AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 2000

REGISTRATION NO. 333-32298

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

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

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

DELAWARE 7371 34-1834775
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

1717 EAST NINTH STREET, SUITE 1600
CLEVELAND, OHIO 44114
TELEPHONE: (216) 861-4007
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

VINCENT P. KAZMER
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
1717 EAST NINTH STREET, SUITE 1600
CLEVELAND, OHIO 44114
TELEPHONE: (216) 861-4007
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

CHRISTOPHER M. KELLY, ESQ. ERIN E. KARZMER, ESQ. WILLIAM T. WHELAN, ESQ.
JONES, DAY, REAVIS & POGUE JONES, DAY, REAVIS & POGUE JOSEPH E. MULLANEY III, ESQ.
599 LEXINGTON AVENUE, 32ND FLOOR NORTH POINT MINTZ, LEVIN, COHN, FERRIS,
NEW YORK, NEW YORK 10022 901 LAKESIDE AVENUE GLOVSKY AND POPEO, P.C.
TEL: (212) 326-3939 CLEVELAND, OHIO 44114 ONE FINANCIAL CENTER
FAX: (212) 755-7306 TEL: (216) 586-3939 BOSTON, MASSACHUSETTS 02111
FAX: (216) 579-0212 TEL: (617) 542-6000
FAX: (617) 542-2241

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

As soon as practicable after this Registration Statement becomes effective.

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

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

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

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

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
UNDERWRITERS MAY NOT CONFIRM SALES OF THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED SEPTEMBER , 2000

PROSPECTUS

5,500,000 SHARES

[LOGO]

COMMON STOCK

This is an initial public offering of common stock by NetGenics, Inc. We
are selling 5,500,000 shares of common stock. The estimated initial public
offering price is between $11.00 and $13.00 per share.

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

Prior to this offering, there has been no public market for our common
stock. We have applied to have the shares of our common stock approved for
quotation on the Nasdaq National Market under the symbol NTGC.

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

Per Share Total
--------- -----

Initial public offering price............................... $ $
Underwriting discounts and commissions......................
Proceeds to NetGenics, before expenses......................

We have granted the underwriters an option for a period of 30 days to
purchase up to 825,000 additional shares of common stock.

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

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.

SEE "RISK FACTORS" BEGINNING ON PAGE 8.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

CHASE H&Q UBS WARBURG LLC

, 2000

3
[Inside Front Cover]

The inside front cover art has three layers. The bottom layer is a three
dimensional grid comprised of an infinite number of squares. At the corner of
each square is a sphere that connects the square to adjacent squares. The
spheres contain either a molecular image or an image of people working in a
laboratory. The middle layer is an assembled floating jigsaw puzzle of SYNERGY
screen capture images. The top layer is a set of nine spheres of varying size
linked together to look like a molecular structure. The structure snakes
through the middle layer to connect to one of the corner spheres on the
bottom-layer grid. Each of the nine spheres also contains either a molecular
image or an image of people working in a laboratory.

4
[Inside Gatefold]

The inside cover art includes a gatefold. The background of the gatefold is
solid blue and depicts a completed jigsaw puzzle. Centered in the gatefold is a
graphic of a triangle comprised of three connected spheres that represents a
molecular structure. One of the spheres, labeled "Professional Services,"
contains an image of two people working in a laboratory. The second sphere,
labeled "Components," contains a SYNERGY screen capture image. The third sphere,
labeled "Framework," contains an image of the grid depicted on the bottom layer
of the inside front cover.

The upper left corner contains an image of two SYNERGY Sequence Analysis screen
captures, one above the other. To the left of the image is the following text:

SYNERGY(TM) Sequence Analysis provides a flexible analysis platform for
scientists working with DNA and protein sequence data. Built on the
SYNERGY Framework, SYNERGY Sequence Analysis integrates a variety of
DNA and protein sequence analysis algorithms while providing users
access to both public and proprietary sequence databases. Working in
this unified environment, scientists can more efficiently process and
annotate sequence data in search of novel biological targets.

The upper right corner contains an image of two SYNERGY Discovery Environment
screen captures, one next to the other. Above the image is the following text:

The SYNERGY(TM) Discovery Environment provides a common user interface to
all SYNERGY-based domain component suites. Mirroring the organization
of a multidisciplinary life science research team, the SYNERGY
Discovery Environment provides a unified workspace in which to carry
out a variety of bioinformatics tasks. The SYNERGY Discovery
Environment facilitates communication among team members, shortens the
learning curve for new users, and eliminates the need to convert data
between analysis programs. A document gateway enables access to office
productivity and internet software.

The bottom right corner contains the following text:

Professional Services
NetGenics Professional Services group employs a proprietary methodology for
solving integration problems in life science research. The methodology
defines an iterative process for assessing customer needs, proposing
solutions, then realizing the solution through the design and development
of software implementations.

The bottom left corner contains an image of two SYNERGY Gene Expression screen
captures, one next to the other. Below the image is the following text:

SYNERGY(TM) Gene Expression enables scientists to integrate, manage and
analyze gene expression data while seamlessly relating it to sequence and
other domain data through the SYNERGY Framework. This integrated approach
gives users a powerful system for rapidly mining their gene expression data
to identify interesting genes worthy of further investigation.

TABLE OF CONTENTS

PAGE
----

PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 8
FORWARD-LOOKING STATEMENTS; MARKET DATA..................... 14
USE OF PROCEEDS............................................. 15
DIVIDEND POLICY............................................. 15
CAPITALIZATION.............................................. 16
DILUTION.................................................... 17
SELECTED CONSOLIDATED FINANCIAL DATA........................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 20
BUSINESS.................................................... 29
MANAGEMENT.................................................. 40
RELATED TRANSACTIONS........................................ 48
PRINCIPAL STOCKHOLDERS...................................... 51
DESCRIPTION OF CAPITAL STOCK................................ 53
SHARES ELIGIBLE FOR FUTURE SALE............................. 56
UNDERWRITING................................................ 58
LEGAL MATTERS............................................... 61
EXPERTS..................................................... 61
WHERE YOU CAN FIND MORE INFORMATION......................... 61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1

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

NetGenics(R) and SYNERGY(TM) are trademarks of NetGenics, Inc. TaqMan(R) is
a registered trademark of Roche Molecular Systems, Inc. Other trademarks used in
this prospectus are the property of their respective owners.

(This page intentionally left blank)
7

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the risk
factors and our consolidated financial statements and related notes appearing
elsewhere in this prospectus, to understand this offering fully.

OUR BUSINESS

We provide bioinformatics solutions for the life science research industry.
Bioinformatics involves the use of information technology by life science
research companies to convert massive amounts of data into useful information
that their scientists can then use in the development of new drugs, gene
therapies and agricultural products.

Bioinformatics is increasingly vital to life science research companies as
they strive to extract meaningful information from the overwhelming volume and
types of data emerging from genomics, gene expression analysis, proteomics,
combinatorial chemistry and high-throughput screening. An unmet need is the
ability to link the disparate data sets created by these technologies to allow
scientists to view data in context, thereby accelerating the discovery of
relationships between the sequence and function of genes, their role in disease,
their availability as drug targets and potential therapeutic agents.

We market a suite of software components, databases and consulting services
that address the informatics integration needs of life science research
companies. We have developed software components that will allow scientists at
pharmaceutical, biotechnology and agriscience companies to manage, integrate,
sort and mine, or extract, biological data. Through our recent acquisition of
the ChemSymphony and MetaSymphony technologies, we are extending our
capabilities to chemical data. Our collaboration with IBM in the development of
the DiscoveryLink platform provides life science research companies with the
capability of enterprise-wide data integration for any type of life science
data. In addition, our Professional Services Group provides life science
research companies with needs assessments, strategy development, software and
database designs and implementation plans. We have provided bioinformatics
solutions for Aventis Crop Science and Pfizer, and are performing consulting
projects for Boehringer Ingelheim, AstraZeneca, Avalon Pharmaceuticals, Harvard
University and the National Library of Medicine. Our ChemSymphony and
MetaSymphony technologies are in use at Merck, Abbott and SmithKline Beecham.

The top 50 life science research companies spent an estimated $40.0 billion
on research and development in 1998, an increase of more than 20% over 1997. We
believe that internal spending on bioinformatics by life science research
companies is approximately $1.5 billion per year and that the annual market for
outsourced bioinformatics databases, products and services is currently $300
million and will grow to as much as $2.0 billion within the next five years.

The life science research industry faces a number of challenges that we
believe will lead to continually increasing demand for our solutions, including
the need to:

- integrate and manage the massive amounts and rapidly growing sources of
life science data;

- derive value from the disparate types of data;

- protect proprietary data;

- resolve the buy vs. build dilemma for bioinformatics solutions; and

- obtain the best practices for bioinformatics as they evolve.

OUR SOLUTION

We believe that our solutions address many of the challenges life science
research companies face regarding bioinformatics. These solutions incorporate
our proprietary technology platform, SYNERGY, a library of proprietary and
third-party software components, including the recently acquired ChemSymphony
and MetaSymphony technologies, and our Professional Services Group.

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8

Our technology platform is flexible because its open architecture allows
universal-compatibility with multiple data sources and extendable because its
component-based design allows new capabilities to be added to the existing
software at any time. This is an important advantage over conventional product
offerings, because our customers can extend or customize their systems to
support their own proprietary data and analysis tools, rather than having to
decide between developing their own software or buying closed,
one-size-fits-all, third-party systems. In addition, our solution provides to
our customers a rigorous, tested platform technology and the benefit of custom
design and consulting services from our bioinformatics team. The result is
state-of-the-art technological capabilities within a secure intranet
environment.

OUR STRATEGY

Our objective is to become the leading provider of bioinformatics solutions
to the life science research industry. Key elements of our strategy to achieve
this objective include the following:

- establish our proprietary technology framework as the information
technology platform of choice for life science research companies;

- establish a dominant market share for bioinformatics solutions based on
our software components;

- solve customers' unique problems by developing tailored solutions;

- expand our corporate relationships for revenue growth; and

- maintain our technological advantage.

Since our inception, we have incurred operating losses and expect that our
future software development efforts and the expansion of our development,
marketing, sales and customer support staffs necessary to implement our strategy
will cause us to continue to incur operating losses in the future.

OUR CORPORATE INFORMATION

We were incorporated in Delaware in 1996. Our principal executive offices
are located at 1717 East Ninth Street, Suite 1600, Cleveland, Ohio 44114. Our
telephone number is 216.861.4007. We also have offices in San Diego, California,
Boston, Massachusetts, Columbus, Ohio and London, England. Our web site address
is www.netgenics.com. The information on our web site is not a part of this
prospectus.

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9

THE OFFERING

COMMON STOCK OFFERED BY NETGENICS....... 5,500,000 shares

COMMON STOCK TO BE OUTSTANDING AFTER
THIS OFFERING........................... 23,485,387 shares

USE OF PROCEEDS......................... Working capital and general
corporate purposes, including
potential acquisitions. See "Use of
Proceeds."

PROPOSED NASDAQ NATIONAL MARKET
SYMBOL.................................. NTGC
------------------

The number of shares of our common stock to be outstanding after the
offering is based on shares outstanding at June 30, 2000. It excludes:

- 1,234,645 shares issuable upon the exercise of options outstanding
at June 30, 2000, which have a weighted average exercise price of
$2.80 per share;

- 416,551 shares issuable upon the exercise of warrants outstanding at
June 30, 2000, which have a weighted average exercise price of $4.22
per share; and

- 615,562 additional shares reserved at June 30, 2000 for future
issuance under our stock option plans.

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

Except where we state otherwise, you should assume the following when
analyzing information contained in this prospectus:

- a one-for-two reverse stock split of our common stock that will be
completed prior to the completion of this offering;

- all of our outstanding redeemable convertible preferred stock will
convert into 14,941,844 shares of common stock upon the completion
of this offering;

- amendments to our certificate of incorporation and bylaws will
become effective upon the completion of this offering; and

- the underwriters will not exercise their option to purchase
additional shares in this offering.

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10

SUMMARY CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS)

We derived the summary consolidated statement of operations data for the
years ended December 31, 1997, 1998 and 1999 from our audited consolidated
financial statements appearing elsewhere in this prospectus. We derived the
summary consolidated statement of operations data for the period from June 24,
1996 (date of inception) through December 31, 1996 from audited financial
statements, which are not included in this prospectus. The consolidated
statement of operations data for the six months ended June 30, 1999 and 2000 and
for the period from June 24, 1996 (date of inception) through June 30, 2000
(cumulative development stage) and the consolidated balance sheet data as of
June 30, 2000 are derived from our unaudited financial statements appearing
elsewhere in this prospectus. The summary "as adjusted" consolidated balance
sheet data as of June 30, 2000 give effect to the conversion of all our
outstanding redeemable convertible preferred stock into common stock as if it
occurred on June 30, 2000, and receipt of estimated net proceeds from the sale
of 5.5 million shares by us in this offering at an assumed initial public
offering price of $12.00 per share, after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us. You should read
the following summary consolidated financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus.

PERIOD FROM
JUNE 24, 1996 PERIOD FROM
(DATE OF INCEPTION) SIX MONTHS JUNE 24, 1996
THROUGH YEAR ENDED DECEMBER 31, ENDED JUNE 30, THROUGH
DECEMBER 31, ----------------------------- ------------------ JUNE 30,
1996 1997 1998 1999 1999 2000 2000(1)
------------------- ------- -------- -------- ------- -------- -------------

CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue......................... $ -- $ 57 $ 405 $ 1,764 $ 764 $ 990 $ 3,216
Costs and expenses:
Costs of services provided.... -- 18..... 124..... 1,163... 476.... 731..... 2,036
Sales and marketing (2)....... 142 697 1,851 2,112 1,048 944 5,746
Research, development and
support (2)................. 315 1,938 4,524 4,998 2,435 2,909 14,684
General and
administrative (2).......... 230 1,485 3,138 3,662 1,788 2,279 10,794
Depreciation and
amortization................ 51 271 887 1,229 616 718 3,156
Non-cash stock compensation... -- -- -- 22 -- 240 262
------ ------- -------- -------- ------- -------- --------
Total costs and expenses...... 738 4,409 10,524 13,186 6,363 7,821 36,678
------ ------- -------- -------- ------- -------- --------
Loss from operations during
development stage............. (738) (4,352) (10,119) (11,422) (5,599) (6,831) (33,462)
Dividend related to beneficial
conversion feature of
redeemable convertible
preferred stock (3)........... -- -- -- -- -- (20,020) (20,020)
Net loss attributable to common
stockholders during
development stage............. $ (730) $(4,233) $ (9,635) $(11,265) $(5,460) $(26,409) $(52,272)
====== ======= ======== ======== ======= ======== ========
Basic and diluted net loss
attributable to common
stockholders during
development stage per common
share......................... $(0.50) $ (1.47) $ (3.33) $ (3.82) $ (1.87) $ (8.71) $ (17.96)
====== ======= ======== ======== ======= ======== ========
Basic and diluted weighted
average common shares
outstanding (4)............... 1,454 2,888 2,893 2,948 2,921 3,031 2,910

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SUMMARY CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS)

JUNE 30, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 16,000 $76,180
Total assets................................................ 20,122 80,302
Long-term debt, net of current portion...................... 1,248 1,248
Total liabilities (5)....................................... 4,630 4,630
Redeemable convertible preferred stock...................... 47,099 --
Total stockholders' equity (deficit)........................ $(31,607) $75,672

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

(1) Cumulative development stage.

(2) Exclusive of non-cash stock compensation for fiscal year 1999 of $3.0 sales
and marketing; $8.0 research, development and support; and $11.0 general and
administrative and for the six months ended June 30, 2000 of $19.0 sales and
marketing; $98.0 research, development and support; and $123.0 general and
administrative.

(3) In accordance with Emerging Issues Task Force Issue No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," our issuance of the Series E
redeemable convertible preferred stock on January 6, 2000 resulted in a
beneficial conversion feature of $20,020. The beneficial conversion feature
is reflected as a dividend by a charge to cumulative deficit during
development stage and an increase to additional paid-in capital in the June
30, 2000 balance sheet and resulted in an increase to net loss per share
attributable to common stockholders during development stage.

(4) We have incurred a net loss during development stage through June 30, 2000,
therefore the impact of common shares issuable upon the exercise of
outstanding options or warrants and the conversion of our redeemable
convertible preferred stock has been excluded from all basic and diluted
weighted average common shares outstanding as it is anti-dilutive.

(5) Includes a remaining $1.5 million customer deposit from IBM. See note 9 to
our consolidated audited financial statements included elsewhere in this
prospectus.

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RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could harm our business, results of operations and financial
condition and could result in a complete loss of your investment.

RISKS RELATED TO OUR BUSINESS

OUR TECHNOLOGY AND PRODUCTS ARE UNPROVEN AND MAY NEVER ACHIEVE COMMERCIAL
SUCCESS.

Market acceptance of our products will depend upon many factors, many of
which are not in our control, such as continued growth in the bioinformatics
industry, the availability and price of competing products and technologies, and
the success of our sales efforts. We cannot assure you that we will be capable
of achieving the improvements in our planned products necessary for their
successful commercialization. In August 1998, American Home Products entered
into a four-year license and services agreement for SYNERGY. American Home
Products terminated this agreement in April 2000 in order to permit it to assess
competing technologies. In November 1997, we entered into a three-year license
agreement for SYNERGY with Abbott. Abbott recently decided not to renew its
license in November 2000 because our software did not fulfill its needs. We
cannot assure you that going forward our products will replace or compete
successfully against either existing or future technologies.

Due to a variety of factors, we may experience delays in developing our
planned products. If we fail to upgrade our products or are unable to introduce
other planned products in a cost-effective and timely manner, our customers may
purchase products from competitors, which would have a material adverse effect
on our business and results of operations. New products may require additional
development work, enhancement, testing, or further refinement before we can make
them commercially available. Even after new products are made commercially
available, unforeseen technical difficulties may arise, which may require us to
spend additional funds to correct those difficulties and may result in further
delays. Further, we cannot assure you that new products will be successfully
developed at all. If our products have performance, reliability or quality
shortcomings, then we may experience reduced orders, higher development costs,
delays in collecting accounts receivable and additional warranty and service
expenses, which would adversely affect our financial condition.

WE CURRENTLY DEPEND ON A LIMITED NUMBER OF SIGNIFICANT CUSTOMERS, AND OUR
REVENUES COULD BE NEGATIVELY AFFECTED BY THE LOSS OR EARLY TERMINATION OF A
MAJOR PARTNER OR CUSTOMER.

We derive a significant portion of our revenue from a small number of
customers. For example, Abbott accounted for approximately 83% of total revenue
in 1997 and approximately 91% of total revenue in 1998. In 1999, American Home
Products accounted for approximately 62% of total revenue and Pfizer accounted
for approximately 20% of total revenue. In the first six months of 2000,
American Home Products accounted for approximately 68% of total revenue and IBM
accounted for approximately 21% of total revenue. Our quarterly operating
results would be adversely affected if one or more of our significant customers
were to unexpectedly discontinue or significantly reduce the use of our
products. Although we have multi-year contracts, our customers generally may
cancel the contracts on short notice. American Home Products terminated its
SYNERGY license and services agreement in April 2000, which will adversely
affect our revenues for the next several quarters. Abbott has decided not to
renew its no-fee license in November 2000.

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WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO INCUR LOSSES AND NEGATIVE
OPERATING CASH FLOWS FOR THE FORESEEABLE FUTURE AND MAY NEVER ACHIEVE OR
MAINTAIN PROFITABILITY.

We have a limited operating history and have experienced significant
operating losses since our inception. We incurred net losses attributable to
common stockholders during development stage of $4.2 million in 1997, $9.6
million in 1998, $11.3 million in 1999 and $26.4 million for the six months
ended June 30, 2000. Our net losses for the six months ended June 30, 2000
include the dividend related to the beneficial conversion feature of our
redeemable convertible preferred stock of $20.0 million. As of June 30, 2000, we
had a cumulative net loss during development stage of $52.3 million, which
includes the dividend related to the beneficial conversion feature of our
redeemable convertible preferred stock of $20.0 million. We expect to incur
significant increases in our expenses over the next several years due to our
software development efforts and the expansion of our development, marketing,
sales and customer support staffs. As a result, we expect to incur operating
losses through at least 2002.

We may never achieve significant revenues or be profitable. Our ability to
achieve significant revenues or profitability will depend upon the demand for
our current and future products by life science research companies. Our failure
to achieve or maintain profitability could materially and adversely affect the
market price of our common stock and you could lose all or part of your
investment.

OUR RESULTS OF OPERATIONS ARE EXPECTED TO VARY FROM QUARTER TO QUARTER IN FUTURE
PERIODS. AS A RESULT, WE MAY FAIL TO MEET THE EXPECTATIONS OF OUR INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE.

Our quarterly operating results are expected to fluctuate on a quarterly
basis as a result of a number of factors, many of which are outside of our
control, including the following:

- the commencement, delay, cancellation or completion of contracts;

- the timing of option, license and scheduled payments received under our
agreements;

- the variety of products and services provided by us;

- the timing of expenses for new services and facilities; and

- the timing and integration of acquisitions related to our products and
services.

Due to all of these factors and the other risks discussed in this
prospectus, you should not rely on quarterly comparisons of our financial
results. These comparisons are not necessarily meaningful nor are they a
reliable indicator of future performance. In addition, fluctuations in quarterly
results could affect the market price of our common stock in a manner unrelated
to our longer term operating performance.

THE SALE OF OUR PRODUCTS AND SERVICES INVOLVES A LENGTHY SALES CYCLE. WE MAY
EXPEND SUBSTANTIAL FUNDS AND EFFORTS TO MARKET OUR PRODUCTS BUT BE UNABLE TO
SUCCESSFULLY SELL OUR PRODUCTS OR SERVICES.

In order to successfully sell our products and services we must first
convince customers that our products can accelerate drug discovery and
development efforts. This sales cycle is typically lengthy due to the education
effort that is required, as well as the need to gain approval from a variety of
constituencies within prospective customers, including research and development
and key management personnel. Our revenues are difficult to forecast because of
this lengthy sales cycle. In addition, our agreements with each customer and
partner may contain terms that are unique to that customer or partner. We may
expend substantial funds and effort to negotiate these agreements, but may be
unable to sell our products and services.

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WE DEPEND ON OUR RELATIONSHIPS WITH OUR CORPORATE PARTNERS. IF OUR PARTNERSHIPS
ARE NOT SUCCESSFUL, OUR REVENUES MAY BE REDUCED AND OUR BUSINESS COULD BE
HARMED.

Our strategy for developing and commercializing our software and related
services contemplates the formation of multiple corporate partnerships and
licensing arrangements. In October 1999, we formed a sub-contracting
relationship with IBM. IBM may terminate our relationship without cause on short
notice, and we can not assure you that IBM will not exercise this right.

Our success will depend on our ability to enter into additional
partnerships and strategic alliances with a variety of third parties. We may not
be able to establish additional corporate partnerships or licensing arrangements
on terms acceptable to us, if at all. If we do establish these relationships, we
cannot assure you that they will be successful. We cannot control the amount and
timing of resources our partners devote to our programs or potential products.
The failure of our partners to assist us in commercializing our products would
result in a reduction of our revenues and would harm our business and operating
results.

COMPETITION IN OUR INDUSTRY IS INTENSE AND THEREFORE WE MAY LOSE SALES TO OUR
COMPETITORS.

We face, and will continue to face, intense competition from third-party
commercial software developers, bioinformatics and genomics companies, academic
institutions and in-house life science research company software development
teams. We also compete with organizations that are pursuing technologies and
products that are similar to our technologies and products. Future competition
may come from existing competitors as well as from companies that provide custom
databases and related data management software. Many of these organizations that
compete or may compete with us have greater capital resources, more experienced
research, development, sales, marketing, distribution and service staffs and
superior facilities and marketing capabilities. In addition, research in the
development of bioinformatics systems generally is highly competitive. We
believe that our future success will depend, in large part, on our ability to
maintain a competitive position in the bioinformatics market.

A number of our competitors are attempting to develop bioinformatics
solutions specifically to assist life science research companies in accelerating
drug discovery and development efforts. If our competitors develop
bioinformatics solutions, the potential value of our software could decrease and
our ability to obtain and retain revenue from customers could be adversely
affected. Furthermore, some of our competitors and prospective competitors are
in the process of developing, and may successfully develop, bioinformatics
solutions that may be more advanced than our products. Specifically, we are
aware that there are a number of companies pursuing alternative methods for
using computers to assist in reducing the time taken to discover new
pharmaceutical products. A number of companies have announced their intent to
develop and market software to assist life science research companies and
academic researchers in the management and analysis of their own genomic data,
as well as the analysis of sequence data that is publicly available. We expect
that competition in developing bioinformatics solutions will intensify as
technical advances are made and become more widely known.

The bioinformatics industry is characterized by extensive research efforts
and rapid technological progress. To remain competitive, we must continue to
expand and enhance the functionality of our bioinformatics software. New
developments are expected to continue and we cannot assure you that discoveries
by others, including in-house developers, will not render our products and
services noncompetitive. Further, some of our competitors may develop
technologies that are superior to ours. Because of rapid technological change,
we may be required to expend greater amounts in the development of each new
product, which in turn would require greater revenues to recoup those
expenditures.

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WE MAY BE UNABLE TO KEEP OUR COMPETITORS FROM COMMERCIALIZING OUR DISCOVERIES IF
WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS.

Even if patents do issue on our discoveries, they may not provide us with
sufficient protection.

Our business and competitive position depend on our ability to protect our
proprietary technologies. We may not be able to obtain patents for our software
technologies and, even if we are able to obtain patents, these patents may not
provide us with meaningful protection or be commercially beneficial. The
issuance of a patent does not mean the patent is valid or enforceable, nor does
it permit the patent holder to operate freely while infringing the proprietary
rights of others. A patent could be challenged by litigation and, if the outcome
of such litigation were adverse to us, competitors could be free to use the
technology covered by the patent, or we may be required to license the
technology to others to settle the litigation. The invalidation of key patents
owned by or licensed to us or non-approval of pending patent applications could
increase competition, and materially and adversely affect our business. In
addition, others could claim that our technologies infringe their patents or
proprietary rights. If such claims are successful, any licenses that we might
need as a result of such infringement might not be available to us on
commercially reasonable terms, if at all.

We cannot be certain that our security measures will protect our
proprietary technologies.

We also rely upon trade secret protection for some of our confidential and
proprietary information. We believe that we have developed proprietary
technology, processes and information systems for use in our software
technologies, including bioinformatics systems. We have taken security measures
to protect our proprietary technologies, processes, information systems and data
and continue to explore ways to enhance such security. These measures, however,
may not provide adequate protection for our trade secrets or other proprietary
information. While we generally require our employees, academic collaborators
and consultants to enter into confidentiality and/or intellectual property
assignments where appropriate, any of the following could still occur:

- our proprietary information could be disclosed;

- our trade secrets could be disclosed; or

- others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets
or disclose such technology.

