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

                                   FORM 10-K
                           -------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934
    FOR THE TRANSITION PERIOD FROM                    TO

                        COMMISSION FILE NUMBER: 0-27488

                          INCYTE PHARMACEUTICALS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                                            
                  DELAWARE                                      94-3136539
(STATE OR OTHER JURISDICTION OF INCORPORATION        (IRS EMPLOYER IDENTIFICATION NO.)
              OR ORGANIZATION)



                                            
  3174 PORTER DRIVE, PALO ALTO, CALIFORNIA                    (650) 855-0555
                    94304
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)       (REGISTRANT'S TELEPHONE NUMBER, INCLUDING
                                                                AREA CODE)


            SECURITIES REGISTERED TO SECTION 12(b) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $.001 PER SHARE
             SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS

     Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  [ ]

     The aggregate market value of Common Stock held by non-affiliates (based
upon the closing sale price on the Nasdaq National Market on February 29, 2000)
was approximately $8,742,060,000.

     As of February 29, 2000, there were 31,724,420 shares of Common Stock,
$.001 per share par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2000 Annual Meeting of Stockholders to be held on
June 5, 2000.
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ITEM 1. BUSINESS

     When used in this Report, the words "expects," "anticipates," "estimates,"
"plans," and similar expressions are intended to identify forward-looking
statements. These are statements that relate to future periods and include
statements as to the Company's and diaDexus' expected net losses, expected
expenditure levels and rate of growth of expenditures, expected cash flows, the
adequacy of capital resources, growth in operations, the ability to
commercialize products developed under collaborations and alliances, our ability
to complete the sequence of full-length genes in areas of therapeutic interest
and file patents on these potential drug targets, our ability to integrate
companies and operations that we have acquired or will acquire, our ability to
implement online delivery of our database and software products, the scheduling
and timing of current and future litigation, our strategy with regard to
protecting our proprietary technology, our ability to compete and respond to
rapid technological change and the performance and utility of our products and
services. Forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. These
risks and uncertainties include, but are not limited to, those risks discussed
below, as well as the extent to which the pharmaceuticals and biotechnology
industries use genomic information in research and development, risks relating
to development of new products and services and their use by our potential
customers and collaborators, our ability to work with our collaborators to meet
the goals of our collaborators and alliances, our ability to retain and obtain
customers, the cost of accessing or acquiring technologies or intellectual
property, the effectiveness of our sequencing efforts, the impact of alternative
technological advances and competition, uncertainties associated with changes in
patent laws and developments in and expenses related to litigation and
interference proceedings; and the risks set forth below under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results." These forward-looking statements
speak only as of the date hereof. The Company expressly disclaims any obligation
or undertaking to release publicly any updates or revisions to any forward-
looking statements contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.

     In the sections of this report entitled "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results," all references to "Incyte,"
"we," "us," "our" or the "Company" mean Incyte Pharmaceuticals, Inc. and its
subsidiaries, except where it is made clear that the term means only the parent
company.

     Incyte, LifeSeq and PathoSeq are our registered trademarks. ZooSeq,
LifeTools, LifeArray, LifeProt, LifeExpress, GeneAlbum and GEM are our
trademarks. We also refer to trademarks of other corporations and organizations
in this document.

OVERVIEW

     Incyte is a leading provider of genomic information-based products and
services. These products and services include database products, genomic data
management software tools, microarray-based gene expression services, genomic
reagents and related services. We focus on providing an integrated platform of
information technologies designed to assist pharmaceutical and biotechnology
companies and academic researchers in the understanding of disease and the
discovery and development of new drugs.

     Our genomic databases integrate bioinformatics software with proprietary
and, when appropriate, publicly available genomic information. In building the
databases, we utilize high-throughput, computer-aided gene sequencing and
analysis technologies to identify and characterize the expressed genes of the
human genome, as well as certain animal, plant and microbial genomes. By
searching our proprietary genomic databases, customers can integrate and analyze
genomic information from multiple sources in order to discover genes that may
represent the basis for new biological targets, therapeutic proteins, or gene
therapy, antisense or diagnostic products. The pharmaceutical and biotechnology
industries use our genomic products and services to accelerate the discovery and
development of new diagnostic and therapeutic products. Our products and
services can be applied to gene and target discovery, functional genomics
studies, preclinical pharmacology and toxicology studies, and can aid in
understanding and analyzing the results of clinical development studies.

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     We currently provide access to our genomic databases through collaborations
with pharmaceutical and biotechnology companies worldwide. As of December 31,
1999, more than twenty companies had entered into multi-year agreements to
obtain access to our databases on a non-exclusive basis. These companies include
the following:


                                    
Abbott Laboratories                    Johnson & Johnson
AstraZeneca PLC                        Millennium Pharmaceuticals, Inc.
Aventis S.A.                           Monsanto Company
Bristol-Myers Squibb Company           Novartis AG
Eli Lilly and Company                  Pfizer Inc.
F. Hoffmann-La Roche Ltd.              Pharmacia & Upjohn, Inc.
Genentech, Inc.                        Schering AG
Glaxo Wellcome plc                     Schering-Plough, Ltd.


     Revenues from these companies have primarily consisted of database access
fees. Our LifeSeq Gold human gene sequence database agreements also provide for
future milestone payments and royalties from the sale of products derived from
proprietary information contained in one or more database modules.

     Our portfolio of products and services includes:

     - LifeSeq Gold human gene sequence and expression database;

     - PathoSeq microbial genomic database;

     - ZooSeq animal model gene sequence and expression database;

     - LifeExpress gene expression and protein expression database;

     - SNP database that identifies common DNA sequence variants between
       individuals;

     - LifeTools suite of bioinformatics software;

     - LifeArray gene expression data management and analysis software;

     - LifeProt protein expression data management and analysis software; and

     - contract sequencing and other services.

     The databases are available using the Oracle database architecture and
operate on Sun Microsystems, Compaq and SGI workstations. As part of our
strategy for expanding our customer base, we are developing the infrastructure
to enable the online delivery of our database and software products.

BACKGROUND

     Genes, found in all living cells, are composed of DNA, which in turn is
composed of two strands of complementary nucleotides referred to as base pairs
or bases. Nucleotides may be one of four different molecules -- adenine,
guanine, cytosine, or thymine -- which are strung together in specific patterns
to create genes. Genes provide the necessary information to create proteins, the
molecules that carry out all functions within a cell. Many human diseases are
associated with the inadequate or inappropriate presence, production or
performance of proteins. As such, pharmaceutical and biotechnology companies
often seek to develop drugs that will bind to a targeted protein involved in
disease in order to regulate, inhibit or stimulate its biological activity.
Other proteins, known as therapeutic proteins, have direct biological activity
and may be capable of treating disease. Insulin and human growth hormone are
examples of therapeutic proteins. Understanding the role genes play in disease,
and the protein targets or therapeutic proteins that they encode, has thus
become a significant area of interest and research within the pharmaceutical and
biotechnology industries.

Sequencing

     One frequently employed method for determining gene function involves the
grouping of genes into "related" families based on similarities, or homologies,
in DNA sequence. DNA sequencing is a process that

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identifies the order of the bases in a segment of DNA. Once a gene's sequence is
known, its function may be inferred by comparing its sequence with the sequences
of other human genes of known function, because genes with homologous sequences
may have related functions. Comparing gene sequences across species has also
become a useful tool for understanding gene function, as frequently it is easier
to first assess gene function in other organisms.

Gene Expression

     Another method used to determine gene function focuses on the analysis of
gene activity, referred to as expression, within a cell. When a gene is active,
its DNA is copied into messenger RNA or "mRNA." The population of mRNA within a
cell can be isolated and converted into complementary DNA or "cDNA," thereby
creating a cDNA library that represents the population of mRNAs present in a
cell type at a particular time. In a process called "gene expression profiling,"
high-throughput cDNA sequencing, computer analysis and microarray technologies
can be used to identify which genes are active or inactive and, if active, at
what levels. Expression profiles provide a more detailed picture of cellular
genetics than conventional laboratory techniques by indicating which genes, both
known and novel, are specifically correlated to discrete biological events in
normal and disease-state cells.

Microarray Technology

     Microarray technology can be used to analyze the expression patterns or
sequence variations in a large number of genes simultaneously. A microarray
consists of fragments of a single strand DNA's double strand attached to a
surface, usually a glass, plastic or silicon slide, in a grid-like formation.
When cDNA that has been prepared from mRNA samples from normal and diseased
cells is applied to the microarray, complementary strands attach to the DNA
fragments on the microarray. Microarray technology allows the fabrication of
very small grids containing probes for thousands of different genes. Microarrays
can be used in drug discovery and development, to evaluate the behavior of a
large number of related genes in a diseased tissue or in response to treatment
with a new drug or in diagnostic testing to quickly detect the presence of a
large number of disease markers.

Bioinformatics

     Due to improvements in sequencing technology, genomic information from both
public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. The Company believes
these tools, and those under development, will also assist researchers with the
preclinical and clinical development process. For example, with the help of new
technology and bioinformatic analyses scientists may be able to correlate
genetic and physiologic response in preclinical animal models, examine gene
expression profiles in drug-treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their gene expression profiles.

Single Nucleotide Polymorphism ("SNP") Discovery

     Due to genetic variation, individuals may respond differently to disease or
to treatment with the same drug. Few, if any, FDA-approved drugs are capable of
successfully treating every individual diagnosed with a targeted disease. The
differences in patients' responses to a drug are believed to result in part from
differences in the sequence of nucleotides within genes. The most common form of
sequence variation is known as a single nucleotide polymorphism or "SNP." A SNP
is defined as a single base difference within the same DNA region between two
individuals. Some SNPs are "silent" and not associated with a disease or a
patient's ability to respond to a particular therapy, and some SNPs occur at a
frequency that is too low to justify large-scale patient screening. Thus,
researchers need to do more than identify SNPs; they must identify the most
frequently occurring SNPs and identify those that correlate with a patient's
disease prognosis or ability to respond to a drug. Through our acquisition of
Hexagen in September 1998, we are developing fluorescent single-strand
confirmation polymorphism (fSSCP) technology, a high-throughput SNP discovery
technology.
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fSSCP is particularly useful for identifying SNPs in genes not expressed or more
rarely expressed. This gel-based system detects SNPs in multiple samples
simultaneously by observing changes in the tertiary structure of single stranded
DNA fragments due to base pair changes. Incyte is contributing technologies in
the areas of electrophoresis, fluorescence chemistries, sequencing and
bioinformatics in order to continue to develop and improve the accuracy and
efficiency of this technology.

Gene Mapping

     Mapping refers to the determination of the physical location of a gene in
the genome and the relative position of that gene to other genes along a
chromosome. Physiological processes and associated diseases can be extremely
complex and involve many genes. A gene can activate one or more different genes
forming a cascade of genetically controlled events or a "pathway." When the
genes involved in such a pathway are located within neighboring regions of DNA,
mapping can allow the location of one member of the pathway to be used to
identify the other members. In addition, genetically inherited diseases that
have been passed from generation to generation may be associated with visible
chromosome alterations, such as deletions of large segments of the chromosome or
insertions within the chromosome. These physical chromosome abnormalities allow
researchers to identify the DNA regions and genes that have a critical role in
causing disease.

Proteomics

     Proteomics is a relatively new field of study that involves the separation,
identification, and characterization of proteins present in a biological sample.
By comparing disease and control samples, it is possible to identify
disease-specific proteins. These may have potential as targets for drug
development or as molecular markers of disease. The power of proteomics lies in
the ability to directly measure a gene product, determine subcellular
localization and detect post-translational modifications.

PRODUCTS AND SERVICES

     Our current products and services include an integrated platform of genomic
databases, data management software tools, microarray-based gene expression
databases and services, and related reagents and services.

     Genomic Databases. We provide our database collaborators with non-exclusive
database access. Database collaborators receive periodic data updates as well as
software upgrades and additional search and analysis tools when they become
available. The fees and the period of access are negotiated independently with
each company. Fees generally consist of database access fees, option fees, and
non-exclusive or exclusive license fees corresponding to patent rights on
proprietary sequences. We may also receive future milestone and royalty payments
from database collaborators from the development and sale of their products
derived from our technology and database information. Researchers can browse not
only Incyte-generated data, but also public domain information. We currently
offer the following database modules:

     - LifeSeq Gold Database. The LifeSeq Gold human sequence and expression
       database integrates the information from our LifeSeq public-domain and
       proprietary gene sequences and expression database; LifeSeq FL,
       full-length gene sequence database; and the sequence information from our
       GeneAlbum database and reagent set. LifeSeq Gold uses a novel method to
       assemble cDNA sequence fragments (ESTs) into genes, providing increased
       sensitivity for distinguishing between closely related sequences,
       including splice variants. Researchers can easily move from one module to
       another through the HTML-based graphical interface. The sequence database
       contains our computer-edited gene sequence files and is used by
       researchers to identify related or homologous genes. For example, a
       scientist may wish to identify new genes homologous to a gene identified
       through their own research and believed to be linked to a disease. The
       database contains biological information about each sequence in our
       sequence database, including tissue source, homologies, and annotations
       regarding characteristics of the gene sequence. Also, the database
       contains a gene expression profile for every tissue in the database
       combined with proprietary bioinformatics software to allow collaborators
       to browse data and compare differences in gene expression across cells,
       tissues, and different disease states. Thus, the database can

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       be used to assist researchers in correlating the presence of specific
       genes to discrete biological events in normal and disease-state cells. We
       continually add sequences and expression data from normal and diseased
       tissues to the LifeSeq Gold database.

     - PathoSeq Database. The PathoSeq database currently contains proprietary
       and public domain genomic data for more than 40 medically relevant
       bacterial and fungal microorganisms. With drug-resistant strains of
       bacteria and other microorganisms posing an increasing threat to world
       health, pharmaceutical and biotechnology companies are searching for
       genes unique to these pathogens that will aid in the development of new
       drugs to treat infectious disease. Our proprietary bioinformatics process
       edits all sequence data to remove artifacts and contamination, assemble
       sequences, display the relative position of the DNA coding regions, and
       identify genes either common among multiple microorganisms or unique to
       one microbial genome. We believe PathoSeq can help researchers understand
       the biology of microorganisms, study the mechanisms of drug resistance,
       identify genes that may make effective drug targets, and, ultimately,
       develop new therapeutics to treat and prevent infectious disease.

     - ZooSeq Database. The ZooSeq database was developed to aid pharmaceutical
       and biotechnology companies in designing and evaluating preclinical drug
       studies in animal models, a crucial step in the drug development process.
       The database currently contains gene sequence and expression data for the
       rat, mouse, and monkey -- animals commonly used in preclinical drug
       toxicology and efficacy studies. By correlating a drug's effects on an
       animal with the animal's genetic makeup, and then cross-referencing these
       data with our human LifeSeq database, a researcher may better predict the
       drug's efficacy and side effects before moving to human clinical trials.

     - LifeExpress Database. The LifeExpress database is a comprehensive,
       nonexclusive database of gene expression and protein expression on
       samples focusing on major therapeutic areas and pharmacology/toxicology.
       The protein expression modules of the LifeExpress database are developed
       in cooperation with our collaborator Oxford GlycoSciences. The two
       subcategories of LifeExpress are TargetExpress and LeadExpress. Aimed at
       facilitating the discovery and validation of high value targets,
       TargetExpress provides further annotation and detailed expression
       information on known and unknown gene products. LeadExpress focuses on
       using genomic and proteomic technologies to further annotate chemical
       structures of common drug classes.

     - IsSNPs. Our in silico SNP program identifies common SNPs by mining
       LifeSeq Gold and genomic sequence data. We have identified approximately
       46,000 isSNPs and expect to identify a total of 100,000 isSNPs from
       LifeSeq Gold (over 60,000 from expressed regions) throughout the coming
       year.

     Contract Sequencing. Contract sequencing services generally include
generating sequence and bioinformatics data for customers using our core
strengths in library construction, high-throughput cDNA sequencing and
bioinformatics.

     Software. We have developed an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. This system allows the
integration of our proprietary, subscriber-specific and public domain data, and
is capable of comparing information from humans, animals, microbes, fungi and
plants. The system incorporates the architecture necessary to integrate our
software tools data visualization tools, data mining programs and project
management capabilities, and is capable of being integrated with additional
technologies developed to more efficiently manage and analyze genomic data.

     - LifeTools, a suite of specialized bioinformatic software programs and
       project management tools, consists of sequence analysis and data
       management tools for handling complex genomic information from multiple
       sources. LifeTools reads and edits raw sequence data, including data
       imported from public databases, and annotates and clusters sequence
       fragments based on sequence similarity. LifeTools includes a fast,
       scalable database search engine with intranet-based graphical tools for
       interactive queries and analyses. The LifeTools relational database
       management system stores and distributes sequence assembly, homology,
       tissue expression information and biological data. Our

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       database management architecture is based on open system standards,
       providing interconnectivity between disparate systems and applications,
       and enterprise-wide access to data and functions.

     - LifeArray software manages and analyzes data resulting from microarray
       hybridization experiments. It includes a searchable database that
       accommodates experiment results from a variety of microarray platforms.
       LifeArray provides an integrated data warehouse and analysis environment,
       which allows the customer to bring data from multiple microarray
       platforms into one integrated environment. LifeArray enables the user to
       visualize differential expression between biological samples and can
       track all details of microarrays, genes, biological samples, donor
       information, and experimental results in one integrated environment with
       a Java-based interface. It is an enterprise-wide system that can support
       as many simultaneous users as required, and grow to suit changing
       microarray management needs.

     - LifeProt software provides tools to query, display, and analyze the
       protein expression data resulting from two-dimensional gel experiments.
       Using the program's query capabilities, customers can quickly locate
       relevant sample data sets from among many stored in a central database.
       This database tracks experiment conditions, tissue, treatment, and donor
       information, as well as the sample data. The LifeProt software is an
       enterprise-wide system that uses a Java-based interface and is available
       across a company to scientists using a variety of different computers and
       operating systems.

     Microarray-Based Services. We offer microarray-based gene expression
services to the pharmaceutical, biotechnology, and agricultural industries and
academic researchers. These services can be used to simultaneously evaluate the
gene expression profile of a large number of genes. Our GEM microarray
technology allows probes for up to 10,000 genes per microarray. Microarrays can
be used to identify the genes involved in a complex disease pathway, examine a
drug-treated tissue to understand how the drug affected the expression of
important genes, and study several new drug candidates to determine if one has a
more favorable effect on gene expression than the others. Experiments can use
either prefabricated arrays or custom arrays. Prefabricated arrays contain
either public domain genes or genes chosen from our databases. We currently
offer 18 prefabricated microarrays, including an array containing the genes
found in a microbial pathogen Staphlycoccus aureus, an array containing the
genes found in the rat liver and kidney, and a series of arrays that contain
Incyte proprietary genes. Custom arrays can contain genes provided by the
customer or chosen by the customer from our proprietary databases.

     DNA Reagents and Other Services. We offer a variety of DNA reagents and
other services designed to assist its collaborators in using information from
its databases in the customer's internal lab-based experiments. The cloned DNA
fragments from which the information in our databases is derived represent
valuable resources for researchers, enabling them to perform bench-style
experiments to supplement the information obtained from searching our databases.
We retain copies of all isolated clones corresponding to the sequences in the
database. Our collaborators may request clones corresponding to a sequence of
interest on a one-by-one basis or through the LifeSeq GeneAlbum component of
LifeSeq Gold. GeneAlbum is a subscription-based service that provides database
collaborators with large numbers of sequence verified DNA clones. In addition,
we produce a broad line of genomic research products, such as DNA clones and
insert libraries, and offers technical support services, including
high-throughput DNA screening, custom robotic services, contract DNA
preparation, contract mapping and fluorescent in situ hybridization, to assist
researchers in the identification and isolation of novel genes.

DATABASE PRODUCTION

     We engage in the high-throughput automated sequencing of genes derived from
tissue samples followed by the computer-aided analysis of each gene sequence to
identify homologies to genes of known function in order to predict the
biological function of newly identified sequences. The derivation of information
in our databases involves the following steps:

     - Tissue Access. We obtain tissue samples representing most major organs in
       the human body from various academic and commercial sources. Where
       possible, we obtain information as to the medical history and pathology
       of the tissue. The genetic material is isolated from the tissue and
       prepared for

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       analysis. The results of this analysis, as well as the corresponding
       pathology and medical history information, are incorporated into the
       databases.

     - High-Throughput cDNA Sequencing. We utilize specialized teams in an
       integrated approach to our high-throughput sequencing and analysis
       effort. Gene sequencing is performed using multiple work shifts to
       increase daily throughput. One team develops and prepares cDNA libraries
       from biological sources of interest, a second team prepares the cDNAs
       using robotic workstations to perform key steps that result in purified
       cDNAs for sequencing, and a third team operates the automated DNA
       sequencers.

     - Bioinformatics. Sequence information generated from our high-throughput
       sequencing operations is uploaded to a network of servers. Our
       proprietary bioinformatic software then assembles and edits the sequence
       information. The sequence of each cDNA is compared via automated,
       computerized algorithms to the sequences of known genes in our databases
       and public domain databases to identify whether the cDNA codes for a
       known protein or is homologous to a known gene. Each sequence is
       annotated as to its cell or tissue source, its relative abundance and
       whether it is homologous to a known gene with known function. The
       bioinformatics staff monitors this computerized analysis and may perform
       additional analyses on sequence information. The finished data are then
       added to our proprietary sequence databases.

COLLABORATORS

     As of December 31, 1999, we had database collaboration agreements with more
than 20 companies. Each collaborator has agreed to pay annual fees to receive
non-exclusive access to one or more of our databases. One of these companies
contributed 12% of total revenues in 1998. No customer contributed 10% or more
of total revenues in 1999 or 1997. During 1999, our database collaborators
included the following companies:


                                    
Abbott Laboratories                    Johnson & Johnson
AstraZeneca PLC                        Millennium Pharmaceuticals, Inc.
Aventis S.A.                           Monsanto Company
Bristol-Myers Squibb Company           Novartis AG
Eli Lilly and Company                  Pfizer Inc.
F. Hoffmann-La Roche Ltd.              Pharmacia & Upjohn, Inc.
Genentech, Inc.                        Schering AG
Glaxo Wellcome plc                     Schering-Plough, Ltd.


     Some of our database agreements contain minimum annual update requirements,
which if not met could result in our breach of the respective agreement. We
cannot assure you that any of our database collaboration agreements will not be
terminated early in accordance with their terms. Loss of revenues from any
individual database agreement, if terminated or not renewed, could have an
adverse impact on our results of operations, although is not anticipated to have
a material adverse impact on our business or financial condition.

DEVELOPMENT PROGRAMS

     Since our inception, we have made substantial investments in research and
technology development. During the years ended December 31, 1999, 1998, and 1997
we spent approximately $146.8 million, $97.2 million, and $72.5 million,
respectively, on research and development activities. This investment in
research and development includes an active program to enter into relationships
with other technology-driven companies and, when appropriate, acquire licenses
to technologies for evaluation or use in the production and analysis process.
Not all of these technologies or relationships survive the evaluation process.
We have entered into a number of research and development relationships with
companies and research institutions.

