $    1,201,190  $   2,258,359   $    1,201,190
                                                                       --------------  -------------  ----------------
                                                                       --------------  -------------  ----------------
Supplemental disclosure of cash flow information:
  Cash paid during the period for interest...........................  $       21,265  $      50,186   $      454,318
Supplemental schedule of noncash financing activity:
  Issuance of convertible debt for technology........................  $     --        $    --         $      905,000
  Conversion of debt to preferred and common stock...................  $     --        $    --         $    1,786,000
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-46
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                         NOTES TO FINANCIAL STATEMENTS
 
                               SEPTEMBER 30, 1998
                                  (UNAUDITED)
 
1.  ORGANIZATION AND BASIS OF PRESENTATION:
 
    GENEMEDICINE, INC. ("GENEMEDICINE" or the "Company") is a Delaware
corporation in the development stage. The Company is developing non-viral gene
therapies that may provide unique clinical benefits in the treatment of a number
of human diseases. The Company intends to develop its products through alliances
with major pharmaceutical and biotechnology companies.
 
    The Company has devoted substantially all of its efforts to research and
product development and has not yet generated any revenues from the sale of
products, nor is there any assurance of future product revenues. In addition,
the Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. The
research and development activities engaged in by the Company involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. These factors include, but are not limited to, the need for additional
financing, the ability to establish and maintain collaborative arrangements for
research, development and commercialization of products with corporate partners,
and the ability to develop or access manufacturing, sales and marketing
experience. Additional factors include uncertainties as to patents and
proprietary technologies, technological change and risk of obsolescence,
development of products, competition, government regulations and regulatory
approval, and product liability exposure. As a result of the aforementioned
factors and the related uncertainties, there can be no assurance of the
Company's future success.
 
    The accompanying interim financial statements are unaudited and reflect all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods presented. Results for interim periods are not necessarily indicative of
the results to be expected for the entire year ending December 31, 1998. These
financial statements should be read in conjunction with the Company's audited
financial statements included with the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
 
    Effective January 1, 1998, the Company adopted Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income and its
components. Comprehensive income is the total of net income and all other non-
owner changes in equity. For the period from inception (January 2, 1992) through
September 30, 1998, the only component of comprehensive income for the Company
is net income. Adopting Statement No. 130 had no effect on the Company's
financial position or results of operation.
 
2.  COLLABORATIVE AGREEMENTS:
 
    Effective February 1995, the Company and Corange International Ltd.
("Corange"), the parent company of Boehringer Mannheim entered into a multi-year
alliance agreement to develop gene therapy products to treat selected cancer
indications. Under the terms of the agreement, Corange agreed to, among other
things, invest $20 million in the common equity of the Company at $4 million per
year. The first four $4 million equity investments were made in July 1995,
February 1996, February 1997 and February 1998 in which 444,444, 418,629,
533,333 and 533,333 common shares were issued at $9.00, $9.56, $7.50 and $7.50
per share, respectively. In August 1998, the agreement was amended to extend the
field of the alliance and the research term of the collaboration. In connection
with this amendment,
 
                                      F-47
<PAGE>
                               GENEMEDICINE, INC.
 
               (A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                               SEPTEMBER 30, 1998
                                  (UNAUDITED)
 
2.  COLLABORATIVE AGREEMENTS: (CONTINUED)
GENEMEDICINE agreed to forgo the requirement of the equity purchase by Corange
due on February 1, 1999, and Corange agreed to pay the Company certain
additional research and milestone payments.
 
3.  SUBSEQUENT EVENTS
 
    On October 24, 1998, GENEMEDICINE entered into a definitive merger agreement
(the "Merger Agreement") with Megabios Corp. ("Megabios") pursuant to which the
Company will become a wholly-owned subsidiary of Megabios in a stock for stock
merger (the "Merger") intended to qualify as a tax-free reorganization. Under
the terms of the Merger agreement, which was unanimously approved by the boards
of directors of both companies, each share of GENEMEDICINE Common Stock
outstanding at the time of the Merger will be exchanged, at a fixed exchange
ratio of 0.5710, for newly issued shares of Common Stock of Megabios. This will
result in the issuance of approximately 8.9 million additional Megabios shares.
In addition, all outstanding employee stock options and warrants of GENEMEDICINE
will convert into Megabios options and warrants at the same exchange ratio. The
proposed transaction will be accounted for as a purchase, and is subject to the
approval of the stockholders of both companies, as well as the satisfaction or
waiver of customary closing conditions. The transaction is expected to close in
the first calendar quarter of 1999.
 
    Pursuant to its Amended and Restated Certificate of Incorporation, the
Company has provided Syntex Corporation written notice of the Company's
intention to convert all outstanding shares of its Series B Preferred Stock into
1,071,428 shares of its Common Stock, effective November 10, 1998.
 
                                      F-48
<PAGE>
                                                                      APPENDIX A
 
                                 CONFORMED COPY
                          AGREEMENT AND PLAN OF MERGER
                                      AND
                                 REORGANIZATION
 
                                     AMONG
 
                                MEGABIOS CORP.,
                            A DELAWARE CORPORATION;
 
                         MONTANA ACQUISITION SUB, INC.,
                            A DELAWARE CORPORATION;
 
                                      AND
 
                               GENEMEDICINE, INC.
                             A DELAWARE CORPORATION
 
                          DATED AS OF OCTOBER 24, 1998
<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
<C>          <S>                                                                                            <C>
SECTION 1. DESCRIPTION OF TRANSACTION.....................................................................        A-1
        1.1  Merger of Merger Sub into the Company........................................................        A-1
        1.2  Effect of the Merger.........................................................................        A-1
        1.3  Closing; Effective Time......................................................................        A-1
        1.4  Certificate of Incorporation and Bylaws; Directors and Officers..............................        A-1
        1.5  Conversion of Shares.........................................................................        A-2
        1.6  Stock Options and Warrants...................................................................        A-2
        1.7  Closing of the Company's Transfer Books......................................................        A-2
        1.8  Exchange of Certificates.....................................................................        A-3
        1.9  Tax Consequences.............................................................................        A-4
       1.10  Further Action...............................................................................        A-4
 
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................................        A-4
        2.1  Due Organization; Subsidiaries; Etc..........................................................        A-4
        2.2  Certificate of Incorporation and Bylaws......................................................        A-5
        2.3  Capitalization, Etc..........................................................................        A-5
        2.4  SEC Filings; Financial Statements............................................................        A-6
        2.5  Absence of Changes...........................................................................        A-7
        2.6  Leasehold; Equipment.........................................................................        A-8
        2.7  Title to Assets..............................................................................        A-8
        2.8  Payments Under Corporate Partnering Agreements...............................................        A-8
        2.9  Proprietary Assets...........................................................................        A-9
       2.10  Contracts....................................................................................       A-10
       2.11  Year 2000 Liabilities........................................................................       A-11
       2.12  Compliance with Legal Requirements...........................................................       A-12
       2.13  Certain Business Practices...................................................................       A-12
       2.14  Governmental Authorizations..................................................................       A-12
       2.15  Tax Matters..................................................................................       A-12
       2.16  Employee and Labor Matters; Benefit Plans....................................................       A-13
       2.17  Environmental Matters........................................................................       A-15
       2.18  Insurance....................................................................................       A-15
       2.19  Transactions with Affiliates.................................................................       A-15
       2.20  Legal Proceedings; Orders....................................................................       A-15
       2.21  Authority; Binding Nature of Agreement.......................................................       A-16
       2.22  No Existing Discussions......................................................................       A-16
       2.23  Vote Required................................................................................       A-16
       2.24  Non-Contravention; Consents..................................................................       A-16
       2.25  Fairness Opinion.............................................................................       A-17
       2.26  Financial Advisor............................................................................       A-17
       2.27  Full Disclosure..............................................................................       A-17
       2.28  Rights Agreement.............................................................................       A-18
 
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB........................................
                                                                                                                 A-18
        3.1  Due Organization; Subsidiaries; Etc..........................................................       A-18
        3.2  Certificates of Incorporation and Bylaws.....................................................       A-18
        3.3  Capitalization, Etc..........................................................................       A-18
        3.4  SEC Filings; Financial Statements............................................................       A-20
        3.5  Absence of Changes...........................................................................       A-20
        3.6  Leasehold; Equipment.........................................................................       A-21
</TABLE>
 
                                      A-i
<PAGE>
                               TABLE OF CONTENTS
                                  (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
<C>          <S>                                                                                            <C>
        3.7  Title to Assets..............................................................................       A-22
        3.8  Payments Under Corporate Partnering Agreements...............................................       A-22
        3.9  Proprietary Assets...........................................................................       A-22
       3.10  Contracts....................................................................................       A-23
       3.11  Year 2000 Liabilities........................................................................       A-25
       3.12  Compliance with Legal Requirements...........................................................       A-25
       3.13  Certain Business Practices...................................................................       A-25
       3.14  Governmental Authorizations..................................................................       A-25
       3.15  Tax Matters..................................................................................       A-25
       3.16  Employee and Labor Matters; Benefit Plans....................................................       A-26
       3.17  Environmental Matters........................................................................       A-27
       3.18  Insurance....................................................................................       A-27
       3.19  Transactions with Affiliates.................................................................       A-28
       3.20  Legal Proceedings; Orders....................................................................       A-28
       3.21  Authority; Binding Nature of Agreement.......................................................       A-28
       3.22  Non-Contravention; Consents..................................................................       A-28
       3.23  Vote Required................................................................................       A-29
       3.24  Valid Issuance...............................................................................       A-29
       3.25  Fairness Opinion.............................................................................       A-29
       3.26  Full Disclosure..............................................................................       A-29
       3.27  Financial Advisor............................................................................       A-30
       3.28  Interim Operations of Merger Sub.............................................................       A-30
 
SECTION 4. CERTAIN COVENANTS OF THE COMPANY...............................................................       A-30
        4.1  Operation of the Company's Business..........................................................       A-30
        4.2  No Solicitation..............................................................................       A-32
        4.3  Conversion of Series B Preferred Stock.......................................................       A-33
 
SECTION 5. CERTAIN COVENANTS OF PARENT....................................................................       A-33
        5.1  Operation of the Parent's Business...........................................................       A-33
 
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES............................................................       A-33
        6.1  Registration Statement; Joint Proxy Statement/Prospectus.....................................       A-33
        6.2  Company Stockholders' Meeting................................................................       A-34
        6.3  Parent Stockholders' Meeting.................................................................       A-35
        6.4  Regulatory Approvals.........................................................................       A-35
        6.5  Stock Options................................................................................       A-36
        6.6  Form S-8.....................................................................................       A-36
        6.7  Indemnification of Officers and Directors....................................................       A-37
        6.8  Tax Free Reorganization......................................................................       A-37
        6.9  Additional Agreements........................................................................       A-37
       6.10  Confidentiality..............................................................................       A-38
       6.11  Disclosure...................................................................................       A-38
       6.12  Tax Matters..................................................................................       A-38
       6.13  Resignation of Officers and Directors........................................................       A-38
       6.14  Nasdaq Listing...............................................................................       A-38
       6.15  FIRPTA Matters...............................................................................       A-38
       6.16  Parent Board of Directors....................................................................       A-38
       6.17  Access and Investigation.....................................................................       A-39
</TABLE>
 
                                      A-ii
<PAGE>
                               TABLE OF CONTENTS
                                  (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
<C>          <S>                                                                                            <C>
       6.18  Operation of Business........................................................................       A-39
       6.19  Financial Statements.........................................................................       A-40
 
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB...................................
                                                                                                                 A-40
        7.1  Accuracy of Representations..................................................................       A-40
        7.2  Performance of Covenants.....................................................................       A-40
        7.3  Effectiveness of Registration Statement......................................................       A-41
        7.4  Stockholder Approval.........................................................................       A-41
        7.5  Consents.....................................................................................       A-41
        7.6  Agreements and Documents.....................................................................       A-41
        7.7  No Material Adverse Change...................................................................       A-41
        7.8  FIRPTA Compliance............................................................................       A-41
        7.9  Listing......................................................................................       A-41
       7.10  No Governmental Litigation...................................................................       A-41
       7.11  No Other Litigation..........................................................................       A-41
       7.12  Conversion of Series B Preferred Stock.......................................................       A-42
 
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.............................................       A-42
        8.1  Accuracy of Representations..................................................................       A-42
        8.2  Performance of Covenants.....................................................................       A-42
        8.3  Effectiveness of Registration Statement......................................................       A-42
        8.4  Stockholder Approval.........................................................................       A-42
        8.5  Documents....................................................................................       A-42
        8.6  No Material Adverse Change...................................................................       A-42
        8.7  Listing......................................................................................       A-42
        8.8  No Governmental Litigation...................................................................       A-43
        8.9  No Other Litigation..........................................................................       A-43
       8.10  Directors....................................................................................       A-43
 
SECTION 9. TERMINATION....................................................................................       A-43
        9.1  Termination..................................................................................       A-43
        9.2  Notice of Termination; Effect of Termination.................................................       A-44
        9.3  Expenses; Termination Fees...................................................................       A-44
 
SECTION 10. MISCELLANEOUS PROVISIONS......................................................................       A-45
       10.1  Amendment....................................................................................       A-45
       10.2  Waiver.......................................................................................       A-45
       10.3  No Survival of Representations and Warranties................................................       A-45
       10.4  Entire Agreement; Counterparts...............................................................       A-45
       10.5  Applicable Law; Jurisdiction.................................................................       A-45
       10.6  Disclosure Schedule..........................................................................       A-46
       10.7  Attorneys' Fees..............................................................................       A-46
       10.8  Assignability................................................................................       A-46
       10.9  Notices......................................................................................       A-46
      10.10  Cooperation..................................................................................       A-47
      10.11  Construction.................................................................................       A-47
</TABLE>
 
                                     A-iii
<PAGE>
                               AGREEMENT AND PLAN
                                       OF
                           MERGER AND REORGANIZATION
 
    THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("AGREEMENT") is made
and entered into as of October 24, 1998, by and among: MEGABIOS CORP., a
Delaware corporation ("PARENT"); MONTANA ACQUISITION SUB, INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("MERGER SUB"); and
GENEMEDICINE, INC., a Delaware corporation (the "COMPANY"). Certain capitalized
terms used in this Agreement are defined in Exhibit A.
 
                                    RECITALS
 
    A. Parent, Merger Sub and the Company intend to effect a merger (the
"MERGER") of Merger Sub with and into the Company in accordance with this
Agreement and the Delaware General Corporation Law, as amended (the "DGCL").
Upon consummation of the Merger, Merger Sub will cease to exist, and the Company
will become a wholly-owned subsidiary of Parent.
 
    B.  It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "CODE").
 
    C.  The respective Boards of Directors of Parent, Merger Sub and the Company
have approved this Agreement and the Merger.
 
                                   AGREEMENT
 
    The parties to this Agreement, intending to be legally bound, agree as
follows:
 
SECTION 1. DESCRIPTION OF TRANSACTION.
 
    1.1  MERGER OF MERGER SUB INTO THE COMPANY.  Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "SURVIVING CORPORATION").
 
    1.2  EFFECT OF THE MERGER.  The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the DGCL.
 
    1.3  CLOSING; EFFECTIVE TIME.  The consummation of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
of Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California, at 10:00 a.m. on a date to be agreed by Parent and the Company (the
"CLOSING DATE"), which shall be no later than the second business day after
satisfaction or waiver of the conditions set forth in Sections 7 and 8.
Contemporaneously with or as promptly as practicable after the Closing, a
properly executed certificate of merger conforming to the requirements of the
DGCL shall be filed with the Secretary of State of the State of Delaware. The
Merger shall take effect at the later of (a) the time the certificate of merger
is accepted for filing by the Secretary of State of the State of Delaware and
(b) at such later time as may be specified in the certificate of merger (the
"EFFECTIVE TIME").
 
    1.4  CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. Unless
otherwise determined by Parent prior to the Effective Time:
 
        (a) the certificate of incorporation and bylaws of the Surviving
    Corporation shall be amended and restated as of the Effective Time to
    conform to the certificate of incorporation and bylaws substantially in the
    form attached hereto as Exhibits B-1 and B-2, respectively; PROVIDED,
    HOWEVER, that
 
                                      A-1
<PAGE>
    at the Effective Time the certificate of incorporation of the Surviving
    Corporation shall be amended so that the name of the Surviving Corporation
    shall be GeneMedicine, Inc.; and
 
        (b) the directors and officers of the Surviving Corporation immediately
    after the Effective Time shall be the directors and officers of Merger Sub
    immediately prior to the Effective Time, until their respective successors
    are elected and qualified or duly appointed, as the case may be.
 
    1.5  CONVERSION OF SHARES.
 
    (a) Subject to Section 1.5(d), at the Effective Time, by virtue of the
Merger and without any further action on the part of Parent, Merger Sub, the
Company or any stockholder of the Company:
 
        (i) any shares of Company Common Stock then held by the Company or any
    subsidiary of the Company (or held in the Company's treasury) shall be
    canceled;
 
        (ii) any shares of Company Common Stock then held by Parent, Merger Sub
    or any other subsidiary of Parent shall be canceled;
 
       (iii) except as provided in clauses "(i)" and "(ii)" above and subject to
    Section 1.5(b), each share of Company Common Stock then outstanding shall be
    automatically converted into 0.5710 of a fully paid and non-assessable share
    of Parent Common Stock; and
 
        (iv) each share of the common stock, no par value per share, of Merger
    Sub then outstanding shall be converted into one share of common stock of
    the Surviving Corporation.
 
    (b) The fraction of a share of Parent Common Stock into which each
outstanding share of Company Common Stock is to be converted pursuant to Section
1.5(a)(iii) (as such fraction may be adjusted in accordance with this Section
1.5(b)) is referred to as the "EXCHANGE RATIO." If, between the date of this
Agreement and the Effective Time, the outstanding shares of Company Common Stock
or Parent Common Stock are changed into a different number or class of shares by
reason of any stock split, stock dividend, reverse stock split,
reclassification, recapitalization or other similar transaction, then the
Exchange Ratio shall be appropriately adjusted.
 
    (c) If any shares of Company Common Stock outstanding immediately prior to
the Effective Time are unvested or are subject to a repurchase option, risk of
forfeiture or other condition under any applicable restricted stock purchase
agreement or other agreement with the Company, then the shares of Parent Common
Stock issued in exchange for such shares of Company Common Stock will also be
unvested and subject to the same repurchase option, risk of forfeiture or other
condition, and the certificates representing such shares of Parent Common Stock
may accordingly be marked with appropriate legends. The Company shall take all
action that may be necessary to ensure that, from and after the Effective Time,
Parent is entitled to exercise any such repurchase option or other right set
forth in any such restricted stock purchase agreement or other agreement.
 
    (d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional shares
shall be issued. In lieu of such fractional shares, any holder of Company Common
Stock who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such holder) shall, upon surrender of such holder's Company Stock
Certificate(s) (as defined in Section 1.7), be paid in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined by multiplying
such fraction by the closing price of a share of Parent Common Stock on Nasdaq
on the Effective Time.
 
    1.6  STOCK OPTIONS AND WARRANTS.  At the Effective Time, all Company Options
(as defined in Section 2.3(b)) shall be assumed by Parent in accordance with
Section 6.5.
 
    1.7  CLOSING OF THE COMPANY'S TRANSFER BOOKS.  At the Effective Time: (a)
all shares of Company Common Stock outstanding immediately prior to the
Effective Time shall automatically be canceled and retired and shall cease to
exist, and all holders of certificates representing shares of Company
 
                                      A-2
<PAGE>
Common Stock that were outstanding immediately prior to the Effective Time shall
cease to have any rights as stockholders of the Company; and (b) the stock
transfer books of the Company shall be closed with respect to all shares of
Company Common Stock outstanding immediately prior to the Effective Time. No
further transfer of any such shares of Company Common Stock shall be made on
such stock transfer books after the Effective Time. If, after the Effective
Time, a valid certificate previously representing any of such shares of Company
Common Stock (a "COMPANY STOCK CERTIFICATE") is presented to the Exchange Agent
(as defined in Section 1.8) or to the Surviving Corporation or Parent, such
Company Stock Certificate shall be canceled and shall be exchanged as provided
in Section 1.8.
 
    1.8  EXCHANGE OF CERTIFICATES.
 
    (a) Prior to the Closing Date, Parent shall select a reputable bank or trust
company reasonably acceptable to the Company to act as exchange agent in the
Merger (the "EXCHANGE AGENT"). At the Effective Time, Parent shall deposit with
the Exchange Agent (i) certificates representing the shares of Parent Common
Stock issuable pursuant to this Section 1 and (ii) cash sufficient to make
payments in lieu of fractional shares in accordance with Section 1.5(d). The
shares of Parent Common Stock and cash amounts so deposited with the Exchange
Agent, together with any dividends or distributions received by the Exchange
Agent with respect to such shares, are referred to collectively as the "EXCHANGE
FUND."
 
    (b) As soon as practicable after the Effective Time, the Exchange Agent will
mail to the registered holders of Company Stock Certificates (i) a letter of
transmittal in customary form and containing such provisions as Parent may
reasonably specify (including a provision confirming that delivery of Company
Stock Certificates shall be effected, and risk of loss and title to Company
Stock Certificates shall pass, only upon delivery of such Company Stock
Certificates to the Exchange Agent), and (ii) instructions for use in effecting
the surrender of Company Stock Certificates in exchange for certificates
representing Parent Common Stock. Subject to Section 1.5(d), upon surrender of a
Company Stock Certificate to the Exchange Agent for exchange, together with a
duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent or Parent, (A) the holder of such
Company Stock Certificate shall be entitled to receive in exchange therefor a
certificate representing the number of shares of Parent Common Stock that such
holder has the right to receive pursuant to the provisions of Section
1.5(a)(iii) together with any cash in lieu of fractional share(s) pursuant to
the provisions of Section 1.5(d) and any dividends or distributions to which
such holder is entitled, and (B) the Company Stock Certificate so surrendered
shall be canceled. Until surrendered as contemplated by this Section 1.8(b),
each Company Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive shares of Parent Common Stock (and
cash in lieu of any fractional share of Parent Common Stock and any dividends or
distributions to which such holder is entitled) as contemplated by Section 1.5.
If any Company Stock Certificate shall have been lost, stolen or destroyed,
Parent may, in its discretion and as a condition precedent to the issuance of
any certificate representing Parent Common Stock, require the owner of such
lost, stolen or destroyed Company Stock Certificate to provide an appropriate
affidavit and to deliver a bond (in such sum as Parent may reasonably direct) as
indemnity against any claim that may be made against the Exchange Agent, Parent
or the Surviving Corporation with respect to such Company Stock Certificate.
 
    (c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby, until such holder surrenders
such Company Stock Certificate in accordance with this Section 1.8 (at which
time such holder shall be entitled to receive all such dividends and
distributions, without interest).
 
    (d) Any portion of the Exchange Fund that remains undistributed to holders
of Company Stock Certificates as of the date 365 days after the date on which
the Merger becomes effective shall be delivered to Parent upon demand, and any
holders of Company Stock Certificates who have not theretofore surrendered their
Company Stock Certificates in accordance with this Section 1.8 shall thereafter
look only
 
                                      A-3
<PAGE>
to Parent for satisfaction of their claims for Parent Common Stock, cash in lieu
of fractional shares of Parent Common Stock and any dividends or distributions
with respect to Parent Common Stock.
 
    (e) Each of the Exchange Agent, Parent and the Surviving Corporation shall
be entitled to deduct and withhold from any consideration payable or otherwise
deliverable pursuant to this Agreement to any holder or former holder of Company
Common Stock such amounts as may be required to be deducted or withheld
therefrom under the Code or under any provision of state, local or foreign tax
law or under any other applicable Legal Requirement. To the extent such amounts
are so deducted or withheld, such amounts shall be treated for all purposes
under this Agreement as having been paid to the Person to whom such amounts
would otherwise have been paid.
 