WE DEPEND ON OUR KEY EMPLOYEES AND IF WE WERE TO LOSE THEIR SERVICES, OUR
BUSINESS WOULD BE MATERIALLY AND ADVERSELY AFFECTED. WE MAY NOT BE ABLE TO HIRE
AND RETAIN QUALIFIED EMPLOYEES, WHICH COULD AFFECT OUR ABILITY TO COMPETE
EFFECTIVELY.

We are highly dependent on the principal members of our research and
development and management staff, including Manuel J. Glynias, our President and
Chief Executive Officer. The loss of services of any of these personnel could
materially and adversely affect our business and results of operations. While
our key employees are subject to non-competition agreements, these agreements
may be difficult to enforce. As a result, our key employees may leave us and
work for our competitors or start their own companies that may compete with us.

We maintain a key person life insurance policy in principal amount of $2.0
million on Manuel J. Glynias, our President and Chief Executive Officer.
Proceeds of $1.5 million under this policy are payable to NetGenics.

If we fail to attract and retain key management, our business would be
materially and adversely affected. The number of people with experience in the
field of information technology and in particular bioinformatics, is limited,
and competition for qualified personnel is intense. Many other employers are
able to offer more attractive compensation and benefits than we do. We have
experienced difficulty from time to time in attracting and retaining the
personnel necessary to support the growth of our business, including executive
officers, and we may experience similar difficulty in the future. Failure to
attract and retain our key personnel could materially and adversely affect our
business.

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WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR PLANNED EXPANSION, WHICH COULD
MATERIALLY ADVERSELY AFFECT US AND STRAIN OUR EXISTING RESOURCES.

Since our inception, we have experienced significant growth in the number
of our employees and the scope of our operations. This growth has strained, and
is expected to continue to strain, our management and operations. Our ability to
manage our growth effectively will depend upon our ability to strengthen our
management team and our ability to attract 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, management information and
financial control systems and to expand, train and manage our work force. In
addition, we must continue to take steps to provide resources to support our
customers as their numbers increase. Further, our partners typically have
worldwide operations and may require support at multiple U.S. and foreign sites.
Providing this support may require us to open offices overseas in addition to
our current London, England office, which could result in additional burdens on
our systems and resources. If we are unable to manage our growth effectively our
financial condition and results of operations could be materially and adversely
affected.

OUR SOFTWARE PRODUCTS CURRENTLY INCORPORATE THIRD PARTY SOFTWARE. THE FAILURE OF
THIRD PARTIES TO PROVIDE SUPPORT FOR THE SOFTWARE COULD ADVERSELY AFFECT THE
QUALITY OF OUR PRODUCTS AND OUR FINANCIAL CONDITION.

Our products incorporate software programs developed by
government-sponsored research organizations and commercial entities. If these
organizations cease providing support for their software programs, the quality
of our products could deteriorate and our financial condition and results of
operations could be materially and adversely affected. We may not be able to
acquire replacement technologies from third parties or develop replacement
technologies, either alone or with others. The failure to license or otherwise
acquire necessary technologies could materially and adversely affect our
financial condition and results of operations.

WE MAY NEED TO RAISE ADDITIONAL FUNDING THAT MAY NOT BE AVAILABLE ON TERMS
ACCEPTABLE TO US, IF AT ALL.

We anticipate that the proceeds from this offering and our existing capital
resources will be sufficient to fund our future operating plans for the next 12
months. We cannot assure you, however, that we will not need additional
financing in the next 12 months. Further, we expect that we may need to raise
significant additional capital. We anticipate that our operating expenses will
increase substantially in the future as we increase our sales and marketing
operations, develop new products, fund greater levels of research and
development, broaden our technical support and improve our operational and
financial systems. The amount of additional capital which we need to raise will
depend on many factors, including:

- the success of our research and development efforts;

- our ability to introduce and sell new products;

- the level of our sales and marketing expenses;

- expenses relative to alliances and license agreements;

- costs incurred in enforcing and defending our patent claims and other
intellectual property rights;

- the cost of financing the purchase of additional capital equipment and
development tools; and

- costs associated with the integration of new operations assumed through
mergers and acquisitions.

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We currently anticipate that we will raise any additional capital we
require through public or private equity offerings, debt financings or
collaborations and licensing arrangements. We may not be able to obtain
additional financing when we need it, or, if available, we may not be able to
obtain such financing on terms favorable to us. If we raise additional capital
by issuing equity securities, our stockholders' ownership will be diluted. If we
raise additional funds through collaborations and licensing arrangements, we may
be required to relinquish rights to certain of our technologies or product
candidates, or to grant licenses on unfavorable terms.

RISKS RELATED TO THE LIFE SCIENCE RESEARCH INDUSTRY

CONSOLIDATION WITHIN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES MAY HARM
OUR EFFORTS TO MARKET AND COMMERCIALIZE OUR PRODUCTS.

Consolidation within the pharmaceutical and biotechnology industries has
heightened the competition for services of the type provided by us. If this
consolidation trend continues, it may result in fewer customers for our
services, price erosion and greater competition among us and our competitors.
Our potential partners may consolidate, which could decrease the value of our
technologies and shrink the research market we target for our products. We
cannot assure you that consolidation in the pharmaceutical and biotechnology
industries will not have a material adverse effect on us.

THE LIFE SCIENCE RESEARCH INDUSTRY IS SUBJECT TO CHANGING REGULATORY INFLUENCES,
WHICH COULD LIMIT THE USEFULNESS OF OUR SOLUTIONS OR REQUIRE US TO MAKE
EXPENSIVE AND TIME-CONSUMING MODIFICATIONS TO OUR PRODUCTS.

During the past several years, the pharmaceutical and biotechnology
industries have been subject to an increase in governmental regulations and
reform proposals. These reforms may increase governmental involvement in these
industries and otherwise change the operating environment for our customers. Our
customers may react to these proposals and the uncertainty surrounding the
proposals by curtailing or deferring investments, including those for our
bioinformatics solutions.

RISKS RELATED TO THIS OFFERING

WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS.

As of July 31, 2000, our directors, executive officers, employees and
principal stockholders and certain of their respective affiliates beneficially
own approximately 76.4% of our outstanding common stock, and after this offering
will beneficially own approximately 58.7% of our outstanding common stock.
Accordingly, they collectively will have significant influence in determining
the outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, acquisitions, consolidations and
the sale of all or substantially all of our assets, and also the power to
prevent or cause a change in control. The interests of these stockholders may
differ from the interests of the other stockholders.

PROVISIONS IN BOTH DELAWARE LAW AND OUR CHARTER AND BYLAWS MAY INHIBIT A
TAKEOVER, WHICH COULD ADVERSELY AFFECT THE PRICE INVESTORS MIGHT BE WILLING TO
PAY IN THE FUTURE FOR OUR COMMON STOCK.

Certain provisions of our certificate of incorporation and bylaws, as well
as provisions of Delaware law, may delay or prevent a change in control or
changes in our management that stockholders consider favorable or beneficial. If
a change in control or change in management is delayed or prevented, the market
price of our common stock could decline.

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OUR COMMON STOCK MAY HAVE A VOLATILE PUBLIC TRADING PRICE AND LOW TRADING
VOLUME.

There has been no public market for our common stock prior to this
offering, and an active public market for our common stock may not develop or be
sustained. We and the representatives of the underwriters, through negotiations,
will determine the initial public offering price. The initial public offering
price will not necessarily be indicative of the market price at which the common
stock will trade after this offering. The market prices for securities of
companies comparable to us have been highly volatile, and the market has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of the individual companies.

OUR MANAGEMENT COULD APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT
INCREASE OUR MARKET VALUE OR IMPROVE OUR OPERATING RESULTS.

We currently intend to use the net proceeds of this offering as described
in "Use of Proceeds." Our management has a great deal of discretion in
allocating the proceeds of this offering, and may allocate the net proceeds
among these purposes as it determines appropriate. In addition, market factors
may require our management to allocate all or portions of the net proceeds for
other purposes. Accordingly, our management may use the net proceeds for
purposes that do not result in any increase in our results of operations or
market value.

THE LARGE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
CAUSE OUR STOCK PRICE TO DECLINE.

Sales of substantial amounts of our common stock in the public market after
this offering could cause prevailing market prices for our common stock to
decline. These sales might make it difficult or impossible for us to sell
additional securities when we need to raise capital. See "Shares Eligible for
Future Sale" for a description of the number of shares which may be sold by
existing stockholders in the future.

FORWARD-LOOKING STATEMENTS; MARKET DATA

We have included forward-looking statements in this prospectus. These
statements relate to our growth strategy and our future financial performance,
including our operations, economic performance, financial condition and
prospects, and other future events. We have attempted to identify forward
looking statements by using such words as "anticipates," "believes," "can,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "should" or "will" or other similar expressions. These
forward-looking statements are only predictions and are largely based on our
current expectations.

In addition, a number of known and unknown risks, uncertainties and other
factors could affect the accuracy of these statements, including the risks
outlined under "Risk Factors" and elsewhere in this prospectus. Some of the more
significant known risks that we face are the uncertainty regarding market
acceptance of our products and our ability to generate revenues and our reliance
on IBM as a strategic partner. These risks may cause our or our industry's
actual results, levels of activity, performance or achievements to differ
materially from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.

Other important factors to consider in evaluating our forward-looking
statements include:

- changes in external market factors;

- changes in our business or growth strategy;

- our possible inability to execute our strategy due to changes in our
industry or the economy generally; and

- the success of our competitors and the emergence of new competitors.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity or performance. We are under

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no duty to update any of the forward-looking statements after the date of this
prospectus or to conform these statements to actual results. You should not
place undue reliance on the forward-looking statements contained in this
prospectus.

The market and industry data we have included in this prospectus are based
on independent industry publications, including Reuters Business Insight,
Pharmaceutical Research and Manufacturing Association Annual Survey, MedAd News
and Trends in Commercial Bioinformatics, a report of Oscar Gruss & Son
Incorporated. We have not independently verified this market and industry
information and we cannot assure you that it is accurate or complete.

USE OF PROCEEDS

We estimate that our net proceeds from our sale of the 5,500,000 shares of
common stock that we are offering will be approximately $60.2 million, assuming
an initial public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and the estimated offering expenses
payable by us.

The principal reasons for this offering are to obtain additional capital,
to create a public market for our common stock and to facilitate access to
public equity markets. As of the date of this prospectus, we have not allocated
the net proceeds of this offering for specific uses. Accordingly, our management
will retain broad discretion in the allocation of the net proceeds. We intend to
use our net proceeds of this offering for working capital and other general
corporate purposes, including potential acquisitions of products, technologies
or companies that are complementary to us. We currently have no commitments or
agreements to make any acquisitions. Pending these uses, we intend to invest the
net proceeds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently intend to support the development of our business and do not
anticipate paying cash dividends in the foreseeable future. Our payment of any
future dividends will be at the discretion of our board of directors after
taking into account various factors, including our financial condition,
operating results, cash needs, growth plans and the terms of any credit
agreements that we may be a party to at the time.

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CAPITALIZATION

The following table summarizes our capitalization as of June 30, 2000:

- on an actual basis;

- on a pro forma basis to reflect the conversion of all of our outstanding
redeemable convertible preferred stock into common stock upon the
completion of this offering; and

- on a pro forma as adjusted basis to reflect our sale of 5,500,000 shares
of common stock at an assumed initial public offering price of $12.00 per
share, after deducting underwriting discounts and commissions and the
estimated offering expenses payable by us.

You should read this table together with our consolidated financial
statements and related notes included elsewhere in this prospectus.

PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)

Long-term debt, net of current portion........... $ 1,248,391 $ 1,248,391 $ 1,248,391
Redeemable convertible preferred stock........... 47,099,057 -- --
Stockholders' equity (deficit):
Preferred stock (undesignated), $0.001 par
value; no shares authorized, actual and pro
forma; 5,000,000 shares authorized and no
shares issued and outstanding, pro forma as
adjusted.................................... -- -- --
Common stock, $0.001 par value; 43,000,000
shares authorized, 3,043,543 shares issued
and outstanding, actual; 43,000,000 shares
authorized, 17,985,387 shares issued and
outstanding, pro forma, and 75,000,000
shares authorized, 23,485,387 shares issued
and outstanding, pro forma as adjusted...... 3,043 17,985 23,485
Additional paid-in capital....................... 24,128,317 71,212,432 131,386,932
Deferred stock compensation...................... (3,468,055) (3,468,055) (3,468,055)
Cumulative deficit during development stage...... (52,272,167) (52,272,167) (52,272,167)
Accumulated other comprehensive income........... 2,039 2,039 2,039
Treasury stock at cost, 46,875 shares actual, pro
forma and pro forma as adjusted................ (81) (81) (81)
------------ ------------ ------------
Total stockholders' equity (deficit)........... (31,606,904) 15,492,153 75,672,153
------------ ------------ ------------
Total capitalization........................ $ 16,740,544 $ 16,740,544 $ 76,920,544
============ ============ ============

The information regarding the number of shares of common stock to be
outstanding after this offering is based on the number of shares outstanding as
of June 30, 2000 and does not include:

- 1,234,645 shares issuable upon the exercise of options outstanding as of
June 30, 2000, at a weighted average exercise price of $2.80 per share;

- 416,551 shares issuable upon the exercise of warrants outstanding as of
June 30, 2000, at a weighted average exercise price of $4.22 per share;
and

- 615,562 additional shares reserved as of June 30, 2000 for future
issuance under our stock option plans.

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DILUTION

Our pro forma net tangible book value as of June 30, 2000, after giving
effect to the conversion of all outstanding shares of redeemable convertible
preferred stock into common stock, was approximately $15.5 million, or $.86 per
pro forma share of common stock. Pro forma net tangible book value per share is
determined by dividing the amount of our pro forma total tangible assets less
our total liabilities by the pro forma number of shares of common stock
outstanding. After giving effect to our sale of 5,500,000 shares of common stock
at an assumed initial public offering price of $12.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by us, our adjusted pro forma net tangible book value as of June 30,
2000 would have been $75.7 million, or $3.22 per share. This amount represents
an immediate increase in pro forma net tangible book value to our existing
stockholders of $2.36 per share and an immediate dilution to new investors of
$8.78 per share. To the extent outstanding options and warrants are exercised,
there will be further dilution to new investors. The following table illustrates
this per share dilution:

Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of June 30,
2000................................................... $0.86
Increase per share attributable to new investors.......... 2.36
-----
Pro forma as adjusted net tangible book value per share
after this offering....................................... 3.22
------
Dilution per share to new investors......................... $ 8.78
======

The following table summarizes as of June 30, 2000, on a pro forma as
adjusted basis after giving effect to the conversion of our outstanding
redeemable convertible preferred stock as described above, the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid by our existing stockholders and by new investors.

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------

Existing stockholders.......... 17,985,387 76.6% $ 49,862,251 43.0% $ 2.62
New investors.................. 5,500,000 23.4 66,000,000 57.0 12.00
---------- ----- ------------ -----
Total..................... 23,485,387 100.0% $115,862,251 100.0%
========== ===== ============ =====

The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants, including:

- 1,234,645 shares issuable upon the exercise of options outstanding as of
June 30, 2000, at a weighted average exercise price of $2.80 per share;

- 416,551 shares issuable upon the exercise of warrants outstanding as of
June 30, 2000, at a weighted average exercise price of $4.22 per share;
and

- 615,562 additional shares reserved as of June 30, 2000 for future
issuance under our stock option plans.

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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)

We derived the selected consolidated statement of operations data for the
years ended December 31, 1997, 1998 and 1999 from our audited consolidated
financial statements appearing elsewhere in this prospectus. We derived the
selected consolidated statement of operations data for the period from June 24,
1996 (date of inception) through December 31, 1996 from audited financial
statements, which are not included in this prospectus. The consolidated
statement of operations data for the six months ended June 30, 1999 and 2000 and
for the period from June 24, 1996 (date of inception) through June 30, 2000
(cumulative development stage) and the consolidated balance sheet data as of
June 30, 2000 are derived from unaudited financial statements appearing
elsewhere in this prospectus. In the opinion of management, the unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
unaudited interim periods. Our historical results are not necessarily indicative
of operating results to be expected for any future period. You should read the
following selected consolidated financial data in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes appearing elsewhere in
this prospectus.

PERIOD FROM
JUNE 24, 1996 PERIOD FROM
(DATE OF INCEPTION) SIX MONTHS ENDED JUNE 24, 1996
THROUGH YEAR ENDED DECEMBER 31, JUNE 30, THROUGH
DECEMBER 31, ----------------------------- ------------------ JUNE 30,
1996 1997 1998 1999 1999 2000 2000(1)
------------------- ------- -------- -------- ------- -------- ----------------

CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue................... $ -- $ 57 $ 405 $ 1,764 $ 764 $ 990 $ 3,216
Costs and expenses:
Costs of services
provided................ -- 18 124 1,163 476 731 2,036
Sales and marketing (2)... 142 697 1,851 2,112 1,048 944 5,746
Research, development and
support (2)............. 315 1,938 4,524 4,998 2,435 2,909 14,684
General and administrative
(2)..................... 230 1,485 3,138 3,662 1,788 2,279 10,794
Depreciation and
amortization............ 51 271 887 1,229 616 718 3,156
Non-cash stock
compensation............ -- -- -- 22 -- 240 262
------ ------- -------- -------- ------- -------- --------
Total costs and
expenses................ 738 4,409 10,524 13,186 6,363 7,821 36,678
------ ------- -------- -------- ------- -------- --------
Loss from operations
during development
stage................... (738) (4,352) (10,119) (11,422) (5,599) (6,831) (33,462)
------ ------- -------- -------- ------- -------- --------
Dividend related to
beneficial conversion
feature of redeemable
convertible preferred
stock (3)............... -- -- -- -- -- (20,020) (20,020)
Net loss attributable to
common stockholders
during development
stage................... $ (730) $(4,233) $ (9,635) $(11,265) $(5,460) $(26,409) $(52,272)
====== ======= ======== ======== ======= ======== ========
Basic and diluted net loss
attributable to common
stockholders during
development stage per
common share............ $(0.50) $ (1.47) $ (3.33) $ (3.82) $ (1.87) $ (8.71) $ (17.96)
====== ======= ======== ======== ======= ======== ========
Basic and diluted weighted
average common shares
outstanding (4)......... 1,454 2,888 2,893 2,948 2,921 3,031 2,910

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SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS)

PERIOD FROM
JUNE 24, 1996
(DATE OF
INCEPTION) THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------- JUNE 30,
1996 1997 1998 1999 2000
------------------ ------- -------- -------- -----------

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 562 $ 4,264 $ 7,413 $ 2,572 $ 16,000
Total assets.................................. 832 6,631 11,332 7,034 20,122
Notes payable to stockholders (5)............. -- 2,750 -- -- --
Long-term debt, net of current portion........ -- -- -- 689 1,248
Total liabilities............................. 56 3,486 1,529 5,705 4,630
Redeemable convertible preferred stock........ 1,500 8,103 24,384 27,079 47,099
Total stockholders' equity (deficit).......... $ (724) $(4,958) $(14,581) $(25,750) $(31,607)

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

(1) Cumulative development stage.

(5) Pursuant to a bridge note agreement dated December 18, 1997, certain of our
stockholders held $2.75 million of convertible notes payable as of December
31, 1997. The entire principal and accrued interest amount were converted to
697,076 shares of Series D redeemable convertible preferred stock upon
completion of the Series D redeemable convertible preferred stock offering
on March 20, 1998. In connection with the bridge note agreement, we issued
warrants to purchase 68,750 shares of common stock to the lenders at an
exercise price of $0.60 per share.

(6) Includes a remaining $1.5 million customer deposit from IBM. See Note 9 to
our audited consolidated financial statements included elsewhere in this
prospectus.

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

You should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes appearing elsewhere in
this prospectus and the Selected Consolidated Financial Data. Except for
historical information, the discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those in these forward-looking statements.
Factors that could cause or contribute to such differences include the risks
discussed in the section titled "Risk Factors" and elsewhere in this prospectus.

OVERVIEW

In October 1999, we formed an alliance with IBM to collaborate with IBM to
deploy and integrate the DiscoveryLink technology to IBM customers and joint
IBM/NetGenics customers. We began implementation of our first DiscoveryLink
project at a top pharmaceutical company in November 1999. Our collaboration with
IBM resulted in a $2.0 million prepayment by IBM for future anticipated
services. On any one occasion before the $2.0 million prepayment is applied as
payment for services provided, IBM may use up to one-third of any remaining
prepayment to purchase future warrants.

Historically we have derived our revenue from customer contracts that
provide licenses and services related to our enterprise SYNERGY software
product. In exchange for the licenses and services, the customer pays us certain
fees. We recognized revenue of $989,500 from license and service offerings
during the six months ended June 30, 2000, $1.4 million in 1999, $405,480 in
1998 and $57,025 in 1997. Revenue from fees for license and service agreements
is recognized ratably over the contract term, generally one year. Revenue from
fees for service contracts is recognized as services are performed and hours are
expended. We start to recognize revenue once the contract

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acceptance criteria have been met and the collection of our fee is probable.
Upon termination of an agreement, we refund cash received in advance on a pro
rata basis.

We also derive revenues from consulting services. We bill on a time and
materials basis. In 1999 we concluded our first consulting engagement for which
we recognized revenue of $345,000. During the six months ended June 30, 2000 we
expanded our services to include two consulting engagements that commence during
the third quarter of 2000. We have not recognized any revenue from these
engagements in the first six months of 2000. During the year 2000 we expect to
expand our consulting services to new and existing customers.

The timing and amount of cash receipts from customers can vary
significantly depending on specific contract terms and can therefore have a
significant impact on the amount of our deferred revenue in any given period.

Since our inception in 1996, we have incurred substantial costs to develop
our technologies and products, to recruit and train personnel for our software
development, sales and marketing and technical support departments, and to
establish an administrative organization. We anticipate that our operating
expenses will increase substantially in the future as we increase our sales and
marketing operations, develop new products, fund greater levels of research and
development, broaden our technical support and improve our operational and
financial systems. Accordingly, we will need to generate significant quarterly
revenues to achieve profitability. In addition, our limited operating history
makes it difficult for us to predict future operating results and, accordingly,
there can be no assurance in future quarters that we will achieve or sustain
revenue growth or profitability.

We have recorded deferred stock compensation of $1.2 million related to
grants of certain stock options in 1999 and an additional $1.1 million related
to grants of certain stock options in 2000. This amount represents the
difference between the exercise price of these stock option grants and the
amount subsequently determined to be the fair value of the underlying common
stock for financial reporting purposes at the time of option grant. We amortized
$21,565 of deferred stock compensation related to these options in 1999 and
$213,019 in the first six months of 2000. We will amortize the remaining $2.1
million of deferred stock compensation ratably over the remaining vesting
periods of the options, generally five years, which will affect our reported
results of operations through 2005. All of these amounts appear on our
consolidated statement of operations as non-cash stock compensation expense.

We have also recorded deferred stock compensation of $268,500 associated
with warrants outstanding provided to a customer in 1999 to purchase 111,940
shares of our common stock. We amortized $26,850 of deferred stock compensation
in the first six months of 2000. Additionally, under a services agreement with
this customer we have recorded deferred stock compensation of $1.6 million
associated with the customer's ability to convert a portion of a $2.0 million
prepayment for services to future warrants. During the first six months of 2000,
the customer applied $547,300 of invoices for services provided and expenses
incurred against the prepayment. Accordingly, we recognized net revenue of
$206,400 and amortized $340,900 of deferred stock compensation as the fair value
of the future warrants is amortized against the related service revenue.

We had 100 employees at July 31, 2000, compared to 83 at December 31, 1999
and 48 at December 31, 1997. This growth has placed significant demands on our
management and operational resources. In order to manage our growth effectively,
we must implement and improve our operational systems, procedures and controls
on a timely basis. In addition, we expect that future expansion will continue to
challenge our ability to hire, train, motivate and manage our employees.
Competition is intense for highly qualified technical, sales and marketing and
management personnel. If our total revenue does not increase relative to our
operating expenses, our management systems do not expand to meet increasing
demands, we fail to attract, assimilate and retain qualified personnel or our
management otherwise fails to manage our expansion effectively, we will not
achieve our expected revenues and operating results.

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American Home Products terminated its SYNERGY license in April 2000, which
will adversely affect our revenues for the next several quarters. Abbott will
not renew its no-fee license in November 2000.

On July 27, 2000, we purchased the ChemSymphony and MetaSymphony software
technologies from FamilyGenetix Limited. The purchase price of $1.0 million
consisted of $0.8 million paid at closing and $0.2 million held in escrow
pending the assignment to us of three customer contracts including Merck, Abbott
and SmithKline Beecham.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999

Revenue. Our revenue was $989,500 for the six months ended June 30, 2000
and $764,000 for the six months ended June 30, 1999, representing an increase of
$225,500, or 30%. This increase is primarily attributable to recognizing revenue
in the first six months of 2000 of $670,600 from American Home Products and
$206,400 from IBM. Included in the revenue from American Home Products is the
recognition of $215,600 in deferred revenue due to the contract being terminated
during the second quarter of 2000. In addition, an increase of $92,500 from our
European customer, Aventis Crop Science, also contributed to the 30% increase in
revenue. In the six months ended June 30, 2000, American Home Products and IBM
accounted for approximately 68% and 21%, respectively, of total revenue.

Cost of Services Provided. Cost of services provided were $731,414 for the
six months ended June 30, 2000 and $475,955 for the six months ended June 30,
1999. The increase of $255,459 is attributed to an increase in professional
services being provided to customers including IBM, Aventis, and Abbott,
$262,240, $102,512 and $78,609, respectively. Although our cost of services
increased overall, decreases in services provided to Pfizer of $38,482 due to
the contract requirements being fulfilled during 1999 and American Home Products
of $145,313 due to the termination of the contract during the second quarter of
2000 were also realized during the six months ended June 30, 2000.

Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, commissions, payroll taxes and employee benefits as well
as travel, entertainment and discretionary marketing expenses. Sales and
marketing expenses were $943,949 for the six months ended June 30, 2000 and
$1.05 million for the six months ended June 30, 1999. The decrease of $103,630,
or 10%, is attributable to a decrease in sales and marketing personnel headcount
from an average of 13.5 employees in 1999 to 11.5 in 2000. Salaries, benefits
and related expenses decreased $57,207. A decrease in travel expense of $66,373
was also a contributing factor to the overall decrease. We expect sales and
marketing expense to increase as we hire additional sales and marketing
personnel.