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     In January 1998, we announced a relationship with Oxford GlycoSciences plc
("OGS") to investigate the use of proteomics, the large-scale, high-throughput
analysis of protein expression, in the development of new information-based
products. As part of the relationship, we made an equity investment in OGS. We
and OGS entered into a collaborative agreement under which the two parties are
developing data, software and related services, focusing on protein expression
and sequence information from a variety of human tissues. As part of the
collaborative agreement, we reimbursed OGS $5.0 million in 1999 for services
rendered and agreed to reimburse OGS for up to an additional $5.0 million in
2000 if revenues are not sufficient to offset OGS' expenses for services to be
rendered.

     In August 1998, we initiated a series of programs in human genome
sequencing, accelerated human genome mapping, bioinformatics and SNP discovery.
The information resulting from these efforts will be used to supplement existing
databases and to generate new databases and services. We are initiating SNP
programs focused on specific candidate genes, gene families, disease pathways,
therapeutic areas or drug targets that could be useful to individual
pharmaceutical partners. These programs may include the identification of genes
associated with a particular disease and an in depth study of the population
frequency and disease correlation of SNPs within a selected DNA region. The SNP
discovery efforts were assisted by our acquisition of Hexagen in September 1998.

     We are developing various platforms that can be used for the high
throughput screening of patient samples in order to correlate SNPs with
patients' responses to drugs. These platforms may be used to offer genotyping
and patient profiling services to pharmaceutical companies to help identify
statistically significant and medically relevant associations between SNPs in
specific genes and drug response or disease susceptibility. We expect that this
service will be used to assist in the evaluation of new drugs in clinical trials
and to assess clinical trial design.

DIADEXUS JOINT VENTURE

     In September 1997, we established a 50-50 joint venture company, diaDexus,
LLC, with SmithKline Beecham Corporation. diaDexus is applying genomic and
bioinformatic technologies to the discovery and commercialization of novel
molecular diagnostic products. We provide diaDexus with non-exclusive access to
our human and microbial databases (LifeSeq Gold and PathoSeq) for diagnostic
applications. diaDexus also has exclusive rights to develop diagnostic tests
based on novel molecular targets and genetic alterations identified as part of
SmithKline Beecham's drug discovery efforts. SmithKline Beecham and Incyte have
also each assigned various additional technologies and intellectual property
rights in the diagnostic field and initially contributed a combined total of $25
million in funding to diaDexus. In July 1999, we and SmithKline Beecham each
invested an additional $2.5 million in the form of convertible notes that mature
in April 2000. The notes will automatically convert into equity if certain
funding requirements are met.

     diaDexus is focusing initially on the generation of unique diagnostic
markers for so-called "homebrew" tests -- scientifically validated tests which
are awaiting formal regulatory approval -- for reference laboratory testing and
for license to diagnostic kit manufacturers. Ultimately, diaDexus may develop
its own capacity to manufacture kits for sale to clinical testing laboratories.
The initial product range will focus on tests for disease detection. New tests
for improved diagnosis, staging and patient stratification in infectious disease
and oncology will be accorded particular emphasis.

PATENTS AND PROPRIETARY TECHNOLOGY

     Our database business and competitive position are in part dependent upon
our ability to protect our proprietary database information and software
technology. We rely on patent, trade secret and copyright law, as well as
nondisclosure and other contractual arrangements to protect our proprietary
information.

     Our ability to license proprietary genes and SNPs may be dependent upon our
ability to obtain patents, protect trade secrets and operate without infringing
upon the proprietary rights of others. Other pharmaceutical, biotechnology and
biopharmaceutical companies, as well as academic and other institutions, have
filed applications for, may have been issued patents or may obtain additional
patents and proprietary rights, relating to products or processes competitive to
our products or processes. Patent applications filed by competitors may
                                        9
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claim some of the same gene sequences or partial gene sequences as those claimed
in patent applications that we file. We are aware that some entities have made
or have announced their intention to make gene sequences publicly available.
Publication of sequence information may adversely affect our ability to obtain
patent protection for sequences that have been made publicly available.

     Our current policy is to file patent applications on what we believe to be
novel full-length and partial gene sequences obtained through our
high-throughput computer-aided gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences and
have filed patent applications in the U.S. and applications under the Patent
Cooperation Treaty ("PCT"), designating countries in Europe as well as Canada
and Japan, claiming full-length gene sequences associated with cells and tissues
that are the subject of our high-throughput gene sequencing program. To date, we
hold approximately 400 U.S. patents with respect to full-length gene sequences
and one issued U.S. patent claiming multiple partial gene sequences. Currently,
we have no registered copyrights for our database-related software.

     In 1996, the United States Patent and Trademark Office issued guidelines
limiting the number of partial gene sequences that can be examined in a single
patent application. Many of our patent applications containing multiple partial
sequences contain more sequences than the maximum number allowed under the new
guidelines. We are reviewing our options, and due to the resources needed to
comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.

     We have begun to file patent applications for patentable SNPs identified
with our LifeSeq Gold database, through our human genome sequencing program, and
through the use of our fSSCP discovery technology. These patents will claim
rights to SNPs for diagnostic and genotyping purposes. As information relating
to particular SNPs is developed, we plan to seek additional rights in those SNPs
that are associated with specific diseases, functions or drug responses. The
scope of patent protection for gene sequences, including SNPs, is highly
uncertain, involves complex legal and factual questions and has recently been
the subject of much controversy. No clear policy has emerged with respect to the
breadth of claims allowable for SNPs. There is significant uncertainty as to
what, if any, claims will be allowed on SNPs discovered through high throughput
discovery programs.

     As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and other genomic-related
businesses, the risk increases that our potential products, and the processes
used to develop these products, may be subject to claims that they infringe the
patents of others. Further, we are aware of several issued patents in the field
of microarray or gridding technology, which can be utilized in the generation of
gene expression information. Some of these patents are the subject of
litigation. Therefore, our operations may require us to obtain licenses under
any of these patents or proprietary rights, and these licenses may not be made
available on terms acceptable to us. Litigation may be necessary to defend
against or assert claims of infringement, to enforce patents issued to us, to
protect trade secrets or know-how owned by us, or to determine the scope and
validity of the proprietary rights of others. We believe that some of our patent
applications cover genes that may also be claimed in patent applications filed
by other parties. Interference proceedings may be necessary to establish which
party was the first to invent a particular sequence for the purpose of patent
protection. Several interferences involving our patent applications covering
full length genes have been declared. Litigation or interference proceedings,
regardless of the outcome, could result in substantial costs to us, and divert
our efforts, and may have a material adverse effect on our business, operating
results and financial condition. In addition, there can be no assurance that
such proceedings or litigation would be resolved in our favor.

     In January and September 1998, Affymetrix, Inc. filed lawsuits in the
United States District Court for the District of Delaware alleging infringement
of three U.S. patents by Incyte and its Synteni, Inc. subsidiary. Incyte
believes that it and Synteni have meritorious defenses and intends to defend
these suits vigorously. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Results -- We Are
Involved in Patent Litigation, Which, If Not Resolved Favorably, Could Harm Our
Business."

                                       10
   11

COMPETITION

     There is a finite number of genes in the human genome, and competitors may
seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. A number of
companies, institutions, and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning and
other genomic service businesses. Many of these companies, institutions and
entities have greater financial and human resources than we do. In addition, we
are aware that other companies have developed databases containing gene
sequence, gene expression, genetic variation or other genomic information and
are marketing, or have announced their intention to market, their data to
pharmaceutical companies. We expect that additional competitors may attempt to
establish databases containing this information in the future.

     In addition, competitors may discover and establish patent positions with
respect to the gene sequences and polymorphisms in our databases. Further, some
entities engaged in or with stated intentions to engage in gene sequencing have
made or have stated their intention to make the results of their sequencing
efforts publicly available. These patent positions, or the public availability
of gene sequences comprising substantial portions of the human genome or on
microbial or plant genes, could:

     - decrease the potential value of our databases to our subscribers; and

     - adversely affect our ability to realize royalties or other revenue from
       commercialization of products based upon such genetic information.

     The gene sequencing machines that are utilized in our high-throughput
computer-aided gene sequencing operations are commercially available and are
currently being utilized by several competitors. Also, some of our competitors
or potential competitors are in the process of developing, and may successfully
develop, proprietary sequencing technologies that may be more advanced than the
technology we use. In addition, we are aware that a number of companies are
pursuing alternative methods for generating gene expression information,
including some that have developed and are developing microarray technologies.
At least one other company currently offers microarray-based services that might
be competitive with those we offer. These advanced sequencing or gene expression
technologies, if developed, may not be commercially available for our purchase
or license on reasonable terms, if at all.

     A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than we do, and their products may achieve
greater market acceptance than our products.

     Our SNP discovery platform represents a modification of a process that is
in the public domain. Other companies could make similar or superior
improvements in this process.

     We believe that the following are important aspects of our competitive
position:

     - the features and ease of use of our database software;

     - our experience in high-throughput gene sequencing;

     - the cumulative size of our databases;

     - the quality of the data, including the annotations in our databases;

     - our computing infrastructure; and

     - and our experience with bioinformatics and database software.

     The genomics industry is characterized by extensive research efforts and
rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render our
services and potential products noncompetitive. In addition, significant levels
of research in

                                       11
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biotechnology and medicine occur in universities and other non-profit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results. These entities
also compete with us in recruiting talented scientists. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results -- We Experience Intense
Competition and Rapid Technological Change and If We Do Not Compete Effectively
Our Revenues May Decline."

GOVERNMENT REGULATION

     Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us or our licensees. At the
present time, we do not intend to develop any pharmaceutical products ourselves.
Our agreements with our LifeSeq Gold database subscribers provide for the
payment to us of royalties on any pharmaceutical products developed by those
subscribers derived from proprietary information obtained from our genomic
databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect on our future revenues.
Pharmaceutical products developed by licensees will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the United States Food and
Drug Administration in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such pharmaceutical products, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect our ability to earn milestone payments,
royalties or other license-based fees. Additional governmental regulations that
might arise from future legislation or administrative action cannot be
predicted, and such regulations could delay or otherwise affect adversely
regulatory approval of potential pharmaceutical products. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Results -- Our Revenues Are Derived
Primarily from the Pharmaceutical and Biotechnology Industries and May Fluctuate
Substantially Due to Reductions and Delays in Research and Development
Expenditures."

HUMAN RESOURCES

     As of December 31, 1999, we had 1,108 full-time equivalent employees (195
of whom were contract or part-time employees), including 399 in sequencing,
microarray, SNP and reagent production, 294 in bioinformatics, 239 in research
and technology development, and 176 in marketing, sales and administrative
positions. None of our employees is covered by collective bargaining agreements,
and management considers relations with our employees to be good. Our future
success will depend in part on the continued service of our key scientific,
software, bioinformatics and management personnel and its ability to identify,
hire and retain additional personnel, including personnel in the customer
service, marketing and sales areas. There is intense competition for qualified
personnel in the areas of our activities, especially with respect to experienced
bioinformatics and software personnel, and there can be no assurance that we
will be able to continue to attract and retain such personnel necessary for the
development of our business. Failure to attract and retain key personnel could
have a material adverse effect on our business, financial condition and
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors that May Affect Results -- We May
Have Difficulty Managing Our Growth, Which May Impact Our Ability to Optimize
Our Resources" and "-- We Depend on Key Employees in a Competitive Market for
Skilled Personnel and the Loss of the Services of Any of Our Key Employees Would
Materially Affect Our Business."

                                       12
   13

ITEM 2. PROPERTIES

     Incyte's headquarters are in Palo Alto, California, where its main research
laboratories, sequencing facility, bioinformatics and administrative facilities
are located. Incyte also operates facilities in Fremont, California; St. Louis,
Missouri; and Cambridge, England. As of December 31, 1999, Incyte had multiple
sublease and lease agreements covering approximately 442,000 square feet that
expire on various dates ranging from March 2000 to March 2011. The Company
believes that its current facilities are adequate to support its current and
anticipated near-term operations and believes that it can obtain additional
space it may need in the future on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

Affymetrix

     In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the " '934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees and
interest. Affymetrix further requests that any such damages be trebled based on
its allegation of willful infringement by Incyte and Synteni.

     In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, subsequently transferred to
the United States District Court for the Northern District of California in
November 1998, alleging infringement of the U.S. patent number 5,800,992 (the
" '992 Patent") and U.S. patent number 5,744,305 (the " '305 Patent") by both
Synteni and Incyte. The complaint alleges that the '305 Patent has been
infringed by the making, using, selling, importing, distributing or offering to
sell in the United States high density arrays by Synteni and Incyte, that the
'992 Patent has been infringed by the use of Synteni's and Incyte's GEM(TM)
microarray technology to conduct gene expression monitoring using two-color
labeling, and that such infringement was willful. Affymetrix seeks a permanent
injunction enjoining Synteni and Incyte from further infringement of the '305
and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in late April 2000.

     In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California.

     Incyte and Synteni believe they have meritorious defenses and intend to
defend the suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. At this time, the
Company cannot reasonably estimate the possible range of any loss resulting from
these suits due to uncertainty regarding the ultimate outcome. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and

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technical personnel. Further, there can be no assurance that any license that
may be required as a result of this suit or the outcome thereof would be made
available on commercially acceptable terms, if at all.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock, par value $.001 ("Common Stock"), is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "INCY." The following
table sets forth, for the periods indicated, the range of high and low sales
prices for the Common Stock on Nasdaq as reported in its consolidated
transaction reporting system.



                                                    HIGH      LOW
                                                    ----      ----
                                                        
1998
  First Quarter...................................  $50 3/8   $36
  Second Quarter..................................   47 1/     31 1/
  Third Quarter...................................  42         18 1/
  Fourth Quarter..................................   39 1/     20 15/1
1999
  First Quarter...................................   37 3/     20 1/1
  Second Quarter..................................   26 7/1    17 3/
  Third Quarter...................................   41 3/     21 5/3
  Fourth Quarter..................................   63 1/     16 9/1


     As of December 31, 1999, the Common Stock was held by 506 stockholders of
record. The Company has never declared or paid dividends on its capital stock
and does not anticipate paying any dividends in the foreseeable future.

                                       14
   15

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in Item 8 of
this Report.



                                                        YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------
                                            1999       1998       1997       1996       1995
                                          --------   --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                       
STATEMENT OF OPERATIONS DATA:(1)
Revenues................................  $156,962   $134,811   $ 89,996   $ 41,895   $ 12,299
Costs and expenses:
  Research and development..............   146,833     97,192     72,452     41,337     19,272
  Selling, general and administrative...    37,235     25,438     13,928      6,957      3,952
  Charge for purchase of in-process
     research and development...........        --     10,978         --      3,165         --
  Acquisition-related charges...........        --      1,171         --         --         --
                                          --------   --------   --------   --------   --------
          Total costs and expenses......   184,068    134,779     86,380     51,459     23,224
Income (loss) from operations...........   (27,106)        32      3,616     (9,564)   (10,925)
Interest and other income, net..........     5,169      7,266      4,140      2,288        988
Losses from joint venture...............    (5,631)    (1,474)      (300)        --         --
                                          --------   --------   --------   --------   --------
Income (loss) before income taxes.......   (27,568)     5,824      7,456     (7,276)    (9,937)
Provision (benefit) for income taxes....      (800)     2,352        548         --         --
                                          --------   --------   --------   --------   --------
Net income (loss).......................  $(26,768)  $  3,472   $  6,908   $ (7,276)  $ (9,937)
                                          ========   ========   ========   ========   ========

Basic net income (loss) per share.......  $  (0.95)  $   0.13   $   0.28   $  (0.32)  $  (0.53)
                                          ========   ========   ========   ========   ========
Number of shares used in computation of
  basic net income (loss) per share.....    28,138     26,921     24,300     22,398     18,819
                                          ========   ========   ========   ========   ========
Diluted net income (loss) per share.....  $  (0.95)  $   0.12   $   0.26   $  (0.32)  $  (0.53)
                                          ========   ========   ========   ========   ========
Number of shares used in computation of
  diluted net income (loss) per share...    28,138     28,899     26,498     22,398     18,819
                                          ========   ========   ========   ========   ========




                                                              DECEMBER 31,
                                          ----------------------------------------------------
                                            1999       1998       1997       1996       1995
                                          --------   --------   --------   --------   --------
                                                             (IN THOUSANDS)
                                                                       
BALANCE SHEET DATA:(1)
Cash, cash equivalents, and securities
  available-for-sale....................  $ 66,937   $111,233   $113,095   $ 40,238   $ 41,218
Working capital.........................    58,043     81,437     90,700     21,351     39,015
Total assets............................   221,934    230,290    199,089     69,173     58,892
Non-current portion of capital lease
  obligations and notes payable.........       194        796        801         37        147
Accumulated deficit.....................   (55,169)   (28,401)   (30,129)   (37,037)   (29,761)
Stockholders' equity....................   170,282    179,567    145,702     44,834     47,606


- ---------------
(1) Financial data for the years ended December 31, 1995 and 1996, have been
    restated to reflect the combined results and financial position of the
    Company and Genome Systems, Inc. All periods through December 31, 1997 have
    been restated to reflect combined results and financial position of the
    Company and Synteni, Inc. See Note 9 of Notes to Consolidated Financial
    Statements.

                                       15
   16

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

     The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Report.

     When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. These statements, which include statements as to the Company's and
diaDexus' expected net losses, expected expenditure levels, expected cash flows,
the adequacy of capital resources, growth in operations and Year 2000 related
actions, are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, those risks discussed below, as well as the
extent of utilization of genomic information by the biotechnology and
pharmaceutical industries; risks relating to the development of new products and
their use by potential collaborators of the Company; the impact of technological
advances and competition; the ability of the Company to obtain and retain
customers; competition from other entities; early termination of a database
collaboration agreement or failure to renew an agreement upon expiration; the
cost of accessing or acquiring technologies developed by other companies;
uncertainty as to the scope of coverage, enforceability or commercial protection
from patents that issue on gene sequences and other genetic information;
developments in and expenses relating to litigation; the results and viability
of joint ventures and businesses in which the Company has purchased equity; and
the matters discussed in "Factors That May Affect Results." These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.

OVERVIEW

     Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") designs, develops and markets genomic
information-based products and services. These products and services include
database products, genomic data management software tools, microarray-based gene
expression services, genomic reagents, and related services. The Company's
genomic databases integrate bioinformatics software with proprietary and, when
appropriate, publicly available genetic information to create information-based
products and services used by pharmaceutical and biotechnology companies and
academic researchers in the understanding of disease and the discovery and
development of new drugs.

     Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements. Revenues also include the
sales of genomic screening products and services, fees for microarray-based gene
expression services, fees for contract sequencing services, and sales of genomic
data management software tools. The Company's database agreements provide for
future milestone payments and royalties from the sale of products derived from
proprietary information obtained through the databases. There can be no
assurance that any database subscriber will ever generate products from
information contained within the databases and thus that the Company will ever
receive additional milestone payments or royalties. The Company's ability to
maintain and increase revenues will be dependent upon its ability to obtain
additional database subscribers, retain existing subscribers, and to expand its
product and service offerings and expand its customer base for microarray
services. The loss of revenues from any individual database agreement, if
terminated or not renewed, could have an adverse impact on the Company's results
of operations, although it is not anticipated to have a material adverse impact
on the Company's business or financial conditions.

     The Company intends to invest in its sequencing, bioinformatics, expression
database development and SNP discovery programs in 2000 and as a result expects
to report a net loss at least through 2000. If the costs of these programs are
greater than anticipated, or if these programs take longer to complete, or if
losses are incurred from strategic investments, the Company may incur losses in
future periods, as well.

     The Company has made and intends to continue to make strategic equity
investments in, and acquisitions of, technologies and businesses that are
complementary to the businesses of the Company. As a result, the
                                       16
   17

Company may record losses or expenses related to the Company's proportionate
ownership interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or record charges for the recognition of
the impairment in the value of the securities underlying such investments.

     In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The intrinsic value of the
stock options was included in the purchase price of Hexagen. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remainder of
the purchase price, approximately $17.6 million, was allocated to goodwill
($16.3 million), developed technology ($0.7 million), and Hexagen's assembled
work force ($0.6 million), which are being amortized over 8, 5 and 3 years,
respectively. The Company evaluates its intangible assets for impairment on a
quarterly basis.

     The Company allocated Hexagen's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. In 1999, the Company completed the
development of the fSSCP technology. There have been no significant changes in
the assumptions used to value the assets of Hexagen.

     In January 1998, the Company completed the acquisition of Synteni, Inc.
("Synteni"), a privately-held microarray-based gene expression company. The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies.

     In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatics technologies in the discovery and commercialization
of molecular diagnostics. The Company and SB each hold a 50 percent equity
interest in diaDexus. The investment is accounted for under the equity method,
and the Company records its share of diaDexus' earnings and losses in its
statement of operations.

     In January 1998, the Company announced a relationship relating to the joint
development of proteomics data and related software with Oxford GlycoSciences
plc ("OGS"). As part of this relationship, the Company made a $5.0 million
initial equity investment and a follow-on investment in April 1998 of
approximately $0.8 million as part of the OGS initial public offering of its
ordinary shares. As part of the collaborative agreement, the Company reimbursed
OGS $5.0 million in 1999 for services rendered and will reimburse OGS up to $5.0
million in 2000 if revenues are not sufficient to offset OGS' expenses for
services rendered. The market prices of the securities of the companies in which
the Company invests are highly volatile and therefore subject to declines in
market value. The Company will continue to evaluate its long-term equity
investments for impairment on a quarterly basis.

     In an effort to broaden its business, the Company is investing in a number
of new areas, including molecular diagnostics, genome sequencing, SNP discovery,
proteomics, and microarray services. Given that many of these address new
markets, or involve untested technologies, it is not known if any of them will
generate revenues or if the revenues will be sufficient to provide an adequate
return on the investment. Depending on the investment required and the timing of
such investments, expenses or losses related to these investments could
adversely affect operating results.

     The Company has incurred and could continue to incur substantial expenses
in its defense of the lawsuits filed in January and September 1998 by
Affymetrix, Inc. ("Affymetrix") alleging patent infringement by Synteni and
Incyte. Affymetrix seeks a preliminary injunction enjoining Incyte and Synteni
from using certain microarray technology in a manner alleged to infringe an
Affymetrix patent and a permanent injunction enjoining Incyte and Synteni from
further infringement of certain Affymetrix patents. In addition, Affymetrix

                                       17
   18

seeks damages, costs, attorneys' fees and interest. Affymetrix further requests
that any such damages be trebled on its allegation of willful infringement by
Incyte and Synteni. Incyte and Synteni believe they have meritorious defenses
and intend to defend these suits vigorously. However, there can be no assurance
that Incyte and Synteni will be successful in the defense of these suits. At
this time, the Company cannot reasonably estimate the possible range of any loss
related to these suits due to uncertainty regarding the ultimate outcome.
Regardless of the outcome, this litigation has resulted and is expected to
continue to result in substantial expenses and diversion of the efforts of
management and technical personnel. Any future litigation could result in
similar expenses and diversion of efforts. Further, there can be no assurance
that any license that may be required as a result of these suits or the outcome
thereof would be made available on commercially acceptable terms, if at all.