    (f) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of Company Common Stock with respect to any shares of
Parent Common Stock (or dividends or distributions with respect thereto), or for
any cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar Legal Requirement.
 
    1.9  TAX CONSEQUENCES.  For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
 
    1.10  FURTHER ACTION.  If, at any time after the Effective Time, any further
action is determined by Parent to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Merger Sub and the
Company, the officers and directors of the Surviving Corporation and Parent
shall be fully authorized (in the name of Merger Sub, in the name of the Company
and otherwise) to take such action.
 
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
 
    The Company represents and warrants to Parent and Merger Sub that, except as
set forth in the disclosure schedule that has been prepared by the Company in
accordance with the requirements of Section 10.6 and that has been delivered by
the Company to Parent on the date of this Agreement and signed by the President
of the Company (the "COMPANY DISCLOSURE SCHEDULE"):
 
    2.1  DUE ORGANIZATION; SUBSIDIARIES; ETC.
 
    (a) The Company has no Subsidiaries, and does not own any capital stock of,
or any equity interest of any nature in, any other Entity. The Company has not
agreed, is not obligated to make, and is not bound by any Contract under which
it may become obligated to make, any future investment in or capital
contribution to any other Entity. The Company has not, at any time, been a
general partner of any general partnership, limited partnership or other Entity.
 
    (b) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all corporate power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
 
    (c) The Company is not and has not been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 2.1(c) of the
Company Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Company. The Company is in good standing as a foreign
corporation in each of the respective jurisdictions identified in Part 2.1(c) of
the Company Disclosure Schedule.
 
                                      A-4
<PAGE>
    2.2  CERTIFICATE OF INCORPORATION AND BYLAWS.  The Company has delivered to
Parent accurate and complete copies of its certificate of incorporation, bylaws
and other charter and organizational documents, including all amendments
thereto. The Company is not in violation of any of the provisions of its
certificate of incorporation or bylaws.
 
    2.3  CAPITALIZATION, ETC.
 
    (a) The authorized capital stock of the Company consists of: (i) Forty
Million (40,000,000) shares of Company Common Stock, $0.001 par value per share,
of which, as of September 30, 1998, 14,579,376 shares (which amount does not
materially differ from the amount issued and outstanding as of the date of this
Agreement) have been issued and are outstanding; and (ii) Twenty Million
(20,000,000) shares of preferred stock, $0.001 par value per share, of which (A)
Six Hundred Thousand (600,000) shares have been designated Series A Junior
Participating Preferred Stock, none of which are outstanding as of the date of
this Agreement, and (B) Three Million Seven Hundred Fifty Thousand (3,750,000)
shares have been designated Series B Preferred Stock, all of which are
outstanding as of the date of this Agreement. All of the outstanding shares of
the Company's capital stock have been duly authorized and validly issued, and
are fully paid and nonassessable. As of the date of this Agreement, no shares of
Company Common Stock were held in treasury by the Company. None of the
outstanding shares of the Company's capital stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any similar
right. Except for the shares of Series B Preferred Stock, none of the
outstanding shares of the Company's capital stock is subject to any right of
first refusal in favor of the Company. Except as provided in Part 2.3(a) of the
Company Disclosure Schedule, there is no Company Contract relating to the voting
or registration of, or restricting any Person from purchasing, selling, pledging
or otherwise disposing of (or granting any option or similar right with respect
to), any shares of Company Common Stock. Upon consummation of the Merger, (A)
the shares of Parent Common Stock issued in exchange for any shares of Company
Common Stock that are subject to a Contract pursuant to which the Company has
the right to repurchase, redeem or otherwise reacquire any shares of Company
Common Stock will, without any further act of Parent, the Company or any other
Person, become subject to the restrictions, conditions and other provisions
contained in such Contract, and (B) Parent will automatically succeed to and
become entitled to exercise the Company's rights and remedies under any such
Contract. The Company is not under any obligation to repurchase, redeem or
otherwise acquire any outstanding shares of the Company's capital stock.
 
    (b) As of September 30, 1998, 3,017,412 shares (which amount does not
materially differ from the amount subject to options outstanding as of the date
of this Agreement) of Company Common Stock are subject to issuance pursuant to
outstanding options to purchase Company Common Stock. (Stock options granted by
the Company pursuant to the Company's stock option plans are referred to in this
Agreement as "COMPANY OPTIONS."). Part 2.3(b)(i) of the Company Disclosure
Schedule sets forth the following information with respect to each Company
Option outstanding as of September 30, 1998: (i) the particular plan pursuant to
which such Company Option was granted; (ii) the name of the optionee; (iii) the
number of shares of Company Common Stock subject to such Company Option; (iv)
the exercise price of such Company Option; (v) the date on which such Company
Option was granted; (vi) the applicable vesting schedule and the extent to which
such Company Option is vested and exercisable as of the date of this Agreement;
and (vii) the date on which such Company Option expires. The Company has
delivered to Parent accurate and complete copies of all stock option plans
pursuant to which the Company has ever granted stock options and the form of all
stock option agreements evidencing such options. Except as set forth in Part
2.3(b) of the Company Disclosure Schedule, there are no commitments or
agreements of any character to which the Company is bound obligating the Company
to accelerate the vesting of any Company Option.
 
    (c) As of September 30, 1998, 1,204,761 shares (which amount does not
materially differ from the amount subject to warrants outstanding as of the date
of this Agreement) of Company Common Stock are subject to issuance pursuant to
outstanding warrants to purchase Company Common Stock. (Warrants
 
                                      A-5
<PAGE>
issued by the Company are referred to in this Agreement as "COMPANY WARRANTS.")
Part 2.3(c)(i) of the Company Disclosure Schedule sets forth the following
information with respect to each Company Warrant outstanding as of September 30,
1998: (i) the name of the Warrant holder; (ii) the number of shares of Company
Common Stock subject to such Company Warrant; (iii) the exercise price of such
Company Warrant; (iv) the date on which such Company Warrant was issued; (v) the
applicable exercise period and the extent to which such Company Warrant is
exercisable as of the date of this Agreement; and (vi) the date on which such
Company Warrant expires. The Company has delivered to Parent accurate and
complete copies of all agreements and other documents evidencing such Company
Warrants. Except as set forth in Part 2.3(c) of the Company Disclosure Schedule,
there are no commitments or agreements of any character to which the Company is
bound obligating the Company to amend or extend exercisability or term of any
Company Warrant.
 
    (d) Except as set forth in Part 2.3(d) of the Company Disclosure Schedule
there is no: (i) outstanding subscription, option, call, warrant or right
(whether or not currently exercisable) to acquire any shares of the capital
stock or other securities of the Company; (ii) outstanding security, instrument
or obligation that is or may become convertible into or exchangeable for any
shares of the capital stock or other securities of the Company; (iii)
stockholder rights plan (or similar plan commonly referred to as a "poison
pill") or Contract under which the Company is or may become obligated to sell or
otherwise issue any shares of its capital stock or any other securities; or (iv)
condition or circumstance that may give rise to or provide a basis for the
assertion of a claim by any Person to the effect that such Person is entitled to
acquire or receive any shares of capital stock or other securities of the
Company.
 
    (e) All outstanding shares of Company Common Stock, all outstanding shares
of Series B Preferred Stock, all outstanding Company Options, all outstanding
Company Warrants and any securities disclosed in Part 2.3(d) of the Company
Disclosure Schedule have been issued and granted in compliance in all material
respects with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
 
    2.4  SEC FILINGS; FINANCIAL STATEMENTS.
 
    (a) The Company has delivered to Parent accurate and complete copies
(excluding copies of exhibits) of all registration statements, definitive proxy
statements and other statements, reports, schedules, forms and other documents
filed by the Company with the SEC between July 14, 1994 and the date of this
Agreement and will deliver to Parent accurate and complete copies of all such
registration statements, proxy statements and other statements, reports,
schedules, forms and other documents filed after the date of this Agreement and
prior to the Effective Time (collectively, the "COMPANY SEC DOCUMENTS"), which
are all of the forms, reports and documents required to be filed by the Company
with the SEC since July 14, 1994. As of the time it was filed with the SEC (or,
if amended or superseded by a later filing, then on the date of such filing):
(i) each of the Company SEC Documents filed with the SEC complied in all
material respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be) as of the date of such filing and any Company
SEC Documents filed after the date hereof will so comply; and (ii) none of the
Company SEC Documents contained any untrue statement of material fact or omitted
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
 
    (b) The financial statements (including any related notes) contained in the
Company SEC Documents filed with the SEC (the "COMPANY FINANCIAL STATEMENTS"):
(i) complied as to form in all material respects with the published rules and
regulations of the SEC applicable thereto; (ii) were prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, as permitted by
Form 10-Q of the SEC, and except that the unaudited financial statements may not
contain footnotes and are subject to normal and recurring year end adjustments
which will not, individually or in the aggregate, be material in amount), and
(iii) fairly present
 
                                      A-6
<PAGE>
the financial position of the Company as of the respective dates thereof and the
results of operations of the Company and its subsidiaries for the periods
covered thereby. All adjustments (consisting of recurring accruals) considered
necessary for a fair presentation of the financial statements have been
included. The audited balance sheet of the Company included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 is sometimes
referred to herein as the "COMPANY BALANCE SHEET" and the unaudited balance
sheet of the Company as of June 30, 1998 included in the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 is sometimes referred to
herein as the "COMPANY UNAUDITED INTERIM BALANCE SHEET."
 
    2.5  ABSENCE OF CHANGES.  Since the date of the Company Unaudited Interim
Balance Sheet:
 
        (a) there has not been any material adverse change in the business,
    assets, liabilities, financial condition or results of operations of the
    Company taken as a whole, and no event has occurred that could reasonably be
    expected to have a Material Adverse Effect on the Company;
 
        (b) there has not been any material loss, damage or destruction to, or
    any material interruption in the use of, any of the assets of the Company
    (whether or not covered by insurance);
 
        (c) the Company has not (i) declared, accrued, set aside or paid any
    dividend or made any other distribution in respect of any shares of capital
    stock, or (ii) repurchased, redeemed or otherwise reacquired any shares of
    capital stock or other securities;
 
        (d) the Company has not sold, issued, granted or authorized the issuance
    or grant of (i) any capital stock or other security (except for Company
    Common Stock issued upon the exercise of outstanding Company Options), (ii)
    any option, call, warrant or right to acquire any capital stock or any other
    security (except for Company Options set forth in Parts 2.3(b)(i), 2.3(d)
    and 2.5(d) of the Company Disclosure Schedule), or (iii) any instrument
    convertible into or exchangeable for any capital stock or other security;
 
        (e) the Company has not amended or waived any of its rights under, or
    permitted the acceleration of vesting under, (i) any provision of the
    Company's stock option plans, (ii) any provision of any agreement evidencing
    any outstanding Company Option, or (iii) any restricted stock purchase
    agreement;
 
        (f) there has been no amendment to the certificate of incorporation,
    bylaws or other charter or organizational documents of the Company, and the
    Company has not effected or been a party to any merger, consolidation, share
    exchange, business combination, recapitalization, reclassification of
    shares, stock split, reverse stock split or similar transaction;
 
        (g) the Company has not formed any subsidiary or acquired any equity
    interest or other interest in any other Entity;
 
        (h) the Company has not made any capital expenditures which exceed
    $100,000 in the aggregate, except as set forth in Part 2.5(h);
 
        (i) except in the ordinary course of business and consistent with past
    practices, the Company has not (i) entered into or permitted any of the
    assets owned or used by it to become bound by any Company Material Contract
    (as defined in Section 2.10), or (ii) amended or prematurely terminated, or
    waived any material right or remedy under, any Company Material Contract,
    except as set forth in Part 2.5(i);
 
        (j) the Company has not (i) acquired, leased or licensed any material
    right or other material asset from any other Person, (ii) sold or otherwise
    disposed of, or leased or licensed, any material right or other material
    asset to any other Person, or (iii) waived or relinquished any right, except
    for rights or other assets acquired, leased, licensed or disposed of in the
    ordinary course of business and consistent with past practices;
 
                                      A-7
<PAGE>
        (k) the Company has not written off as uncollectible, or established any
    extraordinary reserve with respect to, any account receivable or other
    indebtedness in excess of $25,000 with respect to any single matter, or in
    excess of $50,000 in the aggregate;
 
        (l) the Company has not made any pledge of any of its assets or
    otherwise permitted any of its assets to become subject to any Encumbrance,
    except for Permitted Encumbrances;
 
        (m) the Company has not (i) lent money to any Person except as set forth
    on Part 2.5(m) of the Company Disclosure Schedule, or (ii) incurred or
    guaranteed any indebtedness for borrowed money other than payroll, travel
    and other advances made in the ordinary course of business;
 
        (n) the Company has not (i) established or adopted any Company Plan (as
    defined in Section 2.16(a)), (ii) caused or permitted any Company Plan to be
    amended in any material respect, or (iii) paid any bonus or made any
    profit-sharing or similar payment to, or materially increased the amount of
    the wages, salary, commissions, fringe benefits or other compensation or
    remuneration payable to, any of its directors, officers or employees except
    as set forth in Part 2.15(n);
 
        (o) the Company has not changed any of its methods of accounting or
    accounting practices in any material respect;
 
        (p) the Company has not made any material election with respect to
    Taxes;
 
        (q) the Company has not commenced or settled any Legal Proceeding;
 
        (r) the Company has not entered into any material transaction or taken
    any other material action that has had, or could reasonably be expected to
    have, a Material Adverse Effect on the Company; and
 
        (s) the Company has not agreed or committed to take any of the actions
    referred to in clauses "(c)" through "(r)" above.
 
    2.6  LEASEHOLD; EQUIPMENT.
 
    (a) The Company does not own any real property or any interest in real
property, except for the leaseholds created under the real property leases
identified in Part 2.6 of the Company Disclosure Schedule. All such real
property is being leased pursuant to lease agreements that are in full force and
effect, are valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event of default
(or event which with notice or lapse of time, or both, would constitute a
default) that would result in a Material Adverse Effect on the Company.
 
    (b) Part 2.6 of the Company Disclosure Schedule accurately identifies all
material items of equipment leased by the Company. All material items of
equipment and other tangible assets owned by or leased to the Company are
adequate for the uses to which they are being put, are in good condition and
repair (ordinary wear and tear excepted) and are adequate for the conduct of the
business of the Company in the manner in which such business is currently being
conducted.
 
    2.7  TITLE TO ASSETS.  The Company owns, and has good, valid and marketable
title to, or in the case of leased properties and assets, valid leasehold
interests in, all of their respective tangible properties and assets, real,
personal and mixed, used or held for use in their business, including: (i) all
assets reflected on the Company Unaudited Interim Balance Sheet; and (ii) all
other assets reflected in the books and records of the Company as being owned or
leased by the Company. All of said assets are owned or leased by the Company
free and clear of any Encumbrances, except for Permitted Encumbrances.
 
    2.8  PAYMENTS UNDER CORPORATE PARTNERING AGREEMENTS.
 
    (a) The Company has received all amounts that are owed and due to be paid to
the Company under agreements with Syntex (USA) Inc. and Corange International
Limited (the "COMPANY CORPORATE PARTNERS") prior to the date of this Agreement.
For each such payment received by the Company under
 
                                      A-8
<PAGE>
any such agreement, any revenue that the Company recognized with respect to such
payment was recognized in accordance with GAAP.
 
    (b) The Company has no knowledge that a Company Corporate Partner is
considering, intending or planning to terminate any of the agreements between
any such Company Corporate Partner and the Company, or any research program
under such agreement.
 
    2.9  PROPRIETARY ASSETS.
 
    (a) Part 2.9 of the Company Disclosure Schedule sets forth, with respect to
each Proprietary Asset owned or licensed by the Company and registered with any
Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Assets, and (ii)
the names of the jurisdictions covered by the applicable registration or
application. Part 2.9 of the Company Disclosure Schedule identifies and provides
a brief description of, and identifies any ongoing royalty or payment
obligations in excess of $50,000 per year with respect to, each Proprietary
Asset that is licensed or otherwise made available to the Company by any Person
(except for any Proprietary Asset that is licensed to the Company under any
third party software license generally available to the public), and identifies
the Contract under which such Proprietary Asset is being licensed or otherwise
made available to the Company. Excluding the payments required under the Company
Contracts set forth in the Company Disclosure Schedule, the aggregate amounts
payable by the Company for ongoing royalty or license payments do not exceed
$100,000 per year. The Company has good, valid and marketable title to all of
the Company Proprietary Assets (except for licensed assets), free and clear of
all Encumbrances, except (i) as set forth in Part 2.9(a) of the Company
Disclosure Schedule, (ii) for any lien for current taxes not yet due and
payable, and (iii) minor liens that have arisen in the ordinary course of
business and that do not (individually or in the aggregate) materially detract
from the value of the assets subject thereto or materially impair the operations
of the Company. To the Company's knowledge, the Company has a valid right to
use, license and otherwise exploit all Company Proprietary Assets. The Company
has not developed jointly or does not jointly own or have joint rights with any
other Person any Company Proprietary Asset that is material to the business of
the Company. Except as set forth in Part 2.9(a) of the Disclosure Schedule,
there is no Company Contract pursuant to which any Person has any right (whether
or not currently exercisable) to use, license or otherwise exploit any Company
Proprietary Asset.
 
    (b) The Company has taken all commercially reasonable measures and
precautions to protect and maintain the confidentiality and secrecy of all
Company Proprietary Assets (except Company Proprietary Assets whose value would
be unimpaired by public disclosure) and otherwise to maintain and protect the
value of all Company Proprietary Assets.
 
    (c) To the knowledge of the Company, the Company is not misappropriating or
making any unlawful use of, and the Company has not at any time misappropriated
or made any unlawful use of, or received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of, any Proprietary Asset owned
or used by any other Person.
 
    (d) The Company Proprietary Assets constitute all the Proprietary Assets
reasonably necessary to enable the Company to conduct its business in the manner
in which such business has been and is being conducted. Except as set forth in
Part 2.9(d) of the Company Disclosure Schedule, the Company has not licensed any
of the Company Proprietary Assets to any Person on an exclusive basis.
 
    (e) All current and former employees have executed and delivered an
agreement to the Company (containing no exceptions to or exclusions from the
scope of its coverage) that is substantially identical to the form of
Confidential Information and Invention Assignment Agreement previously delivered
to Parent by the Company. All current and former consultants and independent
contractors to the Company have executed and delivered to the Company an
agreement that contains provisions appropriately restricting the use and
disclosure of Company Proprietary Assets.
 
                                      A-9
<PAGE>
    (f) The Company has taken reasonably adequate steps to ensure that all
software (and related Company Proprietary Assets) used in its operations will be
Year 2000 Compliant (as defined below) by December 31, 1999. For purposes of
this Section 2, "YEAR 2000 COMPLIANT" shall mean that software that can
individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the twenty
first century when used in accordance with the documentation relating to all
such software (and related Company Proprietary Assets), including being able to,
before, on and after January 1, 2000 substantially conform to the following: (i)
use logic pertaining to dates which allow users to identify and/or use the
century portion of any date fields without special processing; and (ii) respond
to all date elements and date input so as to resolve any ambiguity as to century
in a disclosed, defined and pre-determined manner and provide date information
in ways which are unambiguous as to century, either by permitting or requiring
the century to be specified or where the data element is represented without a
century, the correct century is unambiguous for all manipulations involving that
element.
 
    2.10  CONTRACTS.
 
    (a) Part 2.10 of the Company Disclosure Schedule identifies each Company
Contract that constitutes a "Company Material Contract." For purposes of this
Agreement, each of the following shall be deemed to constitute a "COMPANY
MATERIAL CONTRACT":
 
        (i) (A) any Contract or outstanding offer relating to the employment of,
    or the performance of services by, any employee, and (B) any Contract
    pursuant to which the Company is required to make any severance, termination
    or similar payment, bonus or relocation payment or any other payment (other
    than payments in respect of salary) to any current or former employee or
    director of the Company;
 
        (ii) any Contract (A) relating to the acquisition, transfer,
    development, sharing, license (to or by the Company), or use of any
    Proprietary Asset (except for any Contract pursuant to which any Proprietary
    Asset is licensed to the Company under any third party software license
    generally available to the public); or (B) with respect to the distribution
    or marketing of any products of the Company;
 
       (iii) any Contract which provides for indemnification of any officer,
    director, employee or agent of the Company;
 
        (iv) any Contract imposing any restriction on the right or ability of
    the Company (A) to compete in any market or geographic area with any other
    Person, (B) to acquire any product or other asset or any services from any
    other Person, to sell any product or other asset to or perform any services
    for any other Person or to transact business or deal in any other manner
    with any other Person, or (C) to develop or distribute any technology;
 
        (v) any Contract (A) relating to the acquisition, issuance, voting,
    registration, sale or transfer of any securities (other than the issuance of
    Company Common Stock upon the valid exercise of Company Options outstanding
    as of the date of this Agreement), (B) providing any Person with any
    preemptive right, right of participation, right of maintenance or any
    similar right with respect to any securities, or (C) providing the Company
    with any right of first refusal with respect to, or right to repurchase or
    redeem, any securities;
 
        (vi) any Contract requiring that the Company give any notice or provide
    any information to any Person prior to accepting any Acquisition Proposal;
 
       (vii) any Contract that (A) contemplates or involves payment or delivery
    of cash or other consideration in an amount or having a value in excess of
    $20,000 per month and (B) has a term of
 
                                      A-10
<PAGE>
    more than 90 days and that may not be terminated by the Company within 90
    days after the delivery of a termination notice by the Company;
 
      (viii) any Contract that contemplates or involves payment or delivery of
    cash or other consideration by the Company in an amount or having a value in
    excess of $75,000 in the aggregate;
 
        (ix) any Contract or Company Plan (including, without limitation, any
    stock option plan, stock appreciation plan or stock purchase plan), any of
    the benefits of which will be increased, or the vesting of benefits of which
    will be accelerated, by the execution of this Agreement or the consummation
    of any of the transactions contemplated by this Agreement or the value of
    any of the benefits of which will be calculated on the basis of any of the
    transactions contemplated by this Agreement;
 
        (x) any Contract (not otherwise identified in clauses "(i)" through
    "(ix)" of this sentence) that is or would be material to the Company, to the
    business, condition, capitalization or operations of the Company or to any
    of the transactions contemplated by this Agreement; and
 
        (xi) any other Contract, if a breach of such Contract could reasonably
    be expected to have a Material Adverse Effect on the Company.
 
    (b) Each Company Material Contract is valid and in full force and effect,
and is enforceable by an Acquired Corporation in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies
 
    (c) Except where the following would not have a Material Adverse Effect on
the Company: (i) the Company has not violated or breached, or committed any
default under, any Company Contract, and, to the knowledge of the Company, no
other Person has violated or breached, or committed any default under, any
Company Contract; (ii) to the knowledge of the Company, no event has occurred,
and no circumstance or condition exists, that (with or without notice or lapse
of time) will, or could reasonably be expected to, (A) result in a violation or
breach of any of the provisions of any Company Contract, (B) give any Person the
right to declare a default or exercise any remedy under any Company Contract,
(C) give any Person the right to a rebate, chargeback, penalty or change in
delivery schedule under any Company Contract, (D) give any Person the right to
accelerate the maturity or performance of any Company Contract, or (E) give any
Person the right to cancel, terminate or modify any Company Contract; and (iii)
neither the Company, nor any of its Representatives, has received any notice or
other communication regarding any actual or possible violation or breach of, or
default under any Company Contract.
 
    (d) There is no Company Contract to which any Governmental Body is a party
or under which any Governmental Body has any rights or obligations, or directly
or indirectly benefiting any Governmental Body (including any subcontract or
other Contract between the Company and any contractor or subcontractor to any
Governmental Body).
 
    (e) No Person is renegotiating, or has a right pursuant to the terms of any
Company Material Contract to renegotiate, any amount paid or payable to the
Company under any Company Material Contract or any other material term or
provision of any Company Material Contract.
 