Research, Development and Support Expenses. Research, development and
support expenses consist primarily of salaries, payroll taxes, employee benefits
and other costs attributable to research and development activities. Research,
development and support expenses were $2.9 million for the six months ended June
30, 2000 and $2.4 million for the six months ended June 30, 1999. An increase of
$473,966, or 19.5%, is primarily attributable to an increase in average research
and development personnel headcount of approximately 50 in 1999 to approximately
60 in 2000. As a direct result of the increase in research and development
personnel headcount, salaries and related payroll expenses increased $337,314
and telephone and internet communication expenses increased $48,453. Other
factors contributing to the overall increase include a $140,746 increase in
outside services, which were utilized to meet temporary staffing requirements.
The mentioned increases were offset by a decrease in travel expenses of $51,179,
which can be attributed to the improved utilization of our strategy to assign
remote office personnel to customers and projects based on location. We expect
research, development and support expenses to increase as we continue to hire
additional research, development and support personnel to meet the demands of
developing new technologies and providing professional, consulting and support
services to our customers.

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General and Administrative Expenses. General and administrative expenses
consist primarily of salaries, payroll taxes, employee benefits and certain
other administrative costs. General and administrative expenses were $2.3
million for the six months ended June 30, 2000 and $1.8 million for the six
months ended June 30, 1999. An increase of $490,787, or 27%, is attributable to
additional personnel requirements. There were increases in salaries, benefits
and related expenses of $249,642 and recruiting expenses of $114,429 to support
our expanding research, development and support activities. Additional office
space was required to accommodate our expansion, resulting in increases in
building and maintenance expenses and related property taxes of $116,950. We
expect general and administrative expenses to increase as we expand our
infrastructure and incur additional costs as a result of being a public company.

Depreciation and Amortization Expense. Depreciation and amortization
expense was $717,200 for the six months ended June 30, 2000 and $616,930 for the
six months ended June 30, 1999. The increase of $100,270, or 16%, is primarily
attributable to additional depreciation expense on current year additions of
property and equipment totaling $881,878. Property and equipment are depreciated
on a straight-line basis over the estimated useful life of the asset, which
ranges from three to five years.

Non-Cash Stock Compensation Expense. We incurred non-cash stock
compensation expense of $239,869 during the six months ended June 30, 2000. We
did not incur non-cash stock compensation expense during the six months ended
June 30, 1999. This expense related to grants of certain stock options in 2000
and 1999 and base warrants granted to IBM. The stock options were granted with
exercise prices less than the amount subsequently determined to be the fair
value of the underlying common stock for financial reporting purposes on the
date of option grant. The options generally vest over five years. The base
warrants granted to IBM resulted in $26,850 of the non-cash stock compensation
expense. The remaining deferred compensation expense of approximately $2.1
million attributable to the stock options and remaining deferred compensation
expense of $241,650 attributable to the IBM base warrants will be amortized
ratably over the remaining vesting periods of the options and will affect
periods ending after June 30, 2000.

Interest Income. Interest income was $514,941 for the six months ended
June 30, 2000 and $140,637 for the six months ended June 30, 1999. The increase
in interest income is primarily attributable to the issuance of our Series E
redeemable convertible preferred stock on January 6, 2000, which generated net
proceeds of $19.6 million. Our net cash used in development stage activities was
$6.8 million for the six months ended June 30, 2000 and $5.0 million for the six
months ended June 30, 1999.

Interest Expense. Interest expense was $73,201 for the six months ended
June 30, 2000 and $2,400 for the six months ended June 30, 1999. During June of
1999, we entered into three equipment-financing loans, each with a due date of
June 30, 2002. In addition, we entered into an equipment-financing loan in June
of 2000, due June 30, 2003. Interest expense during 2000 relates entirely to
these equipment-financing loans.

Beneficial Conversion Expenses. The issuance of our Series E redeemable
convertible preferred stock resulted in a charge of $20.0 million, calculated in
accordance with Emerging Issues Task Force Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios." The dividend related to the beneficial conversion
feature of our redeemable convertible preferred stock has been reflected by
recording a charge to cumulative deficit during development stage and an
increase to additional paid-in capital, and resulted in an increase to net loss
per share attributable to common stockholders during the six months ended June
30, 2000.

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

Revenue. Our revenue was $1.8 million in 1999, $405,480 in 1998 and $57,025
in 1997, representing increases of approximately $1.4 million, or 345%, from
1998 to 1999 and $348,455, or
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611%, from 1997 to 1998. These increases were primarily attributable to
recognizing revenue from our first license agreement in November 1997, our
second in August 1998 and our third in January 1999. In 1999, American Home
Products accounted for approximately 62% of total revenue and Pfizer accounted
for approximately 20% of total revenue. Abbott accounted for approximately 91%
of total revenue in 1998 and approximately 83% of total revenue in 1997.

Cost of Services Provided. Cost of services provided were $1.2 million in
1999, $124,153 in 1998 and $17,460 in 1997. Cost of services provided primarily
consists of direct costs associated with services provided to our customers,
including salaries, benefits and overhead expenses. An increase of $1.0 million
from 1998 to 1999 was primarily attributed to increases in services provided.
The increase in services provided is primarily attributed to new contracts with
Pfizer and American Home Products, totalling $269,375 and $791,773,
respectively. For the year ended 1998, cost of services provided increased
$106,693. The increase is primarily attributed to an increase in services
provided to Abbott of $100,489. During 1997, the cost of services provided was
primarily attributed to initial services being performed for customers.

Sales and Marketing Expenses. Sales and marketing expenses were $2.1
million in 1999, $1.9 million in 1998 and $697,610 in 1997. Sales and marketing
expenses represented 16% of total costs and expenses in 1999, 17.6% in 1998 and
15.8% of total costs and expenses in 1997. We opened a sales office in London
during July 1998. The increase in sales and marketing expense in 1999 compared
to 1998 can be attributed to three primary factors, including a $96,305 increase
related to a full year of London office expense, a $78,406 increase in sales
commission expense as a result of our revenue growth and a $74,137 increase in
salaries, benefits and related expenses. To a lesser extent, increases in
marketing expenditures for advertising and promotions and related materials also
contributed to the overall increases. Staff size as of December 31, 1999 was 12.
The increase in sales and marketing expense in 1998 compared to 1997 was
primarily due to the increases in sales and marketing personnel, which increased
from eight as of December 31, 1997 to 12 at December 31, 1998. The $624,945
increase in salaries, benefits and related expenses was primarily attributable
to additional staffing. Other factors contributing to the overall increase were
a $221,185 increase in travel expenses in 1998 and a $79,411 increase in
advertising and promotional activities. In addition, the new London office
contributed additional office rent, telephone and other expenses of $121,261.

Research, Development and Support Expenses. Research, development and
support expenses were $5.0 million in 1999, $4.5 million in 1998 and $1.9
million in 1997. Research, development and support expenses represented 37.9% of
total costs and expenses in 1999, 43.0% in 1998 and 44.0% of total costs and
expenses in 1997. The increase of $474,501, or 10.5%, in research, development
and support expense in 1999 compared to 1998 was primarily attributable to
headcount increases and license agreements. Headcount increases resulted in
$74,019 in additional salaries, benefits and related expenses and $84,564 in
additional infrastructure costs associated with an average staff size of 52 in
1999 compared to 46 in 1998. License agreements expense increased $387,846 over
1998. The license agreements related primarily to software used in the
development and deployment of our products. Decreases in professional services
from 1998 totalled $70,905. Professional services include consulting and
recruiting services. The decrease is primarily attributed to less headcount
growth in 1999 compared to 1998. The increase of $2.6 million, or 133%, in
research, development and support expense in 1998 compared to 1997 was primarily
attributable to salaries, benefits and related expenses increasing $1.8 million
and training and related expenses increasing $121,184, attributed to the hiring
of additional staff, which increased from 28 as of December 31, 1997, to 52 at
December 31, 1998. In addition, growth in headcount resulted in increases of
$190,943 in infrastructure expenses, including telephone expense and office
rent, $168,009 in travel related expenses and $182,342 in relocation and
recruiting expense. Outside services also increased $158,802 during 1998 as a
result of temporary staffing needs of product development, which were remedied
through the hiring of additional staff.

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General and Administrative Expenses. General and administrative expenses
were $3.7 million in 1999, $3.1 million in 1998 and $1.5 million in 1997.
General and administrative expenses as a percent of total costs and expenses
represented 27.8% in 1999, 29.8% in 1998 and 33.7% in 1997. The increase of
$523,278, or 16.7%, in 1999 compared to 1998 was primarily a result of severance
charges of $502,500 related to the separation of our former Chief Financial
Officer, Vice President of Sales and Vice President of Marketing in July 1999.
Staff size as of December 31, 1999 was 19. The increase of $1.7 million, or
113%, in 1998 compared to 1997 was primarily related to an $859,809 increase in
salaries, benefits and related expenses attributed to the hiring of additional
staff, which increased from 10 as of December 31, 1997, to 16 as of December 31,
1998, which includes four new executive level managers. In addition,
infrastructure and related expenses increased $384,206 due to additional office
space required by the growth in headcount. Other contributing factors included
an increase of $237,819 in professional services related to legal, accounting
and other outside services. Additional administrative personnel were necessary
to support our increased sales, marketing and development activities.

Depreciation and Amortization Expense. Depreciation and amortization
expense was $1.2 million in 1999, $886,989 in 1998 and $271,079 in 1997.
Purchases of property and equipment were $785,759 in 1999 and $2.0 million in
both 1998 and 1997. The increase in depreciation in 1999 compared to 1998, and
the increase in 1998 compared to 1997, were primarily a result of current year
purchases and a full year of depreciation on prior year purchases.

Non-Cash Stock Compensation Expense. We incurred non-cash stock
compensation expense of $21,565 in 1999 related to grants of certain stock
options in 1999 with exercise prices less than the amount subsequently
determined to be the fair value of the underlying common stock for financial
reporting purposes on the date of option grant. The options generally vest over
five years. The remaining deferred compensation expense of approximately $1.1
million will be amortized ratably over the remaining vesting periods of the
options and will affect periods ending after December 31, 1999.

Interest Income. Interest income was $251,953 in 1999, $487,197 in 1998 and
$119,368 in 1997. The increase in interest income was primarily the result of
the timing of our issuance of Series C redeemable convertible preferred stock on
June 5, 1997 (net proceeds of $6.6 million) and the issuance of Series D
redeemable convertible preferred stock on March 20, 1998 (net proceeds of $13.5
million) and April 9, 1999 (net proceeds of $2.7 million). Our net cash used in
development stage activities was $8.1 million in 1999, $8.2 million in 1998 and
$3.4 million in 1997.

Interest Expense. Interest expense was $81,359 in 1999 and zero in 1998 and
1997. Interest expense in 1999 relates entirely to the three equipment-financing
loans.

Income Taxes. We did not record a provision for federal or state income
taxes in 1999, 1998 or 1997, because we have generated net operating loss
carryforwards of approximately $24.7 million from inception through December 31,
1999. As December 31, 1999 and 1998, we recorded a full valuation allowance for
the deferred tax assets related to the future benefits, if any, of these net
operating loss carryforwards. Our net operating loss carryforwards begin to
expire in 2011 and will fully expire in 2019. Under regulations contained in the
Internal Revenue Code and similar state provisions, our use of net operating
loss carryforwards for tax purposes are subject to an annual limitation in the
event of a substantial change in our stock ownership. These annual limitations
may result in the expiration of the net loss operating carryforwards before we
are able to use them. Our sale of securities after this offering could result in
such a change in ownership. These annual limitations may result in the
expiration of the net operating loss carryforwards and other tax credits before
we are able to use them.

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LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations primarily from $49.8 million of gross
proceeds related to the sale of our redeemable convertible preferred stock,
including our Series E redeemable convertible preferred stock.

Our net cash used in development stage activities was $6.8 million for the
six months ended June 30, 2000, $8.1 million in 1999, $8.2 million in 1998 and
$3.4 million in 1997. Net cash used by development stage activities in all
periods was due primarily to net losses during development stage after adjusting
for non-cash depreciation and amortization charges and changes in operating
assets and liabilities, including the IBM pre-payment of $2.0 million in 1999,
reduced by $547,334 in the six months ended June 30, 2000 by the customer's
application of invoices for services against the prepayment.

Our investing activities used net cash of $881,878 for the six months ended
June 30, 2000, $785,759 in 1999, $2.0 million in 1998 and $2.0 million in 1997.
Our investing activities in all periods consisted of purchases of equipment.

Our financing activities provided cash of $21.1 million for the six months
ended June 30, 2000, $4.0 million in 1999, $13.4 million in 1998 and $9.1
million in 1997. For the six months ended June 30, 2000, net cash provided by
financing activities included $20.0 million of net proceeds from the sale of
Series E redeemable convertible preferred stock, and net proceeds of $1.1
million from an equipment financing loan. In 1999 net cash provided by financing
activities included $2.7 million of net proceeds from the sale of Series D
redeemable convertible preferred stock, and net proceeds of $1.1 million from
three equipment financing loans. In 1998 and 1997, financing activities
consisted primarily of sales of redeemable convertible preferred stock totaling
$20.1 million of net proceeds. In December 1997, we issued bridge notes in an
aggregate amount of $2.75 million to seven of our existing stockholders. In
March 1998, these bridge notes were subsequently converted into shares of our
Series D redeemable convertible preferred stock. In connection with the issuance
of the bridge notes, we issued to the lending stockholders warrants to purchase
an aggregate of 68,750 shares of our common stock at an exercise price of $.60
per share. These warrants will expire on December 31, 2000. Repayments on
equipment financing loans amounted to $223,767 in the first six months of 2000
and are anticipated to be an additional $330,805 in the remainder of 2000,
$719,475 in 2001, $625,110 in 2002 and $271,841 in 2003. We have $1.3 million of
borrowing capabilities remaining as of June 30, 2000. The loans have customary
operating covenants under which we must, among other things, maintain the
collateral in good operating condition, use the collateral only for business
purposes, keep the collateral insured and provide our lenders with quarterly and
annual financial statements. We were in compliance with all covenants as of June
30, 2000, but we cannot assure you that we will be able to continue to comply
with our loan covenants in the future.

We intend to continue to invest heavily in the development of new products
and enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including:

- the costs and timing of expansion of product development efforts and the
success of these development efforts;

- the costs and timing of expansion of sales and marketing activities;

- the extent to which our existing and new products gain market acceptance;

- market developments;

- the costs involved in maintaining and enforcing intellectual property
rights;

- the amount and timing of revenue; and

- available borrowings under loan arrangements.
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We believe that the proceeds from this offering, together with our current cash
and investment balances and any cash generated from operations and from
available credit facilities, will be sufficient to meet our operating and
capital requirements through the next 12 months. However, it is possible that we
may require additional financing sooner. We have no current plans to obtain
additional financing following the completion of this offering. The factors
described in this paragraph will affect our future capital requirements and the
adequacy of our available funds. We may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. We cannot ensure that such funding, if needed, will be available
to us on terms attractive to us, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require us to relinquish our rights to certain of our
technologies or products. If we fail to raise capital when needed, our failure
could have a negative impact on our operating results and financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Statement of Position
No. 98-1 requires us to capitalize certain costs related to internal use
software once certain criteria have been met. There was no impact on our
consolidated financial statements when we adopted Statement of Position No. 98-1
on January 1, 1999.

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities." Statement of Position No. 98-5 requires us to
expense all start-up costs related to new operations as incurred. In addition,
all start-up costs that were capitalized in the past must be written off when we
adopt Statement of Position No. 98-5. We adopted Statement of Position No. 98-5
on January 1, 1999, which resulted in an immaterial amount of organizational
cost being written-off.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" in June 1997,
effective for fiscal years beginning after December 15, 1997. This statement
established standards for reporting and displaying comprehensive income in a
full set of financial statements. Accordingly, we adopted this reporting
standard in the preparation of these financial statements. Our only
comprehensive income item is the foreign currency translation adjustment.

In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," and requires companies to
report financial and descriptive information about their reportable operating
segments. The financial information is required to be reported on the same basis
that is used internally for evaluating segment performance and deciding how to
allocate resources to segments. This statement is effective for periods
beginning after December 15, 1997, with interim information required for the
year following adoption. Management has determined that we are of single
operating segment. The adoption of SFAS No. 131 had no impact on our
consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- An Amendment of
FASB Statement No. 133." SFAS No. 138 establishes further accounting and
reporting standards for derivative instruments. Because we do not currently hold
any derivative instruments and do not engage in hedging activities, we expect
that our adoption of SFAS No. 133 will not have a material

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impact on our financial position or results of operations. We will be required
to implement SFAS No. 133 for the fiscal year beginning January 1, 2001.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. Management believes that SAB
101 has no material effect on its financial position, results of operations or
cash flows.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and sell those products primarily
in North America and Europe. In the first six months of 2000, our revenue from
sales outside North America was 11.4% of total revenue. In 1999, our revenue
from our first sales outside North America was 8.1% of total revenue. Our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As all
of our sales are currently made in U.S. dollars, a strengthening of the dollar
could make our products less competitive in foreign markets.

Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since our investments are in short-term
instruments. Due to the nature of our short-term investments, we have concluded
that we do not have material market risk exposure.

Our investment policy requires us to invest funds in excess of current
operating requirements in:

- obligations of the U.S. government and its agencies;

- investment grade state and local government obligations;

- securities of U.S. corporations rated A1 or P1 by Standard & Poors or the
Moody's equivalents; and/or

- money market funds, deposits or notes issued or guaranteed by the U.S.;
and

- non-U.S. commercial banks meeting certain credit rating and net worth
requirements with maturities of less than two years.

At June 30, 2000, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by a large institution in the United
States.

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BUSINESS

BACKGROUND

We market a suite of software components, databases and consulting services
that address the infomatics integration needs of life science research
companies. We have developed software components that will allow scientists at
pharmaceutical, biotechnology and agriscience companies to manage, integrate,
sort and mine, or extract, biological data. Through our recent acquisition of
the ChemSymphony and MetaSymphony technologies, we are extending our
capabilities to chemical data. Our collaboration with IBM in the development of
the DiscoveryLink platform provides life science research companies with the
capability of enterprise-wide data integration for any type of life science
data. In addition, our Professional Services Group provides life science
research companies with needs assessments, strategy development, software and
database designs and implementation plans. We have provided bioinformatics
solutions for Aventis Crop Science and Pfizer, and are performing consulting
projects for Boehringer Ingelheim, AstraZeneca, Avalon Pharmaceuticals, Harvard
University and the National Library of Medicine. Our ChemSymphony and
MetaSymphony technologies are in use at Merck, Abbott and SmithKline Beecham.

Life science research companies are under intense pressure to develop
innovative and cost-effective drugs, chemicals and agricultural products in
order to maintain their competitive positions. As a result, they are increasing
both internal and outsourced resources dedicated to early stage drug and crop
development in order to provide more possible product candidates. This trend has
led to the creation of multiple strategic alliances for product candidate
discovery between life science research companies and producers of databases,
data-generating platform technologies and software tools. However, the large
investments in these technologies have not yielded the hoped-for gains in
productivity, in part because the bioinformatics infrastructure in life science
research companies is inadequate to manage and integrate this large volume of
data, and thus limits the effectiveness of the new discovery technologies. A
recent industry survey indicated that the drug discovery phase could be
accelerated by nearly 50% through the use of bioinformatics, genomics,
high-throughput screening, combinatorial chemistry and rational drug design
technologies.

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INDUSTRY OVERVIEW

The life science research industry faces a number of challenges, including
the need to:

- integrate and manage the massive amounts and rapidly growing sources of
life science data;

- derive value from the disparate types of data;

- protect proprietary data;

- resolve the buy vs. build dilemma for bioinformatics solutions; and

- obtain the best practices for bioinformatics as they evolve.

Integrating and Managing the Massive Amounts and Rapidly Growing Sources of
Life Science Data

Over the last five years, there has been an explosion in the amounts and
types of data used in life science research due to the development of new
technologies. For example, GenBank, the database of all publicly available gene
sequences, has grown from 230 million base pairs of DNA five years ago to over
4.6 billion base pairs today, an increase of 2,000%. There has also been a
significant private effort to sequence the human genome. Celera, one of the
commercial providers of DNA sequence data, announced earlier this year that it
has successfully sequenced the human genome.

As the efforts to sequence the human genome neared completion, researchers
shifted their focus to functional genomics, the effort to understand the role or
function of these genes. As a result of new technologies developed by Affymetrix
and others, the volume of functional genomics data is expected to exceed the
volume of DNA sequence data. One of these technologies, gene chips, uses a
miniaturized chip-based format to obtain biological data. The use of these
chips, each of which can contain 40,000 data points, is expected to grow from
43,800 in 1998 to over 1.0 million in 2001, an increase of 2,200%. Because the
number of data points per chip is growing, there will be an even greater
increase in the amount of available functional genomics data.

Deriving Value from the Disparate Types of Data

The growth in amounts and types of data generated by these new technologies
has caused current life science product development efforts to be characterized
by an excess of data rather than the historical shortage of data. For example, a
large life science research company may obtain genomics data from Incyte and
Celera, gene expression microchips from Incyte and Affymetrix, new combinatorial
chemistry compounds from ArQule and high-throughput screening services from
Aurora Biosciences. The life science research company may then use data analysis
and mining tools from a variety of vendors as well as internal sources to
interpret this data.

In addition, the consolidation occurring among the large life science
research companies has compounded the problem of managing and integrating life
sciences data. These companies need to maximize the return on their investment
in global research and development efforts. However, as these companies merge,
integrating the multiple systems, platforms, databases and sites can be not only
expensive, but an exceedingly complex task.

Protecting Proprietary Data

Life science research companies must prevent disclosure of their
proprietary research data. Exposing proprietary life science data through the
use of Internet-based information portals represents a significant risk to
confidential information that represents a competitive advantage for the
company. Not only is sending data over the public Internet itself a risk, but
having data analyzed at a third-party site, one not under the control of the
company itself, also poses grave risks to data security and integrity.
Additionally, the public Internet is subject to denial of service security
attacks that may render an Internet-based information portal unusable for time
critical research. The inadequacy of current Internet-based information portals
for the bioinformatics needs of life science research companies makes
intranet-based systems an attractive alternative.
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Resolving the Buy vs. Build Dilemma for Bioinformatics Solutions

Life science research companies currently face a dilemma when deciding how
to manage data. A company may attempt to build a proprietary advantage in drug
discovery by hiring the best possible bioinformatics specialists and creating
its own software in order to find targets and drugs that its competitors miss.
However, in a field as complex and dynamic as bioinformatics, this approach can
be both expensive and risky. Bioinformatics needs change rapidly; two years ago
few life science research companies had a need for biochip software, today
almost every one of these companies does. It can be a major and very expensive
task to create software that can both manage large amounts and types of data
across multiple databases and be flexible enough to evolve as needs change and
data sets grow. As a result, resources can be wasted as highly paid
bioinformaticists are involved in costly software or database maintenance or are
required to continuously train and support a company's staff scientists.

The alternative, buying pre-packaged bioinformatics software, also has
significant risks. Third-party software is usually based on closed systems that
cannot be changed by the buyer. Because life science research companies use many
sources of data, including both internally-generated and external, in-licensed
data, software that is not designed to accept new sources of data can create an
expensive problem. Data must then be transformed into a format that the program
can use. Therefore, companies must keep each data set in multiple formats, one
for each pre-packaged program. Additionally, since all buyers of these
pre-packaged software programs have access to the same analytical tools, it is
difficult for any one company to gain a competitive advantage.

Obtaining the Best Practices for Bioinformatics as They Evolve

The strengths of the life science research companies are primarily product
development, chemistry and sales. Typically, they do not have the number of
bioinformatics personnel necessary to both develop and utilize bioinformatics
software. As in many other industries, competitive pressures are causing life
science research companies to consider outsourcing for those needs outside of
their core competence. However, the traditional information technology
outsourcing firms lack the scientific expertise to cost-effectively provide
fully integrated bioinformatics systems.

OUR SOLUTION

We have developed a solutions-based approach to addressing the
bioinformatics challenges life science research companies face. Our solutions,
which incorporate our proprietary technology platform, a library of proprietary
and third-party software components, and our strategic consulting and support
services, have the following characteristics:

- flexibility and extendability as a result of using an open architecture
technology and a component-based design;

- scalability because of the design of our technology platform;

- security, because our solutions are built to run behind a company's
firewall on a corporate intranet;

- integrity of tested platform technology combined with the individuality
of custom design; and

- reliability because of the needs assessment approach of our Professional
Services Group.

Flexibility and Extendability Due to Open Architecture Technology and
Component-Based Design

Our proprietary software technologies allow life science research companies
to manage, integrate, sort and mine, or extract, internally or externally
generated biological and chemical data regardless of database format or size.
Our technology platform is flexible because its open architecture allows
universal-compatibility with multiple data sources and extendable because its
component-based design allows new capabilities to be added to the existing
software at any time. This novel framework allows our customers to link several
different data sets generated through state-of-the-art drug discovery
technologies that provide information about the sequence and

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function of genes, their role in disease, their availability as drug targets and
potential chemical small molecule therapeutics. By linking these data sets,
scientists can analyze their data in multiple contexts, accelerating the
discovery of relationships within the data and facilitating the drug discovery
process.

SYNERGY-based solutions are designed to allow new software components or
data sources to be added at any time, whether created by NetGenics, by
third-party developers or by our customers. This is an important advantage over
conventional software products, because our customers can extend or customize
their systems to support their own proprietary analyses, rather than having to
decide between developing their own software or buying closed third-party
systems. For example, existing in-house databases can be integrated without
changing the data format, a common requirement of conventional software
products. Likewise, the recent addition of the DataMart middleware technology
and ChemSymphony and MetaSymphony, both components that may stand alone or
integrate with a SYNERGY-based solution, demonstrate the extensibility of our
offering with third-party functionality.

Scalability Due to the Design of our Technology Platform

Our component-based technology allows the analysis and integration of data
from multiple sources. As an example, the SYNERGY component suite creates a
single software interface for DNA sequences that allows a scientist to conduct
GenBank searches, and, because the DNA interface is not GenBank specific, it can
also be used to allow access to DNA data from any other source. Once a
SYNERGY-based solution is installed, our framework allows the interface to be
easily adapted to search, for example, the internal DNA sequence database of the
customer, no matter how that database is constructed, or access data from an
in-licensed source, such as Incyte or Celera. Moreover, a working set of
expression data can be created by combining data from experiments conducted
using in-house generated or commercial DNA chips from sources such as Affymetrix
and Incyte. Analysis can be performed on any data, no matter the source, so
programs that analyze expression data do not have to be rewritten when a company
in-licenses a new source of data.

The volumes and types of data in the life sciences are growing at an
exponential rate. Further, consolidation in the life science research industry
necessitates the integration of the user communities that use these data. The
result is that information resources and their users are often distributed
across multiple research sites worldwide. Our framework technology is designed
to scale to meet these growing needs, while maintaining client-appropriate
levels of data-sharing and security.