RESULTS OF OPERATIONS

     The Company recorded a net loss for the year ended December 31, 1999 of
$26.8 million and net income for the years ended December 31, 1998 and 1997 of
$3.5 million and $6.9 million, respectively. On a per share basis, basic and
diluted net loss was $0.95 for the year ended December 31, 1999. Basic and
diluted net income per share was $0.13 and $0.12 for the year ended December 31,
1998, respectively and $0.28 and $0.26 for the year ended December 31, 1997,
respectively. Excluding acquisition related charges, the Company recorded net
income of $15.5 million, and basic and diluted net income per share of $0.58 and
$0.54, respectively, for the year ended December 31, 1998. The net income per
share in 1997 reflects the dilutive effect of approximately 2.7 million shares
issued in an August 1997 follow-on public offering. The net income per share for
1998 and 1997 reflects the issuance of approximately 2.3 million shares in
January 1998 in connection with the Company's business combination with Synteni.
All share and per share data have been adjusted retroactively for a two-for-one
stock split effected in the form of a stock dividend paid on November 7, 1997 to
holders of record on October 17, 1997.

     Revenues. Revenues for the years ended December 31, 1999, 1998, and 1997
were $157.0 million, $134.8 million, and $90.0 million, respectively. Revenues
resulted primarily from database access fees and, to a much lesser extent, from
microarray-based gene expression services, genomic screening products and
services, fees for contract sequencing, and sales of genomic data management
software tools and maintenance. The increase in revenues from year to year was
predominantly driven by expanded database agreements with existing customers,
new database customers and increased revenues from microarray-related products
and services.

     Expenses. Total costs and expenses for the years ended December 31, 1999,
1998, and 1997 were $184.1 million, $134.8 million, and $86.4 million,
respectively. Total costs and expenses for the year ended December 31, 1998
included a one-time charge of $11.0 million for the purchase of in-process
research and development relating to the acquisition of Hexagen, and acquisition
related expenses of $1.2 million related to the combination with Synteni. Total
costs and expenses are expected to increase in the foreseeable future due to the
continued investment in new products and services.

     Research and development expenses for the years ended December 31, 1999,
1998, and 1997 were $146.8 million, $97.2 million, and $72.5 million,
respectively. The increase from 1999 over 1998 resulted primarily from the
Company's genomic sequencing, genetic mapping, and SNP discovery initiatives
that were initiated in the second half of 1998, the Company's collaboration with
OGS in proteomics, the increase in microarray production, and the costs related
to intellectual property protection. The increase in research and development
expenses in 1998 over 1997 resulted primarily from an increase in bioinformatics
and software development efforts and to a lesser extent microarray production
capacity, and from costs related to genomic sequencing, genetic mapping, SNP
discovery efforts, technology development initiatives, and intellectual property
protection. The Company expects research and development spending to increase as
the Company continues to pursue the development of new database products and
services, including expression databases, expansion of existing database
products, increases in sequencing, bioinformatics, expression database
development and SNP discovery operations, and investments in new technologies.

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     Selling, general and administrative expenses for the years ended December
31, 1999, 1998, and 1997 were $37.2 million, $25.4 million, and $13.9 million,
respectively. The increase in selling, general and administrative expenses in
1999 over 1998 resulted primarily from the growth in sales and marketing
activities and the increased personnel to support the growing complexity of the
Company's operations. The increase in selling, general and administrative
expenses in 1998 over 1997 resulted primarily from the growth in sales and
marketing activities and to a lesser extent the expansion of the Company's
United Kingdom operations and increased personnel to support the growing
complexity of the Company's operations. The Company's 1999 and 1998 operations
were also impacted by legal expenses related to the patent infringement lawsuits
filed by Affymetrix of approximately $6.5 million and $2.9 million,
respectively. The Company expects that total selling, general and administrative
expenses will continue to increase, primarily due to continued growth in
marketing, sales and customer support and expenses to support the growing
complexity of the Company's operations.

     Interest and Other Income, Net. Interest and other income, net, for the
years ended December 31, 1999, 1998, and 1997 were $5.2 million, $7.3 million,
and $4.1 million, respectively. The decrease in 1999 from 1998 was primarily due
to decreased interest income as a result of lower cash, cash equivalent and
marketable securities balances. The increase in 1998 over 1997 was primarily due
to increased interest income from higher average combined cash, cash equivalent
and marketable securities balances and an increase in realized gains on the sale
of marketable securities.

     Losses from Joint Venture. Losses from joint venture were $5.6 million,
$1.5 million and $0.3 million for the years ended December 31, 1999, 1998 and
1997, respectively. The loss represents the Company's share of diaDexus' losses
from operations. The loss in 1998 was net of $2.5 million of amortization of the
excess of the Company's share of diaDexus' net assets over its basis.

     Income Taxes. The Company had an effective income tax benefit rate of 3.0%
in 1999. The benefit was primarily due to the carryback of the current year net
operating loss. The effective tax rate for 1998 was 14.0%, excluding the charge
for the purchase of in-process research and development, and for 1997 was 7.3%,
which represents the provision of federal and state alternative minimum taxes
after utilization of net operating loss carryforwards. The increase from 1997 to
1998 in the effective tax rate resulted primarily from the Company's expectation
that it would fully utilize all federal net operating loss carryforwards
available to benefit the income tax provision.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1999, the Company had $66.9 million in cash, cash
equivalents and marketable securities, compared to $111.2 million as of December
31, 1998. The Company has classified all of its marketable securities as
short-term, as the Company may choose not to hold its marketable securities
until maturity in order to take advantage of favorable market conditions.
Available cash is invested in accordance with the Company's investment policy's
primary objectives of liquidity, safety of principal and diversity of
investments.

     Net cash used in operating activities was $21.4 million for the year ended
December 31, 1999, compared to cash provided of $36.2 million and $18.0 million
for the years ended December 31, 1998 and 1997. The change in cash flows from
operations in 1999 compared to 1998 was primarily due to the Company's
investments in genomic sequencing, mapping, bioinformatics and SNP discovery
resulting in a net loss in 1999 as compared to net income in 1998, and the
increase in accounts receivable and prepaid expenses, partially offset by
increases in accrued liabilities. The increase in net cash provided by operating
activities in 1998 compared to 1997 was primarily due to the increase in net
income before non-cash charges and the decrease in accounts receivable,
partially offset by the increase in prepaid and other assets and the decrease in
deferred revenues.

     The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have consisted predominantly of capital
expenditures and net purchases of long-term investments. Capital expenditures
for the years ended December 31, 1999, 1998, and 1997 were $34.8 million, $30.7
million, and $27.2 million, respectively. Capital expenditures increased in 1999
and 1998 primarily due to investments in
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computer and laboratory equipment as well as leasehold improvements related to
the expansion of the Company's facilities. Long-term investments in companies
with which the Company has research and development agreements were $4.2 million
for the year ended December 31, 1999 compared to $7.1 million and $8.5 million
for the years ended December 31, 1998 and 1997, respectively. In 1999 the
Company liquidated its investment in two such companies, resulting in proceeds
of $4.3 million and a net realized gain of $0.2 million. In 1998, the Company
paid $4.0 million, net of cash received, in connection with the purchase of
Hexagen and in 1997 transferred $6.0 million to restricted cash for disbursement
to diaDexus in accordance with the diaDexus joint venture agreement. In the
future, net cash used by investing activities may fluctuate significantly from
period to period due to the timing of strategic equity investments, capital
expenditures and maturity/sales and purchases of marketable securities.

     Net cash provided by financing activities was $12.5 million, $4.0 million,
and $94.8 million for the years ended December 31, 1999, 1998, and 1997,
respectively. Net cash provided by financing activities in 1997 was primarily
due to proceeds from follow-on public stock offerings in August 1997, while net
cash provided by financing activities in 1999 and 1998 was due to the issuance
of common stock under the Company's stock option and employee stock purchase
plans.

     Subsequent to December 31, 1999, the Company raised additional funds in two
financing transactions. In February 2000, the Company issued $200.0 million
aggregate principal amount of 5.5% convertible subordinated notes due 2007 in a
private placement, resulting in net proceeds of approximately $196.8 million.
Beginning May 15, 2000, the notes are convertible at the option of the note
holders into the Company's common stock at an initial conversion price of
$134.839 per share, subject to adjustment. Also in February 2000, the Company
issued 2,000,000 shares of its common stock in a private placement, for an
aggregate purchase price of $422.0 million. Net proceeds from the sale of those
shares were $398.3 million.

     The Company expects its cash requirements to increase in 2000 as it:
invests in its sequencing, bioinformatics, expression database development, and
SNP discovery programs; invests in data-processing-related computer hardware to
support its existing and new database products and to enable the on-line
delivery of those products; continues to seek access to technologies through
investments, research and development alliances, license agreements and/or
acquisitions; makes strategic investments; and continues to make improvements in
existing facilities.

     Based upon its current plans, the Company believes that its existing
resources will be adequate to satisfy its capital needs for at least the next
twelve months. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and other products and services; expenditures in connection with
alliances, license agreements and acquisitions of and investments in
complementary technologies and businesses; competing technological and market
developments; the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights; the purchase of additional
capital equipment, including capital equipment necessary to ensure the Company's
sequencing and microarray operations remain competitive; capital expenditures
required to expand the Company's facilities; and costs associated with the
integration of new operations assumed through mergers and acquisitions. Changes
in the Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.

EURO CONVERSION

     A single currency called the euro was introduced in Europe on January 1,
1999. Eleven of the fifteen member countries of the European Union agreed to
adopt the euro as their common legal currency on that date. Fixed conversion
rates between these participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The legacy
currencies are scheduled to remain legal tender as denominations of the euro
until at least January 1, 2002, but not later than July 1, 2002. During this
transition period, parties may settle transactions using either the euro or a
participating country's legal currency. This conversion to the euro had no
material impact on the Company's results of operations, financial

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   21

position or cash flows. The Company will continue to evaluate the potential
impact of the euro on its computer and financial systems, business processes,
market risk, and price competition.

                        FACTORS THAT MAY AFFECT RESULTS

WE HAVE HAD ONLY LIMITED PERIODS OF PROFITABILITY AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE, WHICH MAY PREVENT US FROM RETURNING TO PROFITABILITY

     We had net losses from inception in 1991 through 1996, reported net income
in 1997 and 1998, and again incurred a net loss in 1999. Because of those
losses, we had an accumulated deficit of $55.2 million as of December 31, 1999.
We intend to make significant investments in sequencing, bioinformatics,
expression database development and single nucleotide polymorphism, or SNP,
discovery over the next year. As a result,we expect to report a net loss for the
year ending December 31, 2000. We may report net losses in future periods as
well. We expect that our expenditures may continue to increase in 2000 due in
part to our continued investment in new product and technology development,
including the continuation of our genomic sequencing, bioinformatics, expression
database development, SNP-discovery programs, obligations under existing and
future research and development alliances, and our increasing investment in
marketing, sales and customer service. Our profitability depends on our ability
to increase our revenues:

     TO GENERATE SIGNIFICANT REVENUES, WE MUST OBTAIN ADDITIONAL DATABASE
COLLABORATORS AND RETAIN EXISTING COLLABORATORS. While we had over 20 database
agreements as of December 31, 1999, we may be unable to enter into any
additional agreements. Also, our database collaborators may choose not to renew
their agreements upon expiration. In 1999, for the first time one of our LifeSeq
Gold database collaborators did not renew its subscription. Our database
revenues are also affected by the extent to which existing collaborators expand
their agreements with us to include our new database products and to the extent
that existing collaborators reduce the number of products or services for which
they subscribe. Some of our database agreements require us to meet performance
obligations. A database collaborator can terminate its agreement before the end
of its scheduled term if we breach the agreement and fail to cure the breach
within a specified period.

     OUR REVENUES AND PROFITABILITY WILL ALSO DEPEND ON OUR ABILITY TO GENERATE
PROFITS FROM EXPRESSION DATABASES AND MICROARRAY SERVICES. We acquired Synteni,
Inc. in January 1998 to provide microarray services and to generate information
for expression databases. The contribution of our microarray operations to our
operating results will depend on whether we can continue to obtain high-volume
customers for microarray services and expression databases, whether we can
continue to increase our microarray production capacity in a timely manner and
with consistent volumes and quality, and the costs associated with increasing
our microarray production capacity.

     WE DO NOT EXPECT MILESTONE OR ROYALTY PAYMENTS TO SUBSTANTIALLY CONTRIBUTE
TO REVENUES FOR SEVERAL YEARS. Part of our strategy is to license to database
collaborators our know how and patent rights associated with the gene sequences
and related information in our proprietary databases, for use in the discovery
and development of potential pharmaceutical, diagnostic or other products. Any
potential product that is the subject of such a license will require several
years of further development, clinical testing and regulatory approval before
commercialization.

OUR OPERATING RESULTS ARE UNPREDICTABLE AND MAY ADVERSELY IMPACT OUR STOCK PRICE

     Our operating results are unpredictable and may fluctuate significantly
from period to period due to a variety of factors, including:

     - changes in the demand for our products and services;

     - the introduction of competitive databases or services, including public
       domain databases;

     - the pricing of access to our databases;

     - the nature, pricing and timing of other products and services provided to
       our collaborators;
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   22

     - changes in the research and development budgets of our collaborators and
       potential collaborators;

     - depreciation expense from capital expenditures;

     - acquisition, licensing and other costs related to the expansion of our
       operations, including operating losses of acquired businesses such as
       Synteni and Hexagen;

     - losses and expenses related to our investments in joint ventures and
       businesses, including our proportionate share of operating losses of our
       diaDexus, LLC, joint venture with SmithKline Beecham Corporation;

     - payments of milestones, license fees or research payments under the terms
       of our increasing number of external alliances; and

     - expenses related to, and the results of, litigation and other proceedings
       relating to intellectual property rights (including the lawsuits filed by
       Affymetrix, Inc. described below).

     In particular, revenues from our database business are unpredictable
because:

     - the timing of our database installations is determined by our
       collaborators;

     - the sales cycle for our database products is lengthy; and

     - the time required to complete custom orders can vary significantly.

     We expect our expression databases to represent an increasing amount of our
revenues. Also, revenues may be affected by developments in the Affymetrix
litigation, which may cause potential customers to postpone or change their
decision to use our microarray services.

     We are investing in a number of new areas to try to broaden our business.
These areas include sequencing, bioinformatics, gene expression databases, SNP
discovery, molecular diagnostics, proteomics, or the large scale,
high-throughput analysis of protein expression, and the online delivery of our
database and software products. Because many of these address new markets or
involve untested technologies, they may not generate any revenues or provide an
adequate return on our investment. In these cases, we may have to recognize
expenses or losses.

     We have significant fixed expenses, due in part to our need to continue to
invest in product development and extensive support for our database
collaborators. We may be unable to adjust our expenditures if revenues in a
particular period fail to meet our expectations, which would adversely affect
our operating results for that period. Forecasting operating and integration
expenses for acquired businesses may be particularly difficult, especially where
the acquired business focuses on technologies that do not have an established
market.

     We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall, possibly by a significant amount.

     WE EXPERIENCE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE AND IF WE
DO NOT COMPETE EFFECTIVELY OUR REVENUES MAY DECLINE

     GENOMIC BUSINESSES ARE INTENSELY COMPETITIVE. The human genome contains a
finite number of genes. Our competitors may seek to identify, sequence and
determine the biological function of numerous genes in order to obtain a
proprietary position with respect to new genes. A number of companies, other
institutions and government-financed entities are engaged in gene sequencing,
gene discovery, gene expression analysis, positional cloning, the study of
genetic variation, and other genomic service businesses. Many of these
companies, institutions and entities have greater financial and human resources
than we do.

     Some of our competitors have developed databases containing gene sequence,
gene expression, genetic variation or other genomic information and are
marketing or plan to market their data to pharmaceutical companies. Additional
competitors may attempt to establish databases containing this information in
the future. We expect that competition in our industry will continue to
intensify. Several large pharmaceutical
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companies have formed a consortium to create a SNPs database and to make all of
the information publicly available. The formation of this consortium could delay
or reduce the potential revenues related to our SNP-related business.

     PATENT POSITIONS OR PUBLIC DISCLOSURES MAY REDUCE THE VALUE OF OUR
DATABASES. Competitors may discover and establish patent positions with respect
to gene sequences in our databases. Further, certain entities engaged in gene
sequencing have made the results of their sequencing efforts publicly available.
In January 2000, the Celera Genomics Group of PE Corporation announced that it
has DNA sequence in its database that covers 90% of the human genome and plans
to complete the sequencing of the human genome by the summer of 2000. Celera has
announced that it has filed a provisional patent application on newly discovered
partial genes and stated its intention to file full applications on medically
important discoveries. The Human Genome Project, which is coordinated by the
U.S. Department of Energy and the National Institutes of Health, has announced
that a consortium of laboratories associated with the Project predicts that they
will produce at least 90% of the human genome sequence in a "working draft form"
by the spring of 2000 and that they intend to make the information publicly
available. The public availability of gene sequences or resulting patent
positions covering substantial portions of the human genome or microbial or
plant genomes could reduce the potential value of our databases to our
collaborators. It could also impair our ability to realize royalties or other
revenue from any commercialized products based on this genetic information.

     COMPETITORS MAY DEVELOP SUPERIOR TECHNOLOGY. The gene sequencing machines
used in our computer-aided sequencing operations are commercially available and
are being used by at least one competitor. In addition, some of our competitors
and potential competitors are developing proprietary sequencing technologies
that may be more advanced than ours. PE Corporation began commercial shipments
of a new gel-based sequencing machine, of which a large number have been
provided to Celera Genomics Group. We may be unable to obtain access to
sufficient quantities of these machines on acceptable terms.

     In addition, a number of companies are pursuing alternative methods for
generating gene expression information, including microarray technologies. These
advanced sequencing or gene expression technologies may not be commercially
available for us to purchase or license on reasonable terms, if at all. At least
one other company currently offers microarray-based services that might be
competitive with ours.

     Our SNP discovery platform represents a modification of a process that is
in the public domain. We are seeking patent protection for these improvements,
but have not yet received any patents. Other companies could make similar or
superior improvements to this process without infringing our rights, and we may
not have access to those improvements. The discovery of SNPs is a competitive
area. Other companies may develop or obtain access to different SNP discovery
platforms, to which we may not have access, that may make our technology
obsolete.

     We also face competition from providers of software. A number of companies
have announced their intent to develop and market software to assist
pharmaceutical companies and academic researchers in managing and analyzing
their own genomic data and publicly available data.

     WE MUST CONTINUE TO INVEST IN NEW TECHNOLOGIES. The genomics industry is
characterized by extensive research efforts, resulting in rapid technological
progress. To remain competitive, we must continue to expand our databases,
improve our software, and invest in new technologies. New developments are
expected to continue, and discoveries by others may render our services and
potential products noncompetitive.

WE ARE INVOLVED IN PATENT LITIGATION, WHICH IF NOT RESOLVED FAVORABLY COULD HARM
OUR BUSINESS

     In January 1998, Affymetrix filed a lawsuit in federal court alleging
infringement of U.S. patent number 5,445,934 by both Synteni and Incyte. The
complaint alleges that the '934 patent has been infringed by Synteni's and
Incyte's making, using, selling, importing, distributing or offering to sell
high density arrays in the United States and that this infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 patent and seeks damages, costs, attorneys'
fees and interest. Affymetrix also requests triple damages based on allegedly
willful infringement.

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   24

     In September 1998, Affymetrix filed an additional lawsuit alleging
infringement of U.S. patent numbers 5,744,305 and 5,800,992 by Synteni and
Incyte. The complaint alleges that the '305 patent has been infringed by
Synteni's and Incyte's making, using, selling, importing, distributing or
offering to sell high density arrays in the United States. It also alleges that
the '992 patent has been infringed by the use of Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling and that this infringement was willful. Affymetrix had sought a
preliminary injunction enjoining Synteni and Incyte from using GEM microarray
technology to conduct this kind of gene expression monitoring, and a permanent
injunction enjoining Synteni and Incyte from further infringing the '305 and
'992 patents.

     The lawsuits were initially filed in the United States District Court for
the District of Delaware. In November 1998, the court granted Incyte's motion to
transfer the suits to the United States District Court for the Northern District
of California. Affymetrix's request for a preliminary injunction was denied in
April 1999. As a result of the assignment of the case to a new judge, all
scheduled trial and pretrial dates have been vacated. The court is expected to
set a new schedule in late April 2000.

     In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office declared interferences between pending patent
applications licensed exclusively to us and the Affymetrix '305 and '992
patents. An interference proceeding is invoked by the Patent and Trademark
Office when more than one patent applicant claims the same invention. The Board
of Patent Appeals and Interferences evaluates all relevant facts, including
those bearing on first to invent, validity, enablement and scope of claims, and
then makes a determination as to who, if anyone, is entitled to the patent on
the disputed invention. In September 1999, the Board of Patent Appeals and
Interferences determined that Incyte had not met its prima facie case, and ruled
that patents licensed by Incyte and Synteni from Stanford University were not
entitled to priority over corresponding claims in the two Affymetrix patents. We
are seeking de novo review of the board decisions in the United States district
court for the Northern District of California.

     We believe we have meritorious defenses and intend to defend these suits
vigorously. However, our defense may be unsuccessful. At this time, we cannot
reasonably estimate the possible range of any loss resulting from these suits
due to uncertainty about the ultimate outcome. We have spent and expect to
continue to spend a significant amount of money and management time on this
litigation. Also, if we are required to license any technology as a result of
these suits, we do not know whether we will be able to do so on commercially
acceptable terms, if at all.

WE SPEND A SUBSTANTIAL AMOUNT OF MONEY ON NEW AND UNCERTAIN BUSINESSES AND
DEMAND FOR OUR PRODUCTS AND SERVICES MAY BE INSUFFICIENT TO COVER OUR COSTS,
WHICH COULD IMPACT OUR PROFITABILITY

     There is no precedent for our microarray-based gene expression database or
service businesses or the use of SNP-based genetic variation information. The
usefulness of the information generated by these businesses is unproven. Our
collaborators and potential collaborators may determine that our databases,
software tools and microarray-related services are not useful or cost-effective.
Due to the nature and price of some of the products and services we offer, only
a limited number of companies are potential collaborators for those products and
services. If we do not develop these new products and services in time to meet
market demand or if there is insufficient demand for these products and
services, we may not be able to cover our costs of developing these products and
services or earn a sufficient return on our investment.

     Additional factors that may affect demand for our products and services
include:

     - the extent to which pharmaceutical and biotechnology companies conduct
       these activities in-house or through industry consortia;

     - the emergence of competitors offering similar services at competitive
       prices;

     - the extent to which the information in our databases is made public or is
       covered by others' patents;

     - our ability to establish and enforce proprietary rights to our products;

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   25

     - regulatory developments or changes in public perceptions relating to the
       use of genetic information and the diagnosis and treatment of disease
       based on genetic information; and

     - technological innovations that are more advanced than the technologies
       that we have developed or that are available to us.

     Many of these factors are beyond our control.

OUR NEW PROGRAMS RELATING TO THE ROLE OF GENETIC VARIATION IN DISEASE AND DRUG
RESPONSE MAY NEVER GENERATE SIGNIFICANT REVENUES OR PROFITABLE OPERATIONS

     We recently began to focus part of our business on developing databases and
other products and services to assist pharmaceutical companies in a new and
unproven area: the identification and correlation of genetic variation to
disease and drug response. We will incur significant costs over the next several
years in expanding our research and development in this area. These activities
may never generate significant revenues or profitable operations.