    2.11  YEAR 2000 LIABILITIES.  The Company does not have any accrued,
contingent or other liabilities of any nature, either matured or unmatured,
including, without limitation, any liabilities relating to costs associated with
insuring that all software (and related Company Proprietary Assets) utilized by
the Company or other components of the Company's information technology
infrastructure are Year 2000 Compliant (whether or not required to be reflected
in financial statements in accordance with GAAP, and whether due or to become
due), except for: (a) liabilities identified as such in the "liabilities" column
of the Company Unaudited Interim Balance Sheet; and (b) normal and recurring
liabilities that have been incurred by the Company since the date of the Company
Unaudited Interim Balance Sheet in the ordinary course of business and
consistent with past practices.
 
                                      A-11
<PAGE>
    2.12  COMPLIANCE WITH LEGAL REQUIREMENTS.  The Company is, and has at all
times since July 14, 1994 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Since
July 14, 1994, the Company has not received any notice or other communication
from any Governmental Body regarding any actual or possible violation of, or
failure to comply with, any Legal Requirement.
 
    2.13  CERTAIN BUSINESS PRACTICES.  Neither the Company nor any director,
officer, agent or employee of the Company has, on behalf of the Company, (i)
used any funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns or violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful
payment.
 
    2.14  GOVERNMENTAL AUTHORIZATIONS.  The Company holds all Governmental
Authorizations necessary to enable it to conduct its business in the manner in
which such business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. The Company is, and at
all times since July 14, 1994 has been, in substantial compliance with the terms
and requirements of such Governmental Authorizations. Since July 14, 1994, the
Company has not received any notice or other communication from any Governmental
Body regarding (a) any actual or possible violation of or failure to comply with
any term or requirement of any Governmental Authorization, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any Governmental Authorization.
 
    2.15  TAX MATTERS.
 
    (a) All Tax Returns required to be filed by or on behalf of the Company with
any Governmental Body with respect to any taxable period ending on or before the
Closing Date (the "COMPANY RETURNS") (i) have been or will be filed on or before
the applicable due date (including any extensions of such due date if properly
obtained), and (ii) have been, or will be when filed, prepared in all material
respects in compliance with all applicable Legal Requirements. All amounts shown
on the Company Returns to be due on or before the Closing Date have been or will
be paid on or before the Closing Date.
 
    (b) The Company Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with GAAP. The Company will establish, in the ordinary course of
business and consistent with its past practices, reserves adequate for the
payment of all Taxes for the period from June 30, 1998 through the Closing Date.
 
    (c) Except as set forth in Part 2.15(c) of the Company Disclosure Schedule,
the Company Returns have never been examined or audited by any Governmental
Body. No extension or waiver of the limitation period applicable to any of the
Company Returns has been granted (by the Company or any other Person), and no
such extension or waiver has been requested from the Company.
 
    (d) No claim or Legal Proceeding is pending or, to the knowledge of the
Company, has been threatened against or with respect to the Company in respect
of any material Tax. There are no unsatisfied liabilities for material Taxes
(including liabilities for interest, additions to tax and penalties thereon and
related expenses) with respect to any notice of deficiency or similar document
received by the Company with respect to any material Tax (other than liabilities
for Taxes asserted under any such notice of deficiency or similar document which
are being contested in good faith by the Company and with respect to which
adequate reserves for payment have been established). There are no liens for
material Taxes upon any of the assets of the Company except liens for current
Taxes not yet due and payable. The Company has not entered into or become bound
by any agreement or consent pursuant to Section 341(f) of the Code. The Company
has not been, and it will not be, required to include any material adjustment in
taxable income for any tax period (or portion thereof) pursuant to Section 481
of the Code or any comparable
 
                                      A-12
<PAGE>
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing.
 
    (e) Except as set forth in Part 2.15(e) of the Company Disclosure Schedule,
there is no agreement, plan, arrangement or other Contract covering any employee
or independent contractor or former employee or independent contractor of the
Company that, considered individually or considered collectively with any other
such Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. The Company is not and has never been,
a party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract.
 
    2.16  EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
 
    (a) Part 2.16(a) of the Company Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan, program or agreement (collectively, the "COMPANY PLANS")
sponsored, maintained, contributed to or required to be contributed to by the
Company for the benefit of any current or former employee of the Company.
 
    (b) Except as set forth in Part 2.16(a) of the Company Disclosure Schedule,
the Company does not maintain, sponsor or contribute to, and it has not at any
time in the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
employees or former employees of the Company (a "COMPANY PENSION PLAN"). None of
the Plans identified in Part 2.16(a) of the Company Disclosure Schedule is
subject to Title IV of ERISA or Section 412 of the Code.
 
    (c) Except as set forth in Part 2.16(a) of the Company Disclosure Schedule,
the Company does not maintain, sponsor or contribute to any employee welfare
benefit plan (as defined in Section 3(1) of ERISA, whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of any
employees or former employees of the Company including any self-funded medical,
dental, or other similar Company Plan (a "COMPANY WELFARE PLAN"). None of the
Company Plans identified in Part 2.16(a) of the Company Disclosure Schedule is a
multi-employer plan (within the meaning of Section 3(37) of ERISA).
 
    (d) With respect to each Company Plan, the Company has delivered to Parent:
(i) an accurate and complete copy of such Company Plan (including all amendments
thereto); (ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Plan for the last two years; (iii) an accurate
and complete copy of the most recent Summary Plan Description, together with
each Summary of Material Modifications, if required under ERISA, with respect to
such Company Plan, (iv) if such Company Plan is funded through a trust or any
third party funding vehicle, an accurate and complete copy of the trust or other
funding agreement (including all amendments thereto) and accurate and complete
copies of the most recent financial statements thereof; (v) accurate and
complete copies of all Contracts relating to such Company Plan, including
service provider agreements, insurance contracts, minimum premium contracts,
stop-loss agreements, investment management agreements, subscription and
participation agreements and recordkeeping agreements; and (vi) an accurate and
complete copy of the most recent determination letter received from the Internal
Revenue Service with respect to such Company Plan (if such Company Plan is
intended to be qualified under Section 401(a) of the Code).
 
    (e) The Company is not and has never been required to be treated as a single
employer with any other Person under Section 4001(b)(1) of ERISA or Section
414(b), (c), (m) or (o) of the Code. The Company has never made a complete or
partial withdrawal from a multiemployer plan, as such term is defined in Section
3(37) of ERISA, resulting in "withdrawal liability," as such term is defined in
 
                                      A-13
<PAGE>
Section 4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).
 
    (f) The Company has no plans or commitment to create any additional Company
Plan, or to modify or change any existing Company Plan (other than to comply
with applicable law) in a manner that would affect any employee of the Company.
 
    (g) No Company Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former employee of the Company after
any such employee's termination of service (other than (i) benefit coverage
mandated by applicable law, including coverage provided pursuant to Section
4980B of the Code, (ii) deferred compensation benefits accrued as liabilities on
the Company Balance Sheet, and (iii) benefits the full cost of which are borne
by current or former employees of the Company (or the employees'
beneficiaries)).
 
    (h) With respect to any Company Plan constituting a group health plan within
the meaning of Section 4980B(g)(2) of the Code, the provisions of Section 4980B
of the Code ("COBRA") have been complied with in all material respects. Part
2.16(h) of the Company Disclosure Schedule describes all obligations of the
Company as of the date of this Agreement under any of the provisions of COBRA.
 
    (i) Each of the Company Plans complies with and has been operated and
administered in all material respects in accordance with applicable Legal
Requirements, including but not limited to ERISA and the Code.
 
    (j) Each of the Company Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and the Company is not aware of any reason why any such determination
letter should be revoked.
 
    (k) Part 2.16(k) of the Company Disclosure Schedule sets forth each plan and
arrangement of the Company including (i) the aggregate amount of payments
thereunder (including any bonus, golden parachute or severance payment), (ii)
any material increase in benefits payable thereunder and (iii) acceleration of
the time of payment or vesting any such benefits referred to in (ii), which may
result in any payment to any current or former employee or director of the
Company as a result of the execution, delivery or performance of this Agreement,
the consummation of the Merger or any other transactions contemplated by this
Agreement, or the termination of any employee.
 
    (l) Part 2.16(l) of the Company Disclosure Schedule contains a list of all
salaried employees of the Company as of the date of this Agreement, and
correctly reflects, in all material respects, their base salaries, their
targeted annual bonus amounts, their dates of employment and their positions.
The Company is not a party to any collective bargaining contract or other
Contract with a labor union involving any of its employees. All of the employees
of the Company are "at will" employees.
 
    (m) Part 2.16(m) of the Company Disclosure Schedule identifies each employee
who is not fully available to perform work because of disability or other leave
and sets forth the basis of such leave and the anticipated date of return to
full service.
 
    (n) The Company is in compliance in all material respects with all Contracts
relating to employment, employment practices, wages, bonuses and terms and
conditions of employment, including employee compensation matters.
 
    (o) The Company has good labor relations, and it has no knowledge of any
facts indicating that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the labor relations of the Company, or (ii) any of the employees of the
Company intends to terminate his or her employment with the Company with which
such employee is employed.
 
                                      A-14
<PAGE>
    2.17  ENVIRONMENTAL MATTERS.  The Company is in compliance with all
applicable Environmental Laws, except where failure to comply would not have a
Material Adverse Effect on the Company. The Company possesses all permits and
other Governmental Authorizations required under applicable Environmental Laws
to conduct its current operations. The Company has not received any notice or
other communication (in writing or otherwise) from a Governmental Body or
citizens group that alleges that the Company is not in compliance with any
Environmental Law. To the knowledge of the Company, there are no circumstances
that may prevent or interfere with the compliance by the Company with any
Environmental Law in the future, except where failure to comply would not have a
Material Adverse Effect on the Company. To the knowledge of the Company without
further inquiry, no current or prior owner of any property leased or controlled
by the Company has received any notice or other communication (in writing or
otherwise) from a Governmental Body or citizens group that alleges that such
current or prior owner or the Company is not in compliance with any
Environmental Law. To the knowledge of the Company, all property that is leased
to, controlled by or used by the Company, and all surface water, groundwater and
soil associated with or adjacent to such property is in clean and healthful
condition and is free of environmental contamination of any nature.
 
    2.18  INSURANCE.  Part 2.18 of the Company Disclosure Schedule sets forth
each insurance policy relating to the business, assets or operations of the
Company and with respect to each such policy, the insurer, the amount of
coverage, the type of insurance and the period of coverage. Each such insurance
policy is in full force and effect. Part 2.18 of the Company Disclosure Schedule
also sets forth each self insurance program relating to the business, assets or
operations of the Company. Since July 14, 1994, the Company has not received any
notice or other communication regarding any actual or possible (a) cancellation
or invalidation of any insurance policy, (b) refusal of any coverage or
rejection of any material claim under any insurance policy, or (c) material
adjustment in the amount of the premiums payable with respect to any insurance
policy. There is no pending claim (including any workers' compensation claim)
under or based upon any insurance policy of the Company; and, to the knowledge
of the Company, no event has occurred that could reasonably be expected to (with
or without notice or lapse of time) directly or indirectly give rise to or serve
as a basis for any such claim.
 
    2.19  TRANSACTIONS WITH AFFILIATES.  Except as set forth in the Company SEC
Documents, since the date of the Company's last proxy statement filed with the
SEC, no event has occurred that would be required to be reported by the Company
pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part 2.19 of the
Company Disclosure Schedule identifies each person who is an "affiliate" (as
that term is used in Rule 145 promulgated under the Securities Act) of the
Company as of the date of this Agreement.
 
    2.20  LEGAL PROCEEDINGS; ORDERS.
 
    (a) Except as set forth in Part 2.20(a) of the Company Disclosure Schedule,
there is no pending Legal Proceeding and, to the knowledge of the Company, no
Person has threatened to commence any Legal Proceeding: (i) that involves the
Company or any of the assets owned or used by the Company, including, without
limitation, Company Proprietary Assets; or (ii) that challenges, or that may
have the effect of preventing, delaying, making illegal or otherwise interfering
with, the Merger or any of the other transactions contemplated by this
Agreement. To the knowledge of the Company, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that will, or that could
reasonably be expected to, give rise to or serve as a basis for the commencement
of any such Legal Proceeding. To the knowledge of the Company, no event has
occurred, and no claim, dispute or other condition or circumstance exists, that
will, or that could reasonably be expected to, cause or provide a basis for a
director, officer or other Representative of the Company to seek indemnification
from, or commence a Legal Proceeding against or involving, the Company.
 
    (b) There is no order, writ, injunction, judgment or decree to which the
Company, or any of the assets owned or used by the Company, is subject. To the
knowledge of the Company, no officer or other
 
                                      A-15
<PAGE>
employee of the Company is subject to any order, writ, injunction, judgment or
decree that prohibits such officer or other employee from engaging in or
continuing any conduct, activity or practice relating to the business of the
Company.
 
    2.21  AUTHORITY; BINDING NATURE OF AGREEMENT.  The Company has the absolute
and unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of the Company (at a
meeting duly called and held) has (a) unanimously determined that the Merger is
advisable and fair and in the best interests of the Company and its
stockholders, (b) unanimously approved the execution, delivery and performance
of this Agreement by the Company and has unanimously approved the Merger, and
(c) unanimously recommended the adoption and approval of this Agreement and the
Merger by the holders of Company Common Stock and directed that this Agreement
and the Merger be submitted for consideration by the Company's stockholders at
the Company Stockholders' Meeting (as defined in Section 6.2). This Agreement
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
 
    2.22  NO EXISTING DISCUSSIONS.  As of the date hereof, neither the Company
nor any Representative of the Company is engaged, directly or indirectly, in any
discussions or negotiations with any other Person relating to any Acquisition
Proposal.
 
    2.23  VOTE REQUIRED.  Upon the conversion of the Company's Series B
Preferred Stock, the affirmative vote of the holders of a majority of the shares
of Company Common Stock outstanding on the record date for the Company
Stockholder Meeting (the "REQUIRED COMPANY STOCKHOLDER VOTE") is the only vote
of the holders of any class or series of the Company's capital stock necessary
to adopt and approve this Agreement, the Merger and the other transactions
contemplated by this Agreement.
 
    2.24  NON-CONTRAVENTION; CONSENTS.  Neither (i) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (ii) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
 
        (a) contravene, conflict with or result in a violation of (i) any of the
    provisions of the certificate of incorporation, bylaws or other charter or
    organizational documents of the Company, or (ii) any resolution adopted by
    the stockholders, the Board of Directors or any committee of the Board of
    Directors of the Company;
 
        (b) contravene, conflict with or result in a violation of, or give any
    Governmental Body or other Person the right to challenge the Merger or any
    of the other transactions contemplated by this Agreement or to exercise any
    remedy or obtain any relief under, any Legal Requirement or any order, writ,
    injunction, judgment or decree to which the Company, or any of the assets
    owned or used by the Company, is subject;
 
        (c) contravene, conflict with or result in a violation of any of the
    terms or requirements of, or give any Governmental Body the right to revoke,
    withdraw, suspend, cancel, terminate or modify, any Governmental
    Authorization that is held by the Company or that otherwise relates to the
    business of the Company or to any of the assets owned or used by the
    Company;
 
        (d) contravene, conflict with or result in a violation or breach of, or
    result in a default under, any provision of any Company Material Contract or
    (except as set forth in Part 2.24(d) of the Company Disclosure Schedule),
    give any Person the right to (i) declare a default or exercise any remedy
    under any such Company Material Contract, (ii) a rebate, chargeback, penalty
    or change in delivery schedule under any such Company Material Contract,
    (iii) accelerate the maturity or performance of any such
 
                                      A-16
<PAGE>
    Company Material Contract, or (iv) cancel, terminate or modify any term of
    such Company Material Contract; or
 
        (e) result in the imposition or creation of any Encumbrance upon, or
    with respect to any asset owned or used by the Company (except for Permitted
    Encumbrances).
 
Except as set forth in Part 2.24(d) of the Company Disclosure Schedule, or
except as may be required by the Exchange Act, the DGCL and the rules of the
National Association of Securities Dealers, Inc. ("NASD") (as they relate to the
S-4 Registration Statement and the Joint Proxy Statement/Prospectus, as defined
in Section 2.27(b)), the Company was not, is not and will not be required to
make any filing with or give any notice to, or to obtain any Consent from, any
Person in connection with (x) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, or (y)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement.
 
    2.25  FAIRNESS OPINION.  The Company's Board of Directors has received the
written opinion of PaineWebber Incorporated, financial advisor to the Company,
dated the date of this Agreement, to the effect that the Exchange Ratio is fair
to the stockholders of the Company from a financial point of view. The Company
has furnished an accurate and complete copy of said written opinion to Parent.
 
    2.26  FINANCIAL ADVISOR.  Except for PaineWebber Incorporated, or any Person
set forth on Part 2.26 of the Company Disclosure Schedule no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The Company has disclosed to Parent the fee formula pursuant to
which fees, commissions and other payments will be paid by the Company to
PaineWebber Incorporated and any such other Person if the Merger is consummated.
The Company furnished to Parent accurate and complete copies of all agreements
under which any such fees, commissions or other amounts have been paid or may
become payable and all indemnification and other agreements relating to the
engagement of PaineWebber Incorporated or any such other Person.
 
    2.27  FULL DISCLOSURE.
 
    (a) This Agreement (including the Company Disclosure Schedule) does not, and
the certificate referred to in Section 7.6(c) will not, (i) contain any
representation, warranty or information that is false or misleading with respect
to any material fact, or (ii) omit to state any material fact necessary in order
to make the representations, warranties and information contained and to be
contained herein and therein (in the light of the circumstances under which such
representations, warranties and information were or will be made or provided)
not false or misleading.
 
    (b) None of the information supplied or to be supplied by or on behalf of
the Company for inclusion or incorporation by reference in the registration
statement on Form S-4 to be filed with the SEC by Parent in connection with the
issuance of Parent Common Stock in the Merger (the "S-4 REGISTRATION STATEMENT")
will, at the time the S-4 Registration Statement is filed with the SEC or at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus
to be filed with the SEC as part of the S-4 Registration Statement (the "JOINT
PROXY STATEMENT/PROSPECTUS"), will, at the time the Joint Proxy
Statement/Prospectus is mailed to the stockholders of the Company, at the time
of the Company Stockholders' Meeting or as of the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. The
Joint Proxy Statement/Prospectus will
 
                                      A-17
<PAGE>
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations promulgated by the SEC thereunder.
 
    2.28  RIGHTS AGREEMENT.  The Company has taken all action necessary to
provide that the execution and delivery of this Agreement and the consummation
of the transactions contemplated by this Agreement will not enable or require
any Rights (as such term is defined in the Rights Agreement) to be exercised or
distributed.
 
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.
 
    Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the Parent SEC Documents (as defined in Section 3.4(a)) or in the
disclosure schedule delivered to the Company on the date of this Agreement and
signed by an executive officer of Parent (the "PARENT DISCLOSURE SCHEDULE"):
 
    3.1  DUE ORGANIZATION; SUBSIDIARIES; ETC.
 
    (a) Parent has no Subsidiaries, except for the corporations identified in
Part 3.1(a) of the Parent Disclosure Schedule; and neither the Parent nor any of
the other corporations identified in Part 3.1(a) of the Parent Disclosure
Schedule owns any capital stock of, or any equity interest of any nature in, any
other Entity. (Parent and each of its Subsidiaries are referred to collectively
in this Agreement as the "PARENT CORPORATIONS".) None of the Parent Corporations
has agreed to or is obligated to make, or is bound by any Contract under which
it may become obligated to make, any future investment in or capital
contribution to any other Entity. None of the Parent Corporations has, at any
time, been a general partner of any general partnership, limited partnership or
other Entity.
 
    (b) Each of the Parent Corporations is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all corporate power and authority: (i) to conduct its
business in the manner in which its business is currently being conducted; (ii)
to own and use its assets in the manner in which its assets are currently owned
and used; and (iii) to perform its obligations under all Contracts by which it
is bound.
 
    (c) None of the Parent Corporations is or has been required to be qualified,
authorized, registered or licensed to do business as a foreign corporation in
any jurisdiction other than the jurisdictions identified in Part 3.1(c) of the
Parent Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Parent Corporations. Each of the Parent Corporations is in
good standing as a foreign corporation in each of the respective jurisdictions
identified in Part 3.1(c) of the Parent Disclosure Schedule.
 
    3.2  CERTIFICATES OF INCORPORATION AND BYLAWS.  The Parent has delivered to
the Company accurate and complete copies of the certificates of incorporation,
bylaws and other charter and organizational documents of the respective Parent
Corporations, including all amendments thereto. None of the Parent Corporations
is in violation of any of the provisions of its respective certificate of
incorporation or bylaws.
 
    3.3  CAPITALIZATION, ETC.
 
    (a) The authorized capital stock of Parent consists of: (i) thirty million
(30,000,000) shares of Parent Common Stock, $.001 par value per share, of which,
as of September 30, 1998, 12,895,163 shares (which amount does not materially
differ from the amount issued and outstanding as of the date of this Agreement)
were issued and outstanding; and (ii) ten million (10,000,000) shares of
preferred stock, $.001 par value per share, of which no shares are outstanding
as of the date of this Agreement. As of the date of this Agreement, there are no
outstanding subscriptions, options, calls, warrants or rights to acquire shares
of Parent Common Stock other than pursuant to stock issuance or stock option
plans or other arrangements disclosed in the Parent SEC Documents. The
authorized capital stock of Merger Sub consists of one
 
                                      A-18
<PAGE>
hundred (100) shares of Common Stock ("MERGER SUB COMMON STOCK"), $.001 par
value per share, all of which have been issued and are outstanding as of the
date of this Agreement and are held by Parent. As of the date of this Agreement,
there are no shares of Parent Common Stock held in treasury by Parent. None of
the outstanding shares of Parent Common Stock is entitled or subject to any
preemptive right, right of participation, right of maintenance or any similar
right. None of the outstanding shares of the Parent's capital stock is entitled
or subject to any preemptive right, right of participation, right of maintenance
or any similar right. None of the outstanding shares of the Parent's capital
stock is subject to any right of first refusal in favor of the Parent. Except as
provided in Part 3.3(a) of the Parent Disclosure Schedule, there is no Parent
Contract relating to the voting or registration of, or restricting any Person
from purchasing, selling, pledging or otherwise disposing of (or granting any
option or similar right with respect to), any shares of Parent Common Stock. The
Parent is not under any obligation to repurchase, redeem or otherwise acquire
any outstanding shares of the Parent's capital stock.
 
    (b) As of September 30, 1998, 1,068,408 shares (which amount does not
materially differ from the amount subject to options outstanding as of the date
of this Agreement) of Parent Common Stock are subject to issuance pursuant to
outstanding options to purchase Parent Common Stock. (Stock options granted by
the Parent pursuant to Parent's stock option plans are referred to in this
Agreement as "PARENT OPTIONS"). Part 3.3(b) of the Parent Disclosure Schedule
sets forth the following information with respect to each Parent Option
outstanding as of September 30, 1998: (i) the particular plan pursuant to which
such Parent Option was granted; (ii) the name of the optionee; (iii) the number
of shares of Parent Common Stock subject to such Parent Option; (iv) the
exercise price of such Parent Option; (v) the date on which such Parent Option
was granted; (vi) the applicable vesting schedule and the extent to which such
Parent Option is vested and exercisable as of the date of this Agreement; and
(vii) the date on which such Parent Option expires. Parent has delivered to the
Company accurate and complete copies of all stock option plans pursuant to which
the Company has ever granted stock options and the form of all stock option
agreements evidencing such options. Except as set forth in Part 3.3(b) of the
Parent Disclosure Schedule, there are no commitments or agreements of any
character to which Parent is bound obligating Parent to accelerate the vesting
of any Parent Option.
 