Our technology platform has also been designed to facilitate the sharing of
data and analyses across all the scientists on a project team, no matter where
they are located worldwide. Members of a team can work collaboratively to
analyze and annotate data, with each scientist having immediate access to new or
modified data created by a teammate.

Security Due to its Intranet Format

To enhance the security of valuable, proprietary research data, our
software solutions are designed to work within a secure intranet operating
inside a customer's firewall, thereby eliminating the danger of data being
stolen during transmission across an unsecured line. We also address the danger
of valuable sequences being stored on personal computers where they can be
corrupted or stolen, resulting in expensive or irreplaceable data loss. SYNERGY
provides central, server-based storage for all data and analysis results, with
regular and secure back-up capability.

Integrity of Tested Platform Technology with the Individuality of Custom
Design

We provide a comprehensive software/hardware solution for the
bioinformatics needs of life science research companies, including:

- SYNERGY, our proprietary technology platform;

- a suite of software components tailored to the customer's specific needs,
including our SYNERGY components and MetaSymphony and ChemSymphony
components;

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- customized software development; and

- outsourced support functions, including on-site training and 24/7 system
support.

Our technology platform has been designed to interoperate with existing
systems. Unlike pre-packaged applications, our system is open, allowing
bioinformaticists to develop additional applications or customize existing
applications as needed. We provide products and services that allow a life
science research company to make use of its skilled personnel more efficiently.
When such tasks are outsourced to us, the life science research company's
bioinformatics professionals can concentrate on those tasks that are unique and
proprietary.

Reliability Due to the Needs Assessment Approach of our Professional
Services Group

Our Professional Services Group recommends, designs, builds and supports
competitive integration solutions for life science research and drug discovery
organizations. We partner with our clients to create solutions that optimize
technological assets, streamline scientific workflow and advance business
objectives. Our approach is both strategic and tactical: we work with our
clients to understand and envision their global requirements. Within this
context, we recommend and develop solutions that address immediate integration
needs in well-focused areas, but that also may be assembled as components of an
enterprise-wide integrated environment. This approach satisfies our clients'
short-term goals while keeping a view of their long-term strategies.

We use a methodology that partitions a large-scale software development
effort into a series of well-defined, short-term projects that successively
build toward an enterprise-scale solution. The short duration and bounded scope
of each project effectively manages requirements gathering and design risks, and
results directly in the rapid deployment of usable software subsystems.

The consolidated software development process employs an ongoing needs
assessment process that governs the high-level scope, prioritization and staging
of projects. We work with clients to continually reassess progress toward
long-term goals based on evaluation of previously completed projects.

To support our Professional Services Group's incremental methodology, the
consolidated software development process specifies solutions built within a
component architecture. This approach ensures the compatibility of individual
project implementations and, where appropriate, allows clients to leverage our
software components and integration frameworks.

OUR STRATEGY

Our objective is to be the leading provider of bioinformatics solutions to
the life science research industry. Key elements of our strategy to achieve this
objective include the following:

Establish our Proprietary Technology Framework as the Information Technology
Platform of Choice for Life Science Research Companies

Our goal is to make SYNERGY's open architecture technology the information
platform of choice for the integration of life science research data worldwide.
We believe that in order for a technology platform to become the standard in the
industry, it must be flexible, scalable, extendable and fast. The life science
research industry is extremely dynamic and changes rapidly with its use of new
drug discovery technology. In addition, the amounts and types of biological
data, from both public and private sources, are growing exponentially each year.
As the discovery process evolves, information technology systems must be able to
adapt and expand, so that the power of available information can be realized. We
believe that deploying SYNERGY-based solutions with industry leaders is an
important step in establishing our technology platform as the industry standard.

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Establish a Dominant Market Share for Bioinformatics Solutions Based on our
Software Components

Our success will depend on gaining market share within our primary target
market, life science research companies. We are developing component suites that
are aimed at solving specific data analysis and integration problems. In
addition, we are encouraging discovery groups within life science research
companies and other third-party software vendors to write additional components
that can integrate with our components. We believe that as the number of
compatible components increases, our integration solutions will serve a wider
audience, which will in turn encourage the creation of still more components
that can be integrated. We intend to continue to publish our programming
interfaces and developer toolkits, facilitating third-party development of tools
and databases compatible with our technologies.

Solve Customers' Unique Problems by Developing Tailored Solutions

We believe that our consulting services can lead to solution sales and that
our solution sales can lead to more demand for our consulting services. We
believe that our ability to understand and address the technology issues of our
customers is integral to the sale of our solution. Due to the open architecture
of the SYNERGY technology platform and our component-based design, our tailored
solutions can integrate easily with existing systems and databases. We design
our solutions using a combination of core components and components designed
exclusively for a specific customer. This enables us to create solutions that
have the benefits of custom software, but have the rigorous product design,
development and testing of commercial software.

Expand our Corporate Relationships for Revenue Growth

We have corporate relationships, in the form of customers and strategic
partners, that we believe will provide us with opportunities to expand our
business. We believe that developing our relationships with industry leaders
will lead to additional revenue opportunities with new customers. Similarly, we
have formed strategic alliances with companies, such as IBM, with their own
blue-chip client bases, that can enhance our credibility and garner the
attention of senior management at large life science research companies. We
intend to leverage our existing relationships to establish new customers, which
we believe will result in increased revenues.

Maintain our Technological Advantage

We believe we have a technological advantage based in part on our early
adoption of CORBA and Java, both leading-edge, Internet-based programming
technologies. This combination of technologies has allowed us to build a
flexible technology platform that is:

- adaptable, as different groups within a life science research company
will continue to develop and obtain new data or capabilities;

- scalable enough to integrate the voluminous amounts of data being
generated in the industry; and

- standardized to ensure the interoperability across different networks,
platforms, languages and client global locations.

We have applied for various patents to protect our inventions. We recently
received a notice of allowance from the U.S. Patent and Trademark Office for one
of our patent applications, which indicates that the application is entitled to
issue as a patent subject to completion of all formalities. We plan to continue
to file applications where we believe that the intellectual property is valuable
to our business. We believe that maintaining a deep and broad intellectual
property estate will be an important competitive advantage.

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OUR TECHNOLOGY, PRODUCTS AND SERVICES

OUR TECHNOLOGY

Our software library has been constructed from a collection of object-based
components that work together to solve life science informatics problems. Our
use of CORBA technology facilitates the integration of diverse data types and
analysis tools. We also engage actively in the analysis of emerging object and
component integration technologies as they are brought to market. In this way,
we can identify and apply new technologies that increase the utility and ease of
use of our products and services.

CORBA and Java

CORBA and Java provide foundation technologies upon which we have built a
stable, scalable, extendable client/server framework. CORBA is a software
architecture that was created to answer the need for systems built of
inter-operable software components distributed over a network, regardless of the
hardware platform or programming language used for their implementations. An
important consideration in this design was the need to integrate existing
systems.

CORBA lets programmers choose the most appropriate operating system,
execution environment and even programming language to use for each component of
a system under construction. More importantly, CORBA allows the integration of
existing components. In a CORBA-based solution, developers model the legacy
component using the same software interfaces they use for creating new objects,
then write "wrapper" code that translates between the framework and the existing
interfaces.

Java is a platform-independent object-oriented computing language that
supports graphically rich, dynamic, programming. Java's platform independence
means that it can deliver the same program to PCs, Macintosh, Sun or Silicon
Graphics work-stations equally well. Development and test time is reduced
because the resultant code is portable to disparate hardware platforms without
re-coding and recompiling.

CORBA and Java together enable client/server systems that allow a user to
access multiple applications and databases across a distributed computing
network. Java allows a user to interact with a graphical user interface, but
still access server computing power normally available only to computer experts.
CORBA allows new programs and services to be added to the server in real time,
and transparently delivers all the needed information to the client program to
use these new services.

Beyond CORBA and Java

CORBA and Java are powerful technologies, not functional implementations.
We have built a software framework using these technologies that provides
flexibility and maintainability. The SYNERGY platform technology has been
designed so that no data types or analyses are built into it. Instead, the
program discovers at run time the data types that the framework supports and the
analyses available for those data types. This architecture frees each component
from having to know any more than is essential for its own function. Segmenting
the system in this way simplifies both extending and maintaining the system, and
provides an architecture that can be extended by others, both our customers and
our partners.

OUR PRODUCTS

SYNERGY-based component suites are designed to address the specific needs
of researchers in life science research companies. Each is designed to be a part
of a total solution that may also include custom component development, systems
integration, consulting services, 24-hour maintenance and support services,
training and regular software updates. When combined with our SYNERGY technology
platform, they are built to address the total enterprise integration needs of a
life science research organization.

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The SYNERGY Platform

The SYNERGY platform provides the basis for the design and delivery of many
of our software solutions. These components provide standards-based interfaces
and are built using the highly flexible client-server capabilities provided by
CORBA. Using these components allows us and our customers to rapidly integrate
and deploy new applications on the SYNERGY platform.

The SYNERGY platform is designed as an extensible enterprise-wide
informatics system, with tools for system administration, project management and
project-based security. This framework also incorporates a set of graphical
components, the Discovery Environment, that provide a common interface to all of
the components deployed on the SYNERGY platform. The use of the
platform-independent Java programming language greatly increases the value of
the Discovery Environment in the heterogeneous computing environments that often
exist within life science research organizations. The Discovery Environment also
includes tools that assist SYNERGY users in sharing the data that reside on
their desktop computers with other users in the enterprise.

Sequence Analysis

We released our first component suite, SYNERGY Sequence Analysis, in
September 1997, with updates released approximately quarterly thereafter. This
component suite allows users to create or import bioinformatics data, including
DNA sequences, protein sequences, multiple sequence alignments and sequence
assemblies. The component suite also provides a set of algorithms that can be
used to analyze these bioinformatics data. The client components support
multiple views of data, and integrates data, annotations and results within a
secure model. Sequences obtained from databases such as GenBank, or Incyte's
LifeSeq retain their associated annotations and other information, which is
supported in both graphical and text formats. Individual sequences can be
imported easily and customers, without assistance from us, can enable access to
other sequence databases within SYNERGY Sequence Analysis.

Gene Expression

The SYNERGY Gene Expression component suite has been designed to automate
the workflow of scientists analyzing the results of gene chip experiments. This
component suite provides access to integrated data sources, data analysis
algorithms and visualization tools. SYNERGY Gene Expression facilitates
integration of data from genechip experiments, such as those from Affymetrix
Gene Chip or Incyte LifeArray, with sequence data, analyses on sequence data,
genetic data, literature information and metabolic pathway data. This integrated
approach gives users a powerful system for rapidly mining their gene expression
data to identify interesting genes.

Service Plug-In

SYNERGY Plug-In components represent a flexible set of tools and interfaces
that allow users to rapidly integrate, or "plug-in," algorithms, scripts,
databases and graphical user interfaces using XML as a data interchange
mechanism. These components are designed to work in conjunction with SYNERGY
Framework components. This component suite will provide a mechanism to quickly
incorporate components such as the provider service and new data sources. These
components will form the basis of a flexible knowledge management system for
life science research that can be delivered on the SYNERGY platform.

DataMarts

Our DataMart components are composed of analytical database products and
custom "extraction, transformation and load", or ETL, services. Generally, a
DataMart component can be specialized for a particular domain. DataMarts focus
on stable data sets that need flexible representation for analysis. DataMarts
therefore have the advantage of being integration points for data coming from
multiple sources within a particular domain. We provide custom ETL services
whereby we develop automated procedures for moving source data sets into a
DataMart.

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Our Gene Expression DataMart component allows scientists to access
normalized and integrated gene expression data derived from any combination of
sources, including oligo-array, spotted-array, RT-PCR, TaqMan and other sources.
Using an ETL paradigm, gene expression data is "published" into a single
repository, normalizing disparate data and optimizing it for browsing and easy
access. The Gene Expression DataMart incorporates a flexible sample-preparation
DataMart system to facilitate the description of biological sources, time
courses, dilution series and any other form of sample preparation.

ChemSymphony/MetaSymphony

We recently obtained the ChemSymphony and MetaSymphony components through
an agreement to purchase various technology assets from FamilyGenetix Limited,
formerly Cherwell Scientific.

ChemSymphony is a toolkit of Java components for chemistry. The toolkit
comprises a collection of useful functional modules designed to accelerate the
construction of chemistry software applications. ChemSymphony provides a
component architecture for developing and assembling network solutions for
heterogeneous hardware and operating system environments run over the Internet
or a corporate intranet.

MetaSymphony is aimed at those companies with diverse sources of data who
want to unlock the information captured within them. It is ideally suited for
those situations where some tasks require the use of combined data, but where
wholesale corporate data integration is undesirable or simply not feasible.
MetaSymphony can combine the data from files with the information in databases,
using a "virtual join" to merge the data. In addition, existing programs can be
integrated easily into MetaSymphony, thus avoiding the expense of rewriting and
revalidating code.

Additional Applications

SYNERGY is a scalable framework for data analysis and integration. In each
SYNERGY product, our flexible framework facilitates integrating the
best-of-breed technologies available. Many of the basic designs for new products
are anticipated to be developed from needs identified through our consulting
services. By employing reusable components in building these custom
implementations, we expect to significantly reduce our time to market with new
products.

OUR SERVICES

Our Professional Services Group includes a set of highly knowledgeable,
industry-seasoned professionals. This group can assist clients in developing
bioinformatics strategies that will benefit their drug discovery and development
efforts. These professionals work closely with each client to understand and
evaluate their needs, recommend solutions and design a plan to realize those
solutions through software implementation. Our goal is that these clients will
decide to use our technology and services for the larger implementation tasks.

We strive to provide each of our customers with a solution that addresses
the customer's specific informatics needs. One of the ways in which we
accomplish this is the inclusion of service hours in many of our license
agreements. A customer can use these service hours to engage us in projects that
allow the customer to specialize the component suites that we have delivered on
the SYNERGY platform.

OUR COMPETITION

We face, and will continue to face, competition from third-party commercial
software developers, bioinformatics and genomics companies, academic
institutions and in-house life science research company software development
teams. In addition, future competition may come from existing competitors as
well as from companies that provide custom databases and related data

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management software. Our success in competing with these organizations will
depend on our ability to:

- take advantage of available technologies to organize and integrate
biological data;

- develop a quantity and variety of software applications;

- maintain flexibility and adaptability in both our applications and our
business strategy;

- balance open standards with our proprietary advantage;

- maximize the interoperability of our software; and

- deliver on our commitments to our customers.

We believe that through continuing to develop standard interfaces, we will
have the ability to collaborate with those organizations that would otherwise
represent competitors. In addition to direct commercial competitors, the most
important other source of competition comes from development teams within life
science research companies. In some cases, life science research companies
maintain programming teams that rival, or surpass in size those at commercial
software companies. In many cases, these in-house groups pose the most daunting
competition to us or, indeed, to any commercial software and service vendor. We
must continue to keep focus on the services we provide to customer
organizations, and to stress the benefit that this support lends to the in-house
development effort.

SALES AND MARKETING

Our objective is to be the leading provider of bioinformatics solutions to
life science research companies. We believe our best market opportunity will be
derived from developing enterprise-wide bioinformatics solutions for large life
science research companies. These enterprise-wide solutions are characterized by
lengthy sales cycles which involve the client's concurrence at the highest
levels within management across multiple disciplines and multiple locations.

To penetrate the market quickly and establish a broad customer base, we are
also developing a line of SYNERGY component suites that target smaller research
groups focused on a specific research area. Because of their lower prices, we
expect that the sales cycle for the individual component suites will be shorter
than for our enterprise-wide solutions. It is possible that several research
groups within a company may employ SYNERGY component suites in their research
efforts.

Our marketing group works closely with our sales organization and
Professional Services Group to define new applications and services, based on
customer and prospect needs and requirements. Our marketing and communications
efforts are aimed at building brand equity and awareness of us as a software
solutions provider for the life science research industry. The goal is to
generate leads for our regional sales executives for follow-up, qualification
and closure.

In addition to our regional sales force, we intend to use targeted direct
marketing campaigns for our SYNERGY component suites. We also attend and
participate in trade shows and conferences, including the Human Genome
Conference, in order to obtain broader market exposure.

We seek to be published in prominent journals within the industry, and we
participate in the Object Management Group, or OMG, in order to be involved in
the setting of standards for data within life science research companies. We
believe that through our participation in the OMG, customers will increasingly
look to us for their information technology solutions.

Since a portion of our prospective market is outside the United States and
our prospective market includes many multinational organizations, we plan to
develop international sales capabilities. We currently have a European-based
customer, Aventis Crop Sciences, and we intend

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to expand our customer base initially through our London office. Other overseas
offices may be opened, on a country by country basis, as business opportunities
arise.

INTELLECTUAL PROPERTY

We filed a U.S. patent application entitled "System for Facilitating Drug
Discovery Data" in June 1997. We received a Notice of Allowance from the U.S.
Patent and Trademark Office on this patent in November 1999, which indicates
that the application is entitled to issue as a patent subject to the completion
of all formalities. In June 1998 we filed a PCT application with the U.S. Patent
and Trademark Office designating the European Patent Office as search authority
for protection of our SYNERGY design and implementation. We have also filed
applications relating to our interface design and other novel aspects of our
software.

To date, we have been issued a U.S. trademark for the "NetGenics" name and
for the service mark "An Infrastructure for Drug Discovery." We intend to file
additional patent applications in relevant areas, and believe that we will be
able to establish a significant patent portfolio based on our ongoing research
and development. Our commercial success will depend in part on our ability to
obtain commercially valid patent claims and to protect our intellectual property
portfolio. We may not be able to obtain patents for our software technology and
even if we are able to obtain patents, these patents may not provide us with
substantial protection or be commercially beneficial.

In addition, others could claim that our technology infringes patents or
proprietary rights of others. If those claims are successful, any licenses that
we might need as a result of such infringement might not be available to us on
commercially reasonable terms, if at all. We also rely upon trade secret
protection for some of our confidential and proprietary information. The
measures we have taken to protect our trade secrets may not provide adequate
protection for our trade secrets or other proprietary information.

GOVERNMENT REGULATION

Although our products are not regulated by governmental agencies such as
the United States Food and Drug Administration, or FDA, the products of many of
the life science research companies to which we market our products are
regulated by the FDA. The interest of the FDA or other governmental agencies in
our products may increase as the number of life science products developed using
our technology increases.

EMPLOYEES

As of July 31, 2000, we had 100 full-time employees, including 63 in
research, development and support, 13 in sales and marketing and 24 in general
and administration.

FACILITIES

We currently lease 26,668 square feet of office space in Cleveland, Ohio
and have additional offices in San Diego, California, Columbus, Ohio, Boston,
Massachusetts and London, England. We maintain customary insurance policies with
respect to our facilities and equipment. We believe that we will be able to
obtain suitable additional or substitute space as needed at commercially
reasonable rates.

LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not a party to any legal proceeding.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors, and their ages and positions as of
July 31, 2000, are as follows:

NAME AGE POSITION
---- --- --------

Manuel J. Glynias......................... 44 President, Chief Executive Officer and Director
Vincent P. Kazmer......................... 51 Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
Michael C. Dickson........................ 39 Chief Technology Officer and Senior Vice
President, Product Development
Joanne M. O'Dell.......................... 31 Vice President, Support Services
Elizabeth Sump-Kleinhenz.................. 35 Vice President, Marketing and Business
Development
Walter Gilbert, Ph.D.(1)(2)............... 68 Chairman of the Board of Directors
Anthony B. Evnin, Ph.D.(2)................ 59 Director
John Pappajohn(1)(2)...................... 72 Director
Nicole Vitullo............................ 43 Director
Alan G. Walton, Ph.D., D.Sc.(1)........... 64 Director

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

(1) Member of the compensation committee.

(2) Member of the audit committee.

Manuel J. Glynias has served as a director and President since our
inception and is our Chief Executive Officer. From 1988 until our inception, Mr.
Glynias was the President and Chief Executive Officer of MG Software Inc., which
developed GeneWorks, a program marketed and later acquired by Intelligenetics,
and Primer Express, a program marketed and later acquired by PE Biosystems. In
1986, Mr. Glynias developed MacGene, a DNA and protein sequence analysis
program, while a graduate student at Case Western Reserve University. Mr.
Glynias received his A.B. in Biochemistry and Molecular Biology from Harvard
University.

Vincent P. Kazmer joined us in December 1999 as Executive Vice President
and Chief Financial Officer and has served as our Secretary since February 2000
and as our Treasurer since April 2000. From August 1995 until November 1999, Mr.
Kazmer served as President, Chief Executive Officer and director of Lark
Technologies, Houston, Texas, a molecular biology contract research
organization. Prior to joining Lark, Mr. Kazmer was a co-founder and President
of Copernicus Gene Systems, Inc., a private gene therapy company. From January
1989 to February 1994 he served as Senior Vice President of United States
Biochemical Corporation with responsibilities for business development,
marketing and sales. While at U.S. Biochemical, Mr. Kazmer was a co-founder and
Vice President of Ribozyme Pharmaceuticals Inc., a biotechnology company. Mr.
Kazmer also served as a nuclear submarine officer and qualified nuclear engineer
in the U.S. Navy. He received his M.B.A. from Stanford University and his B.S.
in computer and information science from Ohio State University.

Michael C. Dickson has served as our Senior Vice President, Product
Development since January 1998 and in November 1999 was named our Chief
Technology Officer. From our inception until January 1998, Mr. Dickson served as
our Principal Software Architect, and was responsible for the primary design of
SYNERGY. Prior to joining us, Mr. Dickson served as the Manager of the Internet
Infrastructure Group at CompuServe, Inc. from November 1989 to February 1996 and
a member of the technical staff of BSDI from February 1996 to July 1996.

Joanne M. O'Dell has served as our Vice President, Support Services since
September 1999. From October 1996 until September 1999, Ms. O'Dell was our
Director of Quality Assurance, and

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was principally responsible for creating and instituting our quality processes.
Prior to joining us, Ms. O'Dell held several staff positions at Blackbaud, Inc.,
including Quality Manager and Software Design Architect. Ms. O'Dell holds a B.A.
in Communications from the University of Toledo.

Elizabeth Sump-Kleinhenz has served as our Vice President, Marketing and
Business Development since May 2000. From March 1997 until May 2000, Ms.
Sump-Kleinhenz served in various capacities with us including Director, Business
Development, Manager, Business Relations and Scientific Application Consultant.
Prior to joining us, Ms. Sump-Kleinhenz served as Senior Product Manager at
AMRESCO Inc. from March 1990 to February 1997. Ms. Sump-Kleinhenz holds a B.S.
in Zoology from Ohio State University.

Walter Gilbert, Ph.D. has served as chairman of our board of directors
since our inception. He has held professorships at Harvard University in the
Departments of Physics, Biophysics, Biochemistry and Biology, and since 1985, in
Molecular and Cellular Biology (formerly Cellular and Development Biology). He
presently holds the Carl M. Loeb University Professorship. He developed a method
for DNA sequencing for which he was awarded a Nobel Prize in Chemistry in 1980.
He was a co-founder of Biogen, Inc. and served as its Chairman of the Board and
Chief Executive Officer from 1981 to 1984, a co-founder of Myriad Genetics,
Inc., of which he is Vice Chairman, in March 1992, and participated in the
establishment of the Human Genome Project. He received an "Entrepreneur of the
Year" award in 1991 from the Institute of American Entrepreneurs. Dr. Gilbert
received his Ph.D. in Mathematics from Cambridge University and his B.A. in
Chemistry and in Physics from Harvard University.

Anthony B. Evnin, Ph.D. has served as a director since June 1996. Dr. Evnin
is a general partner of Venrock Associates, a venture capital partnership which
he joined in 1974. Dr. Evnin is a director of the following public companies:
Caliper Technologies Corp. and Triangle Pharmaceuticals, Inc. He also serves on
the board of directors of GPC Biotech AG and Sonic Innovations. Dr. Evnin
received his Ph.D. in Chemistry from the Massachusetts Institute of Technology
and his A.B. from Princeton University.

John Pappajohn has served as a director since our inception. Since 1969,
Mr. Pappajohn has been the president and principal stockholder of Equity
Dynamics, Inc., a financial consulting firm, and the sole owner of Pappajohn
Capital Resources, a venture capital firm. He also serves as a director of the
following public companies: MC Informatics, Inc., MOMSPharmacy.com, Inc., PACE
Health Management Systems, Inc. and Patient InfoSystems, Inc. Mr. Pappajohn
received his B.A. in Business from the University of Iowa.

Nicole Vitullo has served as a director since March 1998. Since April 1999,
Ms. Vitullo has been Managing Director, Domain Associates, L.L.C. Domain
Associates is a venture capital investment firm focused on the healthcare
industry. Prior to joining Domain, Ms. Vitullo was a Senior Vice President at
Rothschild Asset Management from May 1995 to April 1999. Rothschild Asset
Management Ltd. manages International Biotechnology Trust plc, which is one of
our stockholders, and has been advisor to Biotechnology Investments Limited.
Prior to joining Rothschild, Ms. Vitullo was Director of Corporate
Communications and Investor Relations at Cephalon, Inc., a neuropharmaceutical
company. Ms. Vitullo also serves on the board of directors of Corvas
International and Onyx Pharmaceuticals. She has an M.B.A. in finance and a
degree in mathematics from the University of Rochester.

Alan G. Walton, Ph.D., D.Sc. has served as a director since June 1996. Dr.
Walton has been a general partner of Oxford Bioscience Partners, a private
equity investment firm, since July 1987. From July 1981 to June 1987, Dr. Walton
was President and Chief Executive Officer of University Genetics Co., a public
corporation specializing in technology transfer from academic institutions to
industry and in the seed financing of high technology startups. Prior to joining
University Genetics Co., he was a Professor of Macromolecular Science and
Director of the Laboratory for Biological Macromolecules at Case Western Reserve
University. Dr. Walton serves on the board of directors

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of Gene Logic, Inc., Alexandria Real Estate Equities and Research!America. Dr.
Walton received his Ph.D. in Chemistry and his D.Sc. in Biological Chemistry
from Nottingham University, England.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

All directors are elected at the annual meeting of stockholders and hold
office until the election and qualification of their successors at the next
annual meeting of stockholders. Five of our directors, Mr. Evnin, Mr. Gilbert,
Mr. Glynias, Mr. Pappajohn and Mr. Walton, originally were elected as directors
in accordance with the terms of our certificate of incorporation. Ms. Vitullo
was elected as a director in accordance with the terms of a voting agreement
between NetGenics, our Series E stockholders and various other stockholders.