     This new aspect of our business will focus on SNPs, one type of genetic
variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few, if any, therapeutic or diagnostic products based
on SNPs have been developed and commercialized. Among other things, demand in
this area may be adversely affected by ethical and social concerns about the
confidentiality of patient-specific genetic information and about the use of
genetic testing for diagnostic purposes.

     Except for a few anecdotal examples, there is no proof that SNPs have any
correlation to diseases or a patient's response to a particular drug or class of
drug. Identifying statistically significant correlations is time-consuming and
could involve the collection and screening of a large number of patient samples.
We do not know if the SNPs we have discovered to date are suitable for these
correlation studies. Nor do we currently have access to the patient samples
needed or technology allowing us to rapidly and cost-effectively identify
pre-determined SNPs in large numbers of patients.

     Most SNPs may occur too infrequently to warrant their use in analyzing
patients' genetic variation. We may have trouble identifying SNPs that both
correlate with diseases or drug responses and occur frequently enough to justify
their use by pharmaceutical companies.

     Our success will also depend upon our ability to develop, use and enhance
new and relatively unproven technologies. Our strategy of using high-throughput
mutation detection processes and sequencing to identify SNPs and genes rapidly
is unproven. Among other things, we will need to continue to improve the
throughput of our SNP-discovery technology. We may not be able to achieve these
necessary improvements, and other factors may impair our ability to develop our
SNP-related products and services in time to be competitively available.

OUR STRATEGIC INVESTMENTS MAY RESULT IN LOSSES AND OTHER ADVERSE EFFECTS

     We make strategic investments in joint ventures or businesses that
complement our business. These investments, such as our investment in diaDexus,
may:

     - often be made in securities lacking a public trading market or subject to
       trading restrictions, either of which increases our risk and reduces the
       liquidity of our investment;

     - require us to record losses and expenses related to our ownership
       interest;

     - require us to record charges related to the acquisition of in-process
       technologies or for the impairment in the value of the securities
       underlying our investment; and

     - require us to invest greater amounts than anticipated or to devote
       substantial management time to the management of research and development
       relationships and joint ventures.

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   26

     The market values of many of these investments fluctuate significantly. We
evaluate our long-term equity investments for impairment of their values on a
quarterly basis. Impairment could result in future charges to our earnings.
These losses and expenses may exceed the amounts that we anticipated.

OUR SALES CYCLE IS LENGTHY AND THERE IS NO GUARANTEE THAT A SUBSCRIPTION OR
SERVICES AGREEMENT WILL RESULT

     Our ability to obtain new subscribers for our databases, software tools and
microarray and other services depends upon prospective subscribers' perceptions
that our products and services can help accelerate drug discovery efforts. Our
database sales cycle is typically lengthy because we need to educate our
potential subscribers and sell the benefits of our tools and services to a
variety of constituencies within potential subscriber companies. In addition,
each database subscription and microarray services agreement involves the
negotiation of unique terms. We may expend substantial funds and management
effort with no assurance that a subscription or services agreement will result.
Actual and proposed consolidations of pharmaceutical companies have affected the
timing and progress of our sales efforts. We expect that future proposed
consolidations will have similar effects.

PATENTS AND OTHER PROPRIETARY RIGHTS PROVIDE UNCERTAIN PROTECTION OF OUR
PROPRIETARY INFORMATION AND OUR INABILITY TO PROTECT A PATENT OR OTHER
PROPRIETARY RIGHT MAY IMPACT OUR BUSINESS AND OPERATING RESULTS

     WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY INFORMATION, WHICH MAY RESULT
IN UNAUTHORIZED USE AND A LOSS OF REVENUE. Our business and competitive position
depend upon our ability to protect our proprietary database information and
software technology, but our strategy of obtaining proprietary rights in as many
genes and SNPs as possible is unproven. Despite our efforts to protect this
information and technology, unauthorized parties may attempt to obtain and use
information that we regard as proprietary. Although our database subscription
agreements require our subscribers to control access to our databases, policing
unauthorized use of our databases and software may be difficult.

     We pursue a policy of having our employees, consultants and advisors
execute proprietary information and invention agreements when they begin working
for us. However, these agreements may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosure.

     Our means of protecting our proprietary rights may not be adequate and our
competitors may:

     - independently develop substantially equivalent proprietary information
       and techniques;

     - otherwise gain access to our proprietary information; or

     - design around patents issued to us or our other intellectual property.

     OUR PATENT APPLICATIONS MAY CONFLICT WITH OTHERS. Our current policy is to
file patent applications on what we believe to be novel full-length and partial
gene sequences obtained through our gene sequencing efforts. We have filed U.S.
patent applications in which we have claimed certain partial gene sequences. We
have also applied for patents in the U.S. and other countries claiming
full-length gene sequences associated with cells and tissues involved in our
gene sequencing program. We hold a number of issued U.S. patents on full-length
genes and one issued U.S. patent claiming multiple partial gene sequences. A
number of entities make certain gene sequences publicly available, which may
adversely affect our ability to obtain patents on those genes.

     We believe that some of our patent applications claim genes that may also
be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in an interference before the United States Patent and Trademark Office.

     ENFORCEMENT OF GENE PATENTS IS UNCERTAIN AND GENE PATENTS MAY BE FOUND
UNENFORCEABLE, RESULTING IN A LOSS OF COMPETITIVE BENEFIT. One of our strategies
is to obtain proprietary rights in as many genes (including partial gene
sequences) and SNPs as possible. While the USPTO has issued patents covering
full-length genes, partial gene sequences and SNPs, we do not know whether or
how courts may enforce those patents, if that

                                       26
   27

becomes necessary. If a court finds these types of inventions to be
unpatentable, or interprets them narrowly, the benefits of our strategy may not
materialize.

     WE MAY DECIDE TO ABANDON PATENT APPLICATIONS, WHICH COULD DIMINISH THE
VALUE OF OUR PATENT PORTFOLIO AND POSSIBLY OUR FUTURE REVENUES. The USPTO has
had a substantial backlog of biotechnology patent applications, particularly
those claiming gene sequences. In 1996, the USPTO issued guidelines limiting the
number of partial gene sequences that can be examined within a single patent
application. Many of our patent applications contain more partial sequences than
the maximum number allowed under these guidelines. Due to the resources needed
to comply with the guidelines, we may decide to abandon patent applications for
some of our partial gene sequences.

     Because filing large numbers of patent applications and maintaining issued
patents can be very costly, we may choose not to pursue every application. If we
do not pursue patent protection for all of our full-length and partial gene
sequences, the value of our intellectual property portfolio could be diminished.
Because of the possible delay in obtaining allowance of some of our patent
applications, and the secrecy of patent applications, we do not know if other
applications having priority over ours have been filed.

     WE MAY NEED TO REFILE SOME OF OUR PATENT APPLICATIONS AND THE PERIOD OF
PATENT PROTECTION HAS BEEN SHORTENED, WHICH MAY AFFECT OUR POTENTIAL REVENUES
AND PROFITS. The value of our patents depends in part on their duration. The
U.S. patent laws were amended in 1995 to change the term of patent protection
from 17 years from patent issuance to 20 years from the earliest effective
filing date of the application. Because the average time from filing to issuance
of biotechnology applications is at least one year and may be more than three
years depending on the subject matter, a 20-year patent term from the filing
date may result in substantially shorter patent protection, which may adversely
affect our rights under any patents that we obtain. We may need to refile
applications claiming large numbers of gene sequences and, in these situations,
the patent term will be measured from the date of the earliest priority
application. This would shorten our period of patent exclusivity.

     INTERNATIONAL PATENT PROTECTION IS PARTICULARLY UNCERTAIN, AND OPPOSITION
PROCEEDINGS IN FOREIGN COUNTRIES MAY BE COSTLY AND DIVERT MANAGEMENT
RESOURCES. Biotechnology patent law outside the United States is even more
uncertain than in the United States and is currently undergoing review and
revision in many countries. Further, the laws of some foreign countries may not
protect our intellectual property rights to the same extent as U.S. laws. We may
participate in opposition proceedings to determine the validity of our or our
competitors' foreign patents, which could result in substantial costs and
diversion of our efforts.

WE MAY BE SUBJECT TO ADDITIONAL LITIGATION AND INFRINGEMENT CLAIMS THAT COULD BE
COSTLY AND DISRUPT OUR BUSINESS

     The technology that we use to develop our products, and those that we
incorporate in our products, may be subject to claims that they infringe the
patents or proprietary rights of others. The risk of this occurring will tend to
increase as the genomics, biotechnology and software industries expand, more
patents are issued and other companies attempt to discover genes and SNPs and
engage in other genomic-related businesses.

     As is typical in the genomics, biotechnology and software industries, we
have received, and we will probably receive in the future, notices from third
parties alleging patent infringement. We believe that we are not infringing the
patent rights of any such third party. Except for Affymetrix, no third party has
filed a patent lawsuit against us.

     We may, however, be involved in future lawsuits alleging patent
infringement or other intellectual property rights violations. In addition,
litigation may be necessary to:

     - assert claims of infringement;

     - enforce our patents;

     - protect our trade secrets or know-how; or

     - determine the enforceability, scope and validity of the proprietary
       rights of others.

                                       27
   28

     We may be unsuccessful in defending or pursuing these lawsuits. Regardless
of the outcome, litigation can be very costly and can divert management's
efforts. An adverse determination may subject us to significant liabilities or
require us to seek licenses to other parties' patents or proprietary rights. We
may also be restricted or prevented from manufacturing or selling our products.
Further, we may not be able to obtain the necessary licenses on acceptable
terms, if at all.

WE MAY ENCOUNTER PROBLEMS IN MEETING CUSTOMERS' SOFTWARE NEEDS, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE GOODWILL OF OUR CUSTOMERS

     Our databases also require software support and will need to incorporate
features determined by database collaborators. If we experience delays or
difficulties in implementing our database software or collaborator-requested
features, we may be unable to service our collaborators.

PAST ACQUISITIONS HAVE AND ANY FUTURE ACQUISITIONS THAT WE MAY MAKE COULD
ADVERSELY AFFECT OUR OPERATIONS OR FINANCIAL RESULTS

     As part of our business strategy, we may acquire other assets, technologies
and businesses. We acquired Synteni in January 1998 and Hexagen in September
1998.

     These and any future acquisitions involve risks such as the following:

     - we may be exposed to unknown liabilities of acquired companies;

     - our acquisition and integration costs may be higher than we anticipated
       and may cause our quarterly and annual operating results to fluctuate;

     - we may experience difficulty and expense in assimilating the operations
       and personnel of the acquired businesses, disrupting our business and
       diverting management's time and attention;

     - we may be unable to integrate or complete the development and application
       of acquired technology;

     - we may experience difficulties in establishing and maintaining uniform
       standards, controls, procedures and policies;

     - our relationships with key customers of acquired businesses may be
       impaired, due to changes in management and ownership of the acquired
       businesses;

     - we may be unable to retain key employees of the acquired businesses;

     - we may incur amortization expenses if an acquisition results in
       significant goodwill or other intangible assets; and

     - our stockholders may be diluted if we pay for the acquisition with equity
       securities.

     In addition, if we acquire additional businesses that are not located near
our Palo Alto, California headquarters, we may experience more difficulty
integrating and managing the acquired businesses' operations.

WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH, WHICH MAY IMPACT OUR ABILITY TO
OPTIMIZE OUR RESOURCES

     We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth has placed, and may
continue to place, a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to attract, hire and
retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational
and other systems and to hire, train and manage our employees.

     In addition, we must continue to invest in customer support resources as
the number of database collaborators and their requests for support increase.
Our database collaborators typically have worldwide operations and may require
support at multiple U.S. and foreign sites. To provide this support, we may need
to open offices in addition to our Palo Alto, California headquarters and our
offices in Fremont, California,

                                       28
   29

St. Louis, Missouri and Cambridge, England, which could result in additional
burdens on our systems and resources.

WE DEPEND ON KEY EMPLOYEES IN A COMPETITIVE MARKET FOR SKILLED PERSONNEL AND THE
LOSS OF THE SERVICES OF ANY OF OUR KEY EMPLOYEES WOULD MATERIALLY AFFECT OUR
BUSINESS

     We are highly dependent on the principal members of our management,
operations and scientific staff, including Roy A. Whitfield, our Chief Executive
Officer, and Randal W. Scott, our President and Chief Scientific Officer. The
loss of either of these persons' services may have a material adverse effect on
our business. We have not entered into any employment agreement with either of
these persons and do not maintain a key person life insurance policy on the life
of any employee.

     Our future success also will depend in part on the continued service of our
executive management team, key scientific, software, bioinformatics and
management personnel and our ability to identify, hire and retain additional
personnel, including customer service, marketing and sales staff. We experience
intense competition for qualified personnel. We may not be able to continue to
attract and retain personnel necessary for the development of our business.

OUR INABILITY TO OBTAIN NECESSARY EQUIPMENT, SUPPLIES AND DATA FROM THIRD
PARTIES MAY ADVERSELY IMPACT OUR RESULTS

     WE RELY ON A SMALL NUMBER OF SUPPLIERS OF GENE SEQUENCING MACHINES AND
REAGENTS REQUIRED FOR GENE SEQUENCING. Although we are evaluating alternative
gene sequencing machines, they may not be available in sufficient quantities or
at acceptable costs. In addition, if a third party claims that our use of these
machines infringes their patent rights, our use of these machines could become
more costly or could be prevented. If we are unable to obtain additional
machines or an adequate supply of reagents or other materials at commercially
reasonable rates, our ability to identify genes and SNPs would be adversely
affected.

     WE RELY ON OUTSIDE SOURCES FOR TISSUE SAMPLES FROM WHICH WE ISOLATE GENETIC
MATERIAL USED IN OUR OPERATIONS. Our business could be adversely affected if we
lose access to some of these sources, or if they charged us higher access fees
or imposed tighter restrictions on our use of the information generated from the
samples.

     WE CANNOT CONTROL THE PERFORMANCE OF COLLABORATORS. We may enter into
research and development relationships with corporate and academic collaborators
and others. The success of these relationships depends upon third parties'
performance of their responsibilities. Our ability to develop these
relationships is uncertain, and any established relationships may prove
unsuccessful. Our collaborators may also be pursuing alternative technologies or
developing alternative products on their own or in collaboration with others,
including our competitors.

     WE RELY ON THIRD-PARTY DATA SOURCES. We rely on scientific and other data
supplied by others, including our academic collaborators and sources of tissue
samples. This data could contain errors or other defects, which could corrupt
our databases. In addition, we cannot guarantee that our data sources acquired
this information in compliance with legal requirements. If either of these
happen and become known, our business prospects could be adversely affected.

OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO COSTLY
ENVIRONMENTAL LIABILITY

     Our research and development involves the controlled use of hazardous and
radioactive materials and biological waste. We are subject to federal, state and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
legally prescribed standards, the risk of accidental contamination or injury
from these materials cannot be completely eliminated. In the event of an
accident, we could be held liable for damages, and this liability could exceed
our resources.

                                       29
   30

     We believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material additional capital expenditures for environmental control
facilities in the near term. However, we may have to incur significant costs to
comply with current or future environmental laws and regulations.

OUR REVENUES ARE DERIVED PRIMARILY FROM THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES AND MAY FLUCTUATE SUBSTANTIALLY DUE TO REDUCTIONS AND DELAYS IN
RESEARCH AND DEVELOPMENT EXPENDITURES

     We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to the pharmaceutical and
biotechnology industries as well as to the academic community. Accordingly, our
success will depend in large part upon the success of the companies within these
industries and their demand for our products and services. Our operating results
may fluctuate substantially due to reductions and delays in research and
development expenditures by companies in these industries or by the academic
community. These reductions and delays may result from factors such as:

     - changes in economic conditions;

     - consolidation in the pharmaceutical industry;

     - changes in the regulatory environment affecting health care and health
       care providers;

     - pricing pressures;

     - market-driven pressures on companies to consolidate and reduce costs; and

     - other factors affecting research and development spending.

These factors are not within our control.

OUR BUSINESS COULD BE INTERRUPTED BY NATURAL DISASTERS

     We conduct our sequencing and a significant portion of our other activities
at our facilities in Palo Alto, California, and conduct our microarray-related
activities at our facilities in Fremont, California. Both locations are in a
seismically active area. Although we maintain business interruption insurance,
we do not have or plan to obtain earthquake insurance. A major catastrophe (such
as an earthquake or other natural disaster) could result in a prolonged
interruption of our business.

SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH
FLOW

     We have substantial amounts of outstanding indebtedness, primarily the $200
million of convertible subordinated notes issued in February 2000. As a result
of this indebtedness, our principal and interest payment obligations have
increased substantially. There is the possibility that we may be unable to
generate cash sufficient to pay the principal of, interest on and other amounts
due in respect of our indebtedness when due.

                                       30
   31

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to interest rate risk primarily through its
investments in short-term marketable securities and its note payable. The
Company's investment policy calls for investment in short term, low risk
instruments. As of December 31, 1999, investments in marketable securities were
$37.5 million. At December 31, 1999, the Company had a fixed rate note payable
balance of $0.5 million. Due to the nature of these investments and note, if
market interest rates were to increase immediately and uniformly by 10% from
levels as of December 31, 1999, the decline in the fair value of the portfolio
would not be material.

     The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments and long-term
investments, entered into to further its business and strategic objectives.
These investments are in small capitalization stocks in the pharmaceutical/
biotechnology industry sector, in companies with which the Company has research
and development or licensing agreements. The Company typically does not attempt
to reduce or eliminate its market exposure on these securities. As of December
31, 1999, long-term investments, excluding diaDexus, were $14.2 million.

     The Company typically does not hedge its foreign currency exposure.
Management does not believe that the Company's exposure to foreign currency rate
fluctuations is material.

                                       31
   32

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                     INDEX



                                                              PAGE
                                                              ----
                                                           
CONSOLIDATED FINANCIAL STATEMENTS OF INCYTE PHARMACEUTICALS,
  INC.
  Report of Ernst & Young LLP, Independent Auditors.........   33
  Consolidated Balance Sheets at December 31, 1999 and
     1998...................................................   34
  Consolidated Statements of Operations for the years ended
     December 31, 1999, 1998 and 1997.......................   35
  Consolidated Statements of Comprehensive Income (Loss) for
     the years ended December 31, 1999, 1998 and 1997.......   36
  Consolidated Statement of Stockholders' Equity for the
     three year period ended December 31,
     1999...................................................   37
  Consolidated Statements of Cash Flow for the years ended
     December 31, 1999, 1998 and 1997.......................   38
  Notes to the Consolidated Financial Statements............   39
  Schedule II -- Valuation and Qualifying Accounts..........   53
FINANCIAL STATEMENTS OF DIADEXUS, LLC, A DEVELOPMENT STAGE
  COMPANY
  Report of PricewaterhouseCoopers LLP, Independent
     Accountants............................................   54
  Balance Sheet at December 31, 1999 and 1998...............   55
  Statement of Operations for the years ended December 31,
     1999 and 1998 and for the period from inception
     (September 1997) through December 31, 1999.............   56
  Statement of Changes In Members' Equity For the Period
     From Inception (September 1997) through December 31,
     1999...................................................   57
  Statement of Cash Flows for the years ended December 31,
     1999 and 1998 and for the period from inception
     (September 1997) through December 31, 1999.............   58
  Notes to Financial Statements.............................   59


                                       32
   33

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.

     We have audited the accompanying consolidated balance sheets of Incyte
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We did not audit the financial statements of diaDexus, LLC, a joint
venture, which statements reflect total assets of $11,297,000 and $20,215,000 as
of December 31, 1999 and 1998 respectively, and net losses of $11,286,000,
$7,928,000, and $548,000 for the years ended December 31, 1999 and 1998 and the
period from inception (September 1997) through December 31, 1997. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the losses from joint venture recorded
under the equity method and other data included for diaDexus, LLC, is based
solely on the report of the other auditors.

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

     In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Incyte Pharmaceuticals, Inc. at December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

                                          /s/ ERNST & YOUNG LLP

Palo Alto, California
January 24, 2000

                                       33
   34

                          INCYTE PHARMACEUTICALS, INC.

                          CONSOLIDATED BALANCE SHEETS
             (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PAR VALUE)

                                     ASSETS



                                                              DECEMBER 31,    DECEMBER 31,
                                                                  1999            1998
                                                              ------------    ------------
                                                                        
Current assets:
  Cash and cash equivalents.................................    $ 32,220        $ 50,048
  Marketable securities -- available-for-sale...............      34,717          61,185
  Accounts receivable, net..................................      26,608          14,318
  Prepaid expenses and other current assets.................      15,956           5,813
                                                                --------        --------
          Total current assets..............................     109,501         131,364

Property and equipment, net.................................      67,293          54,429
Long-term investments.......................................      19,275          20,653
Goodwill and other intangible assets, net...................      14,564          16,955
Deposits and other assets...................................      11,301           6,889
                                                                --------        --------
          Total assets......................................    $221,934        $230,290
                                                                ========        ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $  6,501        $  8,244
  Accrued compensation......................................       6,731           4,786
  Accrued and other current liabilities.....................      11,767           7,843
  Deferred revenue..........................................      26,459          29,054
                                                                --------        --------
          Total current liabilities.........................      51,458          49,927
Non-current portion of capital lease obligations and note
  payable...................................................         194             796
                                                                --------        --------
          Total liabilities.................................      51,652          50,723
                                                                --------        --------
Stockholders' equity:
  Preferred stock, $0.001 par value; 5,000,000 shares
     authorized; none issued and outstanding at December 31,
     1999 and 1998..........................................          --              --
  Common stock, $0.001 par value; 75,000,000 shares
     authorized; 28,889,936 and 27,829,850 shares issued and
     outstanding at December 31, 1999 and 1998,
     respectively...........................................          29              28
  Additional paid-in capital................................     222,805         209,192
  Deferred compensation.....................................        (806)         (1,209)
  Receivable from stockholders..............................         (20)            (33)
  Accumulated other comprehensive income (loss).............       3,443             (10)
  Accumulated deficit.......................................     (55,169)        (28,401)
                                                                --------        --------
          Total stockholders' equity........................     170,282         179,567
                                                                --------        --------
          Total liabilities and stockholders' equity........    $221,934        $230,290
                                                                ========        ========


                             See accompanying notes
                                       34
   35

                          INCYTE PHARMACEUTICALS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



                                                                        YEAR ENDED
                                                                       DECEMBER 31,
                                                              -------------------------------
                                                                1999        1998       1997
                                                              --------    --------    -------
                                                                             
Revenues....................................................  $156,962    $134,811    $89,996

Costs and expenses:
  Research and development..................................   146,833      97,192     72,452
  Selling, general and administrative.......................    37,235      25,438     13,928
  Charge for the purchase of in-process research and
     development............................................        --      10,978         --
  Acquisition-related charges...............................        --       1,171         --
                                                              --------    --------    -------
          Total costs and expenses..........................   184,068     134,779     86,380
                                                              --------    --------    -------

Income (loss) from operations...............................   (27,106)         32      3,616

Interest and other income...................................     5,485       7,416      4,326
Interest and other expense..................................      (316)       (150)      (186)
Losses from joint venture...................................    (5,631)     (1,474)      (300)
                                                              --------    --------    -------
Income (loss) before income taxes...........................   (27,568)      5,824      7,456
Provision (benefit) for income taxes........................      (800)      2,352        548
                                                              --------    --------    -------
Net income (loss)...........................................  $(26,768)   $  3,472    $ 6,908
                                                              ========    ========    =======

Basic net income (loss) per share...........................  $  (0.95)   $   0.13    $  0.28
                                                              ========    ========    =======

Shares used in computing basic net income (loss) per
  share.....................................................    28,138      26,921     24,300
                                                              ========    ========    =======

Diluted net income (loss) per share.........................  $  (0.95)   $   0.12    $  0.26
                                                              ========    ========    =======
Shares used in computing diluted net income (loss) per
  share.....................................................    28,138      28,899     26,498
                                                              ========    ========    =======


                             See accompanying notes
                                       35
   36

                          INCYTE PHARMACEUTICALS, INC.

           CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME (LOSS)
                                 (IN THOUSANDS)



                                                                       YEAR ENDED
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                1999       1998      1997
                                                              --------    ------    ------
                                                                           
Net income (loss)...........................................  $(26,768)   $3,472    $6,908
Other comprehensive income (loss)
  Unrealized gains on marketable securities.................     3,618       338       127
  Foreign currency translation adjustment...................      (165)     (404)        2
                                                              --------    ------    ------
Other comprehensive income (loss)...........................     3,453       (66)      129
                                                              --------    ------    ------
Comprehensive income (loss).................................  $(23,315)   $3,406    $7,037
                                                              ========    ======    ======


                             See accompanying notes
                                       36
   37

                          INCYTE PHARMACEUTICALS, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                    (IN THOUSANDS, EXCEPT NUMBER OF SHARES)



                                                                                       ACCUMULATED
                                            ADDITIONAL                  RECEIVABLE        OTHER                         TOTAL
                                   COMMON    PAID-IN       DEFERRED        FROM       COMPREHENSIVE   ACCUMULATED   STOCKHOLDERS'
                                   STOCK     CAPITAL     COMPENSATION   STOCKHOLDER      INCOME         DEFICIT        EQUITY
                                   ------   ----------   ------------   -----------   -------------   -----------   -------------
                                                                                               
Balances at January 1, 1997......   $22      $ 81,922      $    --         $ --          $  (73)       $(37,037)      $ 44,834
Issuance of 2,755,426 shares of
  Common Stock, net of expenses
  and underwriters' fees of
  $5,065.........................     3        87,239           --           --              --              --         87,242
Issuance of 462,434 shares of
  Common Stock, net of expenses
  of $41.........................     1         3,559           --           --              --              --          3,560
Issuance of 431,879 shares of
  Common Stock upon exercise of
  stock options and 14,934 shares
  upon exercise of warrant.......    --         3,029           --           --              --              --          3,029
Net change in unrealized gains
  (losses) on marketable
  securities.....................    --            --           --           --             127              --            127
Change in cumulative translation
  adjustment.....................    --            --           --           --               2              --              2
Net income.......................    --            --           --           --              --           6,908          6,908
                                    ---      --------      -------         ----          ------        --------       --------
Balances at December 31, 1997....    26       175,749           --           --              56         (30,129)       145,702
Adjustment to conform fiscal year
  of pooled entity -- Synteni
  (including issuance of 337,271
  shares of Common Stock)........    --         3,732       (1,658)         (49)             --          (1,744)           281
Issuance of 423,030 shares of
  Common Stock upon exercise of
  stock options; 38,944 shares of
  Common Stock shares issued
  under ESPP.....................     1         4,748           --           --              --              --          4,749
Issuance of 976,130 shares of
  Common Stock in purchase of
  Hexagen Limited................     1        23,438           --           --              --              --         23,439
Tax benefit from employee stock
  transactions...................    --         1,525           --           --              --              --          1,525
Amortization of deferred
  compensation...................    --            --          449           --              --              --            449
Repayment of receivable from
  stockholder....................    --            --           --           16              --              --             16
Net change in unrealized gains
  (losses) on marketable
  securities.....................    --            --           --           --             338              --            338
Change in cumulative translation
  adjustment.....................    --            --           --           --            (404)             --           (404)
Net income.......................    --            --           --           --              --           3,472          3,472
                                    ---      --------      -------         ----          ------        --------       --------
Balances at December 31, 1998....    28       209,192       (1,209)         (33)            (10)        (28,401)       179,567
Issuance of 980,848 shares of
  Common Stock upon exercise of
  stock options; 79,377 shares of
  Common Stock issued under the
  ESPP...........................     1        13,613           --           --              --              --         13,614
Amortization of deferred
  compensation...................    --            --          403           --              --              --            403
Repayment of receivable from
  stockholder....................    --            --           --           13              --              --             13
Net change in unrealized gains
  (losses) on marketable
  securities.....................    --            --           --           --           3,618              --          3,618
Change in cumulative translation
  adjustment.....................    --            --           --           --            (165)             --           (165)
Net loss.........................    --            --           --           --              --         (26,768)       (26,768)
                                    ---      --------      -------         ----          ------        --------       --------
Balances at December 31, 1999....   $29      $222,805      $  (806)        $(20)         $3,443        $(55,169)      $170,282
                                    ===      ========      =======         ====          ======        ========       ========


                             See accompanying notes
                                       37
   38

                          INCYTE PHARMACEUTICALS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1999        1998        1997
                                                              --------    --------    --------
                                                                             
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................  $(26,768)   $  3,472    $  6,908
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization...........................    24,688      17,827      10,633
    Gain on sale of long-term investments...................      (241)         --          --
    Non-cash portion of the charge for the purchase of
     in-process research and development....................        --      10,978          --
    Losses from joint venture...............................     5,631       1,474         300
    Adjustment to conform fiscal year of pooled entity......        --         278          --
    Changes in certain assets and liabilities:
      Accounts receivable...................................   (12,290)      5,885     (18,451)
      Prepaid expenses and other assets.....................   (14,555)     (5,280)     (3,495)
      Accounts payable......................................    (1,743)      1,773       1,028
      Accrued and other current liabilities.................     6,427       1,826      14,404
      Deferred revenue......................................    (2,595)     (2,000)      6,660
                                                              --------    --------    --------
Net cash provided by (used in) operating activities.........   (21,446)     36,233      17,987
                                                              --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................   (34,758)    (30,710)    (27,225)
  Purchase of long-term investments.........................    (4,181)     (7,145)     (8,537)
  Proceeds from the sale of long-term investments...........     4,321          --          --
  Purchase of Hexagen (net of cash received)................        --      (3,977)         --
  Transfer to restricted cash...............................        --          --      (6,000)
  Proceeds from sale of assets leased back under operating
    leases..................................................        --          --       1,696
  Purchases of marketable securities........................   (22,998)    (98,512)    (53,464)
  Sales of marketable securities............................    38,932      88,081       8,515
  Maturities of marketable securities.......................    10,000       6,900      18,225
                                                              --------    --------    --------
Net cash used in investing activities.......................    (8,684)    (45,363)    (66,790)
                                                              --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock....................    13,614       4,749      93,831
  Proceeds from capital leases and notes payable............        --          --       1,000
  Principal payments on capital lease obligations and note
    payable.................................................    (1,160)       (781)        (46)
  Proceeds from repayment of receivable from stockholders...        13          16          --
                                                              --------    --------    --------
Net cash provided by financing activities...................    12,467       3,984      94,785
                                                              --------    --------    --------
Effect of exchange rate on cash and cash equivalents........      (165)       (404)         --
Net increase (decrease) in cash and cash equivalents........   (17,828)     (5,550)     45,982
Cash and cash equivalents at beginning of period............    50,048      55,598       9,616
                                                              --------    --------    --------
Cash and cash equivalents at end of period..................  $ 32,220    $ 50,048    $ 55,598
                                                              ========    ========    ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
  Interest paid.............................................  $    316    $    138    $     16
                                                              ========    ========    ========
  Taxes paid................................................  $    224    $    705    $    252
                                                              ========    ========    ========
CASH FLOW FOR ACQUISITION OF HEXAGEN
  Tangible assets acquired (excluding $1,023 cash
    received)...............................................              $  3,025
  Purchased in-process research and development.............                10,978
  Goodwill and other intangible assets acquired.............                17,553
  Acquisition costs incurred................................                (1,029)
  Liabilities assumed.......................................                (3,112)
  Common stock issued.......................................               (23,438)
                                                                          --------
  Cash paid for acquisition (net of $1,023 cash received)...              $  3,977
                                                                          ========


                             See accompanying notes
                                       38
   39

                          INCYTE PHARMACEUTICALS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Organization and Business. Incyte Pharmaceuticals, Inc. (the "Company") was
incorporated in Delaware in April 1991. The Company designs, develops, and
markets genomic information-based tools including database products, genomic
data management software tools, microarray-based gene expression services and
genomic reagents and related services. The Company's genomic databases integrate
bioinformatics software with proprietary and, when appropriate, publicly
available genetic information to create information-based tools used by
pharmaceutical and biotechnology companies and academic researchers in the
understanding of disease and drug discovery and development.

     Principles of Consolidation. The consolidated financial statements include
the accounts of Incyte Pharmaceuticals, Inc., and its wholly owned subsidiaries.
All material intercompany accounts, transactions, and profits have been
eliminated in consolidation.

     In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), which was accounted for as a purchase. The Company issued 976,130
shares of the its common stock and $5.0 million in cash in exchange for all of
Hexagen's outstanding capital stock. In addition, the Company assumed Hexagen's
outstanding stock options, which if fully vested and exercised, would amount to
125,909 shares of common stock. The consolidated financial statements discussed
herein reflect the inclusion of the results of Hexagen from the date of
acquisition, September 21, 1998.

     In January 1998, the Company issued 2,340,237 shares of common stock in
exchange for all of the capital stock of Synteni, Inc. ("Synteni"). The merger
has been accounted for as a pooling of interests and, accordingly, the Company's
financial statements and financial data for all periods prior to the acquisition
were retroactively restated to include the accounts and operations of Synteni
since inception. Synteni's fiscal year ended on September 30. Synteni's results
of operations for the period from October 1, 1997 to December 31, 1997 were
recorded directly in accumulated deficit in 1998.

     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.

     Foreign Currency Translation. The financial statements of subsidiaries
outside the United States are measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date. The resultant translation
adjustments are included in the accumulated other comprehensive income (loss), a
separate component of stockholders' equity. Income and expense items are
translated at average monthly rates of exchange.

     Concentrations of Credit Risk. Cash, cash equivalents, and short-term
investments, trade receivables, and long term strategic investments are
financial instruments which potentially subject the Company to concentrations of
credit risk. The estimated fair value of financial instruments approximates the
carrying value based on available market information. The Company primarily
invests its excess available funds in notes and bills issued by the U.S.
government and its agencies and corporate debt securities and, by policy, limits
the amount of credit exposure to any one issuer and to any one type of
investment, other than securities issued or guaranteed by the U.S. Government.
The Company's customers are pharmaceutical, biotechnology and agricultural
companies which are typically located in the United States and Europe. The
Company has not experienced any significant credit losses to date and does not
require collateral on receivables. The Company's long-term investments represent
equity investments in a number of companies whose businesses may be
complementary to the Company's business. The Company evaluates the long-term
investments quarterly for impairment, and to date has not incurred a material
impairment related to these investments. (See Long-Term Investments)

                                       39
   40
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. and
U.K. banks or in custodial accounts with U.S. and U.K. banks. Cash equivalents
are defined as all liquid investments with maturity from date of purchase of 90
days or less that are readily convertible into cash and have insignificant
interest rate risk. All other investments are reported as marketable
securities -- available-for-sale.

     Marketable Securities-Available-for-Sale. All marketable securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. The amortized cost of
debt securities in this category is adjusted for amortization of premiums and
accretions of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be other than
temporary for available-for-sale securities are included in interest and other
income/expense. The cost of securities sold is based on the specific
identification method.

     The following is a summary of the Company's investment portfolio, excluding
the Company's investment in diaDexus and including cash equivalents of
$2,803,000 and $26,203,000 as of December 31, 1999 and 1998, respectively.



                                                                              NET
                                                                           UNREALIZED    ESTIMATED
                                                              AMORTIZED      GAINS         FAIR
                                                                COST        (LOSSES)       VALUE
                                                              ---------    ----------    ---------
                                                                         (IN THOUSANDS)
                                                                                
DECEMBER 31, 1999
U.S. Treasury notes and other U.S. government and agency
  securities................................................   $35,043       $ (326)      $34,717
Corporate debt securities...................................     2,800            3         2,803
Long term equity investments................................     9,848        4,333        14,181
                                                               -------       ------       -------
                                                               $47,691       $4,010       $51,701
                                                               =======       ======       =======
DECEMBER 31, 1998
U.S. Treasury notes and other U.S. government and agency
  securities................................................   $72,635       $  210       $72,845
Corporate debt securities...................................    14,543           --        14,543
Long term equity investments................................    12,245          182        12,427
                                                               -------       ------       -------
                                                               $99,423       $  392       $99,815
                                                               =======       ======       =======


     At December 31, 1999 and 1998, all of the Company's investments are
classified as short-term, as the Company has classified its investments as
available for sale and may not hold its investments until maturity in order to
take advantage of market conditions. At December 31, 1999, marketable securities
with a market value of $32,596,000 and an amortized cost of $32,846,000 had
maturities under a year and marketable securities with a market value of
$4,924,000 and an amortized cost of $4,997,000 had maturities over a year, but
less than two years. Unrealized losses were not material and have therefore been
netted against unrealized gains. Net realized gains of $272,000 and $380,000
from sales of marketable securities were included in Interest and Other Income
in 1999 and 1998, respectively, and net realized losses of $25,000 losses from
sales of marketable debt securities were included in Interest and Other Expense
in 1997.

     Accounts Receivable. Accounts receivable at December 31, 1999 and 1998
included an allowance for doubtful accounts of $234,000 and $434,000,
respectively.

     Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is recorded using the
straight-line method over the estimated useful lives of the

                                       40
   41
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

respective assets (generally two to five years). Leasehold improvements are
amortized over the shorter of the estimated useful life of the assets or lease
term. Property and equipment consists of the following:



                                                                  DECEMBER 31,
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
                                                                 (IN THOUSANDS)
                                                                    
Office equipment............................................  $  4,630    $  3,577
Laboratory equipment........................................    25,297      25,665
Computer equipment..........................................    52,565      35,209
Leasehold improvements......................................    37,941      26,026
                                                              --------    --------
                                                               120,433      90,477
Less accumulated depreciation and amortization..............   (53,140)    (36,048)
                                                              --------    --------
                                                              $ 67,293    $ 54,429
                                                              ========    ========


     Depreciation expense, including depreciation expense of assets under
capital leases, was $16,711,000, $13,420,000, and $8,758,000, for 1999, 1998,
and 1997, respectively. Amortization of leasehold improvements was $5,138,000,
$3,343,000, and $2,260,000 for 1999, 1998, and 1997, respectively.

     Certain laboratory and computer equipment used by the Company could be
subject to technological obsolescence in the event that significant advancement
is made in competing or developing equipment technologies. Management
continually reviews the estimated useful lives of technologically sensitive
equipment and believes that those estimates appropriately reflect the current
useful life of its assets. In the event that a currently unknown significantly
advanced technology became commercially available, the Company would re-evaluate
the value and estimated useful lives of its existing equipment, possibly having
a material impact on the financial statements.

     Long-Term Investments. The Company has made equity investments in a number
of companies whose businesses may be complementary to the Company's business.
The Company accounts for its investment in diaDexus ($5,094,000 and $8,226,000
at December 31, 1999 and 1998, respectively) under the equity method of
accounting (see Joint Venture and Note 10 ). All other investments in which the
shares are freely tradable or become freely tradable within one year of the
balance sheet date are accounted for in accordance with Statement of Financial
Accounting Standard ("SFAS") 115, with unrealized gains and losses being
reported in accumulated other comprehensive income (loss) as a separate
component of stockholders' equity. In all other cases, the cost method of
accounting is used. The Company holds less than 10% of each long-term
investment, other than diaDexus, and does not exert significant influence over
these investments.

     Joint Venture. In September 1997, the Company formed a joint venture,
diaDexus, LLC with SmithKline Beecham Corporation ("SB"), which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each hold a 50 percent equity interest
in diaDexus and the Company accounts for the investment under the equity method.
See Note 10.

     Goodwill and Other Intangible Assets. Goodwill and other intangible assets
were generated in the acquisition of Hexagen. Goodwill is being amortized on a
straight line basis over 8 years and the other intangible assets of developed
technology and assembled workforce are being amortized on a straight line basis
over 5 and 3 years, respectively. Goodwill and other intangible assets are
evaluated quarterly for impairment.

     Software Costs. In accordance with the provisions of the Financial
Accounting Standards Board Statement No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," the Company has
capitalized software development costs incurred in developing certain products
once technological feasibility of the products has been determined. At December
31, 1999 and 1998 the Company had capitalized software, net of amortization, of
$8,542,000 and $6,315,000, respectively, and

                                       41
   42
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

recorded amortization of capitalized software of $3,418,000, $1,379,000, and
$391,000 for the years ended December 31, 1999, 1998, and 1997, respectively.

     Accumulated Other Comprehensive Income. Accumulated Other Comprehensive
Income consists of the following:



                                                               DECEMBER 31,
                                                              ---------------
                                                               1999     1998
                                                              ------    -----
                                                              (IN THOUSANDS)
                                                                  
Unrealized gains on marketable securities...................  $4,010    $ 392
Cumulative Translation Adjustment...........................    (567)    (402)
                                                              ------    -----
                                                              $3,443    $ (10)
                                                              ======    =====


     Revenue Recognition. Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
database collaboration agreements revenues are recognized evenly over the term
of each agreement. Revenue is deferred for fees received before earned. Revenues
from custom orders, such as contract sequencing, and reagents are recognized
upon completion and delivery. Revenues from genomic screening services are
recognized upon completion. Revenue from gene expression microarray services
includes; technology access fees, which are generally recognized ratably over
the access term and usage fees which are recognized at the completion of key
stages in the performance of the service, in proportion to costs incurred.
Generally, software revenue is allocated between license fees and maintenance
fees, in accordance with SOP 97-2, with the license revenue being recognized
upon installation, and maintenance fees recognized evenly over the maintenance
term.

     Stock-Based Compensation. The Company accounts for stock option grants to
employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company currently grants stock options for a fixed number of
shares to employees and directors with an exercise price equal to the fair value
of the shares at the date of grant, and therefore records no compensation
expense. Prior to the merger with Incyte, Synteni recorded deferred compensation
of $1,658,000 for options issued to employees with an exercise price below the
fair market value of the underlying stock. The amount is being amortized over
the vesting period of the options issued.

     Advertising Costs. All costs associated with advertising products are
expensed in the year incurred. Advertising expense for the years ended December
31, 1999, 1998, and 1997 was $1,051,000, $1,092,000, and $772,000, respectively.

     New Pronouncements. In June 1998, the FASB issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. ("SFAS 133"). SFAS
133 established standards for accounting and reporting derivative instruments
and hedging activities. In June 1999, The FASB issued Statement No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 ("SFAS 137"). This statement defers the
effective date of SFAS 133 until June 15, 2000. Application of SFAS 133 will
have no impact on the consolidated financial position or results of operations
as currently reported.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Among other things, SAB 101 discusses the SEC staff's view on accounting
for non-refundable up-front fees. The Company is currently evaluating SAB 101 as
to whether it would have any material impact on the Company. Should the Company
determine that a change in its accounting policy is necessary, such a change
will be made effective January 1, 2000 and would result in a charge to results
of operations for the cumulative effect of the change. This amount, if
recognized, would be recorded as deferred revenue and recognized as revenue in
future periods. Prior financial statements would not be restated.
                                       42
   43
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. DATABASE AND MICROARRAY AGREEMENTS

     As of December 31, 1999, the Company had entered into database
collaboration agreements with over twenty pharmaceutical, biotechnology and
agricultural companies. Over 83% of revenues in 1999 were derived from such
collaborations. Each collaborator has agreed to pay, during the term of the
agreement, annual fees to receive non-exclusive access to selected modules of
the Company's databases. In addition, if a customer develops certain products
utilizing the Company's technology and proprietary database information,
milestone and royalty payments could potentially be received by the Company.

     The Company has also entered into microarray production agreements with
pharmaceutical, biotechnology and agricultural companies. The agreements range
from small volume pilot agreements to large volume production agreements.

     No collaborators individually contributed more than 10% of the Company's
total revenues in 1999 or 1997. One of the collaborators contributed 12% of the
Company's total revenues in 1998.

NOTE 3. COMMITMENTS

     At December 31, 1999, the Company had signed noncancelable operating leases
on multiple facilities, including facilities in Palo Alto and Fremont,
California, St. Louis, Missouri and Cambridge, England. The leases expire on
various dates ranging from March 2000 to March 2011. Rent expense for the years
ended December 31, 1999, 1998, and 1997, was approximately $8,674,000,
$5,218,000, and $3,490,000, respectively.

     The Company had laboratory and office equipment with a cost of
approximately $2,308,000 and $2,334,000 at December 31, 1999 and 1998,
respectively, and related accumulated amortization of approximately $716,000 and
$177,000 at December 31, 1999 and 1998, respectively, under capital leases.
These leases are secured by the equipment leased thereunder.

     At December 31, 1999, future noncancelable minimum payments under the
operating and capital leases and note payable were as follows:



                                                                           CAPITAL LEASES
                                                              OPERATING         AND
                                                               LEASES       NOTE PAYABLE
                                                              ---------    --------------
                                                                    (IN THOUSANDS)
                                                                     
Year ended December 31,
     2000...................................................  $ 15,364         $ 720
     2001...................................................    14,789           207
     2002...................................................    11,741            --
     2003...................................................     9,585            --
     2004...................................................     8,001            --
     Thereafter.............................................    47,001            --
                                                              --------         -----
Total minimum lease payments................................  $106,481           927
                                                              ========
Less amount representing interest...........................                    (126)
                                                                               -----
Present value of minimum lease payments.....................                     801
Less current portion........................................                    (607)
                                                                               -----
Non-current portion.........................................                   $ 194
                                                                               =====


     In July 1997, Synteni obtained $1,000,000 in debt financing secured by its
property and equipment. The loan is repayable in 48 equal monthly installments
commencing on September 1, 1997 and carries an annual interest rate of 9%. In
connection with the financing, Synteni issued a warrant to purchase 2,569 shares
of Incyte equivalent common stock, exercisable for a period of seven years from
the date of issue at an exercise

                                       43
   44
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

price of $7.79 per share. Using the Black-Scholes model to determine the fair
market value of the warrant, management has determined that such fair value is
nominal.

     The Company has entered into a number of research and development alliances
with companies and research institutions. These agreements provide for the
funding of research activities by the Company and the possible payment of
milestones, license fees, and, in some cases, royalties. As part of a
collaborative agreement with Oxford GlycoSciences plc ("OGS") relating to the
joint development of a proteomics database, the Company reimbursed OGS $5.0
million for services rendered in 1999 and has agreed to reimburse OGS up to
another $5.0 million in 2000 if revenues are not sufficient to offset OGS'
services rendered. The Company's commitments under any other of these agreements
do not represent a significant expenditure in relation to the Company's total
research and development expense.