    (c) As of September 30, 1998, 62,378 shares (which amount does not
materially differ from the amount subject to warrants outstanding as of the date
of this Agreement) of Parent Common Stock are subject to issuance pursuant to
outstanding warrants to purchase Parent Common Stock. (Warrants issued by Parent
are referred to in this Agreement as "PARENT WARRANTS.") Part 3.3(c) of Parent
Disclosure Schedule sets forth the following information with respect to each
Parent Warrant outstanding as of September 30, 1998: (i) the name of the warrant
holder; (ii) the number of shares of Parent Common Stock subject to such Parent
Warrant; (iii) the exercise price of such Parent Warrant; (iv) the date on which
such Parent Warrant was issued; (v) the applicable exercise period and the
extent to which such Parent Warrant is exercisable as of the date of this
Agreement; and (vi) the date on which such Parent Warrant expires. Parent has
delivered to Parent accurate and complete copies of all agreements and other
documents evidencing such Parent Warrants. Except as set forth in Part 3.3(c) of
Parent Disclosure Schedule, there are no commitments or agreements of any
character to which Parent is bound obligating Parent to amend or extend
exercisability or term of any Parent Warrant.
 
    (d) Except as set forth in this Section 3.3 there is no: (i) outstanding
subscription, option, call, warrant or right (whether or not currently
exercisable) to acquire any shares of the capital stock or other securities of
Parent; (ii) outstanding security, instrument or obligation that is or may
become convertible into or exchangeable for any shares of the capital stock or
other securities of Parent; (iii) stockholder rights plan (or similar plan
commonly referred to as a "poison pill") or Contract under which Parent is or
may become obligated to sell or otherwise issue any shares of its capital stock
or any other securities; or (iv) condition or circumstance that may give rise to
or provide a basis for the assertion of a claim by any Person to the effect that
such Person is entitled to acquire or receive any shares of capital stock or
other securities of Parent.
 
                                      A-19
<PAGE>
    (e) All outstanding shares of Parent Common Stock, all outstanding shares of
Preferred Stock, all outstanding Parent Options, all outstanding Parent Warrants
and all outstanding shares of capital stock of Parent have been issued and
granted in compliance in all material respects with (i) all applicable
securities laws and other applicable Legal Requirements, and (ii) all
requirements set forth in applicable Contracts.
 
    3.4  SEC FILINGS; FINANCIAL STATEMENTS.
 
    (a) Parent has delivered to the Company accurate and complete copies
(excluding copies of exhibits) of all registration statements, definitive proxy
statements and other statements, reports, schedules, forms and other documents
filed by Parent with the SEC between September 15, 1997 and the date of this
Agreement and will deliver to the Company accurate and complete copies of all
such registration statements, proxy statements and other statements, reports,
schedules, forms and other documents filed after the date of this Agreement and
prior to the Effective Time (collectively, the "PARENT SEC DOCUMENTS"), which
are all of the forms, reports and documents required to be filed by Parent with
the SEC since September 15, 1997. As of the time it was filed with the SEC (or,
if amended or superseded by a later filing, then on the date of such filing):
(i) each of Parent SEC Documents filed with the SEC was timely filed and
complied in all material respects with the applicable requirements of the
Securities Act or the Exchange Act (as the case may be) as of the date of such
filing and any Parent SEC Documents filed after the date hereof and prior to the
Effective Time will so comply; and (ii) none of Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
 
    (b) The financial statements (including any related notes) contained in the
Parent SEC Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered (except as may be indicated in the notes to such financial
statements and, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC, and except that unaudited financial statements may not contain
footnotes and are subject to normal and recurring year end adjustments which
will not, individually or in the aggregate, be material in amount); and (iii)
fairly present the financial position of Parent and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of Parent
and its subsidiaries for the periods covered thereby. All adjustments
(consisting of recurring accruals) considered necessary for a fair presentation
of the financial statements have been included. The audited balance sheet of
Parent and its subsidiaries for the year ended June 30, 1998 is sometimes
referred to herein as the "PARENT BALANCE SHEET."
 
    3.5  ABSENCE OF CHANGES.  Since the date of the Parent Balance Sheet:
 
    (a) there has not been any material adverse change in the business, assets,
liabilities, financial condition or results of operations of Parent taken as a
whole, and no event has occurred that could reasonably be expected to have a
Material Adverse Effect on Parent;
 
    (b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of the assets of Parent (whether or not
covered by insurance);
 
    (c) Parent has not (i) declared, accrued, set aside or paid any dividend or
made any other distribution in respect of any shares of capital stock, or (ii)
repurchased, redeemed or otherwise reacquired any shares of capital stock or
other securities;
 
    (d) except for formation of Merger Sub, Parent has not sold, issued, granted
or authorized the issuance or grant of (i) any capital stock or other security
(except for Parent Common Stock issued upon the exercise of outstanding Parent
Options), (ii) any option, call, warrant or right to acquire any capital stock
or any other security (except for Parent Options described in Part 3.3(b)(i) and
3.5(d) of the Parent Disclosure Schedule), or (iii) any instrument convertible
into or exchangeable for any capital stock or other security;
 
                                      A-20
<PAGE>
    (e) Parent has not amended or waived any of its rights under, or permitted
the acceleration of vesting under, (i) any provision of Parent's stock option
plans, (ii) any provision of any agreement evidencing any outstanding Parent
Option, or (iii) any restricted stock purchase agreement;
 
    (f) there has been no amendment to the certificate of incorporation, bylaws
or other charter or organizational documents of Parent, and Parent has not
effected or been a party to any merger, consolidation, share exchange, business
combination, recapitalization, reclassification of shares, stock split, reverse
stock split or similar transaction;
 
    (g) Parent has not formed any subsidiary or acquired any equity interest or
other interest in any other Entity;
 
    (h) except as set forth on Part 3.5(h) of the Parent Disclosure Schedule,
Parent has not made any capital expenditures which exceed $100,000 in the
aggregate;
 
    (i) except in the ordinary course of business and consistent with past
practices, Parent has not (i) entered into or permitted any of the assets owned
or used by it to become bound by any Parent Material Contract (as defined in
Section 3.10), or (ii) amended or prematurely terminated, or waived any material
right or remedy under, any Parent Material Contract;
 
    (j) Parent has not (i) acquired, leased or licensed any material right or
other material asset from any other Person, (ii) sold or otherwise disposed of,
or leased or licensed, any material right or other material asset to any other
Person, or (iii) waived or relinquished any right, except for rights or other
assets acquired, leased, licensed or disposed of in the ordinary course of
business and consistent with past practices;
 
    (k) Parent has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness in excess of $25,000 with respect to any single matter, or in
excess of $50,000 in the aggregate;
 
    (l) Parent has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance, except for
Permitted Encumbrances;
 
    (m) Parent has not (i) lent money to any Person, or (ii) incurred or
guaranteed any indebtedness for borrowed money other than payroll, travel and
other advances made in the ordinary course of business;
 
    (n) Parent has not (i) established or adopted any Parent Plan (as defined in
Section 3.16(a)), (ii) caused or permitted any Parent Plan to be amended in any
material respect, or (iii) paid any bonus or made any profit-sharing or similar
payment to, or materially increased the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable to,
any of its directors, officers or employees;
 
    (o) Parent has not changed any of its methods of accounting or accounting
practices in any material respect;
 
    (p) Parent has not made any material election with respect to Taxes;
 
    (q) Parent has not commenced or settled any Legal Proceeding;
 
    (r) Parent has not entered into any material transaction or taken any other
material action that has had, or could reasonably be expected to have, a
Material Adverse Effect on Parent; and
 
    (s) Parent has not agreed or committed to take any of the actions referred
to in clauses "(c)" through "(r)" above.
 
    3.6  LEASEHOLD; EQUIPMENT.
 
    (a) Parent does not own any real property or any interest in real property,
except for the leaseholds created under the real property leases identified in
Part 3.6(a) of the Parent Disclosure Schedule. All such
 
                                      A-21
<PAGE>
real property is being leased pursuant to lease agreements that are in full
force and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or event
of default (or event which with notice or lapse of time, or both, would
constitute a default) that would result in a Material Adverse Effect on Parent.
 
    (b) Part 3.6(b) of Parent Disclosure Schedule accurately identifies all
material items of equipment leased by Parent. All material items of equipment
and other tangible assets owned by or leased to Parent are adequate for the uses
to which they are being put, are in good condition and repair (ordinary wear and
tear excepted) and are adequate for the conduct of the business of Parent in the
manner in which such business is currently being conducted.
 
    3.7  TITLE TO ASSETS.  Parent owns, and has good, valid and marketable title
to, or in the case of leased properties and assets, valid leasehold interests
in, all of their respective tangible properties and assets, real, personal and
mixed, used or held for use in their business, including: (i) all assets
reflected on the Parent Balance Sheet; and (ii) all other assets reflected in
the books and records of Parent as being owned or leased by Parent. All of said
assets are owned or leased by Parent free and clear of any Encumbrances, except
for Permitted Encumbrances.
 
    3.8  PAYMENTS UNDER CORPORATE PARTNERING AGREEMENTS.
 
    (a) All amounts charged to Glaxo Wellcome PLC and Eli Lilly and Company (the
"PARENT CORPORATE PARTNERS") and Pfizer, Inc. for reimbursement or payments in
accordance with the agreements between Parent and such Persons represent amounts
due to Parent under the terms of such agreements for actual work or services
performed or, in the case of advance payments, work or services to be performed
or milestones met.
 
    (b) Parent has received all amounts that are owed and due to be paid to
Parent under such agreements prior to the date of this Agreement. For each such
payment received by Parent under any such agreement, any revenue that Parent
recognized with respect to such payment was recognized in accordance with GAAP.
 
    (c) Parent has no knowledge that a Parent Corporate Partner is considering,
intending or planning to terminate any of the agreements between any such Parent
Corporate Partner and Parent, or any research program under such agreement.
 
    3.9  PROPRIETARY ASSETS.
 
    (a) Part 3.9(a) of Parent Disclosure Schedule sets forth, with respect to
each Proprietary Asset owned or licensed by Parent and registered with any
Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Proprietary Assets, and (ii)
the names of the jurisdictions covered by the applicable registration or
application. Part 3.9(a) of Parent Disclosure Schedule identifies and provides a
brief description of, and identifies any ongoing royalty or payment obligations
in excess of $50,000 per year with respect to, each Proprietary Asset that is
licensed or otherwise made available to Parent by any Person (except for any
Proprietary Asset that is licensed to Parent under any third party software
license generally available to the public), and identifies the Contract under
which such Proprietary Asset is being licensed or otherwise made available to
Parent. Excluding the payments required under the Parent Contracts set forth in
the Parent Disclosure Schedule, the aggregate amounts payable by Parent for
ongoing royalty or license payments do not exceed $100,000 per year. Parent has
good, valid and marketable title to all of Parent Proprietary Assets (except for
licensed assets), free and clear of all Encumbrances, except (i) as set forth in
Part 3.9(a) of the Parent Disclosure Schedule, (ii) for any lien for current
taxes not yet due and payable, and (iii) for minor liens that have arisen in the
ordinary course of business and that do not (individually or in the aggregate)
materially detract from the value of the assets subject thereto or materially
impair the operations of Parent. To Parent's knowledge, Parent has a valid right
to use, license and otherwise exploit all Parent Proprietary Assets. Except as
set forth in Part 3.9(a) of Parent Disclosure Schedule, Parent has not developed
jointly or does not jointly own
 
                                      A-22
<PAGE>
or have joint rights with any other Person any Parent Proprietary Asset that is
material to the business of Parent. Except as set forth in Part 3.9(a) of the
Disclosure Schedule, there is no Parent Contract pursuant to which any Person
has any right (whether or not currently exercisable) to use, license or
otherwise exploit any Parent Proprietary Asset.
 
    (b) Parent has taken all commercially reasonable measures and precautions to
protect and maintain the confidentiality and secrecy of all Parent Proprietary
Assets (except Parent Proprietary Assets whose value would be unimpaired by
public disclosure) and otherwise to maintain and protect the value of all Parent
Proprietary Assets.
 
    (c) To the knowledge of Parent, Parent is not misappropriating or making any
unlawful use of, and Parent has not at any time misappropriated or made any
unlawful use of, or received any notice or other communication (in writing or
otherwise) of any actual, alleged, possible or potential infringement,
misappropriation or unlawful use of, any Proprietary Asset owned or used by any
other Person.
 
    (d) Parent Proprietary Assets constitute all the Proprietary Assets
reasonably necessary to enable Parent to conduct its business in the manner in
which such business has been and is being conducted. Except as set forth in Part
3.9(d) of the Parent Disclosure Schedule, Parent has not licensed any of the
Company Proprietary Assets to any Person on an exclusive basis.
 
    (e) All current and former employees have executed and delivered an
agreement to Parent (containing no exceptions to or exclusions from the scope of
its coverage) that is substantially identical to the form of Confidential
Information and Invention Assignment Agreement previously delivered to the
Company by Parent. All current and former consultants and independent
contractors to Parent have executed and delivered to Parent an agreement that
contains provisions appropriately restricting the use and disclosure of Parent
Proprietary Assets.
 
    (f) Parent has taken reasonably adequate steps to ensure that all software
(and related Proprietary Assets) used in its operations will be Year 2000
Compliant (as defined below) by December 31, 1999. For purposes of this Section
3, "YEAR 2000 COMPLIANT" shall mean that software that can individually, and in
combination and in conjunction with all other systems, products or processes
with which they are required or designed to interface, continue to be used
normally and to operate successfully (both in functionality and performance in
all material respects) over the transition into the twenty first century when
used in accordance with the documentation relating to all such software (and
related Parent Proprietary Assets), including being able to, before, on and
after January 1, 2000 substantially conform to the following: (i) use logic
pertaining to dates which allow users to identify and/or use the century portion
of any date fields without special processing; and (ii) respond to all date
elements and date input so as to resolve any ambiguity as to century in a
disclosed, defined and pre-determined manner and provide date information in
ways which are unambiguous as to century, either by permitting or requiring the
century to be specified or where the data element is represented without a
century, the correct century is unambiguous for all manipulations involving that
element.
 
    3.10  CONTRACTS.
 
    (a) Part 3.10 of the Parent Disclosure Schedule identifies each Parent
Contract that constitutes a "Parent Material Contract." For purposes of this
Agreement, each of the following shall be deemed to constitute a "PARENT
MATERIAL CONTRACT":
 
        (i) (A) any Contract or outstanding offer relating to the employment of,
    or the performance of services by, any employee, and (B) any Contract
    pursuant to which the Company is required to make any severance, termination
    or similar payment, bonus or relocation payment or any other payment (other
    than payments in respect of salary) to any current or former employee or
    director of the Company;
 
                                      A-23
<PAGE>
        (ii) any Contract (A) relating to the acquisition, transfer,
    development, sharing, license (to or by Parent), or use of any Proprietary
    Asset (except for any Contract pursuant to which any Proprietary Asset is
    licensed to the Company under any third party software license generally
    available to the public); or (B) with respect to the distribution or
    marketing of any products of Parent;
 
       (iii) any Contract which provides for indemnification of any officer,
    director, employee or agent of Parent;
 
        (iv) any Contract imposing any restriction on the right or ability of
    Parent (A) to compete in any market or geographic area with any other
    Person, (B) to acquire any product or other asset or any services from any
    other Person, to sell any product or other asset to or perform any services
    for any other Person or to transact business or deal in any other manner
    with any other Person, or (C) to develop or distribute any technology;
 
        (v) any Contract (A) relating to the acquisition, issuance, voting,
    registration, sale or transfer of any securities (other than the issuance of
    Parent Common Stock upon the valid exercise of Parent Options outstanding as
    of the date of this Agreement), (B) providing any Person with any preemptive
    right, right of participation, right of maintenance or any similar right
    with respect to any securities, or (C) providing Parent with any right of
    first refusal with respect to, or right to repurchase or redeem, any
    securities;
 
        (vi) any Contract that (A) contemplates or involves payment or delivery
    of cash or other consideration in an amount or having a value in excess of
    $20,000 per month and (B) has a term of more than 90 days and that may not
    be terminated by such Parent within 90 days after the delivery of a
    termination notice by such Parent;
 
       (vii) any Contract that contemplates or involves payment or delivery of
    cash or other consideration by Parent in an amount or having a value in
    excess of $75,000 in the aggregate;
 
      (viii) any Contract or Plan (including, without limitation, any stock
    option plan, stock appreciation plan or stock purchase plan), any of the
    benefits of which will be increased, or the vesting of benefits of which
    will be accelerated, by the execution of this Agreement or the consummation
    of any of the transactions contemplated by this Agreement or the value of
    any of the benefits of which will be calculated on the basis of any of the
    transactions contemplated by this Agreement;
 
        (ix) any Contract (not otherwise identified in clauses "(i)" through
    "(viii)" of this sentence) that is or would be material to Parent, to the
    business, condition, capitalization or operations of Parent or to any of the
    transactions contemplated by this Agreement; and
 
        (x) any other Contract, if a breach of such Contract could reasonably be
    expected to have a Material Adverse Effect on Parent.
 
    (b) Each Parent Material Contract is valid and in full force and effect, and
is enforceable by an Acquired Corporation in accordance with its terms, subject
to (i) laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies
 
    (c) Except where the following would not have a Material Adverse Effect on
Parent: (i) Parent has not violated or breached, or committed any default under,
any Parent Contract, and, to the knowledge of Parent, no other Person has
violated or breached, or committed any default under, any Parent Contract; (ii)
to the knowledge of Parent, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) will, or could
reasonably be expected to, (A) result in a violation or breach of any of the
provisions of any Parent Contract, (B) give any Person the right to declare a
default or exercise any remedy under any Parent Contract, (C) give any Person
the right to a rebate, chargeback, penalty or change in delivery schedule under
any Parent Contract, (D) give any Person the right to accelerate the maturity or
performance of any Parent Contract, or (E) give any Person the right to cancel,
 
                                      A-24
<PAGE>
terminate or modify any Parent Contract; and (iii) neither Parent, nor any of
its Representatives, has received any notice or other communication regarding
any actual or possible violation or breach of, or default under any Parent
Contract.
 
    (d) There is no Parent Contract to which any Governmental Body is a party or
under which any Governmental Body has any rights or obligations, or directly or
indirectly benefiting any Governmental Body (including any subcontract or other
Contract between Parent and any contractor or subcontractor to any Governmental
Body).
 
    (e) No Person is renegotiating, or has a right pursuant to the terms of any
Parent Material Contract to renegotiate, any amount paid or payable to Parent
under any Parent Material Contract or any other material term or provision of
any Parent Material Contract.
 
    3.11  YEAR 2000 LIABILITIES.  Parent does not have any accrued, contingent
or other liabilities of any nature, either matured or unmatured, including,
without limitation, any liabilities relating to costs associated with insuring
that all software (and related Parent Proprietary Assets) utilized by Parent or
other components of Parent's information technology infrastructure are Year 2000
Compliant (whether or not required to be reflected in financial statements in
accordance with GAAP, and whether due or to become due), except for: (a)
liabilities identified as such in the "liabilities" column of the Parent Balance
Sheet; and (b) normal and recurring liabilities that have been incurred by
Parent since the date of the Parent Balance Sheet in the ordinary course of
business and consistent with past practices.
 
    3.12  COMPLIANCE WITH LEGAL REQUIREMENTS.  Parent is, and has at all times
since September 15, 1997 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on Parent. Since
September 15, 1997, Parent has not received any notice or other communication
from any Governmental Body regarding any actual or possible violation of, or
failure to comply with, any Legal Requirement.
 
    3.13  CERTAIN BUSINESS PRACTICES.  Neither Parent nor any director, officer,
agent or employee of Parent has, on behalf of Parent, (i) used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
 
    3.14  GOVERNMENTAL AUTHORIZATIONS.  Parent holds all Governmental
Authorizations necessary to enable it to conduct its business in the manner in
which such business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. Parent is, and at all
times since September 15, 1997 has been, in substantial compliance with the
terms and requirements of such Governmental Authorizations. Since September 15,
1997, Parent has not received any notice or other communication from any
Governmental Body regarding (a) any actual or possible violation of or failure
to comply with any term or requirement of any Governmental Authorization, or (b)
any actual or possible revocation, withdrawal, suspension, cancellation,
termination or modification of any Governmental Authorization.
 
    3.15  TAX MATTERS.
 
    (a) All Tax Returns required to be filed by or on behalf of Parent with any
Governmental Body with respect to any taxable period ending on or before the
Closing Date ("PARENT RETURNS") (i) have been or will be filed on or before the
applicable due date (including any extensions of such due date if properly
obtained), and (ii) have been, or will be when filed, prepared in all material
respects in compliance with all applicable Legal Requirements. All amounts shown
on Parent Returns to be due on or before the Closing Date have been or will be
paid on or before the Closing Date.
 
                                      A-25
<PAGE>
    (b) Parent Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with GAAP. Parent will establish, in the ordinary course of business
and consistent with its past practices, reserves adequate for the payment of all
Taxes for the period from June 30, 1998 through the Closing Date.
 
    (c) Except as set forth in Part 3.15(c) of Parent Disclosure Schedule,
Parent Returns have never been examined or audited by any Governmental Body. No
extension or waiver of the limitation period applicable to any Parent Returns
has been granted (by Parent or any other Person), and no such extension or
waiver has been requested from Parent.
 
    (d) No claim or Legal Proceeding is pending or, to the knowledge of Parent,
has been threatened against or with respect to Parent in respect of any material
Tax. There are no unsatisfied liabilities for material Taxes (including
liabilities for interest, additions to tax and penalties thereon and related
expenses) with respect to any notice of deficiency or similar document received
by Parent with respect to any material Tax (other than liabilities for Taxes
asserted under any such notice of deficiency or similar document which are being
contested in good faith by Parent and with respect to which adequate reserves
for payment have been established). There are no liens for material Taxes upon
any of the assets of Parent except liens for current Taxes not yet due and
payable. Parent has not entered into or become bound by any agreement or consent
pursuant to Section 341(f) of the Code. Parent has not been, and it will not be,
required to include any material adjustment in taxable income for any tax period
(or portion thereof) pursuant to Section 481 of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing.
 
    (e) Except as set forth in Part 3.15(e) of Parent Disclosure Schedule, there
is no agreement, plan, arrangement or other Contract covering any employee or
independent contractor or former employee or independent contractor of Parent
that, considered individually or considered collectively with any other such
Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. Parent is not and has never been, a
party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract.
 
    3.16  EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
 
    (a) Part 3.16(a) of Parent Disclosure Schedule identifies each salary,
bonus, deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan, program or agreement (collectively, the "PARENT PLANS")
sponsored, maintained, contributed to or required to be contributed to by Parent
for the benefit of any current or former employee of Parent.
 
    (b) Except as set forth in Part 3.16(a) of Parent Disclosure Schedule,
Parent does not maintain, sponsor or contribute to, and it has not at any time
in the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Subtitles of ERISA) for the benefit of
employees or former employees of Parent (a "PARENT PENSION PLAN"). None of the
Parent Plans identified in Part 3.16(a) of Parent Disclosure Schedule is subject
to Title IV of ERISA or Section 412 of the Code.
 
    (c) Except as set forth in Part 3.16(a) of Parent Disclosure Schedule,
Parent does not maintain, sponsor or contribute to any employee welfare benefit
plan (as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA) for the benefit of any employees or
former employees of Parent including any self-funded medical, dental, or other
similar Parent Plan (a "PARENT WELFARE PLAN"). None of the Parent Plans
identified in Part 3.16(a) of Parent Disclosure Schedule is a multiemployer plan
(within the meaning of Section 3(37) of ERISA).
 