Our compensation committee consists of Dr. Gilbert, Mr. Pappajohn and Dr.
Walton. The compensation committee makes recommendations to our board of
directors regarding the issuance of stock options and other awards under our
stock plan and determines salaries for the executive officers and incentive
compensation for our employees. Dr. Gilbert is the chairperson of the
compensation committee.

Our audit committee consists of Dr. Evnin, Dr. Gilbert and Mr. Pappajohn.
Our audit committee makes recommendations to our board of directors regarding
the selection of independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors and reviews and
evaluates our audit and control functions. Mr. Pappajohn is the chairperson of
the audit committee.

DIRECTOR COMPENSATION

All of our directors are reimbursed for expenses incurred in attending
meetings of the board of directors and its committees. In addition, our
non-employee directors receive an automatic grant of an option to purchase
25,000 shares of our common stock under our 1996 stock option plan upon their
initial election, and automatic grants of options to purchase 2,500 shares of
our common stock each time they are re-elected. Currently, we do not otherwise
compensate directors for their services as members of the board of directors or
any committee of the board.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee of the board of directors currently consists of
Dr. Gilbert, Mr. Pappajohn and Dr. Walton. No interlocking relationship exists
between any member of our board of directors or our compensation committee and
any member of the board of directors or compensation committee of any other
company, and no interlocking relationship has existed in the past.

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EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation we
paid to our chief executive officer and our other executive officers whose total
annual compensation exceeded $100,000 during the year ended December 31, 1999.
Mr. Dennis A. Rossi and Mr. Vincent P. Kazmer joined us in July and December of
1999, respectively, and salary information for each of them is presented on an
annualized basis and does not reflect compensation actually paid or accrued
during fiscal year 1999.

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION NUMBER OF SHARES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION(S) SALARY BONUS OPTIONS (#)
------------------------------ -------- ------- -------------------

Manuel J. Glynias................................... $245,833 $50,000 --
President and Chief Executive Officer
Vincent P. Kazmer................................... 160,000 20,000 92,500
Executive Vice President, Chief Financial Officer
and Secretary
Michael C. Dickson.................................. 166,667 40,000 26,953
Chief Technology Officer and Senior Vice
President, Product Development
Dennis A. Rossi..................................... 175,000 20,000 75,000
Former Senior Vice President, Sales and Marketing
Joanne M. O'Dell.................................... 104,583 25,000 15,125
Vice President, Support Services

OPTION GRANTS

The following table sets forth selected information regarding options we
granted to our named executive officers during the fiscal year ended December
31, 1999. We did not grant any stock appreciation rights to these individuals
during 1999.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------ -------------- ------------ ---------- ----------

Manuel J. Glynias....... -- -- -- -- -- --
Vincent P. Kazmer....... 92,500 17.13% $1.80 12/01/09 $1,641,573 $2,712,554
Michael C. Dickson...... 6,563 1.22% $1.20 3/17/09 120,410 196,397
5,078 .94% $1.20 7/27/09 93,165 151,959
5,312 .98% $1.20 9/23/09 97,467 158,976
10,000 1.85% $1.80 11/11/09 177,467 293,249
Dennis A. Rossi......... 75,000 13.89% $1.20 07/27/09 and 1,376,005 2,244,368
09/23/09
Joanne M. O'Dell........ 1,687 .31% $1.20 3/17/09 30,960 50,498
937 .17% $1.20 7/27/09 17,200 28,055
12,500 2.31% $1.80 11/11/09 221,834 366,561

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The percentage of total options is based on an aggregate of 539,894 options
that we granted during 1999 to our employees, including the named executive
officers. We granted these options with an exercise price equal to the fair
market value of our common stock on the date of grant, as determined in good
faith by our board of directors. For the purposes of this table, we have assumed
that the fair market value of our common stock on December 31, 1999 was $12.00
per share, the assumed initial public offering price.

The potential realizable values are based on the assumption that our common
stock will appreciate at the annual rate shown, compounded annually, from the
date of grant until the expiration of the ten-year term of the option. These
numbers are calculated based on SEC requirements and do not reflect our
prediction of our stock price performance. The actual gain, if any, on the
exercise of a stock option will depend on the future performance of our common
stock, the optionee's continued employment through the date on which the options
are exercised and the time at which the underlying shares are sold.

OPTION EXERCISES AND YEAR END OPTION VALUES

The following table sets forth selected information regarding exercisable
and non-exercisable options held on December 31, 1999. None of our executive
officers exercised options in fiscal year 1999.

AGGREGATED FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR-END
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------

Manuel J. Glynias........................ -- -- $ -- $ --
Vincent P. Kazmer........................ -- 92,500 -- 943,500
Michael C. Dickson....................... 7,500 56,953 81,000 609,098
Dennis A. Rossi.......................... -- 75,000 -- 810,000
Joanne M. O'Dell......................... 19,474 24,273 223,450 259,023

The value of unexercised in-the-money options equals the difference between
the fair market value of our common stock on December 31, 1999 and the per share
exercise price, multiplied by the number of shares underlying the option.
Accordingly, solely for the purposes of this table, we have assumed that the
fair market value of our common stock was $12.00 per share, the assumed initial
public offering price.

EMPLOYEE BENEFIT PLANS

401(k) Plan

In 1998, we adopted a retirement savings plan, commonly known as a 401(k)
plan, covering all of our eligible employees. Participants may elect to reduce
their current compensation, on a pre-tax basis, by up to 15% of their taxable
compensation or the statutorily prescribed annual limit, whichever is lower, and
have the amount of the reduction contributed to the 401(k) plan. Participants'
salary reduction contributions are fully vested at all times. The 401(k) plan is
intended to qualify under Section 401(a) of the Internal Revenue Code. We may,
in our sole discretion, make matching or additional employer contributions to
the 401(k) plan in amounts to be determined annually. Participants' interests in
the additional employer contributions, if any, vest in accordance with a
five-year graduated vesting schedule.

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1996 Stock Option Plan

Under our 1996 stock option plan we are authorized to issue up to 2.0
million shares of common stock. On June 30, 2000, options to purchase a total of
1,234,645 shares of common stock were outstanding under the 1996 plan. These
options have a weighted average exercise price of $2.80 per share.

The 1996 plan authorizes the grant of options to purchase common stock
intended to qualify as incentive stock options, as defined in Section 422 of the
Internal Revenue Code and nonstatutory stock options.

The exercise price of nonstatutory stock options and incentive options
granted under the 1996 plan must be at least equal to the fair market value of
our common stock on the date of grant. The terms of these options may not exceed
ten years. The exercise price of incentive options granted to an optionee who
owns stock possessing more that 10% of the voting power of our outstanding
capital stock must be at least equal to 110% of the fair market value of the
common stock on the date of grant. This type of optionee must exercise his or
her option within five years from the date of grant.

The 1996 plan provides that, upon a change in control of our company, all
outstanding options will become immediately exercisable in full.

For these purposes, a "change in control" means the occurrence of any of
the following:

- any person becomes a beneficial owner, directly or indirectly, of 35% or
more of the combined voting power of our outstanding shares;

- during any period of not more than two consecutive years, there is a
change in more than two-thirds of our incumbent board of directors or
their approved successors;

- our merger with another company, other than a merger:

- in which our voting shares outstanding immediately before the
merger represent at least 50% of the combined voting power of the
voting shares of the surviving entity; or

- effected to implement a recapitalization of NetGenics in which no
person acquires more than 50% of the combined voting power of the
voting shares of the new entity; or

- the liquidation, sale or disposition of all or substantially all of our
assets.

Our board of directors has approved an amendment to the 1996 stock option
plan that authorizes 2,500,000 shares for issuance. The amendment, which is
subject to the approval of our stockholders, will be voted on by our
stockholders prior to the completion of this offering. Following the completion
of this offering, the 1996 plan will be administered by our compensation
committee.

EMPLOYMENT AGREEMENTS

In June 1996, we entered into a five-year employment agreement with Manuel
J. Glynias to serve as our President and CEO. Mr. Glynias is also a director and
stockholder of NetGenics. Pursuant to the employment agreement, Mr. Glynias is
entitled to an annual base salary of not less than $120,000 and, at our board's
discretion, an annual incentive bonus. The amount of Mr. Glynias's annual
incentive bonus is determined by our compensation committee and is based on the
annual performance of NetGenics. The agreement also provides that if we
terminate Mr. Glynias's employment without "cause," he will be entitled to
receive continuation of salary and

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health care benefits for a period of six months. For the purposes of Mr.
Glynias's employment agreement, "cause" means:

- conviction of a felony or like criminal behavior; or

- material breach of the employment agreement by Mr. Glynias that has not
been cured on a prospective basis following written notice from, and the
opportunity to be heard before, our board of directors.

In November 1999, we entered into an employment agreement with Vincent P.
Kazmer, our Executive Vice President and Chief Financial Officer. Mr. Kazmer's
employment agreement entitles him to a salary of $160,000 during the first year
of his employment. Thereafter, Mr. Kazmer's salary will be subject to annual
review. Mr. Kazmer is also entitled to additional annual compensation in a lump
sum of $20,000 if he remains our employee on August 1 of any year including 2000
and after. If we terminate Mr. Kazmer's employment without "cause," we must
continue to pay Mr. Kazmer's then current salary, but not any benefits (except
if required by law) or bonus or bonus payout, for 12 months following the date
of termination. For purposes of Mr. Kazmer's employment agreement, "cause" means
Mr. Kazmer's:

- committing any felony or other crime involving dishonesty or moral
turpitude;

- serious misconduct in the course of employment;

- violation of our company policies; or

- repeated neglect of duties, other than on account of incapacity.

LIABILITY LIMITATIONS AND INDEMNIFICATION

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law expressly permits a
corporation to provide that its directors will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:

- any breach of their duty of loyalty to the corporation or its
stockholders;

- acts or omissions that are not in good faith or that involve intentional
misconduct or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

- any transaction from which the director derived an improper personal
benefit.

These express limitations do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable
remedies, including injunctive relief or rescission.

The provisions of Delaware law that relate to indemnification expressly
state that the rights provided by the statute are not exclusive and are in
addition to any rights provided in a certificate of incorporation, bylaws,
agreement or otherwise. Our certificate of incorporation provides that we will
indemnify our directors and officers, and may indemnify other employees and
agents, to the maximum extent permitted by law. Our certificate of incorporation
also permits us to secure insurance on behalf of any officer, director, employee
or agent for any liability arising out of actions in his or her capacity as an
officer, director, employee or agent. We have obtained an insurance policy that
insures our directors and officers against losses, above a deductible amount,
from specified types of claims. Finally, we have entered into agreements with
each of our directors and executive officers that, among other things, require
us to indemnify those and advance expenses to them relating to indemnification
suits to the fullest extent permitted by law. We believe that these provisions,
policies and agreements will help us attract and retain qualified persons as
directors and executive officers.

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The limited liability and indemnification provisions in our certificate of
incorporation and indemnification agreements may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duties
and may reduce the likelihood of derivative litigation against our directors and
officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification provisions.

There is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, employees and agents under our
certificate of incorporation, bylaws or indemnification agreements we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

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RELATED TRANSACTIONS

SALES OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

A number of our directors, executive officers and stockholders that
beneficially own or owned more than 5% of our common stock have participated in
transactions in which they purchased shares of our redeemable convertible
preferred stock. We believe that we sold these shares at their fair market value
and that the terms of these transactions were no less favorable than we could
have obtained from unaffiliated third parties. The following table summarizes
these transactions:

CLASS OF REDEEMABLE
CONVERTIBLE PREFERRED
CLOSING DATE(S) OF TRANSACTION STOCK PRICE PER SHARE NUMBER OF SHARES
------------------------------ ------------------------ --------------- ----------------

June 5, 1997............................ Series C $2.05 3,220,734
March 20, 1998 and April 9, 1999........ Series D 4.00 5,097,250
January 6, 2000......................... Series E 4.60 4,623,860

On the closing of this offering, these shares of redeemable convertible
preferred stock will automatically convert into shares of our common stock.
Listed below are the directors, executive officers and 5% stockholders who
participated in the transactions described above, the number of shares purchased
and the aggregate consideration paid therefore.

REDEEMABLE CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------
MARCH 20, APRIL 9,
1998 1999 AGGREGATE
NAME SERIES C SERIES D SERIES D SERIES E CONSIDERATION
---- -------- --------- -------- --------- -------------

John Pappajohn...................................... 121,951 63,379 125,904 -- $1,007,132
Edgewater Private Equity Fund II, L.P............... 121,951 63,389 -- -- 503,556
Incyte Genomics, Inc................................ 975,610 63,330 -- -- 2,253,321
Oxford Bioscience II, L.P. and affiliates........... 853,659 126,778 102,759 -- 2,668,149
Venrock Associates and Venrock Associates II,
L.P............................................... 853,659 214,278 114,401 -- 3,064,717
College Retirement Equities Fund.................... -- 1,250,000 129,362 -- 5,517,448
International Biotechnology Trust, plc.............. -- 1,250,000 129,362 -- 5,517,448
Affiliates of KECALP, Inc., an affiliate of Merrill
Lynch & Co........................................ -- -- -- 1,086,956 4,999,998
Kleinwort Benson Holdings........................... -- -- -- 1,086,956 4,999,998
Lombard Odier & Cie................................. -- -- -- 900,000 4,140,000
Affiliates of OrbiMed Advisors, L.L.C............... -- -- -- 760,869 3,499,997

Mr. John Pappajohn has served as one of our directors, since our inception.
Dr. Anthony B. Evnin, general partner of Venrock Associates, has served as a
director since June 1997. Dr. Alan G. Walton, general partner of Oxford
Bioscience Partners, has served as one of our directors since June 1997. Nicole
Vitullo, Managing Director of Domain Associates, L.L.C., and formerly a Senior
Vice President at Rothschild Asset Management, an affiliate of International
Biotechnology Trust, plc, has served as a director since March 1998.

In connection with our sales of redeemable convertible preferred stock in
the foregoing transactions, we granted rights to the holders of redeemable
convertible preferred stock to require us to register their shares under the
Securities Act and to include their shares in registration statements we file
for our own benefit under the Securities Act. For more information about these
registration rights, please see "Description of Capital Stock -- Registration
Rights."

SALE OF BRIDGE NOTES

In December 1997, we issued bridge notes in an aggregate amount of $2.75
million to seven of our existing stockholders, Casdin Life Science Partners
L.P., Crystal Internet Venture Fund, L.P., Edgewater Private Equity Fund II,
L.P., Incyte Pharmaceuticals, Inc., Oxford Bioscience Partners II, L.P., John
Pappajohn and Venrock Associates II, L.P. These notes bore interest at a rate of
5.54%

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per year. In March 1998, these bridge notes were converted into 697,076 shares
of our Series D redeemable convertible preferred stock at the closing of the
first sale of Series D redeemable convertible preferred stock. In connection
with the issuance of the bridge notes, we issued to the lending stockholders
warrants to purchase an aggregate of 68,750 shares of our common stock at an
exercise price of $0.60 per share. In February 2000, warrants to purchase 6,250
shares of our common stock were exercised. The remaining warrants will expire on
December 31, 2000.

LOANS FROM STOCKHOLDERS

In April 1997, we executed a promissory note in the aggregate principal
amount of $250,000 in favor of John Pappajohn, one of our directors and
stockholders. No interest was to accrue on this note. The principal amount of
this note was subsequently converted into 121,951 shares of Series C redeemable
convertible preferred stock at the closing of the sale of Series C redeemable
convertible preferred stock.

In May 1997, we executed a promissory note in the aggregate amount of
$250,000 in favor of Edgewater Private Equity Fund II, L.P., a stockholder of
NetGenics. No interest was to accrue on this note. The principal amount of this
note was subsequently converted into 121,951 shares of Series C redeemable
convertible preferred stock at the closing of the Series C redeemable
convertible preferred stock issue.

TECHNICAL SERVICES AGREEMENT WITH IBM

In October 1999, we entered into a warrant agreement and a technical
services agreement with IBM. Under the IBM warrant agreement, we issued to IBM
warrants to purchase 75,000 shares of our common stock at an exercise price of
$10.00 per share, subject to adjustment. The number of shares for which the IBM
warrants could be exercised was adjusted from 75,000 to 111,940, and the
exercise price of the warrants was decreased to $6.70, because of our sale of
our Series E redeemable convertible preferred stock. The exercise price and
number of warrants are subject to further adjustment for stock splits,
combinations and dividends, and, subject to specific exceptions, future
issuances of securities at a per share price of less than $6.70. IBM is also
protected against reorganizations, reclassifications, mergers, consolidations
and asset sales.

As a part of the IBM technical services agreement, we received $2.0 million
from IBM as a pre-payment for anticipated services. Upon the presentation of our
invoices for our services rendered, IBM may, at its option, credit the amount of
the invoice against the pre-payment or remit additional payment to us. IBM may,
on any one occasion before the $2.0 million pre-payment is exhausted, utilize up
to one-third of any then-remaining pre-payment amount to purchase up to 333,333
additional warrants for our common stock at a purchase price of $2.00 per
warrant. These warrants may be exercised by IBM to purchase our common stock at
a price of $4.00 per share, subject to adjustment in the circumstances
identified above. Any remaining pre-payment amount may be used by IBM to fund
the purchase of our common stock under these warrants. The fair value of the
warrants will be amortized against the related service revenue of $2.0 million
over the service period, which is estimated to be one year. As of June 30, 2000,
the remaining balance of the pre-payment was $1.5 million.

All warrants issued to IBM expire on the earlier of the fifth anniversary
of the closing of:

- a transaction in which all or substantially all of our assets are
transferred to any person or group or any person or group acquires the
beneficial ownership of 50% or more of our voting stock; or

- this offering.

AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
We have entered into employment agreements with some of our executive
officers. See "Management -- Employment Agreements" for a description of the
employment agreements with each of Messrs. Glynias and Kazmer.

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In August 1999, we entered into severance pay agreements with three of our
executive officers that separated from us at that time. In April 2000, we
entered into a severance pay agreement with one of our executive officers that
separated from us at that time. See "Related Transactions -- Severance
Agreements," for a description of the severance pay agreements for each of those
executive officers.

We have granted stock options to each of our directors and executive
officers. See "Management -- Director Compensation" and "Management -- Employee
Benefit Plans."

We have entered into indemnification agreements with each of our directors
and executive officers. These agreements require us to indemnify those persons
to the fullest extent permitted by Delaware law. See "Management -- Liability
Limitations and Indemnification."

SEVERANCE AGREEMENTS

In August 1999, we entered into severance agreements with E. David
Callender, our former Vice President of Sales, Alan Engelberg, our former Vice
President of Marketing and Keith T. Coleman, our former Chief Financial Officer,
Treasurer and Secretary. We agreed to continue to pay Mr. Callender an annual
salary of $130,000 until January 25, 2000. We also agreed that shares of
restricted stock that Mr. Callender purchased from us would continue to vest
through January 25, 2000, and that 3,500 stock options granted to Mr. Callender
on July 31, 1998, vest as of the date of the severance agreement. Mr. Callender
was also entitled to participate in our health insurance and other employee
benefit programs until January 25, 2000 and receive a maximum of $10,000 for
outplacement services, reimbursement of relocation and other expenses, and sales
commissions owed to him, calculated on a cash collected basis through January
25, 2000. We agreed to continue to pay Mr. Engelberg an annual salary of
$108,000 until July 26, 2000. We also agreed that shares of restricted stock
that Mr. Engelberg purchased from us would continue to vest through July 26,
2000. Mr. Engelberg was entitled to participate in our health insurance programs
until July 26, 2000, and receive a maximum of $10,000 in outplacement services
rendered prior to July 26, 2000. We agreed to continue to pay Mr. Coleman an
annual salary of $160,000 until July 31, 2000, and to make additional payments
of $25,000 that would have become payable on August 1, 1999 and on August 1,
2000 pursuant to his employment agreement. We also agreed that all stock options
granted to Mr. Coleman that are scheduled to vest on or before August 12, 2000
shall immediately vest as of the date of his severance agreement. Mr. Coleman
agreed to act as a special consultant to us until July 31, 2000 and to render in
that capacity services that we may reasonably request (but that would not
interfere with Mr. Coleman's alternative employment) to assist us in the conduct
of our business. We agreed to continue Mr. Coleman's health benefits until July
31, 2000 and to provide a maximum of $10,000 for outplacement services rendered
prior to July 31, 2000.

In April 2000, we entered into a severance agreement with Dennis Rossi, our
former Senior Vice President, Sales and Marketing. We made a lump sum payment to
Mr. Rossi in the amount of $87,500 in April 2000.

As of July 31, 2000, our outstanding severance obligations for these four
separated employees were approximately $25,000 in the aggregate.

TERMS OF TRANSACTIONS

We believe that the transactions set forth above were made on terms no less
favorable to us than we could have obtained from unaffiliated third parties. All
future transactions, including loans, between us and our officers, directors,
principal stockholders, and their affiliates will be approved by a majority of
the board of directors, including a majority of the independent and
disinterested outside directors, and will continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership
of our common stock before and after this offering as of July 31, 2000 by each
person who is known by us to own beneficially more than five percent of the
outstanding shares of our common stock, each of our directors, each of our
executive officers and all directors and executive officers as a group.

We have determined beneficial ownership in accordance with the rules of the
SEC. Except as noted below, we believe that the persons named in the table have
sole voting and investment power with respect to all shares of common stock
beneficially owned. Percentage of beneficial ownership before this offering is
based on 17,985,387 shares of common stock outstanding as of July 31, 2000,
including shares into which our redeemable convertible preferred stock will
convert upon completion of this offering. Percentage of beneficial ownership
after this offering is based on 23,485,387 shares of common stock outstanding as
of July 31, 2000, which includes shares into which our redeemable convertible
preferred stock will convert upon completion of this offering and 5,500,000
shares from this offering. Unless otherwise indicated, the address for each
stockholder is c/o NetGenics, Inc., 1717 East Ninth Street, Suite 1600,
Cleveland, Ohio 44114.

PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
------------------------ -------------- -------- -----------

College Retirement Equities Fund(2)................ 1,379,362 7.7% 5.9%
International Biotechnology Trust, plc(3).......... 1,379,362 7.7 5.9
Venrock Associates and Venrock Associates II,
L.P.(4).......................................... 1,211,505 6.7 5.2
Edgewater Private Equity Fund II, L.P.(5).......... 1,191,590 6.6 5.1
Oxford Bioscience Partners II, L.P. and
affiliates(6).................................... 1,095,696 6.1 4.7
Affiliates of KECALP Inc., an affiliate of Merrill
Lynch & Co.(7)................................... 1,086,956 6.0 4.6
Incyte Genomics, Inc.(8)........................... 1,045,190 5.8 4.4
Affiliates of OrbiMed Advisors, L.L.C.(9).......... 1,010,869 5.6 4.3
Lombard Odier & Cie(10)............................ 900,000 5.0 3.8
Manuel Glynias(11)................................. 1,427,500 7.9 6.1
Nicole Vitullo(12)................................. 1,396,028 7.8 5.9
Anthony B. Evnin(13)............................... 1,211,505 6.7 5.2
John Pappajohn(14)................................. 1,201,485 6.7 5.1
Alan G. Walton(15)................................. 1,112,362 6.2 4.7
Walter Gilbert(16)................................. 825,000 4.6 3.5
Michael C. Dickson(17)............................. 55,891 * *
Joanne M. O'Dell(18)............................... 20,724 * *
Elizabeth Sump-Kleinhenz(19)....................... 8,690 * *
Vincent P. Kazmer.................................. -- -- --
All executive officers and directors as a group (10
persons)(20)..................................... 7,259,185 40.0 30.7

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

* Less than 1%

(1) Based on 23,485,387 shares outstanding after this offering, assuming
5,500,000 shares are issued. Does not reflect shares, if any, purchased by
any listed person in this offering.

(2) College Retirement Equities Fund is located at 30 Third Avenue, NY, NY
10017.
(3) International Biotechnology Trust is located at Five Arrow House, St.
Swithin's Lane, London, England EC4N 8NR.

(footnotes continue on next page)
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(4) Venrock Associates is located at 30 Rockefeller Plaza, Suite 5508, NY, NY
10112. Includes 16,666 shares subject to options exercisable within 60 days
of July 31, 2000 and warrants to purchase 12,500 shares.

(5) Edgewater is located at 900 N. Michigan Avenue, 14(th) Floor, Chicago, IL
60611. Includes warrants to purchase 6,250 shares.
(6) Oxford Bioscience Partners is located at 315 Post Road West, Westport, CT
06880. Includes warrants to purchase 12,500 shares.
(7) Merrill Lynch KECALP L.P. 1999, Merrill Lynch KECALP L.P. 1997, KECALP Inc.
as Nominee for Merrill Lynch KECALP International L.P. 1999 and KECALP Inc.
as Nominee for Merrill Lynch KECALP International L.P. 1997 are affiliates
of KECALP Inc., which is an affiliate of Merrill Lynch & Co. KECALP's
address is World Financial Center, South Tower, 23(rd) Floor, NY, NY 10080.

(8) Incyte Genomics is located at 3174 Porter Dr., Palo Alto, CA 94040.
Includes warrants to purchase 6,250 shares.

(9) OrbiMed Advisors is located at 41 Madison Avenue, 40(th) Floor, NY, NY
10010.
(10) Lombard Odier & Cie is located at Sihlstrasse 20, 8021 Zurich, Switzerland.

(11) Includes 1,377,500 shares held by Glynias Family Investment Company L.P.,
of which Manuel Glynias, who is our President, Chief Executive Officer and
a director, is the general partner. Also includes 25,000 shares held by Mr.
Glynias's spouse, Linda M. Glynias, as custodian for Joseph F. Glynias and
25,000 shares held by Mrs. Glynias as custodian for Marissa A. Glynias, as
to all of which Mr. Glynias disclaims beneficial ownership.

(12) Includes 16,666 shares subject to options exercisable within 60 days of
July 31, 2000. Ms. Vitullo, one of our directors, is the board designee of
International Biotechnology Trust plc. Ms. Vitullo disclaims beneficial
ownership of the shares held by International Biotechnology Trust.

(13) Anthony B. Evnin, one of our directors, is a general partner of Venrock
Associates, an affiliate of Venrock Associates II, L.P. Mr. Evnin disclaims
beneficial ownership in the shares owned by Venrock Associates II, L.P. and
its affiliates, except to the extent of his pecuniary interest, if any.
(14) Includes 125,000 shares held by Halkis, Ltd., a sole proprietorship owned
by Mr. Pappajohn, 125,000 shares held by Mr. Pappajohn's spouse, Mary
Pappajohn, and 125,000 shares owned by Thebes, Ltd., a sole proprietorship
owned by Mary Pappajohn. Mr. Pappajohn disclaims beneficial ownership of
the shares held by Mary Pappajohn and Thebes, Ltd.