NOTE 4. STOCKHOLDERS' EQUITY

     Common Stock. At December 31, 1999, the Company had reserved a total of
6,036,364 shares of its Common Stock for issuance upon exercise of outstanding
stock options and purchases under the Employee Stock Purchase Plan described
below. In October 1997, the Company's Board of Directors authorized a two-
for-one stock split effected in the form of a stock dividend paid on November 7,
1997 to holders of record on October 17, 1997. All share and per share data have
been adjusted retroactively to reflect the split.

     On May 21, 1997, the Company's stockholders approved an increase in the
number of shares authorized for issuance from 20,000,000 to 75,000,000.

     Preferred Stock. The Company is authorized to issue 5,000,000 shares of
preferred stock, none of which was outstanding at December 31, 1999 or 1998. The
Board of Directors may determine the rights, preferences and privileges of any
preferred stock issued in the future.

     Sales of Stock. In August 1997, the Company completed a follow-on public
stock offering and issued 2,755,426 shares of common stock, including 355,426
shares covered by the exercise of the underwriters' over-allotment option, at
$33.50 per share. Net proceeds from this offering were approximately $87.2
million after deducting the underwriting discount and offering expenses.

     Stock Compensation Plans. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock compensation plans.
Accordingly, no compensation cost, excluding options issued by Synteni prior to
the merger, has been recognized for its fixed stock option plans. Had
compensation cost for the Company's three stock-based compensation plans been
determined consistent with SFAS 123, the Company's pro forma net loss in 1999,
1998 and 1997 would have been approximately $40.0 million, $7.4 million, and
$0.5 million, respectively. The Company's pro forma basic and diluted net loss
per share in 1999, 1998, and 1997 would have been $1.42, $0.27, and $0.02 per
share, respectively. The weighted average fair value of the options granted
during 1999, 1998, and 1997 are estimated at $13.41, $16.59, and $14.66 per
share, respectively, on the date of grant, using the Black-Scholes
multiple-option pricing model with the following assumptions: dividend yield 0%,
0% and 0%, volatility of 66%, 57%, and 56%, risk-free interest rate with an
average of 5.43%, 5.06%, and 6.05%, and an average expected life of 3.32, 3.79,
and 3.37 years, for 1999, 1998, and 1997, respectively. The average fair value
of the employees' purchase rights under the Employee Stock Purchase Plan during
1999, 1998 and 1997 is estimated at $8.14, $12.15 and $11.86, respectively, on
the date of grant, using the Black-Scholes multiple-option pricing model with
the following assumptions: dividend yield 0%, 0% and 0%, volatility of 66%, 57%
and 56%, risk free interest rate of 5.14%, 4.75% and 5.64%, and an expected life
of 6 months, respectively.

     As SFAS 123 is only applicable to options granted after December 31, 1994,
the pro forma effect was not fully reflected until 1998. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which 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
                                       44
   45
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

volatility and option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, because
changes in the subjective input assumptions can materially affect the fair value
estimate, and because the Company has a relatively limited history with option
behavior, in management's opinion the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock options.

     Summaries of stock option activity for the Company's three fixed stock
option plans as of December 31, 1999, 1998 and 1997, and related information for
the years ended December 31 are included in the plan descriptions below.

     1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991
Stock Plan (the "Stock Plan"), which was amended and restated in 1992, 1995,
1996 and 1997 for issuance of common stock to employees, consultants, and
scientific advisors. Options issued under the plan shall, at the discretion of
the compensation committee of the Board of Directors, be either incentive stock
options or nonstatutory stock options. The exercise prices of incentive stock
options granted under the plan are not less than the fair market value on the
date of the grant, as determined by the Board of Directors. The exercise prices
of nonstatutory stock options granted under the plan cannot be less than 85% of
the fair market value on the date of the grant, as determined by the Board of
Directors. Options generally vest over four years, pursuant to a formula
determined by the Company's Board of Directors, and expire after ten years. On
June 8, 1999, the Company's stockholders approved an increase in the number of
shares of Common Stock reserved for issuance under the plan from 6,300,000 to
7,400,000.

     1996 Synteni Stock Plan. In December 1996, Synteni's board of directors
approved and adopted the 1996 Equity Incentive Plan ("Synteni Plan"). Under the
Synteni Plan, Synteni could grant incentive stock options, nonstatutory stock
options, stock bonuses or restricted stock purchase rights to purchase the
aggregate equivalent of 436,100 shares of Incyte Common Stock. Incentive stock
options could be granted to employees and nonstatutory options and rights to
purchase restricted stock may be granted to employees, directors or consultants
at exercise prices of no less than 100% and 85%, respectively, of the fair value
of the common stock on the grant date, as determined by the board of directors.
Options could be granted with different vesting terms from time to time and
options expire no more than 10 years after the date of grant. All outstanding
options at the time of the merger with Incyte were converted to options to
purchase Incyte Common Stock, and the Synteni Plan was terminated.

                                       45
   46
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Activity under the combined plans was as follows:



                                                                            SHARES SUBJECT TO
                                                                           OUTSTANDING OPTIONS
                                                                          ---------------------
                                                                                       WEIGHTED
                                                              SHARES                   AVERAGE
                                                            AVAILABLE                  EXERCISE
                                                            FOR GRANT      SHARES       PRICE
                                                            ----------    ---------    --------
                                                                              
Balance at January 1, 1997................................     478,808    2,938,086     $11.63
  Additional authorization................................     800,000           --         --
  Shares authorized under Synteni Plan....................     436,100           --         --
  Options granted.........................................  (1,159,508)   1,159,508      25.56
  Options exercised.......................................          --     (408,171)      7.27
  Options canceled........................................     109,398     (109,398)     19.27
                                                            ----------    ---------
Balance at December 31, 1997..............................     664,798    3,580,025      16.46
  Additional authorization................................   1,500,000           --         --
  Options granted.........................................  (1,002,834)   1,002,834      28.70
  Options exercised.......................................          --     (421,010)      8.52
  Options canceled........................................     207,763     (207,763)     30.73
  Termination of Synteni Plan.............................     (88,280)          --         --
                                                            ----------    ---------
Balance at December 31, 1998..............................   1,281,447    3,954,086      19.66
  Additional authorization................................   1,100,000           --         --
  Options granted.........................................  (2,571,044)   2,571,044      27.52
  Options exercised.......................................          --     (980,848)     12.71
  Options canceled........................................     669,704     (669,704)     27.52
                                                            ----------    ---------
Balance at December 31, 1999..............................     480,107    4,874,578     $24.15
                                                            ==========    =========


     Included in the above table, in the 1998 activity, were stock options
issued by Synteni to purchase 89,587 Incyte equivalent common shares at a
weighted average exercise price of $1.49, in the period from October 1, 1997 to
December 31, 1997. The Company recorded $1,658,000 of deferred compensation
related to these options, which is being amortized over the vesting period of
the options.

     Options to purchase a total of 1,862,676; 2,447,539; and 2,145,403 shares
at December 31, 1999, 1998, and 1997, respectively, were exercisable. Of the
options exercisable, 1,713,646; 1,851,549; and 1,197,542 shares were vested at
December 31, 1999, 1998, and 1997, respectively.

     Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of Common Stock to non-employee
directors of the Company. The maximum number of shares issuable under the
Directors' Plan is 400,000.

     The Directors' Plan provides immediate issuance of options to purchase an
initial 40,000 shares of Common Stock to each new non-employee director joining
the Board. The initial options are exercisable in five equal annual
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 10,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market value of the stock on the date of grant. Through December 31, 1999, the
Company had granted options under the Directors' Plan to purchase 307,500 shares
of Common Stock at weighted average exercise prices of $11.25 (287,500 and
267,500 shares of Common Stock at a weighted average exercise price of $11.18
and $8.71 at December 31, 1998 and 1997, respectively); 287,500 shares are
vested and exercisable at December 31, 1999 (241,500 and 171,500 shares were
vested and exercisable at

                                       46
   47
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1998 and 1997, respectively). To date, no options under the
Director's Plan have been exercised or canceled. The Directors' Plan was amended
in March 1998 by the Board of Directors to eliminate the grant referred to above
to each new non-employee director and to reduce the annual grants from 10,000
shares to 5,000 shares.

     The following table summarizes information about stock options outstanding
at December 31, 1999, for the 1991 Stock Plan, the 1996 Synteni Stock Plan, and
the 1993 Non-employee Directors' Stock Option Plan:



                             OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                  -----------------------------------------   ----------------------
                                    WEIGHTED       WEIGHTED                 WEIGHTED
                                    AVERAGE        AVERAGE                  AVERAGE
   RANGE OF         NUMBER         REMAINING       EXERCISE     NUMBER      EXERCISE
EXERCISE PRICES   OUTSTANDING   CONTRACTUAL LIFE    PRICE     EXERCISABLE    PRICE
- ---------------   -----------   ----------------   --------   -----------   --------
                                                             
$  0.50 -  7.25      722,279          4.89          $ 3.92       695,850     $ 3.99
   7.38 - 17.69      678,395          6.90           12.57       496,395      10.84
  18.00 - 20.94      684,028          7.44           20.17       433,062      20.21
  21.00 - 27.75      582,565          9.04           24.62        92,781      25.12
  28.00 - 30.13      918,683          9.22           29.34        25,605      28.13
  30.44 - 30.44      663,369          9.94           30.44           416      30.44
  31.00 - 36.63      737,008          8.30           35.12       312,454      35.13
  40.25 - 45.25      136,699          8.04           43.25        65,270      43.13
  45.44 - 47.00       59,052          8.19           46.12        28,343      46.16
                   ---------                                   ---------
                   5,182,078          7.98           23.38     2,150,176      16.31
                   =========                                   =========


     Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 400,000 shares of Common Stock for issuance under the ESPP. Each
regular full-time and part-time employee is eligible to participate after six
months of employment. The Company issued 79,377 and 38,944 shares under the ESPP
in 1999 and 1998, respectively. As of December 31, 1999, 281,679 shares remain
available for issuance under the ESPP. As of December 31, 1999 and 1998,
$221,000 and $162,000, respectively, has been deducted from employees' payroll
for the purchase of shares under the ESPP.

     Stockholders Rights Plan. On September 25, 1998, the Board of Directors
adopted a Stockholder Rights Plan (the "Rights Plan"), pursuant to which one
preferred stock purchase right (a "Right") was distributed for each outstanding
share of Common Stock held of record on October 13, 1998. One Right will also
attach to each share of Common Stock issued by the Company subsequent to such
date and prior to the distribution date defined below. Each Right represents a
right to purchase, under certain circumstances, a fractional share of the
Company's Series A Participating Preferred Stock at an exercise price of
$200.00, subject to adjustment. In general, the Rights will become exercisable
and trade independently from the Common Stock on a distribution date that will
occur on the earlier of (i) the public announcement of the acquisition by a
person or group of 15% or more of the Common Stock or (ii) ten days after
commencement of a tender or exchange offer for the Common Stock that would
result in the acquisition of 15% or more of the Common Stock. Upon the
occurrence of certain other events related to changes in ownership of the Common
Stock, each holder of a Right would be entitled to purchase shares of Common
Stock, or an acquiring corporation's common stock, having a market value of
twice the exercise price. Under certain conditions, the Rights may be redeemed
at $0.01 per Right by the Board of Directors. The Rights expire on September 25,
2008.

                                       47
   48
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. INCOME TAXES

     The provision for income taxes consists of the following (in thousands):



                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1999      1998     1997
                                                              -----    ------    ----
                                                                        
Current
  Federal...................................................  $(832)   $2,012    $533
  Foreign...................................................    (92)      165      15
  State.....................................................    124       175      --
                                                              -----    ------    ----
          Total provision (benefit) for income taxes........  $(800)   $2,352    $548
                                                              =====    ======    ====


     Income (loss) before provision for income taxes consisted of the following
(in thousands):



                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                                1999       1998      1997
                                                              --------    ------    ------
                                                                           
U.S.........................................................  $(27,869)   $5,536    $7,393
Foreign.....................................................       301       288        63
                                                              --------    ------    ------
                                                              $(27,568)   $5,824    $7,456
                                                              ========    ======    ======


     The provision (benefit) for income taxes differs from the federal statutory
rate as follows (in thousands):



                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1999       1998       1997
                                                              -------    -------    -------
                                                                           
Provision (benefit) at U.S. federal statutory rate..........  $(9,649)   $ 2,038    $ 2,610
State taxes, net of federal benefit.........................       81        112         --
Use of net operating loss carryforwards.....................       --     (4,208)    (3,373)
Unbenefitted net operating losses...........................    8,604         --      1,225
Acquired purchased in-process R&D...........................       --      3,842         --
Non-deductible acquisition costs............................       --        410         --
Other.......................................................      164        158         86
                                                              -------    -------    -------
Provision (benefit) for income tax..........................  $  (800)   $ 2,352    $   548
                                                              =======    =======    =======


     Significant components of the Company's deferred tax assets are as follows
(in thousands):



                                                                  DECEMBER 31
                                                              --------------------
                                                                1999        1998
                                                              --------    --------
                                                                    
Deferred tax assets
  Net operating loss carryforwards..........................  $ 18,700    $  6,200
  Research credits..........................................     9,700       6,900
  Capitalized research and development......................     7,700       6,100
  Accruals and reserves.....................................     2,800       2,600
  Other, net................................................     4,500       1,200
                                                              --------    --------
          Total deferred tax assets.........................    43,400      23,000
Valuation allowance for deferred tax assets.................   (43,400)    (23,000)
                                                              --------    --------
Net deferred tax assets.....................................  $     --    $     --
                                                              ========    ========


     The valuation allowance for deferred tax assets increased by approximately
$20,400,000, $4,800,000, and $3,300,000 during the years ended December 31,
1999, 1998, and 1997, respectively. Approximately

                                       48
   49
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$13,100,000 of the valuation allowance for deferred tax assets relates to
benefits from stock option deductions which, when recognized, will be allocated
directly to contributed capital.

     The Company's management believes the uncertainty regarding the timing of
the realization of net deferred tax assets requires a valuation allowance.

     As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $52,900,000. The Company also had federal
research and development tax credit carryforwards of approximately $6,600,000.
The net operating loss carryforwards will expire at various dates, beginning in
2009, through 2019 if not utilized.

     Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions.

NOTE 6. NET INCOME (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):



                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------    -------    -------
                                                                            
Numerator:
  Net income (loss).........................................  $(26,768)   $ 3,472    $ 6,908
                                                              ========    =======    =======
Denominator:
  Denominator for basic net income (loss) per
     share -- weighted-average shares outstanding...........    28,138     26,921     24,300
  Dilutive potential common shares -- stock options.........        --      1,978      2,198
                                                              --------    -------    -------
  Denominator for diluted net income (loss) per share.......    28,138     28,899     26,498
                                                              ========    =======    =======
Basic net income (loss) per share...........................  $  (0.95)   $  0.13    $  0.28
                                                              ========    =======    =======
Diluted net income (loss) per share.........................  $  (0.95)   $  0.12    $  0.26
                                                              ========    =======    =======


     Options and warrants to purchase 5,182,078 and 654,000 shares of common
stock were outstanding at December 31, 1999 and 1998, respectively, but were not
included in the computation of diluted net income (loss) per share, as their
effect was anti-dilutive. There were no such anti-dilutive securities in 1997.

NOTE 7. DEFINED CONTRIBUTION PLAN

     The Company has a defined contribution plan covering all domestic
employees. Employees may contribute a portion of their compensation, which is
then matched by the Company, subject to certain limitations. Defined
contribution expense for the Company was $1,259,000, $709,000, and $520,000, in
1999, 1998, and 1997, respectively.

NOTE 8. SEGMENT REPORTING

     The Company's operations are treated as one operating segment, in
accordance with SFAS 131, the design, development, and marketing of genomic
information-based tools, as it only reports profit and loss information on an
aggregate basis to chief operating decision makers of the Company. For the year
ended December 31, 1999, the Company recorded revenue from customers throughout
the United States and in Canada, Austria, Belgium, France, Germany, Israel,
Netherlands, Switzerland, and the United Kingdom. Export revenue for the years
ended December 31, 1999, 1998, and 1997, was $43,679,000, $33,584,000, and
$25,694,000, respectively.

                                       49
   50
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. BUSINESS COMBINATIONS

Acquisitions accounted for under the purchase method of accounting

     In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held SNP discovery company based in Cambridge, England.
The Company issued 976,130 shares of its common stock and $5.0 million in cash
in exchange for all of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if fully vested and exercised,
would amount to 125,909 shares of its common stock. The transaction was
accounted for as a purchase with a portion of the purchase price, estimated to
be approximately $11.0 million, expensed in the third quarter of 1998 as a
charge for the purchase of in-process research and development. The remaining
portion of the purchase price, approximately $17.6 million, was allocated to
goodwill ($16.3 million), developed technology ($0.7 million), and Hexagen's
assembled work force ($0.6 million), which are being amortized over 8, 5 and 3
years, respectively.

     The Company allocated Hexagen's purchase price based on the relative fair
value of the net tangible and intangible assets acquired. In performing this
allocation, the Company considered, among other factors, the technology research
and development projects in process at the date of acquisition. Hexagen's
in-process research and development program consisted of the development of its
fSSCP technology for SNP discovery. In 1999, the Company completed the
development of the fSSCP technology. There have been no significant changes in
the assumptions used to value the assets of Hexagen.

     The estimates used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the projected results. Any such variance may result in a
material adverse effect on the financial condition and results of operations of
the Company. The results of operations of Hexagen have been included in the
consolidated results of the Company from the date of acquisition in September
1998.

     Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility and
risks related to the impact of potential changes in future target markets.

     The table below presents the pro forma results of operations and earnings
per share for Hexagen and the Company. The transaction is assumed to be
completed on January 1, 1998 for the period ended December 31, 1998 and January
1, 1997 for the period ended December 31, 1997.



                                                                1998       1997
                                                              --------    -------
                                                                    
Revenues....................................................  $134,811    $89,996
                                                              ========    =======
Net income..................................................  $  7,323    $   271
                                                              ========    =======
Pro forma basic net income per share........................  $   0.27    $  0.01
                                                              ========    =======
Pro forma diluted net income per share......................  $   0.25    $  0.01
                                                              ========    =======
Pro forma shares for basic net income per share.............    27,340     25,276
                                                              ========    =======
Pro forma shares for diluted net income per share...........    29,459     27,588
                                                              ========    =======


Acquisitions accounted for under the pooling of interests method of accounting

     In January 1998, the Company issued 2,340,237 shares of common stock in
exchange for all of the capital stock of Synteni, a privately held
microarray-based genomics company in Fremont, California. Synteni is developing
and commercializing technology for generating microarrays and related software
and services. The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements and financial data have been
restated to include the accounts and operations of Synteni since inception.

                                       50
   51
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The table below presents the separate results of operations for Incyte, and
Synteni prior to the merger. Incyte's results include Synteni from January 1998.



                                                                1998       1997
                                                              --------    -------
                                                                    
Revenues:
  Incyte....................................................  $134,811    $88,351
  Synteni...................................................        --      1,645
                                                              --------    -------
                                                              $134,811    $89,996
                                                              ========    =======
Net income (loss):
  Incyte....................................................  $  4,532    $10,408
  Synteni...................................................        --     (3,500)
  Acquisition-related charges...............................    (1,060)        --
                                                              --------    -------
                                                              $  3,472    $ 6,908
                                                              ========    =======


NOTE 10. JOINT VENTURE

     In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company holds a 50 percent equity interest in
diaDexus and accounts for the investment under the equity method. In July 1999,
the Company and SB each invested an additional $2.5 million in diaDexus through
convertible notes that mature in April 2000. The notes bear interest at 5.6%,
and are subordinate to all other claims. The notes, principal plus accrued
interest, will automatically convert into diaDexus Series C Preferred Stock upon
the closing of the sale of Series C Preferred Stock of diaDexus that results in
aggregate proceeds to diaDexus of at least $10 million, including the $5 million
that would result from the conversion of the loans from SB and the Company.

     diaDexus purchased $1.9 million of contract sequencing and microarray
services from the Company in the year ended December 31, 1999 and did not have
similar purchases prior to 1999. At December 31, 1999, the Company had $0.1
million of receivables outstanding from diaDexus related to these services.

     The following is summary of diaDexus' financial information as of December
31, 1999, 1998 and 1997, for the years ended December 31, 1999 and 1998, and the
period from inception (September 1997) through December 31, 1997 (in thousands):



                                                         1999       1998       1997
                                                        -------    -------    -------
                                                                     
Current assets........................................  $ 8,786    $16,866    $ 6,625
Total assets..........................................   11,297     20,215     10,212
Current liabilities...................................    5,957      3,565      2,658
Total liabilities.....................................    6,044      3,681      2,760
Net loss..............................................   11,286      7,928        548


NOTE 11. LITIGATION

     In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the
United States District Court for the District of Delaware, subsequently
transferred to the United States District Court for the Northern District of
California in November 1998, alleging infringement of U.S. patent number
5,445,934 (the "'934 Patent") by both Synteni and Incyte. The complaint alleges
that the '934 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the U.S. high density arrays by
Synteni and Incyte and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '934 Patent and, in addition, seeks damages, costs and attorney's fees

                                       51
   52
                          INCYTE PHARMACEUTICALS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and interest. Affymetrix further requests that any such damages be trebled based
on its allegation of willful infringement by Incyte and Synteni.

     In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware, subsequently transferred to
the United States District Court for the Northern District of California in
November 1998, alleging infringement of the U.S. patent number 5,800,992 (the
"992 Patent") and U.S. patent number 5,744,305 (the "'305 Patent") by both
Synteni and Incyte. The complaint alleges that the '305 Patent has been
infringed by the making, using, selling, importing, distributing or offering to
sell in the United States high density arrays by Synteni and Incyte, that the
'992 Patent has been infringed by the use of Synteni's and Incyte's
GEM(TM)microarray technology to conduct gene expression monitoring using two-
color labeling, and that such infringement was willful. Affymetrix seeks a
permanent injunction enjoining Synteni and Incyte from further infringement of
the '305 and '992 Patents and, in addition, Affymetrix had sought a preliminary
injunction enjoining Incyte and Synteni from using Synteni's and Incyte's GEM
microarray technology to conduct gene expression monitoring using two-color
labeling as described in the '992 Patent. Affymetrix's request for a preliminary
injunction was denied in May 1999. As a result of the assignment of the case to
a new judge, all scheduled trial and pretrial dates have been vacated. The court
is expected to set a new schedule in late April 2000.

     In April 1999, the Board of Patent Appeals and Interferences of United
States Patent and Trademark Office (PTO) declared interferences between pending
patent applications licensed exclusively to Incyte and the Affymetrix '305 and
'992 Patents. An interference proceeding is invoked by the PTO when more than
one patent applicant claims the same invention. The Board of Patent Appeals and
Interferences evaluates all relevant facts, including those bearing on first to
invent, validity, enablement and scope of claims, and then makes a determination
as to who, if anyone, is entitled to the patent on the disputed invention. In
September 1999, the Board of Patent Appeals and Interferences determined that
Incyte had not met its prima facie case, and ruled that the patents licensed by
Incyte and Synteni from Stanford University were not entitled to priority over
corresponding claims in the two Affymetrix patents. The Company is seeking de
novo review of the Board decisions in the United States District Court for the
Northern District of California. Incyte and Synteni believe they have
meritorious defenses and intend to defend the suits vigorously. However, there
can be no assurance that Incyte and Synteni will be successful in the defense of
these suits. At this time, the Company cannot reasonably estimate the possible
range of any loss resulting from these suits due to uncertainty regarding the
ultimate outcome. Regardless of the outcome, this litigation has resulted and is
expected to continue to result in substantial expenses and diversion of the
efforts of management and technical personnel. Further, there can be no
assurance that any license that may be required as a result of this suit or the
outcome thereof would be made available on commercially acceptable terms, if at
all.