                                      A-26
<PAGE>
    (d) With respect to each Parent Plan, Parent has delivered to the Company:
(i) an accurate and complete copy of such Parent Plan (including all amendments
thereto); (ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Parent Plan for the last two years; (iii) an
accurate and complete copy of the most recent Summary Plan Description, together
with each Summary of Material Modifications, if required under ERISA, with
respect to such Parent Plan, (iv) if such Parent Plan is funded through a trust
or any third party funding vehicle, an accurate and complete copy of the trust
or other funding agreement (including all amendments thereto) and accurate and
complete copies of the most recent financial statements thereof; (v) accurate
and complete copies of all Contracts relating to such Parent Plan, including
service provider agreements, insurance contracts, minimum premium contracts,
stop-loss agreements, investment management agreements, subscription and
participation agreements and recordkeeping agreements; and (vi) an accurate and
complete copy of the most recent determination letter received from the Internal
Revenue Service with respect to such Parent Plan (if such Parent Plan is
intended to be qualified under Section 401(a) of the Code).
 
    (e) Each of the Parent Plans complies with and has been operated and
administered in all material respects in accordance with applicable Legal
Requirements, including but not limited to ERISA and the Code.
 
    (f) Each of the Parent Plans intended to be qualified under Section 401(a)
of the Code has received a favorable determination from the Internal Revenue
Service, and Parent is not aware of any reason why any such determination letter
should be revoked.
 
    (g) Part 3.16(g) of Parent Disclosure Schedule contains a list of all
salaried employees of Parent as of the date of this Agreement, and correctly
reflects, in all material respects, their base salaries, their targeted annual
bonus amounts, their dates of employment and their positions. Parent is not a
party to any collective bargaining contract or other Contract with a labor union
involving any of its employees. All of the employees of Parent are "at will"
employees.
 
    (h) Parent is in compliance in all material respects with all Contracts
relating to employment, employment practices, wages, bonuses and terms and
conditions of employment, including employee compensation matters.
 
    (i) Parent has good labor relations, and it has no knowledge of any facts
indicating that (i) the consummation of the Merger or any of the other
transactions contemplated by this Agreement will have a material adverse effect
on the labor relations of Parent, or (ii) any of the employees of Parent intends
to terminate his or her employment with Parent with which such employee is
employed.
 
    3.17  ENVIRONMENTAL MATTERS.  Parent is in compliance with all applicable
Environmental Laws, except where failure to comply would not have a Material
Adverse Effect on Parent. Parent possesses all permits and other Governmental
Authorizations required under applicable Environmental Laws to conduct its
current operations. Parent has not received any notice or other communication
(in writing or otherwise) from a Governmental Body or citizens group that
alleges that Parent is not in compliance with any Environmental Law. To the
knowledge of Parent, there are no circumstances that may prevent or interfere
with the compliance by Parent with any Environmental Law in the future, except
where failure to comply would not have a Material Adverse Effect on Parent. To
the knowledge of Parent without further inquiry, no current or prior owner of
any property leased or controlled by Parent has received any notice or other
communication (in writing or otherwise) from a Governmental Body or citizens
group that alleges that such current or prior owner or Parent is not in
compliance with any Environmental Law. To the knowledge of Parent, all property
that is leased to, controlled by or used by Parent, and all surface water,
groundwater and soil associated with or adjacent to such property is in clean
and healthful condition and is free of environmental contamination of any
nature.
 
    3.18  INSURANCE.  Parent has delivered to the Company a copy of each
insurance policy relating to the business, assets or operations of Parent and
with respect to each such policy, the insurer, the amount
 
                                      A-27
<PAGE>
of coverage, the type of insurance and the period of coverage. Each such
insurance policy is in full force and effect. Part 3.18 of the Parent Disclosure
Schedule also sets forth each self insurance program relating to the business,
assets or operations of Parent. Since September 15, 1997, Parent has not
received any notice or other communication regarding any actual or possible (a)
cancellation or invalidation of any insurance policy, (b) refusal of any
coverage or rejection of any material claim under any insurance policy, or (c)
material adjustment in the amount of the premiums payable with respect to any
insurance policy. There is no pending claim (including any workers' compensation
claim) under or based upon any insurance policy of Parent; and, to the knowledge
of Parent, no event has occurred that could reasonably be expected to (with or
without notice or lapse of time) directly or indirectly give rise to or serve as
a basis for any such claim.
 
    3.19  TRANSACTIONS WITH AFFILIATES.  Except as set forth in the Parent SEC
Documents no event has occurred that would be required to be reported by Parent
pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part 3.19 of the
Parent Disclosure Schedule identifies each person who is an "affiliate" (as that
term is used in Rule 145 promulgated under the Securities Act) of Parent as of
the date of this Agreement.
 
    3.20  LEGAL PROCEEDINGS; ORDERS.
 
    (a) Except as set forth in Part 3.20(a) of the Parent Disclosure Schedule,
there is no pending Legal Proceeding and, to the knowledge of Parent, no Person
has threatened to commence any Legal Proceeding: (i) that involves Parent or any
of the assets owned or used by Parent, including, without limitation, Parent
Proprietary Assets; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the
knowledge of Parent, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that could reasonably be
expected to, give rise to or serve as a basis for the commencement of any such
Legal Proceeding. To the knowledge of Parent, no event has occurred, and no
claim, dispute or other condition or circumstance exists, that will, or that
could reasonably be expected to, cause or provide a basis for a director,
officer or other Representative of Parent to seek indemnification from, or
commence a Legal Proceeding against or involving, Parent.
 
    (b) There is no order, writ, injunction, judgment or decree to which Parent,
or any of the assets owned or used by Parent, is subject. To the knowledge of
Parent, no officer or other employee of Parent is subject to any order, writ,
injunction, judgment or decree that prohibits such officer or other employee
from engaging in or continuing any conduct, activity or practice relating to the
business of Parent.
 
    3.21  AUTHORITY; BINDING NATURE OF AGREEMENT.  Parent has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. The Board of Directors of Parent (at a meeting
duly called and held) has (a) unanimously determined that the Merger is
advisable and fair and in the best interests of Parent and its stockholders, (b)
unanimously approved the execution, delivery and performance of this Agreement
by Parent and has unanimously approved the Merger, and (c) unanimously
recommended the adoption and approval of a proposal to issue shares of Parent
Common Stock in the Merger by the holders of Parent Common Stock and directed
that such proposal be submitted for consideration by Parent's stockholders at
the Parent Stockholders' Meeting (as defined in Section 6.3). This Agreement
constitutes the legal, valid and binding obligation of Parent, enforceable
against Parent in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
 
    3.22  NON-CONTRAVENTION; CONSENTS.  Neither (i) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (ii) the consummation
 
                                      A-28
<PAGE>
of the Merger or any of the other transactions contemplated by this Agreement,
will directly or indirectly (with or without notice or lapse of time):
 
        (a) contravene, conflict with or result in a violation of (i) any of the
    provisions of the certificate of incorporation, bylaws or other charter or
    organizational documents of Parent, or (ii) any resolution adopted by the
    stockholders, the Board of Directors or any committee of the Board of
    Directors of Parent;
 
        (b) contravene, conflict with or result in a violation of, or give any
    Governmental Body or other Person the right to challenge the Merger or any
    of the other transactions contemplated by this Agreement or to exercise any
    remedy or obtain any relief under, any Legal Requirement or any order, writ,
    injunction, judgment or decree to which Parent, or any of the assets owned
    or used by Parent, is subject;
 
        (c) contravene, conflict with or result in a violation of any of the
    terms or requirements of, or give any Governmental Body the right to revoke,
    withdraw, suspend, cancel, terminate or modify, any Governmental
    Authorization that is held by Parent or that otherwise relates to the
    business of Parent or to any of the assets owned or used by Parent;
 
        (d) contravene, conflict with or result in a violation or breach of, or
    result in a default under, any provision of any Parent Material Contract or
    (except as set forth in Part 3.22(d) of Parent Disclosure Schedule), give
    any Person the right to (i) declare a default or exercise any remedy under
    any such Parent Material Contract, (ii) a rebate, chargeback, penalty or
    change in delivery schedule under any such Parent Material Contract, (iii)
    accelerate the maturity or performance of any such Parent Material Contract,
    or (iv) cancel, terminate or modify any term of such Parent Material
    Contract; or
 
        (e) result in the imposition or creation of any Encumbrance upon or with
    respect to any asset owned or used by Parent (except for Permitted
    Encumbrances).
 
Except as set forth in Part 3.22(d) of the Parent Disclosure Schedule or except
as may be required by the Exchange Act, the DGCL and the rules of NASD (as they
relate to the S-4 Registration Statement and the Joint Proxy
Statement/Prospectus, as defined in Section 2.27(b)), Parent was not, is not and
will not be required to make any filing with or give any notice to, or to obtain
any Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, or (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
 
    3.23  VOTE REQUIRED.  The only vote of Parent's stockholders required to
approve the issuance of Parent Common Stock in the Merger is the vote of a
majority of votes cast in person or by proxy as prescribed by rules of the NASD
(the "REQUIRED PARENT STOCKHOLDER VOTE").
 
    3.24  VALID ISSUANCE.  The Parent Common Stock to be issued in the Merger
will, when issued in accordance with the provisions of this Agreement, be duly
authorized, validly issued, fully paid and nonassessable.
 
    3.25  FAIRNESS OPINION.  Parent's Board of Directors has received the
written opinion of Hambrecht & Quist LLC, financial advisor to Parent, dated as
of the date of this Agreement, to the effect that the Exchange Ratio is fair to
Parent from a financial point of view. Parent has furnished an accurate and
complete copy of said written opinion to the Company.
 
    3.26  FULL DISCLOSURE.
 
    (a) This Agreement (including the Parent Disclosure Schedule) does not, and
the certificate referred to in Section 8.5(b) will not, (i) contain any
representation, warranty or information that is false or misleading with respect
to any material fact, or (ii) omit to state any material fact necessary in order
to make the representations, warranties and information contained and to be
contained herein and therein
 
                                      A-29
<PAGE>
(in the light of the circumstances under which such representations, warranties
and information were or will be made or provided) not false or misleading.
 
    (b) None of the information supplied or to be supplied by or on behalf of
Parent for inclusion or incorporation by reference in the S-4 Registration
Statement to be filed with the SEC by Parent in connection with the issuance of
Parent Common Stock in the Merger will, at the time the S-4 Registration
Statement is filed with the SEC or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. None of the information supplied or to be supplied by or
on behalf of Parent for inclusion or incorporation by reference in the Joint
Proxy Statement/Prospectus to be filed with the SEC as part of the S-4
Registration Statement, will, at the time the Joint Proxy Statement/Prospectus
is mailed to the stockholders of the Parent, at the time of the Parent
Stockholders' Meeting or as of the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading. The Joint Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations promulgated by the
SEC thereunder.
 
    3.27  FINANCIAL ADVISOR.  Except for Hambrecht & Quist LLC, no broker,
finder, investment banker or other Person is entitled to any brokerage, finder's
or other fee or commission in connection with the Merger or any of the other
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Parent. Parent has disclosed to the Company the fees, commissions
and other payments which will be paid by Parent to Hambrecht & Quist LLC if the
Merger is consummated. Parent furnished to the Company accurate and complete
copies of all agreements under which any such fees, commissions or other amounts
have been paid or may become payable and all indemnification and other
agreements relating to the engagement of Hambrecht & Quist LLC.
 
    3.28  INTERIM OPERATIONS OF MERGER SUB.  Merger Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby, has engaged in
no other business activity and has conducted its operations only as contemplated
hereby.
 
SECTION 4. CERTAIN COVENANTS OF THE COMPANY.
 
    4.1  OPERATION OF THE COMPANY'S BUSINESS.  During the period from the date
of this Agreement through the Effective Time (the "PRE-CLOSING PERIOD"), the
Company shall not (without the prior written consent of Parent), except as
contemplated by this Agreement:
 
        (i) declare, accrue, set aside or pay any dividend or make any other
    distribution in respect of any shares of capital stock, or repurchase,
    redeem or otherwise reacquire any shares of capital stock or other
    securities;
 
        (ii) sell, issue, grant or authorize the issuance or grant of (A) any
    capital stock or other security, (B) any option, call, warrant or right to
    acquire any capital stock or other security except as set forth on Part
    4.1(ii) of the Company Disclosure Schedule, or (C) any instrument
    convertible into or exchangeable for any capital stock or other security
    (except that the Company may issue Company Common Stock upon the valid
    exercise of Company Options and pursuant to Company Plans;
 
       (iii) amend or waive any of its rights under, or accelerate the vesting
    under, any provision of any of the Company's stock option plans, any
    provision of any agreement evidencing any outstanding stock option or any
    restricted stock purchase agreement, or otherwise modify any of the terms of
    any outstanding option, warrant or other security or any related Contract,
    except pursuant to written agreements outstanding, or policies existing, on
    the date hereof and as previously disclosed in writing or made available to
    Parent;
 
                                      A-30
<PAGE>
        (iv) amend or permit the adoption of any amendment to its certificate of
    incorporation or bylaws or other charter or organizational documents, or
    effect or become a party to any merger, consolidation, share exchange,
    business combination, recapitalization, reclassification of shares, stock
    split, reverse stock split or similar transaction;
 
        (v) form any Subsidiary or acquire any equity interest or other interest
    in any other Entity;
 
        (vi) make any capital expenditure (except that the Company may make
    capital expenditures that, when added to all other capital expenditures made
    on behalf of the Company during the Pre-Closing Period, do not exceed
    $25,000 with respect to any single capital expenditure or $100,000 in the
    aggregate);
 
       (vii) enter into or become bound by, or permit any of the assets owned or
    used by it to become bound by, any Company Material Contract, or amend or
    prematurely terminate, or waive or exercise any material right or remedy
    (including any right to repurchase shares of Company Common Stock) under,
    any Company Material Contract;
 
      (viii) acquire, lease or license any material right or other asset from
    any other Person or sell or otherwise dispose of, or lease or license or
    encumber, any material right or other asset to any other Person (except in
    each case for material rights or assets acquired, leased, licensed or
    disposed of by the Company in the ordinary course of business and consistent
    with past practices), or waive or relinquish any material right or otherwise
    extend the term of any agreement with respect to, amend or modify in any
    material respect any material rights, including rights to material
    Proprietary Assets of the Company, or enter into assignments of future
    rights, including rights to material Proprietary Assets of the Company,
    other than non-exclusive licenses and distribution rights in the ordinary
    course of business consistent with past practices;
 
        (ix) incur any indebtedness for borrowed money (other than (i) in
    connection with the financing of ordinary trade payables; (ii) pursuant to
    existing credit facilities; (iii) in connection with leasing activities in
    the ordinary course of business; or (iv) for tax planning purposes in the
    ordinary course of business) or guarantee any indebtedness of any Person for
    borrowed money, or issue or sell any debt securities or warrants or right to
    acquire debt securities of the Company or guarantee any debt securities of
    others.
 
        (x) establish, adopt or amend any employee benefit plan, pay any bonus
    except in accordance with the terms of existing Company Plans or pursuant to
    commitments made prior to the date of this Agreement, or make any
    profit-sharing or similar payment to, or increase the amount of the wages,
    salary, commissions, fringe benefits or other compensation or remuneration
    payable to, any of its directors, officers or employees, except for normal
    periodic increases in wages and salaries made in the ordinary course of
    business and consistent with past practices;
 
        (xi) grant any severance or termination pay to any officer or employee
    except payments in amounts consistent with policies and past practices or
    pursuant to written agreements outstanding, or policies existing, on the
    date hereof and as previously disclosed in writing or made available to
    Parent, or adopt any new severance plan;
 
       (xii) hire any new employee having an annual salary in excess of $120,000
    or as an officer of the Company or engage any consultant or independent
    contractor for a period exceeding sixty (60) days;
 
      (xiii) change the status, title or responsibilities, including without
    limitation, termination or promotion, of any officer of the Company or
    promote any employee to an officer position in the Company;
 
       (xiv) change any of its methods of accounting or accounting practices in
    any respect;
 
       (xv) make any election with respect to Taxes;
 
                                      A-31
<PAGE>
       (xvi) commence or settle any Legal Proceeding;
 
      (xvii) enter into any material transaction or take any other material
    action outside the ordinary course of business or inconsistent with past
    practices;
 
      (xviii) enter into any agreement requiring the consent or approval of any
    third party with respect to the Merger; or
 
       (xix) agree or commit to take any of the actions described in clauses
    "(i)" through "(xviii)" of this Section 4.1.
 
    4.2  NO SOLICITATION.
 
    (a) From the date of this Agreement until the earlier of the Effective Time
or termination of this Agreement pursuant to Section 9, the Company shall not
directly or indirectly, and shall not authorize or permit any subsidiary of the
Company or any Representative of the Company directly or indirectly to, (i)
solicit, initiate, encourage or induce the making, submission or announcement of
any Acquisition Proposal or take any action that could reasonably be expected to
lead to an Acquisition Proposal, (ii) furnish any information regarding the
Company to any Person in connection with or in response to an Acquisition
Proposal, (iii) engage in discussions with any Person with respect to any
Acquisition Proposal, (iv) approve, endorse or recommend any Acquisition
Proposal or (v) enter into any letter of intent or similar document or any
Contract contemplating or otherwise relating to any Acquisition Transaction;
PROVIDED, HOWEVER, that prior to the approval of this Agreement by the Required
Company Stockholder Vote, this Section 4.2(a) shall not prohibit the Company
from (A) furnishing nonpublic information regarding the Company to, or entering
into discussions with, any Person in response to a Superior Offer submitted by
such Person (and not withdrawn) if (1) neither the Company nor any
Representative of the Company shall have violated any of the restrictions set
forth in this Section 4.2, (2) the Board of Directors of the Company concludes
in good faith, after consultation with its outside legal counsel, that such
action is required in order for the Board of Directors of the Company to comply
with its fiduciary obligations to the Company's stockholders under applicable
law, (3) prior to furnishing any such nonpublic information to, or entering into
discussions with, such Person, the Company gives Parent written notice of the
identity of such Person and of the Company's intention to furnish nonpublic
information to, or enter into discussions with, such Person, and the Company
receives from such Person an executed confidentiality agreement that is at least
as restrictive as the Confidentiality Agreement (as hereinafter defined) with
respect to the use and disclosure of all nonpublic written and oral information
furnished to such Person by or on behalf of the Company, and (4) prior to
furnishing any such nonpublic information to such Person, the Company furnishes
such nonpublic information to Parent (to the extent such nonpublic information
has not been previously furnished by the Company to Parent) or (B) taking and
disclosing to its stockholders a position contemplated by Rules 14(d)(9) and
14e-2(a) promulgated under the Exchange Act. Without limiting the generality of
the foregoing, the Company acknowledges and agrees that any violation of any of
the restrictions set forth in the preceding sentence by any Representative of
the Company, whether or not such Representative is purporting to act on behalf
of the Company, shall be deemed to constitute a breach of this Section 4.2 by
the Company. In addition to the foregoing, the Company shall (i) provide Parent
with at least twenty-four (24) hours prior notice of any meeting of the
Company's Board of Directors at which the Company's Board of Directors is
reasonably expected to consider a Superior Offer and (ii) not recommend a
Superior Offer to its stockholders for a period of not less than the greater of
two (2) business days or forty-eight (48) hours after Parent's receipt of a copy
of such Superior Offer (pursuant to Section 4.2(b) below).
 
    (b) The Company shall promptly advise Parent orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. The Company shall keep Parent fully
informed with respect to the status of any such Acquisition Proposal and any
modification or proposed modification thereto.
 
                                      A-32
<PAGE>
    (c) The Company shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal.
 
    4.3  CONVERSION OF SERIES B PREFERRED STOCK.  The Company shall take all
actions necessary to effect the conversion of all of the outstanding Series B
Preferred Stock into shares of Company Common Stock in accordance with its
certificate of incorporation no later than twenty (20) days after the date of
this Agreement.
 
SECTION 5. CERTAIN COVENANTS OF PARENT.
 
    5.1  OPERATION OF THE PARENT'S BUSINESS.  During the Pre-Closing Period,
Parent shall not (without the prior written consent of the Company) (i) declare,
accrue, set aside or pay any dividend or make any other distribution in respect
of any shares of its capital stock, (ii) repurchase, redeem or otherwise
reacquire any shares of its capital stock or other securities, (iii) sell,
issue, grant or authorize the issuance or grant of (A) any capital stock or
other security, (B) any option, call, warrant or right to acquire any capital
stock or other security except as set forth on Part 5.1(iii) of the Parent
Disclosure Schedule or (C) any instrument convertible into or exchangeable for
any capital stock or other security (except that Parent may issue Parent Common
Stock upon the valid exercise of Parent Options outstanding as of the date of
this Agreement), (iv) amend or permit the adoption of any amendments to its
certificate of incorporation or bylaws or other charter or organizational
documents or effect or become a party to any merger, consolidation, share
exchange, business combination, recapitalization of shares, stock split, reverse
stock split or similar transaction, (v) incur any indebtedness for borrowed
money (other than (A) in connection with the financing of ordinary trade
payables; (B) pursuant to existing credit facilities; (C) in connection with
leasing activities in the ordinary course of business; or (D) for tax planning
purposes in the ordinary course of business) in excess of $5,000,000, (vi)
acquire, lease or license any material right or other asset from any other
Person or sell or otherwise dispose of, or lease or license or encumber any
material right or other asset to any other Person (except in each case for
material rights or assets acquired, leased, licensed or disposed of by Parent in
the ordinary course of business and consistent with past practices), or waive or
relinquish any material right or otherwise extend the term of any agreement with
respect to, amend or modify in any material respect any material rights,
including rights to material Proprietary Assets of Parent, or enter into
assignments of future rights, including rights to material Proprietary Assets of
Parent, other than non-exclusive licenses and distribution rights in the
ordinary course of business consistent with past practice, or (vii) agree or
commit to take any of the actions described in clauses "(i)" through "(vi)" of
this Section 5.1.
 
SECTION 6. ADDITIONAL COVENANTS OF THE PARTIES.
 
    6.1  REGISTRATION STATEMENT; JOINT PROXY STATEMENT/PROSPECTUS.
 
    (a) As promptly as practicable after the date of this Agreement, the Company
and Parent shall prepare and cause to be filed with the SEC the S-4 Registration
Statement, together with the Joint Proxy Statement/Prospectus and any other
documents required by the Securities Act, the Exchange Act or any other Federal,
foreign or Blue Sky or related laws in connection with the Merger and the
transactions contemplated by this Agreement ("OTHER FILINGS"). Each of Parent
and the Company will notify the other promptly upon the receipt of any comments
from the SEC or its staff or any other government officials and of any request
by the SEC or its staff or any other government officials for amendments or
supplements to the S-4 Registration Statement, the Joint Proxy
Statement/Prospectus or any Other Filings or for additional information and will
supply the other with copies of all correspondence between such party or any of
its representatives, on the one hand, and the SEC, or its staff or any other
government officials, on the other hand, with respect to the S-4 Registration
Statement, the Joint Proxy Statement/ Prospectus, any Other Filings or the
Merger. Each of Parent and the Company shall use all reasonable efforts to cause
the S-4 Registration Statement (including the Joint Proxy Statement/Prospectus)
and any Other Filings to comply with the rules and regulations promulgated by
the SEC, to respond promptly to
 
                                      A-33
<PAGE>
any comments of the SEC or its staff and to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after it
is filed with the SEC. Parent will use all reasonable efforts to cause the Joint
Proxy Statement/Prospectus to be mailed to Parent's stockholders and the Company
will use all reasonable efforts to cause the Joint Proxy Statement/Prospectus to
be mailed to the Company's stockholders, as promptly as practicable after the
Form S-4 Registration Statement is declared effective under the Securities Act.
The Company shall promptly furnish to Parent all information concerning the
Company and the Company's stockholders that may be required or reasonably
requested in connection with any action contemplated by this Section 6.1. If any
event relating to the Company occurs, or if the Company becomes aware of any
information, that should be set forth in an amendment or supplement to the S-4
Registration Statement or the Joint Proxy Statement/Prospectus, then the Company
shall promptly inform Parent thereof and shall cooperate with Parent in filing
such amendment or supplement with the SEC and, if appropriate, in mailing such
amendment or supplement to the stockholders of the Company and the stockholders
of Parent.
 