(15) Includes 16,666 shares subject to options exercisable within 60 days of
July 31, 2000. Alan G. Walton, one of our directors, is a general partner
of Oxford Bioscience Partners, an affiliate of Oxford Bioscience Partners
II, L.P. Mr. Walton disclaims beneficial ownership of the shares held by
Oxford Bioscience Partners II, L.P. and its affiliates, except to the
extent of his pecuniary interest, if any.

(16) Includes 25,000 shares subject to options exercisable within 60 days of
July 31, 2000. Also includes 250,000 shares owned by Mr. Gilbert's wife,
Celia Gilbert, 150,000 shares owned by Mr. Gilbert's son, John Gilbert, and
150,000 shares owned by Mr. Gilbert's daughter, Kate Gilbert, as to all of
which Mr. Gilbert disclaims beneficial ownership.

(17) Includes 18,391 shares subject to options held by Mr. Dickson exercisable
within 60 days of July 31, 2000.

(18) Consists of 20,724 shares subject to options held by Ms. O'Dell exercisable
within 60 days of July 31, 2000.

(19) Consists of 8,690 shares subject to options held by Ms. Sump-Kleinhenz
exercisable within 60 days of July 31, 2000.

(20) Includes 122,805 shares subject to options held by executive officers and
directors exercisable within 60 days of July 31, 2000. Also includes
warrants to purchase 25,000 shares of common stock held by executive
officers and directors.

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DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, our authorized capital stock will consist
of 75.0 million shares of common stock, $0.001 par value, and 5.0 million shares
of undesignated preferred stock, $0.001 par value.

Common Stock

As of July 31, 2000, there were 17,985,387 shares of common stock held of
record by 123 stockholders.

Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a stockholder vote and do not have cumulative
voting rights. The holders of common stock are entitled to their proportionate
share of any dividends that may be declared by the board of directors out of
legally available funds, after any superior rights of the holders of preferred
stock have been satisfied. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
their proportionate share of all assets remaining after payment of liabilities
and any amounts due to the holders of preferred stock. Holders of common stock
have no preemptive rights and no right to convert their common stock into any
other securities. No redemption or sinking fund provisions apply to the common
stock. All outstanding shares of common stock are, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid and
non-assessable.

Preferred Stock

Immediately prior to this offering, our certificate of incorporation
provided for five series of preferred stock.

Following this offering, our board of directors will be authorized, without
stockholder approval, to issue up to 5.0 million shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon the preferred stock, including voting
rights, dividend rights, conversion rights, terms of redemption, liquidation
preference, sinking fund terms and the number of shares constituting any series
or the designation of a series. Our board of directors, without stockholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock. The
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in our control. We have no present plan to issue any shares
of preferred stock.

Warrants

In December 1997, we issued warrants to purchase an aggregate of 68,750
shares of common stock at an exercise price of $0.60 per share to seven of our
existing stockholders. The exercise price of these warrants is subject to
adjustment for stock splits, combinations and dividends. The holders of these
warrants are also protected against reorganizations, mergers, consolidations and
asset sales. These warrants will expire on December 31, 2000. On February 17,
2000, John Pappajohn exercised warrants to purchase 6,250 shares of our common
stock at an exercise price of $0.60 per share.

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Registration Rights

Holders of our Series A, Series B, Series C, Series D and Series E
redeemable convertible preferred stock have demand, "piggyback" and S-3
registration rights pursuant to our registration rights agreement with those
investors. In addition, we granted to IBM "piggyback" registration rights. These
rights are summarized below.

After the completion of this offering, holders of 17,443,749 shares of
common stock or their permitted transferees will be entitled to unlimited
"piggyback" registration rights. These rights entitle the holders to notice of
the registration and to include, at our expense, their shares of common stock in
many of our registrations of our common stock. We and our underwriters can
reduce the number of shares of common stock to be included by holders of
piggyback rights in view of market conditions:

- if the registration is our first registered offering of securities to the
public, by excluding pro rata some or all of the securities to be
registered by holders of piggyback rights; and

- for all other registrations, by reducing pro rata among holders
exercising their piggyback rights their securities to be registered to
not less than 30% of all securities to be registered.

On the date 180 days after completion of this offering, the holders of
17,443,749 shares of common stock or their transferees will be entitled to
"demand" rights to register all or a portion of these shares under the
Securities Act if the reasonably anticipated aggregate price to the public of
these shares would exceed $5.0 million. We are obligated to make two of these
demand registrations for these stockholders.

If at any time we are eligible to register our securities on a Form S-3
under the Securities Act, holders of 17,443,749 shares of our common stock will
be able to demand that we file such registration statement if the reasonably
anticipated price to the public (net of underwriting commissions) for those
shares would exceed $1.0 million.

If our stockholders with registration rights cause a large number of
securities to be registered and sold in the public market, those sales could
cause the market price of our common stock to fall. If we are to initiate a
registration and include registrable securities because of the exercise of
registration rights, the inclusion of registrable securities could adversely
affect our ability to raise capital.

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

Delaware law, our certificate of incorporation and bylaws contain
provisions that could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise. We expect that these provisions, which are
summarized below, will discourage coercive takeover practices and inadequate
takeover bids and encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of discouraging takeover or acquisition proposals because
negotiation of these proposals could result in an improvement of their terms.
The description below is not complete and is qualified in its entirety by
reference to the cited provisions of Delaware law our certificate of
incorporation and bylaws.

Delaware Law

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

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

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- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding specified shares; or

- on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.

Except as specified in Section 203, an interested stockholder is defined to
include any person that is:

- the owner of 15% or more of the outstanding voting stock of the
corporation;

- an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time
within three years immediately prior to the relevant date; and

- the affiliates and associates of the above.

Under specific circumstances, Section 203 makes it more difficult for an
"interested stockholder" to effect various business combinations with a
corporation for a three-year period, although the stockholders may, by adopting
an amendment to the corporation's certificate of incorporation or bylaws, elect
not to be governed by this section effective twelve months after adoption. Our
certificate of incorporation and bylaws do not exclude us from the restrictions
imposed under Section 203. We anticipate that the provisions of Section 203 may
encourage companies interested in acquiring us to negotiate in advance with our
board of directors since the stockholder approval requirement would be avoided
if a majority of the directors then in office approve either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder.

Certificate of Incorporation and Bylaw Provisions

Upon completion of this offering, our certificate of incorporation and
bylaws will include a number of provisions that may have the effect of deterring
hostile takeovers or delaying or preventing changes in control of us or our
management. First, our certificate of incorporation will provide that all
stockholder actions must be effected at a duly called meeting of stockholders
and not by a consent in writing. Second, our bylaws will provide that special
meetings of the stockholders may be called only by the chairman of the board of
directors, the chief executive officer, or our board of directors pursuant to a
resolution adopted by a majority of the total number of authorized directors.
Third, our certificate of incorporation will provide that our board of directors
can issue up to 5,000,000 shares of preferred stock, as described under
"Description of Capital Stock -- Preferred Stock" above. Finally, our bylaws
will establish procedures, including advance notice procedures with regard to
the nomination of candidates for election as directors and stockholder
proposals. These provisions could discourage potential acquisition proposals and
could delay or prevent a change in control of us or our management.

TRANSFER AGENT AND REGISTRAR

We have appointed National City Bank, N.A., as the transfer agent and
registrar for our common stock.

LISTING

We have applied to have the shares of common stock offered hereby approved
for quotation on the Nasdaq National Market under the symbol NTGC.

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SHARES ELIGIBLE FOR FUTURE SALE

No public market for our common stock existed before this offering. Future
sales of substantial amounts of our common stock in the public market could
cause our prevailing market prices to decline. A large number of our shares of
common stock outstanding will not be available for sale shortly after this
offering because of contractual and legal restrictions on resale as described
below. Sales of substantial amounts of our common stock in the public market
after these restrictions lapse could depress our prevailing market price and
limit our ability to raise equity capital in the future.

Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. All of
the shares sold in this offering, other than those sold to our affiliates, will
be freely tradable without restriction or further registration under the
Securities Act. The remaining shares of common stock held by
existing stockholders are restricted securities. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under the Securities Act.

As a result of the contractual restriction described below and the rules
under the Securities Act, the restricted shares will be available for sale in
the public market as follows:

NUMBER OF SHARES ELIGIBLE
RELEVANT DATES FOR FUTURE SALE COMMENT
-------------- ---------------------------- ----------------------------------

On effective date............... Shares not locked-up and saleable
under Rule 144
90 days following the effective Shares not locked-up and saleable
date............................ under Rules 144 and 701
180 days following the effective Lock-up released: shares saleable
date............................ under Rules 144 and 701
More than 181 days after the Additional shares becoming
effective date.................. eligible for sale under Rule 144
more than 180 days after the
effective date

Additionally, of the shares that may be issued upon the
exercise of options outstanding as of , 2000, approximately
shares will be vested and eligible for sale 180 days after the
date of this prospectus.

LOCK-UP AGREEMENTS

All of our executive officers, certain of our directors and a majority of
our stockholders, warrant holders and option holders, have agreed not to
transfer or dispose of, directly or indirectly, any shares of our common stock
or any securities convertible into or exercisable or exchangeable for shares of
our common stock, for a period of 180 days after the date the registration
statement of which this prospectus is a part is declared effective. Transfers or
dispositions can be made sooner with the prior written consent of Chase
Securities Inc.

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RULE 144

In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person that has beneficially owned shares of our common stock for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:

- shares immediately after this offering; or

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

Sales under Rule 144 must comply with manner of sale provisions and notice
requirements, and information about us must be publicly available.

RULE 144(k)

Under Rule 144(k), a person that has not been one of our affiliates at any
time during the 90 days preceding a sale, and that has beneficially owned the
shares proposed to be sold for at least two years, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, 144(k) shares may be sold immediately upon the completion of this
offering.

RULE 701

Any of our employees, officers, directors or consultants who purchased
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provision of Rule 701. Rule 701 permits affiliates to sell
their Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may sell
these shares in reliance on Rule 144 without having to comply with the holding
period, public information, volume limitation or notice provisions of Rule 144.
All holders of Rule 701 shares are required to wait until 90 days after the date
of this prospectus before selling those shares.

We are unable to estimate the number of shares that will be sold under
Rules 144, 144(k) and 701 because the number will depend on the market price for
the common stock, the personal circumstances of the sellers and other factors.

REGISTRATION RIGHTS

On the date 180 days after the completion of this offering, the holders of
17,443,749 shares of our common stock will have rights to require us to register
their shares under the Securities Act. Upon the effectiveness of a registration
statement covering these shares, the shares would become freely tradable. See
"Description of Capital Stock -- Registration Rights."

STOCK OPTIONS

Upon the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering, among other things,
shares of common stock covered by outstanding options under our stock option
plan. Based on the number of shares covered by outstanding options and reserved
for issuance under our stock plan as of , 2000, the registration
statement would cover approximately shares. The registration
statement will become effective upon filing. Accordingly, shares registered
under the registration statement on Form S-8 will be available for sale in the
open market immediately thereafter, after complying with Rule 144 volume
limitations applicable to affiliates, and with applicable 180-day lock-up
agreements.

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UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.
and Warburg Dillon Read LLC, have severally agreed to purchase from us the
following numbers of shares of common stock:

NUMBER OF
UNDERWRITER SHARES
----------- ---------

Chase Securities Inc........................................
UBS Warburg LLC.............................................
---------
Total............................................. 5,500,000
=========

The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us, our
counsel and our independent auditors. The underwriters are committed to purchase
all shares of common stock offered in this prospectus if any shares are
purchased.

The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change this offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of % of the shares of common stock offered by this prospectus.

We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 825,000 additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares the underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of common stock offered in this
prospectus.

The following table shows the per share and total underwriting discounts
and commissions that we will pay to the underwriters. The underwriting discount
was determined based on an arms' length negotiation between the representatives
of the underwriters and us. These amounts are shown assuming both no exercise
and full exercise of the underwriters' over-allotment option to purchase
additional shares.

PAID BY NETGENICS
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------

Per share................................................. $ $
Total..................................................... $ $

We estimate that our share of the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately $ .
This offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal,

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cancellation or modification of this offering without notice. The underwriters
reserve the right to reject an order for the purchase of shares in whole or in
part.

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

All of our executive officers, certain of our directors and a majority of
our stockholders, warrant holders and option holders, have agreed that they will
not, without the prior written consent of Chase Securities Inc., offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into shares
of common stock owned by them during the 180-day period following the date of
this prospectus. We have agreed that we will not, without the prior written
consent of Chase Securities Inc., offer, sell or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options under our stock option plan, provided
that, without the prior written consent of Chase Securities Inc., any additional
options shall not be exercisable during the 180-day period.

At our request, the underwriters have reserved up to five percent (5%) of
the shares of common stock to be sold in this offering to be offered for sale,
at the initial public offering price, to our directors, officers, employees,
business associates such as customers and suppliers and persons related to, or
affiliated with the foregoing persons. The number of shares available for sale
to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered to the general public on the same basis as other shares offered by
this prospectus.

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol NTGC.

In connection with this offering, the underwriters may affect transactions
that could have the effect of raising or maintaining, or preventing or retarding
a decline in, the market price of our shares. As a result, the price of our
shares may be higher than the price that might otherwise exist in the open
market. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.

In particular, the underwriters may make short sales of our shares and may
purchase our shares on the open market to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Covered short sales
are sales made in an amount not greater than the over-allotment option. The
underwriters may close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in this offering.

In addition, an underwriter may enter a stabilizing bid in connection with
the offering, which is the placing of any bid or effecting of any purchase, for
the purposes of pegging, fixing or maintaining the price of the shares. The
underwriters may also impose penalty bids, which permit them to reclaim the
selling concession from a syndicate member when shares sold by the syndicate

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member are purchased in syndicate covering transactions. Any stabilizing, if
commenced, may be discontinued at any time.

The underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority that exceed 5% of the total number of shares of
common stock offered by them.

Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves and the representatives of the underwriters.
Among the factors to be considered in determining the initial public offering
price will be prevailing market and economic conditions, market valuations of
other companies engaged in activities similar to ours, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant.

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LEGAL MATTERS

Jones, Day, Reavis & Pogue will pass upon the validity of the issuance of
the shares being sold in this offering and other legal matters relating to this
offering. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. will act as
counsel for the underwriters.

EXPERTS

The consolidated financial statements of NetGenics, Inc. as of December 31,
1998 and 1999, and for each of the three years in the period ended December 31,
1999 and for the period from June 24, 1996 (date of inception) through December
31, 1999, included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common stock we are offering. This prospectus contains all information about
NetGenics and our common stock that would be material to an investor. The
registration statement includes exhibits and schedules to which you should refer
for additional information about us.

You may inspect a copy of the registration statement and the exhibits and
schedules to the registration statement over the Internet at the SEC's web site
at http://www.sec.gov. You may also read and copy any document we file with the
SEC at its public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth
Street, Washington, D.C. 20549. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at Room
1024, 450 Fifth Street, Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We intend to send our stockholders annual reports containing audited
financial statements and to make available quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.

61
66

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and the cumulative totals
for development stage of operations from June 24, 1996
(date of inception) through December 31, 1999............. F-4
Consolidated Statements of Comprehensive Loss for the years
ended December 31, 1997, 1998 and 1999 and the cumulative
totals for development stage of operations from June 24,
1996 (date of inception) through December 31, 1999........ F-5
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999 and for the period
from June 24, 1996 (date of inception) through December
31, 1999.................................................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and the cumulative totals
for development stage of operations from June 24, 1996
(date of inception) through December 31, 1999............. F-7
Notes to Consolidated Financial Statements.................. F-8

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Unaudited Consolidated Balance Sheets as of June 30, 2000... F-20
Unaudited Consolidated Statements of Operations for the six
months ended June 30, 1999 and 2000 and the cumulative
totals for development stage of operations from June 24,
1996 (date of inception) through June 30, 2000............ F-21
Unaudited Consolidated Statements of Comprehensive Loss for
the six months ended June 30, 1999 and 2000 and the
cumulative totals for development stage of operations from
June 24, 1996 (date of inception) through June 30, 2000... F-22
Unaudited Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit) for the
six months ended June 30, 2000 and for the period from
June 24, 1996 (date of inception) through June 30, 2000... F-23
Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 2000 and the cumulative
totals for development stage of operations from June 24,
1996 (date of inception) through June 30, 2000............ F-24
Notes to Unaudited Consolidated Financial Statements........ F-25

F-1
67

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
NetGenics, Inc. and Subsidiaries
(A Development Stage Company)

The recapitalization described in Note 14 to the consolidated financial
statements has not been consummated at March 9, 2000. When it has been
consummated, we will be in a position to furnish the following report:

"We have audited the accompanying consolidated balance sheets of NetGenics,
Inc. and Subsidiaries (a development stage company) as of December 31, 1998
and 1999, and the related consolidated statements of operations,
comprehensive loss, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the years ended December
31, 1997, 1998 and 1999, and for the period from June 24, 1996 (date of
inception) through December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
NetGenics, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the
results of its operations and its cash flows for the years ended December
31, 1997, 1998 and 1999, and for the period from June 24, 1996 (date of
inception) through December 31, 1999, in conformity with accounting
principles generally accepted in the United States."

PricewaterhouseCoopers LLP
Cleveland, Ohio
March 9, 2000

F-2
68

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999

1998 1999
----------- ------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,412,704 $ 2,572,159
Lease deposit............................................. 260,414 122,564
Accounts receivable....................................... 45,000 247,532
Prepaid expenses.......................................... 353,086 1,550,612
----------- ------------
Total current assets................................... 8,071,204 4,492,867
Property and equipment, at cost:
Furniture and fixtures.................................... 636,505 665,101
Computer equipment........................................ 2,599,936 3,032,482
Computer software......................................... 833,538 853,225
Leasehold improvements.................................... 237,232 339,259
----------- ------------
Total property and equipment........................... 4,307,211 4,890,067
Less accumulated depreciation............................. (1,225,138) (2,418,746)
----------- ------------
3,082,073 2,471,321
Lease deposit............................................... 124,501 --
Other assets................................................ 54,382 69,584
----------- ------------
Total assets........................................... $11,332,160 $ 7,033,772
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 206,997 $ 121,278
Accrued expenses.......................................... 760,330 2,256,721
Deferred revenue.......................................... 562,300 253,100
Customer deposit.......................................... -- 2,000,000
Current portion of long-term debt......................... -- 384,211
----------- ------------
Total current liabilities.............................. 1,529,627 5,015,310
Long-term debt, net of current portion.................... -- 689,349
----------- ------------
Total liabilities...................................... 1,529,627 5,704,659
----------- ------------
Commitments and contingencies (see Note 5)
Redeemable convertible preferred stock (see Note 7)......... 24,383,554 27,079,377
Stockholders' equity (deficit):
Common stock $0.001 par value, 43,000,000 shares
authorized; 2,898,875 and 3,010,813 shares issued and
outstanding in 1998 and 1999, respectively............. 2,899 3,011
Additional paid-in capital................................ 8,713 3,090,929
Deferred stock compensation............................... -- (2,992,137)
Cumulative deficit during development stage............... (14,598,318) (25,863,122)
Accumulated other comprehensive income.................... 5,766 11,136
----------- ------------
(14,580,940) (25,750,183)
Less treasury stock at cost, 46,875 shares................ 81 81
----------- ------------
Total stockholders' equity (deficit)................... (14,581,021) (25,750,264)
----------- ------------
Total liabilities and stockholders' equity (deficit)... $11,332,160 $ 7,033,772
=========== ============

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
69

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND THE
CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OF OPERATIONS FROM
JUNE 24, 1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999

CUMULATIVE
DEVELOPMENT
STAGE PERIOD FROM
JUNE 24, 1996
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ -----------------

Revenue................................ $ 57,025 $ 405,480 $ 1,763,625 $ 2,226,130
Cost and expenses:
Costs of services provided........... 17,460 124,153 1,162,700 1,304,314
Sales and marketing (exclusive of
non-cash stock compensation of
$2,515 in 1999)................... 697,610 1,851,169 2,112,133 4,802,448
Research, development and support
(exclusive of noncash stock
compensation of $7,737 in 1999)... 1,938,247 4,523,637 4,998,138 11,775,231
General and administrative (exclusive
of noncash stock compensation of
$11,313 in 1999).................. 1,484,782 3,138,563 3,661,841 8,515,647
Depreciation and amortization........ 271,079 886,989 1,228,922 2,438,462
Non-cash stock compensation.......... -- -- 21,565 21,565
----------- ------------ ------------ ------------
Total costs and expenses.......... 4,409,178 10,524,511 13,185,299 28,857,667
----------- ------------ ------------ ------------
Loss from operations during development
stage................................ (4,352,153) (10,119,031) (11,421,674) (26,631,537)
Interest income........................ 119,368 487,197 251,953 867,099
Interest expense....................... -- -- (81,359) (81,359)
Foreign currency loss.................. -- (3,601) (13,724) (17,325)
----------- ------------ ------------ ------------
Net loss attributable to common
stockholders during development
stage................................ (4,232,785) (9,635,435) (11,264,804) (25,863,122)
Cumulative deficit at beginning of
period............................... (730,098) (4,962,883) (14,598,318) --
----------- ------------ ------------ ------------
Cumulative deficit at end of period.... $(4,962,883) $(14,598,318) $(25,863,122) $(25,863,122)
=========== ============ ============ ============
Net loss attributable to common
stockholders during development stage
per common share:
Basic and diluted.................... $ (1.47) $ (3.33) $ (3.82) $ (8.94)
=========== ============ ============ ============
Weighted average common shares
outstanding:
Basic and diluted.................... 2,887,500 2,893,286 2,948,223 2,894,568
=========== ============ ============ ============

The accompanying notes are an integral part of these consolidated financial
statements.
F-4
70

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND THE
CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OF OPERATIONS FROM
JUNE 24, 1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999

CUMULATIVE
DEVELOPMENT
STAGE PERIOD
FROM JUNE 24,
1996
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ ----------------

Net loss attributable to common
stockholders during development
stage.......................... $(4,232,785) $(9,635,435) $(11,264,804) $(25,863,122)
Other comprehensive income:
Foreign currency translation
adjustments................. -- 5,766 5,370 11,136
----------- ----------- ------------ ------------
Comprehensive loss during
development stage......... $(4,232,785) $(9,629,669) $(11,259,434) $(25,851,986)
----------- ----------- ------------ ------------

The accompanying notes are an integral part of these consolidated financial
statements.
F-5
71

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND FOR THE PERIOD FROM
JUNE 24, 1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999

REDEEMABLE
CONVERTIBLE
PREFERRED
STOCK
---------------------------------------------

SERIES A SERIES B SERIES C SERIES D
SHARES SHARES SHARES SHARES
--------- --------- --------- ---------

Sale of common stock on June 25 and September 9, 1996....... -- -- -- --
Sale of Series A redeemable convertible preferred stock on
June 26, 1996.............................................. 1,000,000
Sale of Series B redeemable convertible preferred stock on
June 26, 1996.............................................. 1,000,000
Net loss attributable to common stockholders during
development stage..........................................
--------- --------- --------- ---------
Balance at December 31, 1996................................ 1,000,000 1,000,000
Sale of Series C redeemable convertible preferred stock on
June 5, 1997............................................... 3,220,734
Net loss during development stage...........................
--------- --------- --------- ---------
Balance at December 31, 1997................................ 1,000,000 1,000,000 3,220,734
Sale of Series D redeemable convertible preferred stock on
March 20, 1998, net of issuance costs of $1,412,126........ 3,726,219
Conversion of notes payable to stockholders and accrued
interest to Series D redeemable convertible preferred stock
on March 20, 1998.......................................... 697,076
Stock options exercised from February through December
1998.......................................................
Treasury stock purchased from February through August
1998.......................................................
Foreign currency translation adjustment.....................
Net loss attributable to common stockholders during
development stage..........................................
--------- --------- --------- ---------
Balance at December 31, 1998................................ 1,000,000 1,000,000 3,220,734 4,423,295
Sale of additional Series D redeemable convertible preferred
stock on April 9, 1999..................................... 673,955
Stock options exercised from January through December
1999.......................................................
Foreign currency translation adjustment.....................
Issuance of warrants to purchase common stock...............
Deferred stock compensation.................................
Stock compensation..........................................
Net loss attributable to common stockholders during
development stage..........................................
--------- --------- --------- ---------
Balance at December 31, 1999................................ 1,000,000 1,000,000 3,220,734 5,097,250
========= ========= ========= =========

REDEEMABLE
CONVERTIBLE STOCKHOLDERS'
PREFERRED EQUITY
STOCK (DEFICIT)
----------- -------------------------------------

COMMON STOCK TREASURY STOCK
------------------ ----------------
AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ------ ------- ------

Sale of common stock on June 25 and September 9, 1996....... $ -- 2,887,500 $2,888 -- $ --
Sale of Series A redeemable convertible preferred stock on
June 26, 1996.............................................. 500,000
Sale of Series B redeemable convertible preferred stock on
June 26, 1996.............................................. 1,000,000
Net loss attributable to common stockholders during
development stage..........................................
----------- --------- ------ ------- ------
Balance at December 31, 1996................................ 1,500,000 2,887,500 2,888
Sale of Series C redeemable convertible preferred stock on
June 5, 1997............................................... 6,602,502
Net loss during development stage...........................
----------- --------- ------ ------- ------
Balance at December 31, 1997................................ 8,102,502 2,887,500 2,888
Sale of Series D redeemable convertible preferred stock on
March 20, 1998, net of issuance costs of $1,412,126........ 13,492,748
Conversion of notes payable to stockholders and accrued
interest to Series D redeemable convertible preferred stock
on March 20, 1998.......................................... 2,788,304
Stock options exercised from February through December
1998....................................................... 11,375 11
Treasury stock purchased from February through August
1998....................................................... (46,875) (81)
Foreign currency translation adjustment.....................
Net loss attributable to common stockholders during
development stage..........................................
----------- --------- ------ ------- ------
Balance at December 31, 1998................................ 24,383,554 2,898,875 2,899 (46,875) (81)
Sale of additional Series D redeemable convertible preferred
stock on April 9, 1999..................................... 2,695,823
Stock options exercised from January through December
1999....................................................... 111,938 112
Foreign currency translation adjustment.....................
Issuance of warrants to purchase common stock...............
Deferred stock compensation.................................
Stock compensation..........................................
Net loss attributable to common stockholders during
development stage..........................................
----------- --------- ------ ------- ------
Balance at December 31, 1999................................ $27,079,377 3,010,813 $3,011 (46,875) $ (81)
=========== ========= ====== ======= ======

STOCKHOLDERS'
EQUITY
(DEFICIT)
----------------------------------------------------------
CUMULATIVE ACCUMULATED
ADDITIONAL DEFERRED DEFICIT DURING OTHER
PAID-IN STOCK DEVELOPMENT COMPREHENSIVE
CAPITAL COMPENSATION STAGE INCOME
---------- ------------ -------------- -------------