NOTE 12. SUBSEQUENT EVENTS

     In February 2000, in a private placement, the Company issued $200 million
of convertible subordinated notes, which resulted in net proceeds of
approximately $196.8 million. The notes bear interest at 5.5%, payable
semi-annually on March 1 and September 1, and are due February 1, 2007. The
notes are subordinate to all other indebtedness. The notes can be converted at
the option of the holder at a price of $134.84 per share. The Company may redeem
the notes at any time before February 7, 2003, only if the Company's stock
exceeds 150% of the conversion price for 20 trading days in a period of 30
consecutive trading days. On or after February 7, 2003 the Company may redeem
the notes at specific prices. Holders may require the Company to repurchase the
notes upon a change in control, as defined.

     In February 2000, in a private placement, the Company issued 2,000,000 of
its common stock at a price of $211 per share, resulting in net proceeds of
$398.3 million.

                                       52
   53

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS



                                                        BALANCE AT   CHARGED TO                BALANCE AT
                                                        BEGINNING    COSTS AND                   END OF
                     DESCRIPTION                        OF PERIOD     EXPENSES    DEDUCTIONS     PERIOD
                     -----------                        ----------   ----------   ----------   ----------
                                                                         (IN THOUSANDS)
                                                                                   
Allowance for doubtful accounts -- 1997...............     $ --         $260        $ (35)        $225
Allowance for doubtful accounts -- 1998...............      225          213           (4)         434
Allowance for doubtful accounts -- 1999...............      434           --         (200)         234


                                       53
   54

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Members of
diaDexus, LLC

     In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in members' equity and of cash flows present fairly,
in all material respects, the financial position of diaDexus, LLC (a development
stage company) at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, for the
period from inception (September 1997) through December 31, 1997 and for the
period from inception (September 1997) through December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ PricewaterhouseCoopers LLP

January 17, 2000

                                       54
   55

                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEET

                                     ASSETS



                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 1999           1998
                                                              -----------    -----------
                                                                       
Current assets:
  Cash and cash equivalents.................................  $ 8,358,000    $16,454,000
  Prepaid expenses and other current assets.................      428,000        412,000
                                                              -----------    -----------
          Total current assets..............................    8,786,000     16,866,000
Property and equipment, net.................................    2,442,000      3,280,000
Deposits....................................................       69,000         69,000
                                                              -----------    -----------
                                                              $11,297,000    $20,215,000
                                                              ===========    ===========

                            LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
  Due to Members............................................  $ 5,456,000    $ 2,690,000
  Accounts payable..........................................       42,000        239,000
  Accrued liabilities.......................................      459,000        636,000
                                                              -----------    -----------
          Total current liabilities.........................    5,957,000      3,565,000
Deferred rent...............................................       87,000        116,000
                                                              -----------    -----------
          Total liabilities.................................    6,044,000      3,681,000
                                                              -----------    -----------
Commitments (Note 8)
Members' equity:
  Series A preferred capital; 4,400,000 units authorized,
     issued and outstanding.................................    5,119,000     10,762,000
  Series B preferred capital; 4,400,000 units authorized,
     issued and outstanding.................................      119,000      5,762,000
  Common capital; 2,200,000 units authorized; no units
     issued and outstanding.................................           --             --
  Additional paid-in capital................................       15,000         10,000
                                                              -----------    -----------
          Total Members' equity.............................    5,253,000     16,534,000
                                                              -----------    -----------
                                                              $11,297,000    $20,215,000
                                                              ===========    ===========


   The accompanying notes are an integral part of these financial statements.
                                       55
   56

                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                            STATEMENT OF OPERATIONS



                                                                                   FOR THE PERIOD
                                                                                   FROM INCEPTION
                                                                                     (SEPTEMBER
                                                      YEAR ENDED DECEMBER 31,       1997) THROUGH
                                                    ---------------------------     DECEMBER 31,
                                                       1998            1999             1999
                                                    -----------    ------------    ---------------
                                                                          
License revenue...................................  $        --    $    100,000     $    100,000
Operating expenses:
  Research and development........................    6,761,000       9,461,000       16,623,000
  General and administrative......................    1,882,000       2,345,000        4,506,000
                                                    -----------    ------------     ------------
Loss from operations..............................   (8,643,000)    (11,706,000)     (21,029,000)
Interest and other income, net....................      715,000         540,000        1,387,000
Interest expense..................................           --        (120,000)        (120,000)
                                                    -----------    ------------     ------------
Net loss..........................................  $(7,928,000)   $(11,286,000)    $(19,762,000)
                                                    ===========    ============     ============


   The accompanying notes are an integral part of these financial statements.
                                       56
   57

                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                     STATEMENT OF CHANGES IN MEMBERS EQUITY
                 FOR THE PERIOD FROM INCEPTION (SEPTEMBER 1997
                           THROUGH DECEMBER 31, 1999



                                           SERIES A                  SERIES B
                                       PREFERRED CAPITAL         PREFERRED CAPITAL      ADDITIONAL      MEMBER
                                    -----------------------   -----------------------    PAID-IN     CONTRIBUTIONS
                                      UNITS       AMOUNT        UNITS       AMOUNT       CAPITAL      RECEIVABLE        TOTAL
                                    ---------   -----------   ---------   -----------   ----------   -------------   ------------
                                                                                                
Issuance, at inception, of Series
  A preferred units at $3.41 per
  unit............................  4,400,000   $15,000,000          --   $        --    $    --     $(11,000,000)   $  4,000,000
Issuance, at inception, of Series
  B preferred units at $2.27 per
  unit............................         --            --   4,400,000    10,000,000         --       (6,000,000)      4,000,000
Net loss..........................         --      (274,000)         --      (274,000)        --               --        (548,000)
                                    ---------   -----------   ---------   -----------    -------     ------------    ------------
Balance at December 31, 1997......  4,400,000    14,726,000   4,400,000     9,726,000         --      (17,000,000)      7,452,000
Proceeds received from Members....         --            --          --            --         --       17,000,000      17,000,000
Stock-based compensation..........         --            --          --            --     10,000               --          10,000
Net loss..........................         --    (3,964,000)         --    (3,964,000)        --               --      (7,928,000)
                                    ---------   -----------   ---------   -----------    -------     ------------    ------------
Balance at December 31, 1998......  4,400,000    10,762,000   4,400,000     5,762,000     10,000               --      16,534,000
Stock-based compensation..........         --            --          --            --      5,000               --           5,000
Net loss..........................         --    (5,643,000)         --    (5,643,000)        --               --     (11,286,000)
                                    ---------   -----------   ---------   -----------    -------     ------------    ------------
Balance at December 31, 1999......  4,400,000   $ 5,119,000   4,400,000   $   119,000    $15,000     $         --    $  5,253,000
                                    =========   ===========   =========   ===========    =======     ============    ============


   The accompanying notes are an integral part of these financial statements.
                                       57
   58

                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                            STATEMENT OF CASH FLOWS



                                                                                    FOR THE PERIOD
                                                                                    FROM INCEPTION
                                                                                   (SEPTEMBER 1997)
                                                       YEAR ENDED DECEMBER 31,         THROUGH
                                                      --------------------------     DECEMBER 31,
                                                         1998           1999             1999
                                                      -----------   ------------   ----------------
                                                                          
CASH FLOW USED IN OPERATING ACTIVITIES:
  Net loss..........................................  $(7,928,000)  $(11,286,000)    $(19,762,000)
  Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation...................................    1,657,000      1,072,000        2,731,000
     Loss on disposal of property and equipment.....       23,000          3,000           26,000
     Stock-based compensation.......................       10,000          5,000           15,000
     Changes in assets and liabilities:
       Prepaid expenses and other current assets....     (319,000)       (24,000)        (428,000)
       Accounts payable.............................      239,000       (197,000)          42,000
       Accrued liabilities..........................      244,000       (177,000)         274,000
       Due to Members...............................      132,000     (2,234,000)      (1,917,000)
       Deposits.....................................        2,000             --           (2,000)
       Deferred rent................................       14,000        (29,000)          87,000
                                                      -----------   ------------     ------------
          Net cash used in operating activities.....   (5,926,000)   (12,867,000)     (18,934,000)
                                                      -----------   ------------     ------------
CASH FLOW USED IN INVESTING ACTIVITIES:
  Purchase of property and equipment................   (1,160,000)      (238,000)      (1,670,000)
  Proceeds from sale of equipment...................           --          9,000            9,000
                                                      -----------   ------------     ------------
          Net cash used in investing activities.....   (1,160,000)      (229,000)      (1,661,000)
                                                      -----------   ------------     ------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
  Proceeds from issuance of Series A Preferred
     Units..........................................           --             --       13,953,000
  Proceeds from issuance of Series B Preferred
     Units..........................................           --             --       10,000,000
  Proceeds from Member contributions receivable.....   17,000,000             --               --
  Proceeds from bridge loan payable to Members......           --      5,000,000        5,000,000
                                                      -----------   ------------     ------------
          Net cash provided by financing
            activities..............................   17,000,000      5,000,000       28,953,000
                                                      -----------   ------------     ------------
Net (decrease) increase in cash and cash
  equivalents.......................................    9,914,000     (8,096,000)       8,358,000
Cash and cash equivalents at beginning of period....    6,540,000     16,454,000               --
                                                      -----------   ------------     ------------
Cash and cash equivalents at end of period..........  $16,454,000   $  8,358,000     $  8,358,000
                                                      ===========   ============     ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
  ACTIVITIES:
  Capital contribution of property and equipment....  $        --   $         --     $  1,047,000
                                                      ===========   ============     ============
  Construction in-progress funded by a Member.......  $   106,000   $         --     $  2,305,000
                                                      ===========   ============     ============
  Deposit funded by a Member........................  $        --   $         --     $     67,000
                                                      ===========   ============     ============


   The accompanying notes are an integral part of these financial statements.
                                       58
   59

                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

     diaDexus, LLC (the "Company") was formed in Delaware as a limited liability
company ("LLC") in September 1997 for the purpose of discovery and
commercialization of novel molecular diagnostic products. The Company's founders
and members ("Members") are SmithKline Beecham Corporation ("SmithKline
Beecham") and Incyte Pharmaceuticals, Inc. ("Incyte"). The Company is in the
development stage at December 31, 1999, devoting substantially all of its
efforts to recruiting personnel, financial planning, establishing its
facilities, defining its research and product development strategies and
conducting research and development.

     In connection with forming the Company, SmithKline Beecham and Incyte
entered into several agreements during September 1997, including an Operating
Agreement (the "Operating Agreement") and a Master Strategic Relationship
Agreement (the "Master Agreement"). The Operating Agreement serves as the
Company's by-laws while the Master Agreement documents certain specific matters
regarding the operation of the Company. During September 1997, the Company
issued 4,400,000 Series A Preferred Units to SmithKline Beecham in exchange for
an initial capital contribution of $4.0 million in cash and assets and a
contractual commitment for additional cash contributions of $11.0 million, which
was received in two installments on April 15 and July 15, 1998. Concurrently,
the Company issued 4,400,000 of Series B Preferred Units to Incyte in exchange
for an initial capital contribution of $4.0 million in cash and a contractual
commitment for additional cash contributions of $6.0 million, which was received
in two installments on April 15 and July 15, 1998.

     In addition to the above contributions, SmithKline Beecham has granted the
Company various exclusive and non-exclusive rights to develop certain diagnostic
tests using genes identified by SmithKline Beecham, including genes identified
by SmithKline Beecham from the Human Genome Sciences, Inc. collaboration.
SmithKline Beecham has also granted the Company an exclusive license for a
number of diagnostic tests which are in late stage clinical validation. Incyte
has provided the Company with non-exclusive access to certain of its gene
sequence and expression databases for various exclusive and non-exclusive rights
to diagnostic applications. The Company will pay royalties to Incyte and Human
Genome Sciences, Inc. on the sale of certain products developed using their
respective proprietary databases. Both SmithKline Beecham and Incyte have also
non-exclusively licensed various additional technologies useful in the
diagnostic field to the Company. Noncash assets received as capital
contributions have been recorded in amounts equal to the Members' net book
value, which was zero for all the property and rights described above.

     The Operating Agreement specifies that the LLC would merge into a C
corporation at the earliest of (i) the eighteen month anniversary of the
Company's formation (March 1999); (ii) any time after January 1, 1999, if the
Company's cash balance falls below $2.0 million, or (iii) the mutual agreement
of SmithKline Beecham and Incyte. Pursuant to an agreement in principle, the
Members agreed during 1999 to defer merging the LLC into a C corporation until
such time as a proposed Preferred Stock financing is completed (see Note 2).

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents at
December 31, 1999 consist of a money market investment totaling $8,174,000, the
carrying amount of which approximates fair value.

                                       59
   60
                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains its cash and cash equivalents in a money market fund with
a high-credit quality financial institution.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at the Company's cost, less accumulated
depreciation. Assets contributed by the Members are recorded at amounts equal to
the Members' net book value. Depreciation is computed using the straight-line
method over the estimated remaining useful lives of the assets, which is
generally one to three years. Leasehold improvements are depreciated over the
shorter of their useful lives or the term of the lease.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development costs are expensed as incurred.

EQUITY-BASED COMPENSATION

     The Company has adopted the pro forma disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). As permitted, the Company continues to recognize
equity-based compensation to employees under the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25. The pro
forma effect of applying SFAS 123 is described in Note 7 to the financial
statements.

     Stock compensation expense for options granted to consultants has been
determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The fair value of options granted to
consultants is periodically remeasured as the underlying options vest.

INCOME TAXES

     No provision or benefit for federal and state income taxes is reported in
the financial statements as the Company has elected to be taxed as a
partnership. The federal and state income tax effects of the Company's results
of operations are recorded by the Members in their respective income tax
returns.

USE OF ESTIMATES

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

2. NEED FOR ADDITIONAL FINANCING

     These financial statements are prepared on a going concern basis that
contemplates the realization of assets and discharge of liabilities in the
normal course of business. From inception, the Company has suffered recurring
losses from operations totaling $19,762,000 and currently does not have
financing sufficient for continued operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management is
currently pursuing several financing alternatives, including a private placement
of Preferred Stock. There can be no assurance, however, that such a financing
will be successfully completed on

                                       60
   61
                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

terms acceptable to the Company. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

3. RELATED PARTY TRANSACTIONS

     Under an Intercompany Services Agreement, SmithKline Beecham and Incyte
have agreed to provide the Company with certain services, including legal,
financial and research and development. Charges for these services are either
based on actual costs incurred by each Member or, if available, rates charges to
other customers for similar services. During 1998, the Company incurred related
charges of $86,000 and $72,000 from SmithKline Beecham and Incyte, respectively,
all of which has been included in research and development expense. During 1999,
the Company incurred additional charges of $0 and $1,928,000 from Smithkline
Beecham and Incyte, respectively, all of which has been included in research and
development expense.

     Additionally, SmithKline Beecham has agreed to pay, on the Company's
behalf, certain costs associated with the build-out of the Company's leased
facility. Such amounts were included in leasehold improvements and laboratory
equipment at December 31, 1999 and 1998.

     In September 1998, the Company entered into a service agreement with
SmithKline Beecham and SmithKline Beecham plc. Under the agreement, SmithKline
Beecham plc will employ an individual to monitor journals and databases for
information on genes and proteins which may be of interest to the Company's
research efforts. The term of the agreement is one year, unless otherwise
modified by the Company and SmithKline Beecham plc. In consideration for such
services, the Company paid a total of $200,000, all of which was included in
research and development expense.

     In March 1998, the Company entered into a collaboration and license
agreement with Incyte and a third party (see Note 4). The agreement was
terminated on January 6, 2000.

     At December 31, 1999 and 1998, due to Members consisted of $2,631,000 and
$2,618,000, respectively, due to SmithKline Beecham and $2,825,000 and $72,000,
respectively, due to Incyte.

BRIDGE LOANS

     In July 1999, the Company issued two convertible notes for $2,500,000, one
to SmithKline Beecham and the other to Incyte. Interest accrues at 5.6% per
annum and the principal and interest is due and payable in April 2000 (the
"Repayment Date"). Should the Company complete the sale and issuance of shares
of its Preferred Stock prior to the Repayment Date in one or more closings
generating aggregate proceeds of at least $5,000,000, the principal amount of
the notes and interest accrued thereon shall automatically convert into shares
of the Company's Preferred Stock. The convertible notes will convert at the same
price per share and on the same terms and conditions at which such shares of
Preferred are sold to the other investors.

4. COLLABORATION AND LICENSE AGREEMENTS

     In November 1999, the Company entered into a collaboration and license
agreement with another company (the "Collaborator") whereby the Company will
engage in a research program (the "Program") for two years to develop and
commercialize certain in vitro cardiovascular diagnostic products. Under this
collaboration, diaDexus will identify and select targets with potential
cardiovascular diagnostic utility. The Collaborator will manufacture and deliver
the antibodies required by the Program. The royalty fee structure is dependent
upon various factors, including which entity bears the costs of developing the
antibody and the format of the product. Through December 31, 1999, the Company
has not recorded any amounts relating to this agreement.

                                       61
   62
                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     In February 1999, the Company entered into a royalty-bearing license
agreement with a clinical reference laboratory company whereby the Company
granted the licensee the right and license to make, use, have made, and import
materials or components for the sole purpose of developing tests performed on
human serum for the diagnosis and/or prognosis of prostate cancer. The Company
received a $100,000 non-refundable license fee, which was recognized as license
revenue and is fully creditable against future royalties. Through December 31,
1999, the Company has not recorded any royalty revenue related to this license
agreement.

     In September 1998, the Company entered into a worldwide, exclusive,
royalty-bearing license agreement whereby the Company was granted the right to
develop, manufacture and sell certain products relating to diagnosis of cervical
disease. The Company paid a non-refundable fee of $250,000 upon signing the
agreement for access to related technology for a six month evaluation period.
The Company amortized the initial fee over a six-month evaluation period. In
March 1999, the Company paid an amended first milestone fee of $250,000, which
was included in research and development expense in 1999. The Company had the
option to terminate the agreement without penalty through the earlier of the
successful completion of the predetermined development plan or September 30,
2000. In July 1999, the Company and licensee mutually agreed to terminate the
agreement. The Company was relieved of any obligation or liability to make any
further payments to the licensee subsequent to a final payment of $50,000 which
was expensed in August 1999.

     In March 1998, the Company entered into a collaboration and license
agreement with Incyte and a third party (collectively, the "Licensor"). The
agreement provides the Company access to certain information and databases
relating to prostate disease for an initial option period which expires on the
later of March 18, 1999 or six months following the completion of certain
research activities, as defined. The Company may then, at its option, enter into
either an exclusive or a non-exclusive license arrangement with the Licensor.
Future consideration for entering into an exclusive license arrangement is
$1,000,000 or $500,000 for a non-exclusive license. Additionally, should it
choose to obtain either license, the Company will owe the Licensor $100,000 upon
approval for sale in certain countries of each product developed as a result of
the collaboration and license agreement. The $100,000 payments are creditable
against future royalties on sales of the related products. On January 6, 2000,
the Company, Incyte and the Licensor agreed to terminate the collaboration and
license agreement.

5. PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:



                                                                   DECEMBER 31,
                                                            --------------------------
                                                               1999           1998
                                                            -----------    -----------
                                                                     
Leasehold improvements....................................  $ 2,632,000    $ 2,111,000
Laboratory equipment......................................    1,434,000      1,313,000
Computer equipment and software...........................      639,000        599,000
Furniture and fixtures....................................      449,000        428,000
Construction-in-progress..................................           --        477,000
                                                            -----------    -----------
                                                              5,154,000      4,928,000
Less accumulated depreciation.............................   (2,712,000)    (1,648,000)
                                                            -----------    -----------
                                                            $ 2,442,000    $ 3,280,000
                                                            ===========    ===========


                                       62
   63
                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. MEMBERS' EQUITY

     In accordance with the terms of the Operating Agreement, the rights and
preference of the Members, as well as the allocation and distribution of net
income or losses, are as follows:

PREFERRED UNITS

     At December 31, 1999 and 1998, the Company had authorized and outstanding
8,800,000 Preferred Units ("Preferred Units"), of which 4,400,000 are designated
Series A and 4,400,000 are designated as Series B. Each Preferred Unit is
entitled to one vote on all matters, other than the election of the Board of
Directors, including Member distributions. The holders of Series A and B
Preferred Units are each entitled, upon approval of the majority of the units
within each series, to elect two of the five Directors constituting the Board.
The fifth Board member is the Company's Chief Executive Officer who was elected
by the A/B Members, voting as a class (by vote of the holders of a majority of
the Series A and Series B Preferred Units).

     In the event the Company makes a distribution, each Preferred Unit has a
distribution preference of $11.36 per unit (defined as the "Original Purchase
Price"), plus a 15% per annum compounded rate of return (the "Preference
Amount") on such Original Purchase Price.

     If and when the Company merges into a C corporation, each Preferred Unit
will automatically convert into one share of Preferred Stock. Each member will
also receive 100 shares of Common Stock upon such conversion.

COMMON UNITS

     At December 31, 1999, the Company had authorized 2,200,000 Common Units for
issuance in connection with a unit option plan. Common Units have no voting
rights and, after payment of the Preference Amount to the Preferred Unit
holders, distributions (if any) are allocated ratably among holders of both the
Common and Preferred Units. As of December 31, 1999, no units had been issued
under the Company's option plan.

ALLOCATION OF NET LOSSES AND NET INCOME

     Net losses of the Company are allocated (i) to the members of the Preferred
and Common Units in proportion to their relative number of units to the extent
that this would not cause such holders to have a capital deficit; (ii) to the
extent any holder's capital account would equal zero the loss is allocated to
all other holders in proportion to their relative ownership of units until such
allocation would cause those holders to have a capital account balance of zero;
(iii) thereafter, the remaining loss would be allocated to all holders in
proportion to their relative number of units.

     Net income of the Company is allocated (i) to the holders of Preferred
Units proportionately based on their capital account deficit until all capital
accounts are zero; (ii) to the holders of Preferred Units whose capital account
is less than any declared but unpaid dividend in proportion to their respective
unpaid dividends; (iii) to the holders of Preferred Units whose capital account
is less than any unpaid Preference Amount in proportion to such amounts; (iv) to
each Common Unit that has a capital account less than any distributed amount in
proportion to such amounts; and (v) thereafter, to all holders in proportion to
their relative number of units.

DIVIDENDS

     The holders of the Preferred Units are entitled to receive a non-cumulative
dividend, if and when declared by the Board, at a rate of 8% per annum of the
undistributed Preference Amount attributable to each Preferred Unit, prorated
for any partial year, commencing on the first date each Preferred Unit is issued
and

                                       63
   64
                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

outstanding. Dividends shall be paid from available cash after approval of at
least 75% of the Preferred Unit holders.