    (b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the Parent Common Stock to
be issued in the Merger will be registered or qualified under the securities law
of every jurisdiction of the United States in which any registered holder of
Company Common Stock has an address of record on the record date for determining
the stockholders entitled to notice of and to vote at the Company Stockholders'
Meeting; PROVIDED, HOWEVER, that Parent shall not be required (i) to qualify to
do business as a foreign corporation in any jurisdiction in which it is not now
qualified or (ii) to file a general consent to service of process in any
jurisdiction.
 
    6.2  COMPANY STOCKHOLDERS' MEETING.
 
    (a) The Company shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of Company Common Stock (the "COMPANY STOCKHOLDERS' MEETING") to consider, act
upon and vote upon the adoption of this Agreement and approval of the Merger.
The Company Stockholders' Meeting will be held as promptly as practicable and in
any event within forty-five (45) days after the S-4 Registration Statement is
declared effective under the Securities Act; PROVIDED, HOWEVER, that
notwithstanding anything to the contrary contained in this Agreement, the
Company may adjourn or postpone the Company Stockholders' Meeting to the extent
necessary to ensure that any necessary supplement or amendment to the Joint
Proxy Statement/Prospectus is provided to the Company's stockholders in advance
of a vote on the Merger and this Agreement or, if as of the time for which
Company Stockholders' Meeting is originally scheduled (as set forth in the Joint
Proxy Statement/Prospectus) there are insufficient shares of Company Common
Stock represented (either in person or by proxy) to constitute a quorum
necessary to conduct the business of the Company Stockholders' Meeting. The
Company shall ensure that the Company Stockholders' Meeting is called, noticed,
convened, held and conducted, and that all proxies solicited in connection with
the Company Stockholders' Meeting are solicited, in compliance with all
applicable Legal Requirements; PROVIDED, HOWEVER that the Company shall not be
obligated to call, give notice of, convene and hold the Company Stockholders'
Meeting in accordance with this Section 6.2(a) if in accordance with Section
6.2(c) the Board of Directors of the Company withdraws, amends or modifies its
unanimous recommendation in favor of the Merger and accepts or recommends to the
stockholders of the Company a Superior Offer.
 
    (b) Subject to Section 6.2(c): (i) the Board of Directors of the Company
shall unanimously recommend that the Company's stockholders vote in favor of and
adopt and approve this Agreement and the Merger at the Company Stockholders'
Meeting; (ii) the Joint Proxy Statement/Prospectus shall include a statement to
the effect that the Board of Directors of the Company has unanimously
recommended that the Company's stockholders vote in favor of and adopt and
approve this Agreement and the Merger at the Company Stockholders' Meeting; and
(iii) neither the Board of Directors of the Company nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify, in a manner adverse to Parent, the unanimous recommendation of the Board
of Directors of the Company that the Company's stockholders vote in favor of and
adopt and approve this Agreement and the Merger.
 
                                      A-34
<PAGE>
For purposes of this Agreement, said recommendation of the Board of Directors
shall be deemed to have been modified in a manner adverse to Parent if said
recommendation shall no longer be unanimous.
 
    (c) Nothing in Section 6.2(b) shall prevent the Board of Directors of the
Company from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Offer is made to the Company and is not
withdrawn, (ii) neither the Company nor any of its Representatives shall have
violated any of the restrictions set forth in Section 4.2, and (iii) the Board
of Directors of the Company concludes in good faith, after consulting with its
outside counsel, that, in light of such Superior Offer, the withdrawal,
amendment or modification of such recommendation is required in order for the
Board of Directors of the Company to comply with its fiduciary obligations to
the Company's stockholders under applicable law.
 
    6.3  PARENT STOCKHOLDERS' MEETING.
 
    (a) Parent shall take all action necessary to call, give notice of, convene
and hold a meeting of the holders of Parent Common Stock to consider and vote
upon the issuance of Parent Common Stock in the Merger (the "PARENT
STOCKHOLDERS' MEETING"). The Parent Stockholders' Meeting will be held as
promptly as practicable and in any event within forty-five (45) days after the
S-4 Registration Statement is declared effective under the Securities Act;
PROVIDED, HOWEVER, that notwithstanding anything to the contrary contained in
this Agreement, Parent may adjourn or postpone the Parent Stockholders' Meeting
to the extent necessary to ensure that any necessary supplement or amendment to
the Joint Proxy Statement/Prospectus is provided to Parent's stockholders in
advance of a vote on the issuance of Parent Common Stock in the Merger or, if as
of the time for which the Parent Stockholders' Meeting is originally scheduled
(as set forth in the Joint Proxy Statement/Prospectus) there are insufficient
shares of Parent Common Stock represented (either in person or by proxy) to
constitute a quorum necessary to conduct the business of the Parent
Stockholders' Meeting. Parent shall ensure that the Parent Stockholders' Meeting
is called, noticed, convened, held and coordinated, and that all proxies
submitted in connection with the Parent Stockholders' Meeting are solicited, in
compliance with all applicable Legal Requirements.
 
    (b) Subject to Section 6.3(c): (i) The Board of Directors of Parent shall
unanimously recommend that Parent's stockholders vote in favor of the issuance
of Parent Common Stock in the Merger; (ii) the Joint Proxy Statement/Prospectus
shall include a statement to the effect that the Board of Directors of Parent
has unanimously recommended that Parent's stockholders vote in favor of the
issuance of Parent Common Stock in the Merger; and (iii) neither the Board of
Directors of Parent nor any committee thereof shall withdraw, amend or modify,
or propose or resolve to withdraw, amend or modify, in a manner adverse to the
Company, the unanimous recommendation of the Board of Directors of Parent that
Parent's stockholders vote in favor of the issuance of Parent Common Stock in
the Merger. For purposes of this Agreement, said recommendation of Parent's
Board of Directors shall be deemed to have been modified in a manner adverse to
the Company if said recommendation shall no longer be unanimous.
 
    (c) Nothing in Section 6.3(b) shall prevent the Board of Directors of Parent
from withdrawing, amending or modifying its unanimous recommendation in favor of
the issuance of Parent Common Stock in the Merger if the Board of Directors of
Parent concludes in good faith, based upon the advice of its outside counsel,
that the withdrawal, amendment or modification of such recommendation is
required in order for the Board of Directors of Parent to comply with its
fiduciary obligations to Parent's stockholders under applicable law.
 
    6.4  REGULATORY APPROVALS.  The Company and Parent shall use all reasonable
efforts to file, as soon as practicable after the date of this Agreement, all
notices, reports and other documents required to be filed with any Governmental
Body with respect to the Merger and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. The Company and Parent shall respond as promptly as
practicable to (i) any inquiries or requests received from any Governmental Body
(including any state attorney general) in connection with antitrust or related
matters. Each of the Company and Parent shall (1) give the other party prompt
 
                                      A-35
<PAGE>
notice of the commencement of any Legal Proceeding by or before any Governmental
Body with respect to the Merger or any of the other transactions contemplated by
this Agreement, (2) keep the other party informed as to the status of any such
Legal Proceeding, and (3) promptly inform the other party of any communication
to or from any Governmental Body regarding the Merger. The Company and Parent
will consult and cooperate with one another, and will consider in good faith the
views of one another, in connection with any analysis, appearance, presentation,
memorandum, brief, argument, opinion or proposal made or submitted in connection
with any Legal Proceeding under or any other federal or state antitrust or fair
trade law. In addition, except as may be prohibited by any Governmental Body or
by any Legal Requirement, in connection with any Legal Proceeding under or any
other federal or state antitrust or fair trade law or any other similar Legal
Proceeding, each of the Company and Parent agrees to permit authorized
Representatives of the other party to be present at each meeting or conference
relating to any such Legal Proceeding and to have access to and be consulted in
connection with any document, opinion or proposal made or submitted to any
Governmental Body in connection with any such Legal Proceeding.
 
    6.5  STOCK OPTIONS.
 
    (a) At the Effective Time, all rights with respect to Company Common Stock
under each Company Option then outstanding shall be converted into and become
rights with respect to Parent Common Stock, and Parent shall assume each such
Company Option in accordance with the terms (as in effect as of the date of this
Agreement) of the stock option plan under which it was issued and the stock
option agreement by which it is evidenced as same may be amended or modified by
the Company's employment agreements and severance agreements, plans and
arrangements. From and after the Effective Time, (i) each Company Option assumed
by Parent may be exercised solely for shares of Parent Common Stock, (ii) the
number of shares of Parent Common Stock subject to each such Company Option
shall be equal to the number of shares of Company Common Stock subject to such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounding down to the nearest whole share (with cash, less the
applicable exercise price, being payable for any fraction of a share), (iii) the
per share exercise price under each such Company Option shall be adjusted by
dividing the per share exercise price under such Company Option by the Exchange
Ratio and rounding up to the nearest cent and (iv) any restriction on the
exercise of any such Company Option shall continue in full force and effect and
the term, exercisability, vesting schedule and other provisions of such Company
Option as may have been amended or modified by the Company's employment
agreements and severance agreements, plans and arrangements shall otherwise
remain unchanged; PROVIDED, HOWEVER, that each Company Option assumed by Parent
in accordance with this Section 6.5(a) shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split, stock
dividend, reverse stock split, reclassification, recapitalization or other
similar transaction subsequent to the Effective Time.
 
    (b) Notwithstanding anything to the contrary contained in this Section 6.5,
in lieu of assuming outstanding Company Options in accordance with Section
6.5(a), Parent may, at its election, cause such outstanding Company Options to
be replaced by issuing reasonably equivalent replacement stock options in
substitution therefor; provided however, that such replacement options shall in
any event comply with the provisions of the second sentence of Section 6.5(a).
 
    (c) The Company shall take all action that may be necessary (under the plans
pursuant to which Company Options are outstanding and otherwise) to effectuate
the provisions of this Section 6.5 and to ensure that, from and after the
Effective Time, holders of Company Options have no rights with respect thereto
other than those specifically provided in this Section 6.5.
 
    6.6  FORM S-8.  Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Options as soon as reasonably practical (and in any event within sixty (60)
days) after the Effective Time.
 
                                      A-36
<PAGE>
    6.7  INDEMNIFICATION OF OFFICERS AND DIRECTORS.
 
    (a) All rights to indemnification existing in favor of the current directors
and officers of the Company for acts and omissions occurring prior to the
Effective Time, as provided in the Company's bylaws (as in effect as of the date
of this Agreement) and as provided in any indemnification agreements between the
Company and said officers and directors (as in effect as of the date of this
Agreement), shall survive the Merger and shall be observed by the Surviving
Corporation for a period of not less than six (6) years from the Effective Time.
 
    (b) From the Effective Time until the third anniversary of the date on which
the Merger becomes effective, the Surviving Corporation shall maintain in
effect, for the benefit of the current directors and officers of the Company
with respect to acts or omissions occurring prior to the Effective Time, the
lesser of (i) the existing amount of coverage of the existing policy of
directors' and officers' liability insurance maintained by the Company as of the
date of this Agreement (the "EXISTING POLICY") and (ii) the amount of coverage
purchased by 150% of the amount of the last annual premium paid by the Company
prior to the date of this Agreement for the Existing Policy; PROVIDED, HOWEVER,
that the Surviving Corporation may substitute for the Existing Policy a policy
or policies of comparable coverage.
 
    (c) In the event that Parent (i) causes the Surviving Corporation to
consolidate with or merge into any other Person and the Surviving Corporation is
not the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) causes the Surviving Corporation to transfer or convey all or
substantially all of Surviving Corporation's properties and assets to any
Person, then, and in each such case, to the extent necessary to effectuate the
purposes of this Section 6.7, proper provision shall be made so that the
successors and assigns of the Surviving Corporation assume the obligations set
forth in this Section 6.7 and none of the actions described in clause (i) or
(ii) shall be taken until such provision is made.
 
    6.8  TAX FREE REORGANIZATION.  Each of the Company and Parent agrees not to
take any action either prior to or after the Effective Time that could
reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code.
 
    6.9  ADDITIONAL AGREEMENTS.
 
    (a) Subject to Section 6.9(b), Parent and the Company shall use all
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, but subject to
Section 6.9(b), each party to this Agreement (i) shall make all filings (if any)
and give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, (ii) shall use all reasonable efforts to obtain each Consent (if any)
required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement, and (iii) shall use all
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger.
 
    (b) Notwithstanding anything to the contrary contained in this Agreement,
Parent shall not have any obligation under this Agreement: (i) to dispose or
cause any of its subsidiaries to dispose of any assets, or to commit to cause
the Company to dispose of any assets; (ii) to license or otherwise make
available, or cause any of its subsidiaries to license or otherwise make
available, to any Person, any technology or other Proprietary Asset, or to
commit to cause the Company to license or otherwise make available to any Person
any technology or other Proprietary Asset; (iii) to hold separate any assets or
operations (either before or after the Closing Date), or to commit to cause the
Company to hold separate any assets or operations; or (iv) to make any
commitment (to any Governmental Body or otherwise) regarding its future
operations or the future operations of the Company.
 
                                      A-37
<PAGE>
    6.10  CONFIDENTIALITY.  The parties acknowledge that the Company and Parent
have previously executed a Mutual Confidential Disclosure Agreement, dated as of
September 17, 1998 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality
Agreement, excluding Section 7 thereof, will continue in full force and effect
in accordance with its terms.
 
    6.11  DISCLOSURE.  Parent and the Company have agreed to the text of a joint
press release announcing the signing of this Agreement and shall consult with
each other before issuing any other press release or otherwise making any public
statement with respect to the Merger or any of the other transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, neither Parent nor the Company shall, and neither shall permit any of
its Representatives to, make any disclosure regarding the Merger or any of the
other transactions contemplated by this Agreement unless (a) the other party
shall have approved such disclosure or (b) the disclosing party shall have been
advised by its outside legal counsel that such disclosure is required by
applicable law.
 
    6.12  TAX MATTERS.
 
    (a) At or prior to the filing of the S-4 Registration Statement, Parent and
Merger Sub and the Company shall execute and deliver to Cooley Godward LLP and
to Heller Ehrman White & McAuliffe LLP tax representation letters in the forms
attached as Exhibit C-1 and C-2, as applicable;
 
    (b) Parent, Merger Sub and the Company shall each confirm to Cooley Godward
LLP and to Heller Ehrman White & McAuliffe LLP the accuracy and completeness as
of the Effective Time of the tax representation letters delivered pursuant to
Section 6.12(a);
 
    (c) Parent, Merger Sub and the Company shall use all reasonable efforts to
cause the Merger to qualify as a tax free reorganization under Section 368(a)(1)
of the Code; and
 
    (d) Following delivery of the tax representation letters pursuant to Section
6.12(a), each of Parent and the Company shall use its reasonable efforts to
cause Cooley Godward LLP and Heller Ehrman White & McAuliffe LLP, respectively,
to deliver promptly to it a legal opinion satisfying the requirements of Item
601 of Regulation S-K promulgated under the Securities Act. In rendering such
opinions, each of such counsel shall be entitled to rely on the tax
representation letters delivered pursuant to Section 6.12(a).
 
    6.13  RESIGNATION OF OFFICERS AND DIRECTORS.  The Company shall use all
reasonable efforts to obtain and deliver to Parent prior to the Closing the
resignation of each officer and director of the Company.
 
    6.14  NASDAQ LISTING.  Parent shall use all reasonable efforts to have the
shares of Parent Common Stock issuable to the stockholders of the Company
pursuant to the Agreement and such other shares required to be reserved for
issuance in connection with the Merger authorized for listing on Nasdaq upon
official notice of issuance.
 
    6.15  FIRPTA MATTERS.  At the Closing, (a) the Company shall deliver to
Parent a statement (in such form as may be reasonably requested by counsel to
Parent) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the
Internal Revenue Service the notification required under Section 1.897-2(h)(2)
of the United States Treasury Regulations.
 
    6.16  PARENT BOARD OF DIRECTORS.  On or prior to the Closing Date, Parent
shall take all actions necessary to nominate and appoint (i) Arthur M. Pappas to
Class I of its Board of Directors to serve until the annual meeting of
stockholders to be held in 2001; (ii) Stanley T. Crooke to Class II of its Board
of Directors to serve until the annual meeting of stockholders to be held in
1999; and (iii) Bert W. O'Malley to Class III of its Board of Directors to serve
until the annual meeting of stockholders to be held in 2000.
 
                                      A-38
<PAGE>
    6.17  ACCESS AND INVESTIGATION.  During the Pre-Closing Period, the Company
and Parent shall, and shall cause their respective Representatives to: (a)
provide the Company and Parent and the Company's and Parent's Representatives
with reasonable access to the other party's Representatives, personnel and
assets and to all existing books, records, Tax Returns, work papers and other
documents and information relating to the Company and Parent; and (b) provide
Company and Parent and Company's and Parent's Representatives with such copies
of the existing books, records, Tax Returns, work papers and other documents and
information relating to the other party, and with such additional financial,
operating and other data and information regarding the other party, as such
party may reasonably request. Without limiting the generality of the foregoing,
during the Pre-Closing Period, the Company and Parent shall promptly provide the
other party with copies of:
 
        (a) any written materials or communications sent by or on behalf of the
    other party to its stockholders;
 
        (b) any material notice, document or other communication sent by or on
    its behalf to any party to any Company Material Contract or Parent Material
    Contract, respectively, or sent to the Company or Parent by any party to any
    Company Material Contract or Parent Material Contract, respectively, (other
    than any communication that relates solely to commercial transactions
    between the Company or Parent and the other party to any such Company
    Material Contract or Parent Material Contract, respectively, and that is of
    the type sent in the ordinary course of business and consistent with past
    practices);
 
        (c) any notice, report or other document filed with or sent to any
    Governmental Body in connection with the Merger or any of the other
    transactions contemplated by this Agreement; and
 
        (d) any material notice, report or other document received by either the
    Company or Parent from any Governmental Body.
 
    6.18  OPERATION OF BUSINESS.
 
    (a) During the Pre-Closing Period: (i) both the Company and Parent shall
ensure that each of the Company and Parent, respectively, conducts its business
and operations (A) in the ordinary course of business and in accordance with
past practices and (B) in compliance with all applicable Legal Requirements and
the requirements of all Company Material Contracts and Parent Material
Contracts, respectively; (ii) each of the Company and Parent shall use all
reasonable efforts to ensure that each of the Company and Parent preserves
intact its respective business organization, keeps available the services of its
respective officers and employees and maintains its respective relations and
goodwill with all suppliers, landlords, creditors, licensors, licensees,
employees and other Persons having business relationships with it; (iii) the
Company and Parent, respectively, shall keep in full force all insurance
policies referred to in Sections 2.18 and 3.18, respectively, or replace such
policies that terminate with comparable policies; (iv) the Company and Parent
shall provide all notices, assurances and support required by any Company
Contract or Parent Contract, respectively, relating to any Proprietary Asset in
order to ensure that no condition under such Company Contract or Parent
Contract, respectively, occurs which could result in, or could increase the
likelihood of, any transfer or disclosure by the Company or Parent,
respectively, of any Proprietary Asset; and (v) each of the Company and Parent
shall (to the extent requested by the other party) cause its officers to report
regularly to the other party concerning the status of the other party's
business.
 
    (b) During the Pre-Closing Period, each of the Company and Parent shall
promptly notify the other party in writing of: (i) the discovery by the Company
or Parent, respectively, of any circumstance that occurred or existed on or
prior to the date of this Agreement and that caused or constitutes a material
inaccuracy in any representation or warranty made by the Company or Parent,
respectively, in this Agreement; (ii) any event, condition, fact or circumstance
that occurs, arises or exists after the date of this Agreement and that would
cause or constitute a material inaccuracy in any representation or warranty
 
                                      A-39
<PAGE>
made by the Company or Parent, respectively, in this Agreement if (A) such
representation or warranty had been made as of the time of the occurrence,
existence or discovery of such event, condition, fact or circumstance, or (B)
such event, condition, fact or circumstance had occurred, arisen or existed on
or prior to the date of this Agreement; (iii) any event, condition, fact or
circumstance hereafter arising which, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
Company Disclosure Schedule or Parent Disclosure Schedule, respectively; (iv)
any material breach of any covenant or obligation of the Company or Parent,
respectively; and (v) any event, condition, fact or circumstance that would make
the timely satisfaction of any of the conditions set forth in Section 7 or
Section 8 impossible or unlikely or that has had or could reasonably be expected
to have a Material Adverse Effect on the Company or Parent, respectively. No
notification given to the Company or Parent, respectively, pursuant to this
Section 6.18(b) shall limit or otherwise affect any representations, warranties,
covenants or obligations of the Company or Parent, respectively, contained in
this Agreement.
 
    (c) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 6.18(b) requires any change in the Company
Disclosure Schedule or Parent Disclosure Schedule, or if any such event,
condition, fact or circumstance would require such a change assuming that the
Company Disclosure Schedule or Parent Disclosure Schedule were dated as of the
date of the occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company or Parent, respectively, shall deliver to the
other party an update to the Company Disclosure Schedule or Parent Disclosure
Schedule, respectively, at least three (3) days prior to the Effective Time,
specifying such change. No such update shall be deemed to supplement or amend
the Company Disclosure Schedule or Parent Disclosure Schedule, respectively, for
the purpose of (i) determining the accuracy of any of the representations and
warranties made by the Company or Parent, respectively, in this Agreement, or
(ii) determining whether any of the conditions set forth in Section 7 or Section
8 has been satisfied.
 
    6.19  FINANCIAL STATEMENTS.  All financial statements (including any related
notes) contained in Company SEC Documents and Parent SEC Documents filed after
the date hereof shall meet the conditions set forth in (i), (ii) and (iii) of
Sections 2.4(b) or 3.4(b), respectively.
 
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.
 
    The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
and upon consummation of the Closing, all conditions herein shall be deemed
satisfied and any liability for failure to satisfy any condition herein shall be
precluded:
 
    7.1  ACCURACY OF REPRESENTATIONS.  The representations and warranties of the
Company contained in this Agreement shall have been accurate in all material
respects as of the date of this Agreement and shall be accurate in all material
respects as of the Closing Date, as if made on and as of the Closing Date,
except representations and warranties that refer specifically to "the date of
this Agreement" or a specific date prior to the date of this Agreement, and
except that any inaccuracies in such representations and warranties shall be
disregarded if the circumstances giving rise to such inaccuracies (individually
and collectively) do not constitute a Material Adverse Effect on the Company (it
being understood that, for purposes of determining the accuracy of such
representations and warranties, (i) all "Material Adverse Effect" or other
materiality qualifications and (ii) any update or modification to the Company
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded).
 
    7.2  PERFORMANCE OF COVENANTS.  Each covenant or obligation that the Company
is required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
 
                                      A-40
<PAGE>
    7.3  EFFECTIVENESS OF REGISTRATION STATEMENT.  The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
 
    7.4  STOCKHOLDER APPROVAL.  This Agreement and the Merger shall have been
duly approved by the Required Company Stockholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote.
 
    7.5  CONSENTS.  The Consents identified in Part 2.24(d) of the Company
Disclosure Schedule shall have been obtained and shall be in full force and
effect.
 
    7.6  AGREEMENTS AND DOCUMENTS.  Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
 
        (a) the statement referred to in Section 6.15(a), executed by the
    Company;
 
        (b) a legal opinion of Cooley Godward LLP, dated as of the Closing Date
    and addressed to Parent in a form substantially similar to the opinion
    delivered pursuant to Section 8.5(a), to the effect that the Merger will
    constitute a reorganization within the meaning of Section 368 of the Code
    (it being understood that, in rendering such opinion, Cooley Godward LLP may
    rely upon the tax representation letters referred to in Section 6.12);
 
        (c) a certificate executed on behalf of the Company by an executive
    officer of the Company confirming that the conditions set forth in Sections
    7.1, 7.2, 7.4 (with respect to the Company only), 7.5, 7.7, 7.8, 7.10 (with
    respect to the Company only), 7.11 (with respect to the Company only) and
    7.12 have been duly satisfied; and
 
        (d) the written resignations of all officers and directors of the
    Company, effective as of the Effective Time.
 