Sale of common stock on June 25 and September 9, 1996....... $ 2,887 $ -- $ -- $ --
Sale of Series A redeemable convertible preferred stock on
June 26, 1996..............................................
Sale of Series B redeemable convertible preferred stock on
June 26, 1996..............................................
Net loss attributable to common stockholders during
development stage.......................................... (730,098)
---------- ----------- ------------ -------
Balance at December 31, 1996................................ 2,887 (730,098)
Sale of Series C redeemable convertible preferred stock on
June 5, 1997...............................................
Net loss during development stage........................... (4,232,785)
---------- ----------- ------------ -------
Balance at December 31, 1997................................ 2,887 (4,962,883)
Sale of Series D redeemable convertible preferred stock on
March 20, 1998, net of issuance costs of $1,412,126........
Conversion of notes payable to stockholders and accrued
interest to Series D redeemable convertible preferred stock
on March 20, 1998..........................................
Stock options exercised from February through December
1998....................................................... 5,826
Treasury stock purchased from February through August
1998.......................................................
Foreign currency translation adjustment..................... 5,766
Net loss attributable to common stockholders during
development stage.......................................... (9,635,435)
---------- ----------- ------------ -------
Balance at December 31, 1998................................ 8,713 (14,598,318) 5,766
Sale of additional Series D redeemable convertible preferred
stock on April 9, 1999.....................................
Stock options exercised from January through December
1999....................................................... 68,514
Foreign currency translation adjustment..................... 5,370
Issuance of warrants to purchase common stock............... 1,856,856 (1,856,856)
Deferred stock compensation................................. 1,156,846 (1,156,846)
Stock compensation.......................................... 21,565
Net loss attributable to common stockholders during
development stage.......................................... (11,264,804)
---------- ----------- ------------ -------
Balance at December 31, 1999................................ $3,090,929 $(2,992,137) $(25,863,122) $11,136
========== =========== ============ =======

STOCKHOLDERS'
EQUITY
(DEFICIT)
----------------

TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------

Sale of common stock on June 25 and September 9, 1996....... $ 5,775
Sale of Series A redeemable convertible preferred stock on
June 26, 1996..............................................
Sale of Series B redeemable convertible preferred stock on
June 26, 1996..............................................
Net loss attributable to common stockholders during
development stage.......................................... (730,098)
------------
Balance at December 31, 1996................................ (724,323)
Sale of Series C redeemable convertible preferred stock on
June 5, 1997...............................................
Net loss during development stage........................... (4,232,785)
------------
Balance at December 31, 1997................................ (4,957,108)
Sale of Series D redeemable convertible preferred stock on
March 20, 1998, net of issuance costs of $1,412,126........
Conversion of notes payable to stockholders and accrued
interest to Series D redeemable convertible preferred stock
on March 20, 1998..........................................
Stock options exercised from February through December
1998....................................................... 5,837
Treasury stock purchased from February through August
1998....................................................... (81)
Foreign currency translation adjustment..................... 5,766
Net loss attributable to common stockholders during
development stage.......................................... (9,635,435)
------------
Balance at December 31, 1998................................ (14,581,021)
Sale of additional Series D redeemable convertible preferred
stock on April 9, 1999.....................................
Stock options exercised from January through December
1999....................................................... 68,626
Foreign currency translation adjustment..................... 5,370
Issuance of warrants to purchase common stock...............
Deferred stock compensation.................................
Stock compensation.......................................... 21,565
Net loss attributable to common stockholders during
development stage.......................................... (11,264,804)
------------
Balance at December 31, 1999................................ $(25,750,264)
============

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

F-6
72

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 AND THE
CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OF OPERATIONS FROM
JUNE 24, 1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999

CUMULATIVE
DEVELOPMENT
STAGE PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 24, 1996
DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH
1997 1998 1999 DECEMBER 31, 1999
------------ ------------ ------------ -----------------

Cash flows from development stage
activities:
Net loss during development stage..... $(4,232,785) $(9,635,435) $(11,264,804) $(25,863,122)
Adjustments to reconcile net loss
during development stage to net
cash used in development stage
activities:
Depreciation and amortization...... 272,825 904,679 1,400,163 2,629,139
Non-cash stock compensation........ -- -- 21,565 21,565
Changes in operating assets and
liabilities:
Accounts receivable.............. -- (45,000) (202,532) (247,532)
Prepaid expenses................. (28,553) (306,933) 52,548 (300,538)
Accounts payable................. 202,250 (30,694) (85,719) 121,278
Accrued expenses................. 344,431 432,980 318,799 1,117,433
Deferred revenue................. 132,000 430,300 (309,200) 253,100
Customer deposit................. -- -- 2,000,000 2,000,000
Other, net....................... (40,678) 12,534 (18,852) (69,584)
----------- ----------- ------------ ------------
Net cash used in development
stage activities............ (3,350,510) (8,237,569) (8,088,032) (20,338,261)
Cash flows from investing activities:
Purchases of property and equipment... (2,034,232) (1,998,359) (785,759) (5,092,970)
Other................................. -- -- -- (7,066)
----------- ----------- ------------ ------------
Net cash used in investing
activities.................. (2,034,232) (1,998,359) (785,759) (5,100,036)
Cash flows from financing activities:
Net proceeds from sale of stock....... 6,602,502 13,492,748 2,695,823 24,296,848
Stock options exercised............... -- 5,837 68,626 74,463
Proceeds from long-term debt.......... -- -- 1,278,567 1,278,567
Payments on long-term debt............ -- -- (205,007) (205,007)
Proceeds from notes payable to
stockholders....................... 2,750,000 -- -- 2,750,000
Lease deposit......................... (265,980) (118,935) 262,351 (122,564)
Payments to acquire treasury stock.... -- (81) -- (81)
Other................................. -- -- (72,482) (72,482)
----------- ----------- ------------ ------------
Net cash provided by financing
activities.................. 9,086,522 13,379,569 4,027,878 27,999,744
----------- ----------- ------------ ------------
Effect of exchange rate
changes on cash............. -- 5,344 5,368 10,712
----------- ----------- ------------ ------------
Net change in cash and cash
equivalents................. 3,701,780 3,148,985 (4,840,545) 2,572,159
Cash and cash equivalents at beginning
of period............................. 561,939 4,263,719 7,412,704 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of
period................................ $ 4,263,719 $ 7,412,704 $ 2,572,159 $ 2,572,159
=========== =========== ============ ============

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

F-7
73

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:

NetGenics, Inc. and Subsidiaries (the "Company") design and develop
proprietary software for use in technology solutions. These solutions are the
basis of service offerings designed to enable pharmaceutical and biotechnology
companies to reduce the time and cost of drug development. The Company operates
two wholly-owned subsidiaries, NetGenics UK, Ltd. and NetGenics International,
Ltd.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Development Stage

The Company has been in the development stage since its inception on June
24, 1996. The Company's primary activities since inception have been: (i) the
research and development of products; (ii) the marketing of service offerings to
potential customers; (iii) recruiting personnel; and (iv) raising capital. No
significant revenues have been generated from planned principal operations. As
of December 31, 1999, the Company continues to be in the development stage.

Principles of Consolidation

The consolidated financial statements include the accounts of NetGenics,
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.

Recently Issued Accounting Standards

In March 1998, the American Institute of Certified Public Accountants, the
AICPA, issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Statement of Position
No. 98-1 requires the Company to capitalize certain costs related to internal
use software once certain criteria have been met. There was no impact on the
consolidated financial statements when the Company adopted Statement of Position
No. 98-1 on January 1, 1999.

In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities." Statement of Position No. 98-5 requires the
Company to expense all start-up costs related to new operations as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when the Company adopts Statement of Position No. 98-5. The Company adopted
Statement of Position No. 98-5 on January 1, 1999, which resulted in an
immaterial amount of organizational costs being written-off.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in June
1997, effective for fiscal years beginning after December 15, 1997. This
statement established standards for reporting and displaying comprehensive
income in a full set of financial statements. Accordingly, the Company adopted
this reporting standard in the preparation of these consolidated financial
statements. The Company's only comprehensive income item is the foreign currency
translation adjustment.

In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and requires
companies to report financial and descriptive information about their reportable
operating segments. The financial information is required to be reported on the
same basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. This statement is effective for
periods beginning after December 15,

F-8
74
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1997, with interim information required for the year following adoption.
Management has determined that the Company consists of a single operating
segment. The adoption of SFAS No. 131 had no impact on the Company's
consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. In June 2000,
the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- An Amendment of
FASB Statement No. 133." SFAS No. 138 establishes further accounting and
reporting standards for derivative instruments. Because the Company does not
currently hold any derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will not have
a material impact on the Company's consolidated financial position or results of
operations. The Company will be required to implement SFAS No. 133 for the
fiscal year beginning January 1, 2001.

Major Customers and Concentration of Risks

The Company expects that substantially all of its revenues for the
foreseeable future will be derived from software components, databases and
consulting services provided primarily to pharmaceutical, biotechnology, and
agriscience companies. Accordingly, the Company's success in the foreseeable
future is directly dependent upon the success of the companies within those
industries and their demand for the Company's service offerings. The Company
currently uses a single supplier to provide its object database and a single
supplier to provide certain hardware required to develop and produce the
Company's software. The Company's service offerings are provided primarily
throughout the U.S. There was no revenue earned outside of North America prior
to 1999. Revenue earned outside of North America was 8% of total revenue in
1999. Revenue to one major domestic customer represented approximately 83% and
91% of total net revenue in 1997 and 1998, respectively. Revenue to two other
major domestic customers represented approximately 62% and 20% of total revenue
in 1999. One customer represented the entire balance of accounts receivable as
of December 31, 1998 and 1999. The Company also has deferred revenue for
services of $253,100 with one major domestic customer as of December 31, 1999.

The Company and its subsidiaries place their cash with high credit quality
financial institutions. These balances, as reflected in the financial
institution's records, are insured in the U.S. by the Federal Deposit Insurance
Corporation for up to $100,000. As of December 31, 1999, cash balances of
foreign subsidiaries aggregated $25,234 and the uninsured cash balances in the
U.S. aggregated $2,446,925 with one financial institution.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

Software Development Costs

In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," costs incurred to develop
software technologies internally are expensed as incurred as research and
development until technological feasibility is established. Based on the
Company's development process, technological feasibility occurs upon the
completion of a working model in accordance with each specific license
agreement. As the time period

F-9
75
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

between the completion of a working model and the general availability of the
product to a customer has not been significant, the Company has not capitalized
any software development costs to date.

Property and Equipment

Property and equipment are stated at cost and are being depreciated on a
straight-line basis over the estimated useful lives of the assets which range
from three to five years. Leasehold improvements are depreciated on a
straight-line basis over the remaining term of the lease. Expenditures for
maintenance and repairs are charged to operating expenses as incurred.

Income Taxes

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

Use of Estimates

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

Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting For Stock Based Compensation" ("SFAS 123"). SFAS 123 allows entities
to continue to measure compensation cost using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). As permitted by SFAS 123,
the Company has elected to account for its employee stock based compensation
plan under the intrinsic value based method of accounting prescribed by APB 25,
while providing pro forma disclosures of net loss attributable to common
stockholders during development stage as if a fair value basis of accounting
method had been applied.

Currency Translation

For operations outside of the U.S. that prepare financial statements in
currencies other than the U.S. dollar, the Company translates income statement
amounts at average exchange rates for the year, and assets and liabilities are
translated at year-end exchange rates. The accumulated translation adjustments
are shown as a separate component of stockholders' deficit.

Revenue Recognition

The Company earns revenue from license and service contracts. In accordance
with Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements," revenue from fees for license and service agreements is recognized
ratably over the contract term, generally one year. Revenue from fees for
service contracts is recognized as services are performed and hours are

F-10
76
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

expended. Service hours provided in excess of the number of hours per calendar
period specified in the license agreement are billed at an agreed-upon hourly
billing rate. The Company begins recognizing contract revenue once the contract
acceptance criteria have been met and the collection of the fee is probable.
Revenue from consulting services under time and materials contracts are
recognized as services are performed. Deferred revenue represents cash received
in advance of earned revenues on license agreements and consulting services.
Upon termination of an agreement, the Company refunds cash received in advance
on a pro rata basis.

Advertising Costs

The Company began advertising in 1998 and incurred costs of $100,700 and
$106,487 in 1998 and 1999, respectively. Advertising costs are expensed as
incurred.

Net Loss Per Share

Computations of basic and diluted net loss per share of common stock have
been made in accordance with the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Basic
net loss per share is computed by dividing net loss attributable to common
stockholders during development stage (the numerator) by the weighted average
number of common shares outstanding (the denominator) during the period. Shares
issued during the period are weighted for the portion of the period that they
are outstanding. The computation of diluted net loss per share is similar to the
computation of basic net loss per share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. The Company
has incurred a net loss for 1997, 1998 and 1999 and the cumulative development
stage period from June 24, 1996 through December 31, 1999, therefore, the impact
of dilutive potential common shares has been excluded from the computation as it
would be anti-dilutive.

The following outstanding stock options and warrants (prior to the
application of the treasury stock method), and redeemable convertible preferred
stock (on an as-converted basis) were excluded from the computation of diluted
net loss per share:

1997 1998 1999
--------- --------- ----------

Stock options........................ 552,500 922,847 1,087,417
Warrants............................. 68,750 68,750 514,023
Redeemable convertible preferred
stock.............................. 5,220,734 9,644,029 10,317,984

Reclassifications

Certain amounts in the 1997, 1998 and cumulative development stage period
from June 24, 1996 through December 31, 1999 consolidated financial statements
have been reclassified to conform to the 1999 presentation.

F-11
77
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACCRUED EXPENSES:

The accrued expenses of the Company are as follows:

1998 1999
-------- ----------

Accrued vacation pay.............................. $155,831 $ 270,629
Accrued expenses related to Series E
Redeemable Convertible Preferred Stock.......... -- 1,177,592
Other accrued expenses............................ 604,499 808,500
-------- ----------
$760,330 $2,256,721
======== ==========

4. LONG-TERM DEBT AGREEMENTS:

The long-term debt of the Company is as follows:

1998 1999
-------- ----------

Equipment financing loan, due June 30, 2002.
Monthly payments of $14,928 plus interest of
prime plus 3% (11.5% at December 31, 1999)...... $ -- $ 447,837
Two equipment financing loans, due June 30, 2002.
Monthly payments aggregating $23,687 include
principal and interest at 14.82% through May 31,
2002, final payments aggregating $74,116 due
June 30, 2002................................... -- 625,723
-------- ----------
-- 1,073,560
Less current maturities........................... -- 384,211
-------- ----------
Long-term debt.................................... $ -- $ 689,349
======== ==========

In June 1999, the Company entered into three equipment financing loans,
each due June 30, 2002. Interest expense for 1999 was $81,359. Borrowings under
these loans are collateralized by various receivables, equipment and other
assets of the Company.

Maturities of debt outstanding for the years ended December 31, are as
follows:

2000....................................................... $ 384,211
2001....................................................... 416,755
2002....................................................... 272,594
----------
$1,073,560
==========

5. COMMITMENTS AND CONTINGENCIES:

In the ordinary course of its business, the Company is potentially a party
to litigation regarding the operation of its business. The Company is currently
not the subject of any legal actions.

6. INCOME TAXES:

As of December 31, 1999, the Company had net operating loss carryforwards
("NOL's") of approximately $24,673,000 for income tax purposes. In addition, the
Company had approximately

F-12
78
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$668,000 in research and development tax credit carryforwards ("R&D Credits").
Such losses and credits may be carried forward to reduce future tax liabilities
and expire as follows:

YEARS ENDING DECEMBER 31, R&D CREDITS NOL'S
------------------------- ----------- -----------

2011.................................... $ 27,000 $ 695,000
2012.................................... 107,000 4,170,000
2018.................................... 288,000 9,403,000
2019.................................... 246,000 10,405,000
-------- -----------
$668,000 $24,673,000
======== ===========

Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates, applicable to future years,
to differences between the financial reporting and the tax basis of existing
assets and liabilities. The tax effects of temporary differences that give rise
to deferred tax assets and the liability are as follows:

1998 1999
----------- ------------

Deferred tax assets.......................... $ 6,221,000 $ 10,756,000
Deferred tax liability....................... (188,000) (94,000)
Valuation allowance.......................... (6,033,000) (10,662,000)
----------- ------------
Net deferred taxes......................... $ -- $ --
=========== ============

The Company's deferred tax liability relates to accumulated depreciation.
The deferred tax assets relate to the following:

1998 1999
---------- -----------

Research and development tax credit
carryforwards................................ $ 404,000 $ 668,000
Net operating loss carryforwards............... 5,705,000 9,870,000
Nondeductible accrued liabilities.............. 112,000 218,000
---------- -----------
$6,221,000 $10,756,000
========== ===========

As a result of the Company's limited historical performance and its
development stage, management is unable to project future taxable income that
will be sufficient to realize the deferred tax assets. As of December 31, 1999,
a valuation allowance equaling the total amount of net deferred taxes has been
established reflecting the Company's uncertainty regarding future profitability.

Pursuant to the Tax Reform Act of 1986, the utilization, for tax purposes,
of net operating loss and research and development tax credit carryforwards are
subject to an annual limitation as a result of a cumulative change in ownership
of more than 50% over a three-year period.

F-13
79
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

The redeemable convertible preferred stock is as follows as of December 31:

1998 1999
----------- -----------

Series A redeemable convertible preferred stock, $0.001
par value, 2,000,000 shares authorized; 1,000,000
shares issued and outstanding (liquidation preference
$0.50 per share)...................................... $ 500,000 $ 500,000
Series B redeemable convertible preferred stock, $0.001
par value, 2,000,000 shares authorized; 1,000,000
shares issued and outstanding (liquidation preference
$1.00 per share)...................................... 1,000,000 1,000,000
Series C redeemable convertible preferred stock, $0.001
par value, 7,500,000 shares authorized; 3,220,734
shares issued and outstanding (liquidation preference
$2.58 per share)...................................... 6,602,502 6,602,502
Series D redeemable convertible preferred stock, $0.001
par value, 12,000,000 shares authorized; 4,423,295 and
5,097,250 shares issued and outstanding in 1998 and
1999, respectively (liquidation preference $4.48 per
share)................................................ 16,281,052 18,976,875
----------- -----------
Total redeemable convertible preferred
stock....................................... $24,383,554 $27,079,377
=========== ===========

On June 26, 1996, the Company authorized 2,000,000 shares and issued
1,000,000 shares of Series A Redeemable Convertible Preferred Stock, $0.25 par
value, to a member of the board of directors for $500,000 and 1,000,000 shares
of Series B Redeemable Convertible Preferred Stock, $0.50 par value, to an
investor for $1,000,000.

In April and May 1997, the Company issued two convertible promissory notes,
without interest in the aggregate principal amount of $500,000 to two
stockholders. The principal amount of these notes was subsequently converted
into 243,902 shares of Series C Redeemable Convertible Preferred Stock at the
closing of the sale of the Series C Redeemable Convertible Preferred Stock.

On June 5, 1997, the Company authorized the issuance of 7,500,000 shares of
Series C Redeemable Convertible Preferred Stock, $1.025 par value, and issued
3,220,734 shares of Series C Redeemable Convertible Preferred Stock at $2.05 per
share for total proceeds of $6,602,502. Of the total Series C Redeemable
Convertible Preferred shares issued, 2,073,173 shares were issued to related
parties who are members or observers of the board of directors.

On March 20, 1998, the Company authorized the issuance of 8,900,000 shares
of Series D Redeemable Convertible Preferred Stock, $0.001 par value, and issued
4,423,295 shares of Series D Redeemable Convertible Preferred Stock valued at
$17,693,178, or $4.00 per share. Of the 4,423,295 shares, 3,726,219 shares were
issued for gross proceeds of $14,904,874 before considering expenses of
$1,412,126 related to the issuance. The remaining 697,076 shares were issued
concurrently with the closing of the Series D placement as a result of the
automatic conversion of $2,788,304 of notes payable and accrued interest held by
certain stockholders of the Company. These notes payable were issued on December
18, 1997 in the amount of $2,750,000 and bore interest at a rate of 5.54% per
annum. These notes were convertible to Series D Redeemable Convertible Preferred
Stock at $4.00 per share. In conjunction with these notes, the Company issued
warrants to purchase an aggregate of 68,750 shares of common stock at an
exercise price of $0.60 per share to stockholders. The warrants expire on
December 31, 2000 (see Note 9). On April 9, 1999, the Company authorized the
issuance of an additional 3,100,000 shares of Series D Redeemable Convertible
Preferred Stock, $0.001 par value, and issued 673,955 shares of Series D
Redeemable Convertible Preferred Stock for

F-14
80
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cash proceeds of $2,695,823, or $4.00 per share. Of the total Series D
Redeemable Convertible Preferred shares issued, 4,006,812 shares were issued to
related parties who are members or observers of the board of directors.

On March 20, 1998, the Company adjusted the par value on its Series A,
Series B and Series C Redeemable Convertible Preferred Stock to $0.001 from
$0.25, $0.50 and $1.025, respectively.

All redeemable convertible preferred shares are convertible into common
shares on a 1:1 basis, subject to adjustment which is based upon the issuance of
additional common shares or other convertible securities, without payment of any
additional consideration, at the option of the holder, or other events as
defined. All redeemable convertible preferred shares are entitled to vote on all
matters upon which holders of common stock have the right to vote, to receive
notice of any stockholders meetings, and the number of votes are equal to the
largest number of full shares of common stock into which the redeemable
convertible preferred stock could be converted. Effective upon the closing of an
initial public offering with net proceeds of at least $15,000,000, all
outstanding shares of redeemable convertible preferred stock will automatically
be converted into common stock.

The redeemable convertible preferred shares contain certain preferential
rights upon the liquidation of the Company. In the event of liquidation of the
Company, the holders of outstanding Series A and Series B Redeemable Convertible
Preferred Stock shall be entitled to receive a distribution of the original
price per share, as adjusted for any stock dividends, combinations or splits
with respect to such shares. The liquidation preference for Series A and Series
B Redeemable Convertible Preferred Stock as of December 31, 1999 was $0.50 per
share and $1.00 per share, respectively. In the event of a liquidation or
dissolution of the Company, the holders of outstanding Series C and Series D
Redeemable Convertible Preferred Stock shall be entitled to receive a
distribution of the original price per share, as adjusted for any stock
dividends, combinations or splits with respect to such shares, plus an amount
that reflects a 12% return, compounded annually from the original purchase date,
on the original purchase price for each twelve months that has passed since the
original issue date. The liquidation preference for Series C and Series D
Redeemable Convertible Preferred Stock as of December 31, 1999 was $2.58 per
share and $4.48 per share, respectively.

8. STOCKHOLDERS' EQUITY:

On June 25, 1996, the Company sold 2,687,500 shares of common stock to
directors, officers and employees of the Company for $0.002 per share. During
1996, 200,000 shares of restricted common stock were sold to employees before
software development began at a price of $0.002 per share. These additional
employee shares become unrestricted in annual increments of 25% on the first day
of each year commencing on the first anniversary of the sale. During 1998,
46,875 of the original 200,000 restricted shares were repurchased by the Company
as treasury shares for $81. As of December 31, 1998, 68,750 shares were
restricted and 84,375 shares were unrestricted. As of December 31, 1999, 34,375
shares were restricted and 118,750 shares were unrestricted.

On December 21, 1999, the stockholders of the Company approved an increase
in the number of preferred and common shares authorized to 75,750,000.

9. STOCK OPTION PLAN AND WARRANTS:

The Company adopted the NetGenics, Inc. 1996 Stock Option Plan (the "Plan")
on November 20, 1996. Stock options granted under the Plan may be either
incentive stock options or

F-15
81
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

nonqualified stock options. The purpose of the Plan is to attract, retain and
motivate officers, key employees and directors. A total of 2,000,000 shares of
common stock have been authorized for issuance upon exercise of options under
the Plan. Incentive stock options may be granted at a price equal to or greater
than the fair value at the date of grant. If, at the time the Company grants an
incentive stock option, the optionee owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company, the option
price shall be at least 110% of the fair value at the date of grant.
Nonqualified stock options may be granted at exercise prices of no less than 50%
of the fair value at the date of grant. All options granted to employees are
incentive stock options and become exercisable in annual increments of 20%
following the date of grant except for a total of 60,000 options, issued to
three employees which become exercisable in annual increments of 25% following
the date of grant. All options granted to directors are nonqualified stock
options and become exercisable in annual increments of 33.3% following the date
of grant. All options expire 10 years from the date of grant.

The following table summarizes the transactions of the Company's stock
option plan since its inception date:

WEIGHTED-
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------

BALANCE, DECEMBER 31, 1996...................... 117,500 $0.50
Granted......................................... 460,000 $0.56
Exercised....................................... -- --
Cancelled....................................... (25,000) $0.50
--------- -----
BALANCE, DECEMBER 31, 1997...................... 552,500 $0.56
Granted......................................... 519,543 $1.08
Exercised....................................... (11,375) $0.52
Cancelled....................................... (137,821) $0.76
--------- -----
BALANCE, DECEMBER 31, 1998...................... 922,847 $0.82
Granted......................................... 539,894 $1.40
Exercised....................................... (111,938) $0.62
Cancelled....................................... (263,386) $1.08
--------- -----
BALANCE, DECEMBER 31, 1999...................... 1,087,417 $1.04
========= =====

During 1997, 412,500 of the 460,000 options issued were issued at an
exercise price greater than the fair value on the date of grant. The
weighted-average exercise price and weighted-average fair value of the 412,500
options was $0.58 and $0.42, respectively. The weighted-average exercise price
of the 47,500 options issued at fair value was $0.52.

As of December 31, 1999, there were 238,255 options exercisable with a
weighted average exercise price of $0.66, and 789,270 options available for
grant. The range of exercise prices on options granted as of December 31, 1999
was $0.50 -- $3.00. The weighted-average remaining contractual life of options
granted and exercisable as of December 31, 1999 was 8.17 years.

In December 1997, the Company issued warrants to purchase an aggregate of
68,750 shares of common stock at an exercise price of $0.60 per share to
stockholders. The warrants are immediately exercisable and expire on December
31, 2000 (see Note 7). The fair value of the warrants was not material.

F-16
82
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In October 1999, the Company entered into a warrant agreement with a
customer to purchase 111,940 shares of the Company's common stock at $6.70 per
share, subject to certain adjustments related to subsequent equity transactions.
The fair value of the related warrants of $268,500 has been recognized as a
charge to stockholders' equity as a debit to deferred stock compensation and a
credit to additional paid-in capital. The fair value of the warrants was
estimated using a Black-Scholes pricing model with the following assumptions:
volatility of 37.47%, risk free interest rate of 6.28%, dividend yield of 0.0%
and a weighted average expected life of 5 years. These warrants are being
amortized over 5 years.