LIQUIDATION

     In the event of any liquidation of the Company, distributions, if any, will
be made to all unit holders in proportion to the positive balance in their
respective capital accounts, after giving cumulative effect to all
contributions, distributions and allocations for all periods and payment of
costs for winding up of the business, payment of debts, and establishment of
appropriate reserves.

7. EMPLOYEE BENEFIT PLANS

     In January 1998, the Company's Board of Directors adopted the 1997
Incentive Plan (the "1997 Plan") under which 1,200,000 shares of the Company's
Common Units ("Units") were reserved for issuance to employees and consultants
of the Company. During 1999, the Company increased the number of Units reserved
for future issuance by 1,000,000. Options granted under the 1997 Plan are for
terms not to exceed ten years. If the option is granted to an individual who, at
the time of grant, owns a membership interest in the Company representing more
than 10% of the voting power of all classes of membership interest of the
Company or any parent or subsidiary, the exercise price of the stock option must
be at least 110% of the estimated fair value of the Units at the date of grant.
Exercise prices of options granted to all other persons must be at least 85% of
the estimated fair value of the Units at the date of grant. Options under the
1997 Plan generally vest over four to five years. The 1997 Plan expires in 2008.

     Information regarding the Company's option activity is summarized below:



                                                                                 WEIGHTED
                                                                                 AVERAGE
                                                     OPTIONS        OPTIONS      EXERCISE
                                                    AVAILABLE     OUTSTANDING     PRICE
                                                    ----------    -----------    --------
                                                                        
Options authorized................................   1,200,000            --      $  --
Granted...........................................    (760,500)      760,500       0.36
Canceled..........................................      44,250       (44,250)      0.35
                                                    ----------     ---------
Balance at December 31, 1998......................     483,750       716,250       0.36
Options authorized................................   1,000,000            --         --
Granted...........................................  (1,055,083)    1,055,083       0.75
Canceled..........................................     433,738      (433,738)      0.47
                                                    ----------     ---------
Balance at December 31, 1999......................     862,405     1,337,595       0.63
                                                    ==========     =========


     The following table summarizes information about options outstanding and
exercisable under the 1997 Plan at December 31, 1999:



              OPTIONS OUTSTANDING        OPTIONS EXERCISABLE
           --------------------------   ----------------------
                           WEIGHTED                 WEIGHTED
                           AVERAGE                  AVERAGE
EXERCISE                  REMAINING                REMAINING
 PRICE       NUMBER      CONTRACTUAL              CONTRACTUAL
PER UNIT   OUTSTANDING   LIFE (YEARS)   NUMBER    LIFE (YEARS)
- --------   -----------   ------------   -------   ------------
                                      
0$.35..       387,354        8.14       277,322       8.13
0$.75..       950,241        9.04       158,754       8.15
            ---------                   -------
            1,337,595        8.78       436,076       8.13
            =========                   =======


                                       64
   65
                                 DIADEXUS, LLC
           A LIMITED LIABILITY COMPANY (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Had compensation cost for the Company's option plan been determined based
on the fair value at the grant date as prescribed in SFAS 123, the Company's net
loss for 1999 and 1998 would have increased by $27,000 and $15,000,
respectively. The fair value of each option grant is estimated on the date of
grant using the minimum value method with the following assumptions used for
grants during December 31, 1999 and 1998: dividend yield of zero percent,
risk-free interest rates of 5.9% and 5.4%, respectively, and a weighted average
expected option term of 4 and 5 years, respectively. The calculation of
compensation expense recorded for options to consultants also includes
volatility of 70% for both 1999 and 1998.

     The Company maintains a 401(k) plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k)
plan, participating employees may defer a portion of their pretax earnings not
to exceed certain statutorily specified amounts ($10,000 for calendar year
1999). The Company, at its discretion, may make contributions for the benefit of
eligible employees. The Company has made no contributions under the 401(k) plan.

8. COMMITMENTS

     The Company leases its office facilities under a noncancelable operating
lease agreement which expires in September 2002 and contains renewal provisions.
Future minimum lease payments under the noncancelable lease at December 31, 1999
are as follows:


                                                           
Year Ending December 31,
     2000...................................................  $  799,000
     2001...................................................     818,000
     2002...................................................     624,000
                                                              ----------
          Total minimum lease payments......................  $2,241,000
                                                              ==========


     Rent expense for the years ended December 31, 1999 and 1998 was $838,000
and $825,000, respectively.

     In 1998, the Company entered into a noncancelable sublease agreement
relating to a portion of its leased office facilities. The sublease agreement
expired in August 1999, at which time the existing sublessee and the Company
entered into a month-to-month lease. Rental income for the years ended December
31, 1999 and 1998 was $202,000 and $117,000, respectively.

     At December 31, 1999, the Company is committed to pay Incyte $2,392,000 for
certain sequencing and microarray services and products through September 2001.

                                       65
   66

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE

     Not Applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item (with respect to Directors) is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Company's 2000 Annual Meeting of Stockholders to be held on June
5, 2000 (the "Proxy Statement").

     The executive officers of the Company are as follows:

     Roy A. Whitfield, age 46, co-founded the Company and has been Chief
Executive Officer since June 1993 and a Director since June 1991. Mr. Whitfield
served as President of the Company from June 1991 until January 1997 and as
Treasurer of the Company between April 1991 and October 1995. Previously, Mr.
Whitfield served as the President of Ideon Corporation, which was a
majority-owned subsidiary of Invitron Corporation, a biotechnology company, from
October 1989 until April 1991. From 1984 to 1989, he held senior operating and
business development positions with Technicon Instruments Corporation, a medical
instrumentation company, and its predecessor company, CooperBiomedical, Inc., a
biotechnology and medical diagnostics company. Prior to his work at Technicon,
Mr. Whitfield spent seven years with the Boston Consulting Group's international
consulting practice. Mr. Whitfield received a B.S. with first class honors in
Mathematics from Oxford University, and an M.B.A. with distinction from Stanford
University. Mr. Whitfield is a director of Aurora Biosciences Corporation.

     Randal W. Scott, Ph.D., age 42, co-founded the Company and has been
President since January 1997. He has served as Chief Scientific Officer of the
Company since March 1995, a Director since June 1991. He also served as
Executive Vice President of the Company from March 1995 until January 1997 and
Vice President, Research and Development of the Company from April 1991 until
February 1995 and as Secretary from April 1991 to June 1998. Dr. Scott was one
of Invitron's founding scientists and was employed by Invitron from March 1985
to June 1991. In 1987, Dr. Scott started the Protein Biochemistry Department at
Invitron's California Research Division and later became Senior Director of
Research in November 1988. Dr. Scott was responsible for developing Invitron's
proprietary products and discovery programs and is an inventor of several of the
Company's patents. Prior to joining Invitron, he was a Senior Scientist at
Unigene Laboratories, a biotechnology company. Dr. Scott received his Ph.D. in
Biochemistry from the University of Kansas.

     Michael D. Lack, age 48, has been the Chief Operating Officer of the
Company since July 1999. Prior to joining the Company, he was the President and
Chief Executive Officer of Silicon Valley Networks. Previously, Mr. Lack served
as Chief Executive Officer with several software startup companies, including
Aqueduct Software and Presidio Systems, Inc. He also held various senior
positions with Cadence Design Systems, Inc., including Senior Vice President of
Product Operations, Division President of Integrated Circuit Design, and
Division President of Systems. Mr. Lack received his B.S. in Physics from the
University of California, Los Angeles.

     John M. Vuko, age 49, joined the Company as the Chief Financial Officer in
December 1999. Previously, Mr. Vuko was the Senior Vice President and Chief
Financial Officer of Achievement Radio Holdings Inc. Prior to his work at
Achievement Radio Holdings, Mr. Vuko served as Senior Vice President and Chief
Financial Officer of Ross Stores, Inc., and held various positions with the
Cooper family of companies, including Corporate Development Executive, Vice
President, Treasurer, and Controller. Mr. Vuko received his B.A. in Accounting
from San Francisco State University.

     James R. Neal, age 44, has been the Executive Vice President of Sales and
Marketing since July 1999. Mr. Neal served as General Manager of the Solaris
Group, a division of Monsanto Company. From 1982, he also held various positions
with Monsanto, including Manager of New Product Introduction, Director of Brand

                                       66
   67

Marketing and Residential Products, and Vice President of Global Business
Development. Mr. Neal received his B.S. in Biology and his M.S. in Genetics and
Plant Breeding from the University of Manitoba, Canada as well as an Executive
M.B.A. from Washington University, St. Louis.

     E. Lee Bendekgey, age 42, has been General Counsel of the Company since
January 1998 and served as the Interim Chief Financial Officer from June 1999
until December 1999. Mr. Bendekgey became the Secretary of the Company in June
1998 and Executive Vice President in June 1999. Prior to joining the Company,
Mr. Bendekgey was the Director of Strategic Relations at Silicon Graphics, Inc.
He held various positions with SGI from March 1993, including Director of Legal
Services, Products and Technology; Senior Counsel, Product Divisions; Group
Counsel, Computer Systems Group; and Division Counsel, MIPS Technologies, Inc.
From 1982 to 1993, Mr. Bendekgey held associate and partner positions with
Graham & James, a law firm in San Francisco, where he specialized in
intellectual property protection and licensing. Mr. Bendekgey received his B.A.
magna cum laude in Political Science and French from Kalamazoo College and his
J.D. from Stanford University.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference from the
information under the captions "Election of Directors -- Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference from the
information under the captions "Election of Directors -- Compensation of
Directors," "Executive Compensation," and "Report of the Compensation Committee
of the Board of Directors on Executive Compensation -- Compensation Committee
Interlocks and Insider Participation" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" contained in the
Proxy Statement.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF THIS REPORT:

     (1) Financial Statements

        Reference is made to the Index to Consolidated Financial Statements of
        Incyte Pharmaceuticals, Inc. and the Index to Financial Statements of
        diaDexus, LLC, a Limited Liability Company, under Item 8 of Part II
        hereof.

     (2) Financial Statement Schedules

        The following financial statement schedule of Incyte Pharmaceuticals,
        Inc. is filed as part of this Form 10-K included in Item 8 of Part II:

          Schedule II -- Valuation and Qualifying Accounts for each of the three
     years in the period ended December 31, 1999.

     All other financial statement schedules have been omitted because they are
not applicable or not required or because the information is included elsewhere
in the Consolidated Financial Statements or the Notes thereto.

                                       67
   68

     (3) Exhibits

        See Item 14(c) below. Each management contract or compensatory plan or
        arrangement required to be filed has been identified.

(b) REPORTS ON FORM 8-K.

     The Company filed no reports on Form 8-K during the fiscal quarter ended
December 31, 1999.

(c) EXHIBITS



 EXHIBIT
 NUMBER                      DESCRIPTION OF DOCUMENT
 -------                     -----------------------
        
 3(i)(a)   Restated Certificate of Incorporation, as amended
           (incorporated by reference to Exhibit 4.1 to the Company's
           Registration Statement on Form S-3 (File No. 333-31307)).
 3(i)(b)   Certificate of Designation of Series A Participating
           Preferred Stock, (incorporated by reference to the Company's
           Annual Report on 10-K for the year ended December 31, 1998).
 3(ii)     Bylaws of the Company, as amended (incorporated by reference
           to Exhibit 4.2 to the Company's Registration Statement on
           Form S-3 (File No. 333-31307)).
 4.1       Form of Common Stock Certificate (incorporated by reference
           to the exhibit of the same number to the Company's
           Registration Statement on Form S-1 (File No. 33-68138)).
 4.2       Rights Agreement dated as of September 25, 1998 between the
           Company and Chase Mellon Shareholder Services, L.L.C., which
           includes as Exhibit B, the rights certificate (incorporated
           by reference to Exhibit 4.1 to the Company's Registration
           Statement on Form 8-A (filed on September 30, 1998).
 4.3       Indenture dated as of February 4, 2000 between the Company
           and State Street Bank and Trust Company of California, N.A.,
           as trustee.
10.1#      1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended
           and restated (the "Plan") (incorporated by reference to
           Exhibit 10.18 to the Company's Registration Statement on
           Form S-8 (File No. 333-83291)).
10.2#      Form of Incentive Stock Option Agreement under the Plan
           (incorporated by reference to the exhibit of the same number
           to the Company's Registration Statement on Form S-1 (File
           No. 33-68138)).
10.3#      Form of Nonstatutory Stock Option Agreement under the Plan
           (incorporated by reference to the exhibit of the same number
           to the Company's Registration Statement on Form S-1 (File
           No. 33-68138)).
10.4#      Amended and Restated 1993 Directors' Stock Option Plan of
           Incyte Pharmaceuticals, Inc. (incorporated by reference to
           the exhibit of the same number to the Company's Annual
           Report on Form 10-K for the year ended December 31, 1997).
10.5#      Form of Indemnity Agreement between the Company and its
           directors and officers (incorporated by reference to Exhibit
           10.5 to the Company's Registration Statement on Form S-1
           (File No. 33-68138)).
10.6       Lease Agreement dated December 8, 1994 between the Company
           and Matadero Creek (incorporated by reference to Exhibit
           10.16 to the Company's Annual Report on Form 10-K for the
           year ended December 31, 1994).




10.9       Stock Purchase Agreement dated as of June 22, 1994 between the Company and Pfizer Inc
           (incorporated by reference to Exhibit B to the Company's Current Report on Form 8-K dated
           June 23, 1994).
        
10.10      Registration Rights Agreement dated as of June 22, 1994 between the Company and Pfizer
           Inc (incorporated by reference to Exhibit C to the Company's Current Report on Form 8-K
           dated June 23, 1994).
10.11      Stock Purchase Agreement dated as of November 30, 1994 between the Company and The Upjohn
           Company (incorporated by reference to Exhibit B to the Company's Current Report on Form
           8-K dated November 30, 1994, as amended by Form 8-K/A filed with the Commission on March
           27, 1995).


                                       68
   69



10.12      Registration Rights Agreement dated as of November 30, 1994 between the Company and The
           Upjohn Company (incorporated by reference to Exhibit C to the Company's Current Report on
           Form 8-K dated November 30, 1994).
        
10.13      Registration Rights Agreement dated as of February 4, 2000 among the Company and Deutsche
           Bank Securities Inc. and Warburg Dillon Read LLC.
10.14      Lease Agreement dated June 19, 1997 between the Company and The Board of Trustees of the
           Leland Stanford Junior University.
10.15#     1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals, Inc. (incorporated by
           reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File No.
           333-31409)).
10.16#     1998 Amendment to the 1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals, Inc.
           (incorporated by reference to Exhibit 99 to the Company's Quarterly Report on Form 10-Q
           for the quarter ended September 30, 1998).
10.17+     Master Strategic Relationship Agreement dated as of September 2, 1997 between SmithKline
           Beecham Corporation, Incyte Pharmaceuticals, Inc. and diaDexus, LLC (incorporated by
           reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q/A for the
           quarter ended September 30, 1997).
10.18#     1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated by reference to Exhibit
           10.19 to the Company's Registration Statement on Form S-8 (File No. 333-46639)).
10.19#     The Hexagen Limited Unapproved Company Share Option Plan 1996, as amended (incorporated
           by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (File
           No. 333-67691)).
10.20      Stock Purchase Agreement dated as February 24, 2000 between the Company and the investors
           named therein.
21.1       Subsidiaries of the Company.
23.1       Consent of Ernst & Young LLP, Independent Auditors.
23.2       Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24.1       Power of Attorney (see page 70 of this Form 10-K).
27         Financial Data Schedule.


- ---------------
+ Confidential treatment has been granted with respect to certain portions of
  these agreements.

# Indicates management contract or compensatory plan or arrangement.

                                       69
   70

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          INCYTE PHARMACEUTICALS, INC.

Date: March 17, 2000                      By      /s/ ROY A. WHITFIELD
                                            ------------------------------------
                                                      Roy A. Whitfield
                                                  Chief Executive Officer

                               POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Roy A. Whitfield, Randal W. Scott, and John M.
Vuko, and each of them, his true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



                          NAME                                        TITLE                   DATE
                          ----                                        -----                   ----
                                                                                   

                  /s/ ROY A. WHITFIELD                       Chief Executive Officer     March 17, 2000
- --------------------------------------------------------  (Principal Executive Officer)
                    Roy A. Whitfield                              and Director

                    /s/ JOHN M. VUKO                         Chief Financial Officer     March 17, 2000
- --------------------------------------------------------  (Principal Financial Officer)
                      John M. Vuko

                  /s/ TIMOTHY G. HENN                      Vice President, Finance and   March 17, 2000
- --------------------------------------------------------      Corporate Controller
                    Timothy G. Henn                           (Principal Accounting
                                                                    Officer)

                /s/ JEFFREY J. COLLINSON                      Chairman of the Board      March 17, 2000
- --------------------------------------------------------
                  Jeffrey J. Collinson

                   /s/ BARRY M. BLOOM                               Director             March 17, 2000
- --------------------------------------------------------
                     Barry M. Bloom

                /s/ FREDERICK B. CRAVES                             Director             March 17, 2000
- --------------------------------------------------------
                  Frederick B. Craves

                    /s/ JON S. SAXE                                 Director             March 17, 2000
- --------------------------------------------------------
                      Jon S. Saxe

                  /s/ RANDAL W. SCOTT                               President            March 17, 2000
- --------------------------------------------------------
                    Randal W. Scott


                                       70
   71

                                 EXHIBIT INDEX



 EXHIBIT
 NUMBER                      DESCRIPTION OF DOCUMENT
 -------                     -----------------------
        
 3(i)(a)   Restated Certificate of Incorporation, as amended
           (incorporated by reference to Exhibit 4.1 to the Company's
           Registration Statement on Form S-3 (File No. 333-31307)).
 3(i)(b)   Certificate of Designation of Series A Participating
           Preferred Stock, (incorporated by reference to the Company's
           Annual Report on 10-K for the year ended December 31, 1998).
 3(ii)     Bylaws of the Company, as amended (incorporated by reference
           to Exhibit 4.2 to the Company's Registration Statement on
           Form S-3 (File No. 333-31307)).
 4.1       Form of Common Stock Certificate (incorporated by reference
           to the exhibit of the same number to the Company's
           Registration Statement on Form S-1 (File No. 33-68138)).
 4.2       Rights Agreement dated as of September 25, 1998 between the
           Company and Chase Mellon Shareholder Services, L.L.C., which
           includes as Exhibit B, the rights certificate (incorporated
           by reference to Exhibit 4.1 to the Company's Registration
           Statement on Form 8-A (filed on September 30, 1998).
 4.3       Indenture dated as of February 4, 2000 between the Company
           and State Street Bank and Trust Company of California, N.A.,
           as trustee.
10.1#      1991 Stock Plan of Incyte Pharmaceuticals, Inc., as amended
           and restated (the "Plan") (incorporated by reference to
           Exhibit 10.18 to the Company's Registration Statement on
           Form S-8 (File No. 333-83291)).
10.2#      Form of Incentive Stock Option Agreement under the Plan
           (incorporated by reference to the exhibit of the same number
           to the Company's Registration Statement on Form S-1 (File
           No. 33-68138)).
10.3#      Form of Nonstatutory Stock Option Agreement under the Plan
           (incorporated by reference to the exhibit of the same number
           to the Company's Registration Statement on Form S-1 (File
           No. 33-68138)).
10.4#      Amended and Restated 1993 Directors' Stock Option Plan of
           Incyte Pharmaceuticals, Inc. (incorporated by reference to
           the exhibit of the same number to the Company's Annual
           Report on Form 10-K for the year ended December 31, 1997).
10.5#      Form of Indemnity Agreement between the Company and its
           directors and officers (incorporated by reference to Exhibit
           10.5 to the Company's Registration Statement on Form S-1
           (File No. 33-68138)).
10.6       Lease Agreement dated December 8, 1994 between the Company
           and Matadero Creek (incorporated by reference to Exhibit
           10.16 to the Company's Annual Report on Form 10-K for the
           year ended December 31, 1994).
10.9       Stock Purchase Agreement dated as of June 22, 1994 between
           the Company and Pfizer Inc (incorporated by reference to
           Exhibit B to the Company's Current Report on Form 8-K dated
           June 23, 1994).
10.10      Registration Rights Agreement dated as of June 22, 1994
           between the Company and Pfizer Inc (incorporated by
           reference to Exhibit C to the Company's Current Report on
           Form 8-K dated June 23, 1994).
10.11      Stock Purchase Agreement dated as of November 30, 1994
           between the Company and The Upjohn Company (incorporated by
           reference to Exhibit B to the Company's Current Report on
           Form 8-K dated November 30, 1994, as amended by Form 8-K/A
           filed with the Commission on March 27, 1995).
10.12      Registration Rights Agreement dated as of November 30, 1994
           between the Company and The Upjohn Company (incorporated by
           reference to Exhibit C to the Company's Current Report on
           Form 8-K dated November 30, 1994).
10.13      Registration Rights Agreement dated as of February 4, 2000
           among the Company and Deutsche Bank Securities Inc. and
           Warburg Dillon Read LLC.

   72



 EXHIBIT
 NUMBER                      DESCRIPTION OF DOCUMENT
 -------                     -----------------------
        
10.14      Lease Agreement dated June 19, 1997 between the Company and
           The Board of Trustees of the Leland Stanford Junior
           University.
10.15#     1997 Employee Stock Purchase Plan of Incyte Pharmaceuticals,
           Inc. (incorporated by reference to Exhibit 10.1 to the
           Company's Registration Statement on Form S-8 (File No.
           333-31409)).
10.16#     1998 Amendment to the 1997 Employee Stock Purchase Plan of
           Incyte Pharmaceuticals, Inc. (incorporated by reference to
           Exhibit 99 to the Company's Quarterly Report on Form 10-Q
           for the quarter ended September 30, 1998).
10.17+     Master Strategic Relationship Agreement dated as of
           September 2, 1997 between SmithKline Beecham Corporation,
           Incyte Pharmaceuticals, Inc. and diaDexus, LLC (incorporated
           by reference to Exhibit 10.18 to the Company's Quarterly
           Report on Form 10-Q/A for the quarter ended September 30,
           1997).
10.18#     1996 Synteni, Inc. Equity Incentive Stock Plan (incorporated
           by reference to Exhibit 10.19 to the Company's Registration
           Statement on Form S-8 (File No. 333-46639)).
10.19#     The Hexagen Limited Unapproved Company Share Option Plan
           1996, as amended (incorporated by reference to Exhibit 10.1
           to the Company's Registration Statement on Form S-8 (File
           333-67691)).
10.20      Stock Purchase Agreement dated as February 24, 2000 between
           the Company and the investors named therein.
21.1       Subsidiaries of the Company.
23.1       Consent of Ernst & Young LLP, Independent Auditors.
23.2       Consent of PricewaterhouseCoopers LLP, Independent
           Accountants.
24.1       Power of Attorney (see page 70 of this Form 10-K).
27         Financial Data Schedule.


- ---------------
+ Confidential treatment has been granted with respect to certain portions of
  these agreements.

# Indicates management contract or compensatory plan or arrangement.

     Copies of above exhibits not contained herein are available to any
stockholder upon written request to: Investor Relations, Incyte Pharmaceuticals,
Inc., 3174 Porter Drive, Palo Alto, CA 94034.