    7.7  NO MATERIAL ADVERSE CHANGE.  There shall have been no material adverse
change in the business, assets, liabilities, financial condition or results of
operations performance of the Company since the date of this Agreement.
 
    7.8  FIRPTA COMPLIANCE.  The Company shall have filed with the Internal
Revenue Service the notification referred to in Section 6.15(b).
 
    7.9  LISTING.  The shares of Parent Common Stock to be issued in the Merger
shall have been authorized for listing on Nasdaq, subject to notice of issuance.
 
    7.10  NO GOVERNMENTAL LITIGATION.  There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from Parent or any of its subsidiaries any damages that may be material to
Parent; (c) seeking to prohibit or limit in any material respect Parent's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or (d)
which would materially and adversely affect the right of Parent, the Surviving
Corporation or any subsidiary of Parent to own the assets or operate the
business of the Company.
 
    7.11  NO OTHER LITIGATION.  There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on the Company or on Parent: (a) challenging or seeking
to restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating to the Merger and
seeking to obtain from Parent or any of its subsidiaries any damages that may be
material to Parent; (c) seeking to prohibit or limit in any material respect
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would affect
 
                                      A-41
<PAGE>
adversely the right of Parent, the Surviving Corporation or any subsidiary of
Parent to own the assets or operate the business of the Company.
 
    7.12  CONVERSION OF SERIES B PREFERRED STOCK.  All outstanding shares of
Series B Preferred Stock shall be converted into Company Common Stock in
accordance with the provisions of Section 4.3 and the Company's certificate of
incorporation.
 
SECTION 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.
 
    The obligation of the Company to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions, and upon consummation
of the Closing, all conditions herein shall be deemed satisfied and any
liability for failure to satisfy any condition herein shall be precluded:
 
    8.1  ACCURACY OF REPRESENTATIONS.  The representations and warranties of
Parent and Merger Sub contained in this Agreement shall have been accurate in
all material respects as of the date of this Agreement and shall be accurate in
all material respects as of the Closing Date, except representations and
warranties that refer specifically to "the date of this Agreement" or a specific
date prior to the date of this Agreement, and except that any inaccuracies in
such representations and warranties shall be disregarded if the circumstances
giving rise to such inaccuracies (individually and collectively) do not
constitute a Material Adverse Effect on Parent (it being understood that, for
purposes of determining the accuracy of such representations and warranties, (i)
all "Material Adverse Effect" or other materiality qualifications and (ii) any
update or modification to the Company Disclosure Schedule made or purported to
have been made after the date of this Agreement shall be disregarded).
 
    8.2  PERFORMANCE OF COVENANTS.  Each covenant and obligation that the Parent
are required to comply with or to perform at or prior to the Closing shall have
been complied with and performed in all material respects.
 
    8.3  EFFECTIVENESS OF REGISTRATION STATEMENT.  The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
 
    8.4  STOCKHOLDER APPROVAL.  This Agreement and the Merger shall have been
duly approved by the Required Company Stockholder Vote, and the issuance of
Parent Common Stock in the Merger shall have been duly approved by the Required
Parent Stockholder Vote.
 
    8.5  DOCUMENTS.  The Company shall have received the following documents:
 
        (a) a legal opinion of Heller Ehrman White & McAuliffe LLP, dated as of
    the Closing Date and addressed to the Company in a form substantially
    similar to the opinion delivered pursuant to Section 7.6(b), to the effect
    that the Merger will constitute a reorganization within the meaning of
    Section 368 of the Code (it being understood that, in rendering such
    opinion, Heller Ehrman White & McAuliffe LLP may rely upon tax
    representation letters including those referred to in Section 6.12);
 
        (b) a certificate executed on behalf of Parent by its Chief Executive
    Officer, confirming that conditions set forth in Sections 8.1, 8.2, 8.3, 8.4
    (with respect to Parent only), 8.6, 8.7, 8.8 (with respect to Parent only),
    8.9 (with respect to Parent only) and 8.10 have been duly satisfied.
 
    8.6  NO MATERIAL ADVERSE CHANGE.  There shall have been no material adverse
change in Parent's business, assets, liabilities, financial condition or results
of operations since the date of this Agreement (it being understood that a
decline in the price of Parent Common Stock shall not constitute, in and of
itself, a material adverse change).
 
    8.7  LISTING.  The shares of Parent Common Stock to be issued in the Merger
shall have been authorized for listing on Nasdaq, subject to notice of issuance.
 
                                      A-42
<PAGE>
    8.8  NO GOVERNMENTAL LITIGATION.  There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Merger or any of the other transactions
contemplated by this Agreement; (b) relating to the Merger and seeking to obtain
from the Company any damages that may be material to the Company; or (c) seeking
to prohibit or limit in any material respect Parent's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with respect to
the stock of the Surviving Corporation; or (d) which would materially and
adversely affect the right of Parent, the Surviving Corporation or any
subsidiary of Parent to own the assets or operate the business of the Company.
 
    8.9  NO OTHER LITIGATION.  There shall not be pending any Legal Proceeding
in which there is a reasonable possibility of an outcome that would have a
Material Adverse Effect on Parent or on the Company: (a) challenging or seeking
to restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement; (b) relating to the Merger and
seeking to obtain from the Company or any of its subsidiaries any damages that
may be material to the Company; (c) seeking to prohibit or limit in any material
respect Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would affect adversely the right of Parent, the
Surviving Corporation or any subsidiary of Parent to own the assets or operate
the business of the Company.
 
    8.10  DIRECTORS.  Parent shall have taken all actions necessary to cause the
number of authorized directors to be nine and Board of Directors of Parent to
include Drs. Pappas, Crooke and O'Malley in accordance with the procedures set
forth in Section 6.16.
 
SECTION 9. TERMINATION.
 
    9.1  TERMINATION.  This Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the stockholders of the
Company:
 
        (a) by mutual written consent of the Parent and the Company;
 
        (b) by either Parent or the Company if the Merger shall not have been
    consummated by February 28, 1999 (unless the failure to consummate the
    Merger is attributable to a failure on the part of the party seeking to
    terminate this Agreement to perform any material obligation required to be
    performed by such party at or prior to the Effective Time);
 
        (c) by either Parent or the Company if a court of competent jurisdiction
    or other Governmental Body shall have issued a final and non-appealable
    order, decree or ruling, or shall have taken any other action, having the
    effect of permanently restraining, enjoining or otherwise prohibiting the
    Merger;
 
        (d) by either Parent or the Company if (i) the Company Stockholders'
    Meeting shall have been held (either on the date for which such Meeting was
    originally scheduled or pursuant to any permissible adjournment or
    postponement) and (ii) this Agreement and the Merger shall not have been
    adopted and approved at such meeting by the Required Company Stockholder
    Vote (PROVIDED that the right to terminate this Agreement under this Section
    9.1(d) shall not be available to the Company where the failure to obtain
    Company stockholder approval shall have been caused by the action or failure
    to act of the Company and such action or failure to act constitutes a
    material breach by the Company of this Agreement);
 
        (e) by Parent (at any time prior to the adoption and approval of this
    Agreement and the Merger by the Required Company Stockholder Vote) if a
    Triggering Event shall have occurred;
 
                                      A-43
<PAGE>
        (f) by the Company if in accordance with Section 6.2(c) hereof the Board
    of Directors of the Company withdraws, amends or modifies its unanimous
    recommendation in favor of the Merger and accepts or recommends to the
    Stockholders of the Company a Superior Offer.
 
        (g) by either Parent or Company if (i) the Parent Stockholders' Meeting
    shall have been held (either on the date for which such Meeting was
    originally scheduled or pursuant to any permissible adjournment or
    postponement) and (ii) issuance of the Parent Common Stock in the Merger
    shall not have been approved at such meeting by the Required Parent
    Stockholder Vote (provided that the right to terminate this Agreement under
    this Section 9.1(g) shall not be available to Parent where the failure to
    obtain Parent stockholder approval shall have been caused by the action or
    failure to act of Parent and such action or failure to act constitutes a
    material breach by Parent of this Agreement);
 
        (h) by Parent if any of the Company's representations and warranties
    contained in this Agreement shall be or shall have become materially
    inaccurate, or if any of the Company's covenants contained in this Agreement
    shall have been breached in any material respect and such inaccuracy or
    breach (individually and collectively) will cause a Material Adverse Effect
    on the Company; PROVIDED, HOWEVER, that if an inaccuracy in the Company's
    representations and warranties or a breach of a covenant by the Company is
    curable by the Company and the Company is continuing to exercise all
    reasonable efforts to cure such inaccuracy or breach, then Parent may not
    terminate this Agreement under this Section 9.1(h) on account of such
    inaccuracy or breach; or
 
        (i) by the Company if any of Parent's representations and warranties
    contained in this Agreement shall be or shall have become materially
    inaccurate, or if any of Parent's covenants contained in this Agreement
    shall have been breached in any material respect and such inaccuracy or
    breach (individually and collectively) will cause a Material Adverse Effect
    on Parent; PROVIDED, HOWEVER, that if an inaccuracy in Parent's
    representations and warranties or a breach of a covenant by Parent is
    curable by Parent and Parent is continuing to exercise all reasonable
    efforts to cure such inaccuracy or breach, then the Company may not
    terminate this Agreement under this Section 9.1(i) on account of such
    inaccuracy or breach.
 
    9.2  NOTICE OF TERMINATION; EFFECT OF TERMINATION.  Any termination under
Section 9.1 above will be effective immediately upon the delivery of written
notice of the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 9.1, this Agreement shall
be of no further force or effect; PROVIDED, HOWEVER, that (i) this Section 9.2,
Section 9.3 and Section 10 shall survive the termination of this Agreement and
shall remain in full force and effect, (ii) the termination of this Agreement
shall not relieve any party from any liability for any breach of this Agreement
and (iii) no termination of this Agreement shall affect the obligations of the
parties contained in the Confidentiality Agreement, all of which obligations
shall survive termination of this Agreement in accordance with their terms.
 
    9.3  EXPENSES; TERMINATION FEES.
 
    (a) Except as set forth in this Section 9.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; PROVIDED, HOWEVER, that Parent and the Company shall
share equally all fees and expenses, other than attorneys' fees, incurred in
connection with the printing and filing of the S-4 Registration Statement and
the Joint Proxy Statement/Prospectus and any amendments or supplements thereto.
 
    (b) If this Agreement is terminated by Parent pursuant to Section 9.1(e),
then the Company shall pay to Parent, in cash, a nonrefundable fee equal to one
million four hundred thousand dollars ($1,400,000) (the "TERMINATION FEE") in
cash within three (3) business days of such termination.
 
    (c) If this Agreement is terminated by Company or Parent pursuant to Section
9.1(d) and an Acquisition Transaction is publicly announced at any time within
six (6) months after the date of
 
                                      A-44
<PAGE>
termination and consummated within twelve (12) months after the date of
termination, the Company shall pay to Parent a nonrefundable fee equal to three
percent (3%) of the aggregate consideration received by the Company in such
Acquisition Transaction contemporaneously with the consummation of such
Acquisition Transaction.
 
    (d) If this Agreement is terminated by the Company pursuant to Section
9.1(f), then the Company shall pay to Parent the Termination Fee
contemporaneously with the written notice of termination.
 
SECTION 10. MISCELLANEOUS PROVISIONS.
 
    10.1  AMENDMENT.  This Agreement may be amended with the approval of the
respective boards of directors of the Company and Parent at any time (whether
before or after approval of this Agreement and the Merger by the stockholders of
the Company; and whether before or after approval of the issuance of Parent
Common Stock in the Merger by Parent's stockholders); PROVIDED, HOWEVER, that
(i) after any such approval of this Agreement and the Merger by the Company's
stockholders, no amendment shall be made which by law or NASD regulation
requires further approval of the stockholders of the Company without the further
approval of such stockholders, and (ii) after any such approval of the issuance
of Parent Company Stock in the Merger by Parent's stockholders, no amendment
shall be made which by law or NASD regulation requires further approval of
Parent's stockholders without the further approval of such stockholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
 
    10.2  WAIVER.
 
    (a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
 
    (b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
 
    10.3  NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES.  None of the
representations and warranties contained in this Agreement or in any certificate
(except as provided in the Tax Representation Letters attached as Exhibits C-1
and C-2 hereto) delivered pursuant to this Agreement shall survive the Merger.
 
    10.4  ENTIRE AGREEMENT; COUNTERPARTS.  This Agreement and the other
agreements referred to herein constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among or between any
of the parties with respect to the subject matter hereof and thereof. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original and all of which shall constitute one and the same instrument.
 
    10.5  APPLICABLE LAW; JURISDICTION.  THIS AGREEMENT IS MADE UNDER, AND SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. In any action between
or among any of the parties, whether arising out of this Agreement or otherwise,
(a) each of the parties irrevocably and unconditionally consent in the State of
California; (b) if any such action is commenced in a state court, then, subject
to applicable law, no party shall object to the removal of such action to any
federal court located in the law, no party shall object to the removal of such
action to
 
                                      A-45
<PAGE>
any federal court located in the State of California; (c) each of the parties
irrevocably waivers the right to trial by jury; and (d) each of the parties
irrevocably consents to service of process by first class certified mail, return
receipt requested, postage prepaid, to the address at which such party is to
receive notice in accordance with Section 10.9.
 
    10.6  DISCLOSURE SCHEDULE.  Each of the Company Disclosure Schedule and the
Parent Disclosure Schedule shall be arranged in separate parts corresponding to
the numbered and lettered sections contained in Sections 2 and 3, respectively,
and the information disclosed in any numbered or lettered part shall be deemed
to relate to and to qualify only the particular representation or warranty set
forth in the corresponding numbered or lettered section in Section 2 or 3,
respectively, and shall not be deemed to relate to or to qualify any other
representation or warranty.
 
    10.7  ATTORNEYS' FEES.  In any action at law or suit in equity to enforce
this Agreement or the rights of any of the parties hereunder, the prevailing
party in such action or suit shall be entitled to receive a reasonable sum for
its attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
 
    10.8  ASSIGNABILITY.  This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; PROVIDED, HOWEVER, that neither this
Agreement nor any of the other party's rights hereunder may be assigned by any
party without the prior written consent of the other party, and any attempted
assignment of this Agreement or any of such rights by a party without such
consent shall be void and of no effect. Except as set forth in Section 6.7 with
respect to the current directors and officers of the Company, nothing in this
Agreement, express or implied, is intended to or shall confer upon any Person
any right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
 
    10.9  NOTICES.  Any notice or other communication required or permitted to
be delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
 
<TABLE>
<S>                 <C>
if to Parent:       Megabios Corp.
                    863A Mitten Road
                    Burlingame, CA 94010
                    Attn: Benjamin F. McGraw III, Pharm.D.
                    Facsimile: (650) 652-1990
 
with a copy to:     Cooley Godward LLP
                    Five Palo Alto Square
                    3000 El Camino Real
                    Palo Alto, CA 94306-2155
                    Attn: Patrick A. Pohlen
                    Facsimile: (650) 849-7400
 
if to Merger Sub:   Montana Acquisition Sub, Inc.
                    863A Mitten Road
                    Burlingame, CA 94010
                    Attn: Benjamin F. McGraw III, Pharm.D.
                    Facsimile: (650) 652-1990
</TABLE>
 
                                      A-46
<PAGE>
<TABLE>
<S>                 <C>
if to the Company:  GeneMedicine, Inc.
                    8301 New Trails Drive
                    The Woodlands, TX 77381-4248
                    Attn: Eric Tomlinson
                    Facsimile: (281) 419-0795
 
with a copy to:     Heller Ehrman White & McAuliffe
                    525 University Avenue
                    Palo Alto, CA 94301
                    Attn: Stephen C. Ferruolo
                    Facsimile: (650) 324-0638
</TABLE>
 
    10.10  COOPERATION.  The Company agrees to cooperate fully with Parent and
to execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by
Parent to evidence or reflect the transactions contemplated by this Agreement
and to carry out the intent and purposes of this Agreement.
 
    10.11  CONSTRUCTION.
 
    (a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include masculine
and feminine genders.
 
    (b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
 
    (c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
 
    (d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
 
                                      A-47
<PAGE>
    IN WITNESS WHEREOF, the parties have caused this AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION to be executed as of the date first above written.
 
<TABLE>
<S>                             <C>  <C>
                                MEGABIOS CORP.
 
                                By:         /s/ BENJAMIN F. MCGRAW, III
                                     -----------------------------------------
                                       Printed Name: Benjamin F. McGraw, III
                                          Title: Chairman, President & CEO
 
                                MONTANA ACQUISITION SUB, INC.
 
                                By:         /s/ BENJAMIN F. MCGRAW, III
                                     -----------------------------------------
                                       Printed Name: Benjamin F. McGraw, III
                                          Title: Chairman, President & CEO
 
                                GENEMEDICINE, INC.
 
                                By:              /s/ ERIC TOMLINSON
                                     -----------------------------------------
                                            Printed Name: Eric Tomlinson
                                      Title: Vice Chairman, Board of Directors
</TABLE>
 
                AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
                                 SIGNATURE PAGE
                                 EXECUTION COPY
 
                                      A-48
<PAGE>
                                 EXHIBIT INDEX
 
<TABLE>
<S>                 <C>
Exhibit A.........  Certain Definitions
 
Exhibit B-1.......  Form of Surviving Corporation Certificate of Incorporation
 
Exhibit B-2.......  Form of Surviving Corporation Bylaws
 
Exhibit C-1.......  Form of Tax Representation Letter to be delivered by Parent and Merger
                    Sub
 
Exhibit C-2.......  Form of Tax Representation Letter to be delivered by Company
</TABLE>
 
                                      A-49
<PAGE>
                                   EXHIBIT A
                              CERTAIN DEFINITIONS
 
    For purposes of the Agreement (including this Exhibit A):
 
    ACQUISITION PROPOSAL.  "ACQUISITION PROPOSAL" shall mean any offer or
proposal (other than an offer or proposal by Parent) contemplating or otherwise
relating to any Acquisition Transaction.
 
    ACQUISITION TRANSACTION.  "ACQUISITION TRANSACTION" shall mean any
transaction or series of related transactions involving:
 
        (a) any merger, consolidation, share exchange, business combination,
    issuance of securities, acquisition of securities, tender offer, exchange
    offer or other similar transaction (i) in which the Company is a constituent
    corporation, (ii) in which a Person or "group" (as defined in the Exchange
    Act and the rules promulgated thereunder) of Persons directly or indirectly
    acquires the Company or more than fifty percent (50%) of the Company's
    business or directly or indirectly acquires beneficial or record ownership
    of securities representing more than twenty percent (20%) of the outstanding
    securities of any class of voting securities of the Company, or (iii) in
    which the Company issues securities representing more than twenty percent
    (20%) of the outstanding securities of any class of voting securities of the
    Company;
 
        (b) any sale, lease (other than in the ordinary course of business),
    exchange, transfer, license (other than in the ordinary course of business),
    acquisition or disposition of more than 50% of the assets of the Company; or
 
        (c) any liquidation or dissolution of the Company.
 
    AGREEMENT.  "AGREEMENT" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
 
    COMPANY COMMON STOCK.  "COMPANY COMMON STOCK" shall mean the Common Stock,
$.001 par value per share, of the Company.
 
    COMPANY CONTRACT.  "COMPANY CONTRACT" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any asset of the Company is
or may become bound or under which the Company has, or may become subject to,
any obligation; or (c) under which the Company has or may acquire any right or
interest.
 
    COMPANY PROPRIETARY ASSET.  "COMPANY PROPRIETARY ASSET" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
 
    CONSENT.  "CONSENT" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
 
    CONTRACT.  "CONTRACT" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
 
    ENCUMBRANCE.  "ENCUMBRANCE" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
 
                                     A-A-1
<PAGE>
    ENTITY.  "ENTITY" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
 
    ENVIRONMENTAL LAW.  "ENVIRONMENTAL LAW" means any federal, state, local or
foreign Legal Requirement relating to pollution or protection of human health or
the environment (including ambient air, surface water, ground water, land
surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
 
    EXCHANGE ACT.  "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
 
    GOVERNMENTAL AUTHORIZATION.  "GOVERNMENTAL AUTHORIZATION" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
 
    GOVERNMENTAL BODY.  "GOVERNMENTAL BODY" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
 
    LEGAL PROCEEDING.  "LEGAL PROCEEDING" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
 
    LEGAL REQUIREMENT.  "LEGAL REQUIREMENT" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
 
    MATERIAL ADVERSE EFFECT.  An event, violation, inaccuracy, circumstance or
other matter will be deemed to have a "Material Adverse Effect" on the Company
if such event, violation, inaccuracy, circumstance or other matter (considered
together with all other matters that would constitute exceptions to the
representations and warranties set forth in the Agreement but for the presence
of "Material Adverse Effect" or other materiality qualifications, or any similar
qualifications, in such representations and warranties) would have a material
adverse effect on (i) the business, assets, liabilities, financial condition or
results of operations of the Company taken as a whole, (ii) the ability of the
Company to consummate the Merger or any of the other transactions contemplated
by the Agreement or to perform any of its obligations under the Agreement, or
(iii) Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation. An event, violation, inaccuracy, circumstance or other matter will
be deemed to have a "Material Adverse Effect" on Parent if such event,
violation, inaccuracy, circumstance or other matter (considered together with
all other matters that would constitute exceptions to the representations and
warranties set forth in the Agreement but for the presence of "Material Adverse
Effect" or other materiality qualifications, or any similar qualifications, in
such representations and warranties) would have a material adverse effect on (i)
the
 
                                     A-A-2
<PAGE>
business, assets, liabilities, financial condition or results of operations of
Parent and its subsidiaries taken as a whole, (ii) the ability of Parent to
consummate the Merger or any of the other transactions contemplated by the
Agreement or to perform any of its obligations under the Agreement, or (iii)
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation.
 
    MATERIALS OF ENVIRONMENTAL CONCERN.  "MATERIALS OF ENVIRONMENTAL CONCERN"
include chemicals, pollutants, contaminants, wastes, toxic substances, petroleum
and petroleum products and any other substance regulated by any Environmental
Law.
 
    NASDAQ.  "NASDAQ" shall mean the Nasdaq National Market.
 
    PARENT COMMON STOCK.  "PARENT COMMON STOCK" shall mean the Common Stock,
$.001 par value per share, of Parent.
 
    PARENT CONTRACT.  "PARENT CONTRACT" shall mean any Contract: (a) to which
Parent is a party; (b) by which Parent or any asset of Parent is or may become
bound or under which Parent has, or may become subject to, any obligation; or
(c) under which Parent has or may acquire any right or interest.
 
    PARENT PROPRIETARY ASSET.  "PARENT PROPRIETARY ASSET" shall mean any
Proprietary Asset owned by or licensed to Parent or otherwise used by Parent.
 
    PERSON.  "PERSON" shall mean any individual, Entity or Governmental Body.
 
    PERMITTED ENCUMBRANCES.  "PERMITTED ENCUMBRANCES" means such of the
following as to which no enforcement, collection, execution, levy or foreclosure
proceeding shall have been commenced: (a) liens for taxes, assessments and
governmental charges or levies not yet due and payable which are not in excess
of $50,000 in the aggregate; (b) Encumbrances imposed by law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's liens and other
similar liens arising in the ordinary course of business securing obligations
that (i) are not overdue for a period of more than 30 days and (ii) are not in
excess of $5,000 in the case of a single property or $50,000 in the aggregate at
any time; (c) pledges or deposits to secure obligations under workers'
compensation laws or similar legislation or to secure public or statutory
obligations; and (d) minor survey exception, reciprocal easement agreements and
other customary Encumbrances on title to real property that (i) were not
incurred in connection with any indebtedness, (ii) do not render title to the
property encumbered thereby unmarketable and (iii) do not, individually or in
the aggregate, materially adversely affect the value or use of such property for
its current and anticipated purposes.
 
    PROPRIETARY ASSET.  "PROPRIETARY ASSET" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program (in source and executable form), algorithm,
invention, design, blueprint, engineering drawing, proprietary product,
technology, proprietary right or other intellectual property right or intangible
asset in any jurisdiction in the world; or (b) right to use or exploit any of
the foregoing in any jurisdiction in the world.
 
    REPRESENTATIVES.  "REPRESENTATIVES" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
 
    RIGHTS AGREEMENT.  "RIGHTS AGREEMENT" shall mean the Rights Agreement by and
between the Company and American Stock Transfer & Trust Company dated as of
January 16, 1996, as amended January 31, 1998 (or similar plan commonly referred
to as a "poison pill").
 
    SEC.  "SEC" shall mean the United States Securities and Exchange Commission.
 
                                     A-A-3
<PAGE>
    SECURITIES ACT.  "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
 
    SUBSIDIARY.  An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities of other interests in such Entity that is sufficient
to enable such Person to elect at leased a majority of the members of such
Entity's Board of Directors or other governing body.
 
    SUPERIOR OFFER.  "SUPERIOR OFFER" shall mean an unsolicited, bona fide
written offer made by a third party to consummate any of the following
transactions: (i) the purchase of more than 50% of the outstanding shares of
Company Common Stock or (ii) a sale or other disposition by the Company of all
or substantially all of its assets, on terms that the Board of Directors of the
Company determines, in its reasonable judgment, after consultation with its
financial advisor, to be more favorable to the Company's stockholders than the
terms of the Merger; PROVIDED, HOWEVER, that any such offer shall not be deemed
to be a "Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not committed or is not likely to be obtained by
such third party on a timely basis.
 
    TAX.  "TAX" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, AD
VALOREM tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
 
    TAX RETURN.  "TAX RETURN" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
 
    TRIGGERING EVENT.  A "TRIGGERING EVENT" shall be deemed to have occurred if:
(i) the Board of Directors of the Company shall have failed to recommend, or
shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to Parent its unanimous recommendation in favor of, the adoption
and approval of the Agreement or the approval of the Merger; (ii) the Company
shall have failed to include in the Joint Proxy Statement/Prospectus the
unanimous recommendation of the Board of Directors of the Company in favor of
the adoption and approval of the Agreement and the approval of the Merger; (iii)
the Board of Directors of the Company fails to reaffirm its unanimous
recommendation in favor of the adoption and approval of the Agreement and the
approval of the Merger within five (5) business days after the Parent request in
writing that such recommendation be reaffirmed; (iv) the Board of Directors of
the Company shall have approved, endorsed or recommended any Acquisition
Proposal; (v) the Company shall have entered into any letter of intent or
similar document or any Contract relating to any Acquisition Proposal; (vi) the
Company shall have failed to hold the Company Stockholders' Meeting as promptly
as practicable and in any event within 45 days after the Form S-4 Registration
Statement is declared effective under the Securities Act; (vii) a tender or
exchange offer relating to securities of the Company shall have been commenced
and the Company shall not have sent to its securityholders, within five (5)
business days after the commencement of such tender or exchange offer, a
statement disclosing that the Company recommends rejection of such tender or
exchange offer; (viii) an Acquisition Proposal is publicly announced, and the
Company (A) fails to issue a press release announcing its opposition to such
Acquisition Proposal within five business days after such Acquisition Proposal
is announced or (B) otherwise fails to actively oppose such Acquisition
Proposal; or (ix) the Company shall have breached in any material respect any of
its obligations under Section 4.2 of the Agreement.
 
                                     A-A-4
<PAGE>
                               AMENDMENT NO. 1 TO
                          AGREEMENT AND PLAN OF MERGER
                                      AND
                                 REORGANIZATION
 
    THIS AMENDMENT NO. 1 ("Amendment") to Agreement and Plan of Merger and
Reorganization is made and entered into as of November 24, 1998, by and among
Megabios Corp., a Delaware corporation ("Megabios"), Montana Acquisition Sub,
Inc., a Delaware corporation, and GeneMedicine, Inc., a Delaware corporation
("GeneMedicine").
 
                                R E C I T A L S:
 
    WHEREAS, the parties hereto entered into that certain Agreement and Plan of
Merger, dated as of October 24, 1998 (the "Merger Agreement"); and
 
    WHEREAS, the parties hereto desire to amend the Merger Agreement to provide
for the assumption of GeneMedicine's outstanding warrants and the assumption and
cancellation of the GeneMedicine Employee Stock Purchase Plan by Megabios;
 
    NOW, THEREFORE, the parties hereto agree as follows:
 
    1.  Section 1.6 of the Merger Agreement is hereby amended in its entirety to
read as follows:
 
       "1.6  STOCK OPTIONS AND WARRANTS.  At the Effective Time, all
       Company Options (as defined in Section 2.3(b)) and Company
       Warrants (as defined in Section 2.3(c)) shall be assumed by Parent
       in accordance with Section 6.5."
 
    2.  The parenthetic phrase at the end of Section 4.1(ii) of the Merger
Agreement is hereby amended in its entirety to read as follows:
 
       "(except that the Company may issue Company Common Stock upon the
       valid exercise of Company Options or Company Warrants and pursuant
       to Company Plans);"
 
    3.  Section 6.5 of the Merger Agreement is hereby amended in its entirety to
read as follows:
 
        "6.5  STOCK OPTIONS AND WARRANTS.
 
            (A)  At the Effective Time, all rights with respect to
       Company Common Stock under each Company Option and each Company
       Warrant then outstanding shall be converted into and become rights
       with respect to Parent Common Stock. Parent shall assume each
       Company Option in accordance with the terms (as in effect as of
       the date of this Agreement) of the stock option plan under which
       it was issued and the stock option agreement by which it is
       evidenced as same may be amended or modified by the Company's
       employment agreements and severance agreements, plans and
       arrangements. Parent shall assume each Company Warrant in
       accordance with the terms (as in effect as of the date of this
       Agreement) of the agreement under which it was issued and the
       warrant agreement by which it is evidenced. From and after the
       Effective Time, (i) each Company Option and Company Warrant
       assumed by Parent may be exercised solely for shares of Parent
       Common Stock, (ii) the number of shares of Parent Common Stock
       subject to each such Company Option or Company Warrant shall be
       equal to the number of shares of Company Common Stock subject to
       such Company Option or Company Warrant immediately prior to the
       Effective Time multiplied by the Exchange Ratio, rounding down to
       the nearest whole share (with cash, less the applicable exercise
       price, being payable for any fraction of a share), (iii) the per
       share exercise price under each such Company Option or Company
       Warrant shall be adjusted by dividing the respective per share
       exercise price under such Company Option or Company Warrant
 
                                     A-1-1
<PAGE>
       by the Exchange Ratio and rounding up to the nearest cent and (iv)
       any restriction on the exercise of any such Company Option or
       Company Warrant shall continue in full force and effect and the
       term, exercisability, vesting schedule and other provisions of
       such Company Option or Company Warrant as may have been amended or
       modified by the Company's employment agreements and severance
       agreements, plans and arrangements shall otherwise remain
       unchanged; PROVIDED, HOWEVER, that each Company Option and each
       Company Warrant assumed by Parent in accordance with this Section
       6.5(a) shall, in accordance with its terms, be subject to further
       adjustment as appropriate to reflect any stock split, stock
       dividend, reverse stock split, reclassification, recapitalization
       or other similar transaction subsequent to the Effective Time.
 
            (B)  Notwithstanding anything to the contrary contained in
       this Section 6.5, in lieu of assuming outstanding Company Options
       in accordance with Section 6.5(a), Parent may, at its election,
       cause such outstanding Company Options to be replaced by issuing
       reasonably equivalent replacement stock options in substitution
       therefor; PROVIDED, HOWEVER, that such replacement options shall
       in any event comply with the provisions of the fourth sentence of
       Section 6.5(a).
 
            (C)  The Company shall take all action that may be necessary
       (under the plans or agreements pursuant to which Company Options
       or Company Warrants are outstanding and otherwise) to effectuate
       the provisions of this Section 6.5 and to ensure that, from and
       after the Effective Time, holders of Company Options or Company
       Warrants have no rights with respect thereto other than those
       specifically provided in this Section 6.5."
 
    4.  A new Section 6.20, reading in its entirety as follows, is hereby added
to the Merger Agreement:
 
       "6.20  COMPANY EMPLOYEE STOCK PURCHASE PLAN.  Prior to January 1,
       1999, the Company shall amend the Company's Employee Stock
       Purchase Plan (the "Company ESPP") to provide that no new
       offerings or purchase periods will commence under the Company ESPP
       after December 31, 1998. Prior to the Effective Time, the Company
       shall take all corporate action necessary to (a) provide that the
       participants' accumulated payroll deductions made under the
       Company ESPP will be used to purchase Company Common Stock
       immediately prior to the Effective Time and (b) amend the Company
       ESPP to provide that all offerings that have commenced under the
       Company ESPP and all of participants' rights in such offerings
       will terminate immediately prior to the Effective Time."
 
    5.  All references in the Merger Agreement to the term "Agreement" shall be
deemed to refer to the Merger Agreement, as amended by this Amendment.
 
    6.  Except as specifically modified by this Amendment, the terms of the
Merger Agreement shall remain in full force and effect.
 
    7.  This Amendment is made under, and shall be construed and enforced in
accordance with, the laws of the State of California applicable to agreements
made and to be performed solely therein, without giving effect to principles of
conflicts of law.
 
    8.  This Amendment may be executed in several counterparts, each of which
shall be deemed an original and all of which shall constitute one and the same
instrument.
 
                                     A-1-2
<PAGE>
    IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
the undersigned, thereunto duly authorized, as of the date first set forth
above.
 
                                          MEGABIOS CORP.
                                          By: /s/ BENNET WEINTRAUB
 
                                          --------------------------------------
 
                                          Printed Name: Bennet Weintraub
 
      --------------------------------------------------------------------------
 
                                          Title: Vice President, Finance and
                                              Chief Financial Officer
 
                                          --------------------------------------
 
                                          MONTANA ACQUISITION SUB, INC.
 
                                          By: /s/ BENNET WEINTRAUB
 
                                          --------------------------------------
 
                                          Printed Name: Bennet Weintraub
 
      --------------------------------------------------------------------------
 
                                          Title: Chief Financial Officer
 
                                          --------------------------------------
 
                                          GENEMEDICINE, INC.
 
                                          By: /s/ RICHARD A. WALDRON
 
                                          --------------------------------------
 
                                          Printed Name: Richard A. Waldron
 
      --------------------------------------------------------------------------
 
                                          Title: Vice President and Chief
                                          Financial Officer
 
                                          --------------------------------------
 
                                     A-1-3
<PAGE>
                                                                    APPENDIX B-1
 
                                 [LOGO]
 
October 24, 1998
 
CONFIDENTIAL
 
Board of Directors
 
GeneMedicine, Inc.
 
8301 New Trails Drive
 
The Woodlands, TX 77381-4248
 
Gentlemen:
 
    GeneMedicine, Inc. (the "Company"), Megabios Corp. ("Megabios") and Montana
Acquisition Sub, Inc. ("Sub"), a wholly-owned subsidiary of Megabios, propose to
enter into an Agreement and Plan of Merger and Reorganization (the "Agreement")
pursuant to which Sub will be merged with and into the Company and the Company
will survive as a wholly-owned subsidiary of Megabios (the "Merger"). At the
Effective Time of the Merger (as defined in the Agreement), each outstanding
share of common stock, par value $.001 per share, of the Company (other than
shares owned by the Company, Megabios or any of their respective subsidiaries)
(the "Common Stock") will be automatically converted into .5710 (the "Exchange
Ratio") of a fully paid and non-assessable share of common stock, $.001 par
value per share of Megabios. The Merger is expected to be considered by the
stockholders of the Company and Megabios respectively at special meetings and
consummated shortly thereafter.
 
    You have asked us whether or not, in our opinion, the proposed Exchange
Ratio is fair to the holders of Common Stock of the Company from a financial
point of view.
 
    In arriving at the opinion set forth below, we have, among other things:
 
    (1) Reviewed the Company's Annual Reports, Forms 10-K and related financial
       information for the three fiscal years ended December 31, 1997 and the
       Company's Form 10-Q and the related unaudited financial information for
       the six months ended June 30, 1998;
 
    (2) Reviewed Megabios' Registration Statement on Form S-1 (including the
       prospectus contained therein) dated September 15, 1997 and Form 10-K and
       related financial information for the fiscal year ended June 30, 1998;
 
    (3) Reviewed certain information, including financial forecasts, relating to
       the business, earnings, cash flow, assets and prospects of the Company
       and Megabios, furnished to us by the Company and Megabios, respectively;
 
    (4) Conducted discussions with members of senior management of the Company
       and Megabios concerning their respective businesses and prospects;
 
    (5) Reviewed the historical market prices and trading activity for the
       shares of common stock of the Company and Megabios and compared them with
       those of certain publicly traded companies which we deemed to be
       relevant;
 
                                     B-1-1
<PAGE>
    (6) Compared the results of operations of the Company and Megabios with
       those of certain companies which we deemed to be relevant;
 
    (7) Compared the proposed financial terms of the Merger with the financial
       terms of certain other mergers and acquisitions which we deemed to be
       relevant;
 
    (8) Reviewed a draft of the Agreement dated October 21, 1998; and
 
    (9) Reviewed such other financial studies and analyses and performed such
       other investigations and took into account such other matters as we
       deemed necessary, including our assessment of general economic, market
       and monetary conditions.
 
    In preparing our opinion, we have relied upon the accuracy and completeness
of all information supplied or otherwise made available to us by the Company and
Megabios, and we have not assumed any responsibility to independently verify
such information. With respect to the financial forecasts examined by us, we
have assumed that they were reasonably prepared and reflect the best currently
available estimates and good faith judgments of the management of the Company
and Megabios, respectively, as to the future performance of the Company and
Megabios. We have also relied upon assurances of the management of the Company
and Megabios, respectively, that they are unaware of any facts that would make
the information or financial forecasts provided to us incomplete or misleading.
We have not made any independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company or Megabios nor have we
been furnished with any such evaluations or appraisals. We have also assumed
with your consent, that (i) the Merger will be a tax-free reorganization, (ii)
the Company's Preferred Series B Stock will be converted into Common Stock and
(iii) any material liabilities (contingent or otherwise) of the Company and
Megabios are as set forth in the consolidated financial statements of the
Company and Megabios, respectively. No opinion is expressed herein as to the
price at which the securities to be issued in the Merger to the holders of
Common Stock may trade at any time. Our opinion is based on economic, monetary
and market conditions existing on the date hereof.
 
    Our Opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder as to how any such
stockholder should vote on the Merger. This opinion does not address the
relative merits of the Merger and any other transactions or business strategies
discussed by the Board of Directors of the Company as alternatives to the Merger
or the decision of the Board of Directors of the Company to proceed with the
Merger.
 
    In the ordinary course of business, PaineWebber Incorporated may trade in
the securities of the Company and Megabios for our own account and for the
accounts of our customers and, accordingly, may at any time hold long or short
positions in such securities.
 
    PaineWebber Incorporated is currently acting as financial advisor to the
Company in connection with the Merger and will receive a fee in connection with
the rendering of this opinion and upon consummation of the Merger.
 
    This opinion has been prepared for the information of the Board of Directors
of the Company in connection with the Merger and shall not be reproduced,
summarized, described or referred to, provided to any person or otherwise made
public or used for any other purpose without the prior written consent of
PaineWebber Incorporated, PROVIDED, HOWEVER, that this letter may be reproduced
in full in the Proxy Statement/Prospectus related to the Merger.
 
    On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Exchange Ratio is fair to the holders of Common Stock of the
Company from a financial point of view.
 
                                          Very truly yours,
 
                                          PAINEWEBBER INCORPORATED
 
                                          /s/ PAINEWEBBER INCORPORATED
                                          --------------------------------------
 
                                     B-1-2
<PAGE>
                                                                    APPENDIX B-2
 
HAMBRECHT & QUIST LLC
 
                                                              ONE BUSH STREET
                                                             SAN FRANCISCO, CA
                                                                   94104
                                                             (415) 439-3000
 
October 23, 1998
 
CONFIDENTIAL
 
The Board of Directors
Megabios Corp.
863A Mitten Road
Burlingame, CA 94010
 
Gentlemen:
 
    You have requested our opinion as to the fairness from a financial point of
view to Megabios Corp. ("Megabios" or the "Company") of the Exchange Ratio (as
defined below) in connection with the proposed merger of a wholly-owned
subsidiary of Megabios with and into GeneMedicine, Inc. ("GeneMedicine")
pursuant to the Agreement and Plan of Merger to be dated as of October 24, 1998,
among Megabios, Montana Acquisition Sub, Inc., and GeneMedicine (the
"Agreement").
 
    We understand that the terms of the Agreement provide, among other things,
that each issued and outstanding share of GeneMedicine Common Stock shall be
converted into the right to receive 0.571 shares of Megabios common stock (the
"Exchange Ratio"), as more fully set forth in the Agreement. For purposes of
this opinion, we have assumed that the Proposed Transaction will qualify as a
tax-free reorganization under the United States Internal Revenue Code for the
shareholders of the Company and that the Proposed Transaction will be accounted
for as a purchase.
 
    Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Megabios in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
 
    In the ordinary course of business, Hambrecht & Quist may trade in the
equity and derivative securities of Megabios and GeneMedicine for its own
account and for the accounts of its customers and, accordingly, may at any time
hold a long or short position in such securities. Hambrecht & Quist may in the
future provide additional investment banking or other financial advisory
services to Megabios.
 
     SAN FRANCISCO - NEW YORK - BOSTON - NEWPORT BEACH - SAN DIEGO - LONDON
   MEMBERS NEW YORK STOCK EXCHANGE - AMERICAN STOCK EXCHANGE - PACIFIC STOCK
                                    EXCHANGE
 
                                     B-2-1
<PAGE>
The Board of Directors
Megabios Corp.
Page 2
 
    In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
 
    (i) reviewed the publicly available consolidated financial statements of
       GeneMedicine for recent years and interim periods to date and certain
       other relevant financial and operating data of GeneMedicine made
       available to us from published sources and from the internal records of
       GeneMedicine;
 
    (ii) reviewed certain internal financial and operating information,
       including certain projections, relating to GeneMedicine prepared by the
       management of GeneMedicine;
 
    (iii) discussed the business, financial condition and prospects of
       GeneMedicine with certain of its officers;
 
    (iv) reviewed the publicly available financial statements of Megabios for
       recent years and interim periods to date and certain other relevant
       financial and operating data of Megabios made available to us from
       published sources and from the internal records of Megabios;
 
    (v) reviewed certain internal financial and operating information, including
       certain projections, relating to Megabios prepared by the management of
       Megabios;
 
    (vi) discussed the business, financial condition and prospects of Megabios
       with certain of its officers;
 
    (vii) reviewed the recent reported prices and trading activity for the
       common stocks of Megabios and GeneMedicine and compared such information
       and certain financial information for Megabios and GeneMedicine with
       similar information for certain other companies engaged in businesses we
       consider comparable;
 
    (viii)reviewed the financial terms, to the extent publicly available, of
       certain comparable merger and acquisition transactions;
 
    (ix) reviewed the Agreement; and
 
    (x) performed such other analyses and examinations and considered such other
       information, financial studies, analyses and investigations and
       financial, economic and market data as we deemed relevant.
 
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Megabios or GeneMedicine
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of any
of the assets or liabilities of Megabios or GeneMedicine; nor have we conducted
a physical inspection of the properties and facilities of either company. With
respect to the financial forecasts and projections made available to us and used
in our analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of Megabios
and GeneMedicine. For purposes of this opinion, we have assumed that neither
Megabios nor GeneMedicine is a party to any pending transactions, including
external financings, recapitalizations or material merger discussions, other
than the Proposed Transaction and those activities undertaken in the ordinary
course of conducting their respective businesses. Our opinion is necessarily
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of this letter and any change in such conditions
would require a reevaluation of this opinion. We express no opinion as to the
price at which Megabios common stock will trade subsequent to the Effective Time
(as defined in the Agreement).
 
                                     B-2-2
<PAGE>
The Board of Directors
Megabios Corp.
Page 2
 
    It is understood that this letter is for the information of the Board of
Directors only in connection with their evaluation of the Proposed Transaction
and may not be used for any other purpose without our prior written consent;
provided, however, that this letter may be reproduced in full in the proxy
statement/ prospectus relating to the Proposed Transaction. This letter does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the Proposed Transaction.
 
    Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that, as of the date hereof,
the Exchange Ratio is fair to the Company from a financial point of view.
 
                                          Very truly yours,
 
                                          HAMBRECHT & QUIST LLC
 
                                          By /s/ David G. Golden
                                            ------------------------------------
                                            David G. Golden
                                            Managing Director
 
                                     B-2-3
<PAGE>




                        GENEMEDICINE, INC.

              PROXY FOR SPECIAL MEETING OF STOCKHOLDERS

      THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS


    The undersigned stockholder of GeneMedicine, Inc., a Delaware corporation 
("GeneMedicine"), hereby acknowledges receipt of the Notice of Special 
Meeting of Stockholders and Joint Proxy Statement/Prospectus, each dated 
November [__], 1998, and hereby appoints Stanley T. Crooke, M.D., Ph.D. and 
Richard A. Waldron, and each of them, proxies and attorneys-in-fact, with 
full power to each of substitution, on behalf of and in the name of the 
undersigned, to vote as designated on the reverse side, all shares of Common 
Stock of GeneMedicine that the undersigned is entitled to vote at the special 
meeting of stockholders of GeneMedicine to be held on January __, 1999, at 
10:00 a.m., local time, at _______________ and at any adjournment thereof.

    THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED 
HEREIN BY THE UNDERSIGNED STOCKHOLDER.  IF NO DIRECTION IS MADE, THIS PROXY 
WILL BE VOTED FOR PROPOSAL 1 TO APPROVE THE AGREEMENT AND PLAN OF MERGER AND 
REORGANIZATION AND THE MERGER, AND THE PROXIES, IN THEIR DISCRETION, WILL 
VOTE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING. 

         PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN
                   IT PROMPTLY IN THE ENCLOSED ENVELOPE

                                                         --------------
                                                              See
                                                            Reverse
                                                              Side
                                                         --------------


<PAGE>


/ X /    Please mark your   
         choices like this  



       THE GENEMEDICINE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
                               FOLLOWING PROPOSAL.



<TABLE>

<S>                                <C>                       <C>
                                   FOR  ABSTAIN  AGAINST 
1.  Proposal to approve            / /    / /     / /        2. In their discretion, to 
    and adopt the Agreement                                     vote upon such other
    and Plan of Merger and                                      business as may properly      
    Reorganization, dated as                                    come before the Special       
    of October 24, 1998, and                                    Meeting or any adjournment    
    amended as of November 24, 1998,                            thereof, including, among     
    by and among Megabios Corp., a                              other things, a motion to     
    Delaware corporation ("Megabios"),                          adjourn the Special Meeting   
    Montana Acquisition Sub, Inc.,                              to another time and/or place  
    a Delaware corporation and a                                for, among other things, the  
    wholly-owned subsidiary of                                  purpose of soliciting         
    Megabios ("Acquisition Sub"),                               additional proxies.           
    and GeneMedicine, and to           
    approve the merger of              
    Acquisition Sub with and           
    into GeneMedicine.                 
</TABLE>



_____________________  _______________________________    _____________, 199__
        Signature            (Signature if held jointly)          Dated


(Please sign exactly as name appears on your stock certificate. When shares 
are held by joint tenants, both should sign. When signing as attorney, 
executor administrator, trustee, guardian or corporate officer or partner, 
please give full title as such. If a corporation, please sign in corporate 
name by President or other authorized officer. If a partner, please sign 
partnership name by authorized person.)






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