Concurrent with the execution of the warrant agreement, this customer
entered into a services agreement and prepaid $2,000,000, for future anticipated
services, or the option to purchase up to 333,333 future warrants at a
conversion price of $2.00 per warrant to allow for the purchase of common stock
at an exercise price of $4.00 per share. This customer may, on any one occasion
before the $2,000,000 is exhausted, utilize up to one-third of any then
remaining prepayment amount to purchase the future warrants. The $2,000,000
prepayment has been recorded as a customer deposit and the fair value of the
related warrants of $1,588,356 has been recognized as a charge to stockholders'
equity as a debit to deferred stock compensation and a credit to additional
paid-in capital. Any remaining prepayment amount may be used to fund the
purchase of common stock under these warrants at an exercise price of $4.00 per
share. The $1,588,356 fair value of the warrants will be amortized against the
related service revenue of $2,000,000 over the service period, which is
estimated to be one year. The fair value of the warrants was estimated using a
Black-Scholes pricing model with the following assumptions: volatility of
37.47%, risk free interest rate of 6.28%, dividend yield of 0.0% and a weighted
average expected life of 5 years.

All of these warrants are immediately exercisable and expire on the earlier
of the fifth anniversary of the closing of a transaction which transfers
substantially all of the Company's assets or beneficial ownership of 50% or more
to another party or an initial public offering.

10. STOCK-BASED COMPENSATION:

The Company has elected to account for its employee stock options under APB
25. Under APB 25 compensation expense is to be recognized for all options
granted at less than the fair value of the Company's Common Shares on the date
of grant.

SFAS 123 requires the Company to make pro forma disclosures of what net
loss would have been had the fair value based method defined in SFAS 123 been
applied to employee and director stock options. The fair value for these options
was estimated using a Black-Scholes option pricing model with the following
weighted-average assumptions: volatility of 0.01%, risk free interest rate of
6.0%, dividend yield of 0.0% and a weighted-average expected life of the option
of 10 years. For purposes of proforma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The pro
forma effect of applying SFAS 123 would be an increase in net loss attributable
to common stockholders during development stage of $6,267 in 1997, $23,952 in
1998 and $60,540 in 1999.

If the Company had elected to recognize the compensation cost of the Plan
based on the fair value of all awards under the plan in accordance with SFAS No.
123, fiscal years 1997, 1998 and 1999 pro forma net loss attributable to common
stockholders during development stage and pro

F-17
83
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

forma net loss attributable to common stockholders during development stage per
common share would have been as follows:

CUMULATIVE
DEVELOPMENT
STAGE PERIOD
FROM JUNE 24,
1996
FOR THE YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------- DECEMBER 31,
1997 1998 1999 1999
------------ ------------- ------------- -------------

Net loss attributable to common
stockholders during
development stage................. As reported $ (4,232,785) $ (9,635,435) $ (11,264,804) $(25,863,122)
Pro forma (4,239,052) (9,659,387) (11,325,344) (25,953,881)
Net loss attributable to common
stockholders during development
stage per common share:
Basic and diluted................. As reported $ (1.47) $ (3.33) $ (3.82) $ (8.94)
Pro forma (1.47) $ (3.34) $ (3.84) $ (8.97)

The Company has recorded deferred stock compensation of $1,156,846 during
the year ended December 31, 1999 representing the difference between the
exercise price of the options granted and the deemed fair value of the common
stock. These deferred amounts are being amortized by charges to operations over
the vesting periods of the individual stock options using the graded vesting
method. Such amortization amounted to $21,565 for the year ended December 31,
1999.

11. EMPLOYEE BENEFIT PLAN:

In September 1998, the Company adopted a 401(k) defined contribution plan
(the "Plan") covering substantially all officers and employees. The Plan permits
participants to defer up to a maximum of 15% of their taxable compensation, not
to exceed the statutory limit. The employee's contribution vests immediately.
Employer matching contributions are made at the discretion of the Company and
vest in accordance with a five-year graduated vesting schedule. The Company made
no discretionary contributions to the Plan during the years ended December 31,
1998 and 1999.

12. LEASE COMMITMENTS:

The Company leases its corporate headquarters facility in Cleveland, Ohio
under an operating lease which expires in May 2003. In addition, the Company
leases office space in Palo Alto, California; San Diego, California and
Columbus, Ohio. Total lease expense for 1997, 1998 and 1999 was $109,718,
$544,646 and $687,921, respectively. Minimum future lease payments as of
December 31, 1999 are as follows:

YEARS ENDING DECEMBER 31,
-------------------------

2000................................................ $ 633,514
2001................................................ 646,033
2002................................................ 660,033
2003................................................ 311,739
2004................................................ 35,690
Thereafter.......................................... 145,736
----------
Total minimum lease payments........................ $2,432,745
==========

F-18
84
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. SUPPLEMENTAL CASH FLOW DISCLOSURE:

The Company paid no taxes or interest in 1997 or 1998. The Company paid no
taxes and $81,359 for interest during 1999. In 1998, the Company converted notes
payable to stockholders and related accrued interest in the amount of $2,788,304
to Series D Redeemable Convertible Preferred Stock. Accordingly, this
transaction was excluded from financing activities on the Consolidated Statement
of Cash Flows for the year ended December 31, 1998 and for the cumulative
development stage period from June 24, 1996 through December 31, 1998. During
1999, the Company wrote off fully depreciated computer equipment and software
totaling $202,903. Accordingly, this transaction was excluded from the
Consolidated Statement of Cash Flows. During 1999, the Company incurred
$1,250,074 in costs associated with the Series E Redeemable Convertible
Preferred Stock which is included in prepaid expenses as of December 31, 1999.
The Company paid $72,482 of the costs in 1999 and the remaining balance of
$1,177,592 is included in accrued expenses as of December 31, 1999. Accordingly,
this transaction was excluded from the Consolidated Statement of Cash Flows.
During 1999, the Company recorded a fair value associated with warrants (see
Note 9) in the amount of $1,856,856 with a charge to deferred stock compensation
and an increase to additional paid-in capital which was a non-cash transaction
and excluded from the Consolidated Statement of Cash Flows.

14. SUBSEQUENT EVENTS:

On January 6, 2000, the Company completed the sale of 4,623,860 (9,250,000
shares authorized) shares of Series E Redeemable Convertible Preferred Stock for
net proceeds of $20,019,680. Upon the sale of the Series E Redeemable
Convertible Preferred Stock, the Company received $21,269,754 of the cash
proceeds of the offering which was released from escrow on January 6, 2000. The
issuance of the Series E Redeemable Convertible Preferred Stock will result in a
beneficial conversion feature of $20,019,680, calculated in accordance with
Emerging Issues Task Force Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios." The beneficial conversion feature will be reflected as a
dividend by a charge to cumulative deficit during development stage and an
increase to additional paid-in capital and will result in an increase to net
loss per share attributable to common stockholders in the first quarter of 2000.
The holders of the Series E Redeemable Convertible Preferred Stock shall be
entitled to a liquidation preference of $4.60 per share and liquidation rights
comparable to the rights of the holders of Series C and Series D Redeemable
Convertible Preferred Stock. Of the total Series E Redeemable Convertible
Preferred shares issued, 106,008 shares were issued to related parties who are
observers of the board of directors.

From January 1, 2000 to January 27, 2000, options to purchase 28,650 shares
were granted pursuant to the 1996 Stock Option Plan (the "Plan") with a weighted
average exercise price of $3.00 per share. The Company estimates that additional
deferred compensation of approximately $223,470 will be recorded as a result of
these option grants and amortized to non-cash stock compensation expense over
the vesting period of the options.

On February 24, 2000, the Company's board of directors authorized
management to file a registration statement with the Securities and Exchange
Commission to permit the Company to sell its common stock to the public. Upon
the completion of the Company's initial public offering, all of the outstanding
redeemable convertible preferred stock will be converted into shares of common
stock.

On February 24, 2000, the Company's board of directors authorized a 1-for-2
reverse stock split that will be completed prior to the completion of the
Company's initial public offering. The accompanying financial statements have
been adjusted retroactively to reflect the reverse split of all outstanding
redeemable convertible preferred stock and common stock.

F-19
85

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000

PROFORMA
JUNE 30, JUNE 30, 2000
2000 (SEE NOTE 1)
------------- -------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,000,012 $ 16,000,012
Lease deposit............................................. 21,144 21,144
Accounts receivable....................................... 191,267 191,267
Prepaid expenses.......................................... 1,216,947 1,216,947
------------ ------------
Total current assets................................... 17,429,370 17,429,370
Property and equipment, net................................. 2,536,542 2,536,542
Other assets................................................ 156,396 156,396
------------ ------------
Total assets........................................... $ 20,122,308 $ 20,122,308
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 155,866 $ 155,866
Accrued expenses.......................................... 1,074,393 1,074,393
Customer deposit.......................................... 1,452,666 1,452,666
Current portion of long-term debt......................... 698,839 698,839
------------ ------------
Total current liabilities.............................. 3,381,764 3,381,764
Long-term debt, net of current portion.................... 1,248,391 1,248,391
------------ ------------
Total liabilities...................................... 4,630,155 4,630,155
------------ ------------
Commitments and contingencies (see Note 4)
Redeemable convertible preferred stock...................... 47,099,057 --
Stockholders' equity (deficit):
Common stock $0.001 par value, 43,000,000 shares
authorized; 3,043,543 shares issued and outstanding at
June 30, 2000 (17,985,387 shares issued and outstanding
pro forma)............................................. 3,043 17,985
Additional paid-in capital................................ 24,128,317 71,212,432
Deferred stock compensation............................... (3,468,055) (3,468,055)
Cumulative deficit during development stage............... (52,272,167) (52,272,167)
Accumulated other comprehensive income.................... 2,039 2,039
------------ ------------
(31,606,823) 15,492,234
Less treasury stock, at cost, 46,875 shares............... 81 81
------------ ------------
Total stockholders' equity (deficit)................... (31,606,904) 15,492,153
------------ ------------
Total liabilities and stockholders' equity (deficit)... $ 20,122,308 $ 20,122,308
============ ============

The accompanying notes are an integral part of these consolidated financial
statements.
F-20
86

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 AND

THE CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OPERATIONS FROM

JUNE 24, 1996 (DATE OF INCEPTION) THROUGH JUNE 30, 2000

CUMULATIVE
DEVELOPMENT
STAGE PERIOD FROM
SIX MONTHS SIX MONTHS JUNE 24, 1996
ENDED ENDED THROUGH
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 2000
------------- ------------- -----------------

Revenue....................................... $ 764,000 $ 989,500 $ 3,215,630
Costs and expenses:
Costs of services provided.................. 475,955 731,414 2,035,728
Sales and marketing (exclusive of noncash
stock compensation of $0 and $18,967 for
the six months ended June 30, 1999 and
2000).................................... 1,047,579 943,949 5,746,397
Research, development and support (exclusive
of noncash stock compensation of $0 and
$98,323 for the six months ended June 30,
1999 and 2000)........................... 2,435,048 2,909,014 14,684,245
General and administrative (exclusive of
non-cash stock compensation of $0 and
$122,579 for the six months ended June
30, 1999 and 2000)....................... 1,788,372 2,279,159 10,794,806
Depreciation and amortization............... 616,930 717,200 3,155,662
Non-cash stock compensation................. -- 239,869 261,434
------------ ------------ ------------
Total costs and expenses................. 6,363,884 7,820,605 36,678,272
------------ ------------ ------------
Loss from operations during development
stage....................................... (5,599,884) (6,831,105) (33,462,642)
Interest income............................... 140,637 514,941 1,382,040
Interest expense.............................. (2,400) (73,201) (154,560)
Foreign currency loss......................... 1,363 -- (17,325)
------------ ------------ ------------
Net loss during development stage............. (5,460,284) (6,389,365) (32,252,487)
Dividend related to beneficial conversion
feature of redeemable convertible preferred
stock....................................... -- (20,019,680) (20,019,680)
------------ ------------ ------------
Net loss attributable to common stockholders
during development stage.................... (5,460,284) (26,409,045) (52,272,167)
Cumulative deficit at beginning of period..... (14,598,318) (25,863,122) --
------------ ------------ ------------
Cumulative deficit at end of period........... $(20,058,602) $(52,272,167) $(52,272,167)
============ ============ ============
Net loss attributable to common stockholders
during development stage per common share:
Basic and diluted........................... $ (1.87) $ (8.71) $ (17.96)
============ ============ ============
Weighted average common shares outstanding:
Basic and diluted........................... 2,921,166 3,030,920 2,909,872
============ ============ ============

The accompanying notes are an integral part of these consolidated financial
statements.
F-21
87

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 AND

THE CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OF OPERATIONS FROM

JUNE 24, 1996 (DATE OF INCEPTION) THROUGH JUNE 30, 2000

CUMULATIVE
DEVELOPMENT
STAGE PERIOD FROM
SIX MONTHS SIX MONTHS JUNE 24, 1996
ENDED ENDED THROUGH
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 2000
------------- ------------- -----------------

Net loss attributable to common stockholders
during development stage (including beneficial
conversion of $20,019,680)..................... $(5,460,284) $(26,409,045) $(52,272,167)
Other comprehensive income:
Foreign currency translation adjustments....... (4,214) (9,097) 2,039
----------- ------------ ------------
Comprehensive loss during development
stage..................................... $(5,464,498) $(26,418,142) $(52,270,128)
----------- ------------ ------------

The accompanying notes are an integral part of these consolidated financial
statements.
F-22
88

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2000

REDEEMABLE
CONVERTIBLE
PREFERRED
STOCK
---------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E
SHARES SHARES SHARES SHARES SHARES
--------- --------- --------- --------- ---------

Balance at December 31, 1999...................... 1,000,000 1,000,000 3,220,734 5,097,250
Sale of Series E redeemable convertible preferred
stock on January 6, 2000......................... 4,623,860
Dividend related to beneficial conversion feature
of redeemable convertible preferred stock........
Stock options exercised from January through June
2000.............................................
Amortization of IBM Service Fee Warrants..........
Foreign currency translation adjustment...........
Warrants exercised by a related party from January
through June 2000................................
Deferred stock compensation.......................
Stock compensation................................
Net loss attributable to common stockholders
during development stage.........................
--------- --------- --------- --------- ---------
Balance at June 30, 2000.......................... 1,000,000 1,000,000 3,220,734 5,097,250 4,623,860
========= ========= ========= ========= =========

STOCKHOLDERS'
REDEEMABLE EQUITY
CONVERTIBLE (DEFICIT)
PREFERRED -------------------------------------
STOCK
----------- COMMON STOCK TREASURY STOCK
------------------ ----------------
AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ------ ------- ------

Balance at December 31, 1999...................... $27,079,377 3,010,813 $3,011 (46,875) $(81)
Sale of Series E redeemable convertible preferred
stock on January 6, 2000......................... 20,019,680
Dividend related to beneficial conversion feature
of redeemable convertible preferred stock........
Stock options exercised from January through June
2000............................................. 26,480 26
Amortization of IBM Service Fee Warrants..........
Foreign currency translation adjustment...........
Warrants exercised by a related party from January
through June 2000................................ 6,250 6
Deferred stock compensation.......................
Stock compensation................................
Net loss attributable to common stockholders
during development stage.........................
----------- --------- ------ ------- ----
Balance at June 30, 2000.......................... $47,099,057 3,043,543 $3,043 (46,875) $(81)
=========== ========= ====== ======= ====

STOCKHOLDERS'
EQUITY
(DEFICIT)
-----------------------------------------------------------
CUMULATIVE ACCUMULATED
ADDITIONAL DEFERRED DEFICIT DURING OTHER
PAID-IN STOCK DEVELOPMENT COMPREHENSIVE
CAPITAL COMPENSATION STAGE INCOME
----------- ------------ -------------- -------------

Balance at December 31, 1999...................... $ 3,090,929 $(2,992,137) $(25,863,122) $11,136
Sale of Series E redeemable convertible preferred
stock on January 6, 2000.........................
Dividend related to beneficial conversion feature
of redeemable convertible preferred stock........ 20,019,680
Stock options exercised from January through June
2000............................................. 16,827
Amortization of IBM Service Fee Warrants.......... (153,328) 434,678
Foreign currency translation adjustment........... (9,097)
Warrants exercised by a related party from January
through June 2000................................ 3,744
Deferred stock compensation....................... 1,150,465 (1,150,465)
Stock compensation................................ 239,869
Net loss attributable to common stockholders
during development stage......................... (26,409,045)
----------- ----------- ------------ -------
Balance at June 30, 2000.......................... $24,128,317 $(3,468,055) $(52,272,167) $ 2,039
=========== =========== ============ =======

STOCKHOLDERS'
EQUITY
(DEFICIT)
----------------

TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------

Balance at December 31, 1999...................... $(25,750,264)
Sale of Series E redeemable convertible preferred
stock on January 6, 2000.........................
Dividend related to beneficial conversion feature
of redeemable convertible preferred stock........ 20,019,680
Stock options exercised from January through June
2000............................................. 16,853
Amortization of IBM Service Fee Warrants.......... 281,350
Foreign currency translation adjustment........... (9,097)
Warrants exercised by a related party from January
through June 2000................................ 3,750
Deferred stock compensation....................... --
Stock compensation................................ 239,869
Net loss attributable to common stockholders
during development stage......................... (26,409,045)
------------
Balance at June 30, 2000.......................... $(31,606,904)
============

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

F-23
89

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 AND

THE CUMULATIVE TOTALS FOR DEVELOPMENT STAGE OF OPERATIONS FROM

JUNE 24, 1996 (DATE OF INCEPTION) THROUGH JUNE 30, 2000

CUMULATIVE
DEVELOPMENT
SIX MONTHS SIX MONTHS STAGE PERIOD FROM
ENDED ENDED JUNE 24, 1996
JUNE 30, JUNE 30, THROUGH
1999 2000 JUNE 30, 2000
----------- ----------- -----------------

Cash flows from development stage activities:
Net loss during development stage............. $(5,460,284) $(6,389,365) $(32,252,487)
Adjustments to reconcile net loss during
development stage to net cash used in
development stage activities:
Depreciation and amortization.............. 687,440 810,662 3,439,801
Amortization of IBM Service Fee Warrants --
APIC..................................... -- (153,328) (153,328)
Amortization of IBM Service Fee Warrants --
Deferred Compensation.................... -- 434,678 434,678
Non-cash stock compensation................ -- 239,869 261,434
Changes in operating assets and
liabilities:
Accounts receivable...................... 45,000 56,265 (191,267)
Prepaid expenses......................... 91,412 (916,409) (1,216,947)
Accounts payable......................... (179,193) 34,588 155,866
Accrued expenses......................... 176,531 (4,736) 1,112,697
Deferred revenue......................... (277,200) (253,100) --
Customer deposit......................... -- (547,334) 1,452,666
Other, net............................... (47,074) (86,812) (156,396)
----------- ----------- ------------
Net cash used in development stage
activities.......................... (4,963,368) (6,775,022) (27,113,283)
Cash flows from investing activities:
Purchases of property and equipment........... (368,195) (881,878) (5,974,848)
Other......................................... -- -- (7,066)
----------- ----------- ------------
Net cash used in investing
activities.......................... (368,195) (881,878) (5,981,914)
Cash flows from financing activities:
Net proceeds from sale of stock............... 2,695,823 20,019,680 44,316,528
Stock options and warrants exercised.......... 12,500 20,603 95,066
Proceeds from long-term debt.................. 537,404 1,097,437 2,376,004
Payments on long-term debt.................... -- (223,767) (428,774)
Proceeds from notes payable to stockholders... -- -- 2,750,000
Lease deposit................................. 88,660 101,420 (21,144)
Payments to acquire treasury stock............ -- -- (81)
Other......................................... -- 72,482 --
----------- ----------- ------------
Net cash provided by financing
activities.......................... 3,334,387 21,087,855 49,087,599
Effect of exchange rate changes on
cash................................ (9,163) (3,102) 7,610
----------- ----------- ------------
Net change in cash and cash
equivalents......................... (2,006,339) 13,427,853 16,000,012
Cash and cash equivalents at beginning of
period........................................ 7,412,704 2,572,159 --
----------- ----------- ------------
Cash and cash equivalents at end of period...... $ 5,406,365 $16,000,012 $ 16,000,012
=========== =========== ============

The accompanying notes are an integral part of these consolidated financial
statements.
F-24
90

NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

The accompanying consolidated interim financial information has been
prepared by NetGenics, Inc. and its wholly-owned subsidiaries (collectively, the
"Company").

In the opinion of management, the unaudited consolidated financial
statements for the interim periods presented reflect all adjustments consisting
only of normal recurring adjustments necessary for a fair presentation of the
consolidated financial position and results of operations as of and for such
periods indicated. These consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
and notes thereto included elsewhere in this prospectus. Results for the interim
periods presented herein are not necessarily indicative of results which may be
reported for any other interim period or for the entire fiscal year.

Net Loss Per Share

Computations of basic and diluted net loss per share of common stock have
been made in accordance with the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". The
Company has incurred a net loss for the periods ended June 30, 1999 and June 30,
2000 and the cumulative development stage period from June 24, 1996 through June
30, 2000, therefore, the impact of dilutive potential common shares has been
excluded from the computations as it would be anti-dilutive.

JUNE 30, JUNE 30,
1999 2000
---------- ----------

Stock Options....................................... 1,083,782 1,234,645
Warrants............................................ 68,750 416,551
Redeemable convertible preferred stock.............. 10,317,984 14,941,844

Pro Forma Balance Sheet

The Pro Forma Balance Sheet gives effect to the conversion of all of the
Company's outstanding shares of redeemable convertible preferred stock into
common stock upon the closing of the Company's contemplated initial public
offering as if it occurred on June 30, 2000.

Pro Forma Net Loss Per Share

The pro forma basic and diluted net loss per share is as follows:

SIX MONTHS
ENDED
JUNE 30,
2000
-----------

Pro forma basic and diluted net loss per share attributable
to common stockholders during development stage........... $ (1.48)
-----------
Shares used in computing pro forma basic and diluted net
loss per share attributable to common stockholders during
development stage......................................... 17,820,329
===========

F-25
91
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following at June 30,
2000:
Furniture and fixtures...................................... $ 701,328
Computer equipment.......................................... 3,401,729
Computer software........................................... 841,554
Leasehold improvements...................................... 344,384
-----------
5,288,995
Less accumulated depreciation............................... (2,752,453)
-----------
$ 2,536,542
===========

3. LONG-TERM DEBT AGREEMENTS:

The long-term debt of the Company at June 30, 2000 is as follows:

Equipment financing loan, due June 30,2002. Monthly Payments
of $14,928 plus interest of prime plus 3% (12.5% at June
30, 2000)................................................. $ 358,269
Two equipment financing loans, due June 30, 2002. Monthly
payments aggregating $23,687 include Principal and
interest at 14.82% through May 31, 2002, final payments
aggregating $74,116 due June 30, 2002..................... 526,960
Equipment financing loan, due June 30, 2003. Monthly
payments aggregating $35,344 include Principal and
interest at 15.32% through May 31, 2003, final payments
aggregating $109,744 due June 30, 2003.................... 1,062,001
----------
1,947,230
Less current maturities..................................... 698,839
----------
Long-term debt.............................................. $1,248,391
==========

In June of 1999 the Company entered into three equipment financing loans,
each due June 30, 2002. In June of 2000, the Company entered into a fourth
equipment financing loan due June 30, 2003. Interest expense for the first six
months of 2000 on these four loans was $73,201. Borrowings under these loans are
collateralized by various receivables, equipment and other assets of the
Company.

4. COMMITMENTS AND CONTINGENCIES:

In the ordinary course of its business, the Company is potentially a party
to litigation regarding the operation of its business. The Company is currently
not the subject of any legal actions.

5. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

F-26
92
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Contingently Adjustable Conversion Ratios". The beneficial conversion feature is
reflected as a dividend by a charge to cumulative deficit during the development
stage and an increase to additional paid-in capital and results in an increase
to net loss per share attributable to common stockholders in the first six
months of 2000. The holders of the Series E Redeemable Convertible Preferred
Stock shall be entitled to a liquidation preference of $4.60 per share and
liquidation rights comparable to the rights of the holders of Series C and
Series D Redeemable Convertible Preferred Stock. Of the total Series E
Redeemable Convertible Preferred shares issued, 106,008 shares were issued to
related parties who are observers of the board of directors.

6. STOCK OPTION PLAN AND WARRANTS:

The following table summarizes the transactions of the Company's stock
option plan since December 31, 1999.

WEIGHTED-
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------

Balance, December 31, 1999......................... 1,087,417 $1.04
Granted............................................ 351,150 $7.52
Exercised.......................................... (26,480) $ .64
Cancelled.......................................... (177,442) $1.66
--------- -----
Balance, June 30, 2000............................. 1,234,645 $2.80
========= =====

From January 1, 2000 to June 30, 2000, options to purchase 351,150 shares
were granted pursuant to the 1996 Stock Option Plan (the "Plan") with a weighted
average exercise price of $7.52 per share. The Company recognized additional
deferred compensation of $1,150,465 as a result of these option grants.

Amortization of the deferred stock compensation amounted to $213,019 for
the six months ended June 30, 2000 and has been recorded as non-cash stock
compensation expense in the unaudited consolidated statements of operations.

The following table summarizes information about stock options outstanding
at June 30, 2000:

WEIGHTED WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE 6/30/00 LIFE PRICE AT 6/30/00 PRICE
----- ----------- ----------- -------- ----------- --------

$0.50 to $ 3.00........................... 1,024,645 7.82 $ 1.26 294,053 $0.72
$8.00 to $10.80........................... 210,000 9.78 $10.26 -- --
--------- ---- ------ ------- -----
1,234,645 8.14 $ 2.72 294,053 $0.72
========= =======

As of June 30, 2000, there are 615,562 options available for grant.

The Company's board of directors has approved an amendment to the 1996
Stock Option Plan that authorizes an additional 500,000 shares for issuance. The
amendment, which is subject to the

F-27
93
NETGENICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

approval of the stockholders, will be voted on by the stockholders prior to the
completion of the Company's contemplated initial public offering.

As of June 30, 2000, the Company has warrants outstanding with a customer
to purchase 111,940 shares of the Company's common stock at $6.70 per share. The
fair value of these warrants is $268,500. Amortization of these warrants
amounted to $26,850 for the six months ended June 30, 2000 and has been recorded
as non-cash stock compensation expense in the unaudited consolidated statements
of operations.

Under a services agreement, this customer prepaid $2,000,000 for future
anticipated services, or the option to purchase up to 333,333 future warrants.
During the period ended June 30, 2000, the customer has applied $547,334 of
invoices for services provided and expenses incurred against the $2,000,000
prepayment, resulting in a prepayment balance of $1,452,666 as of June 30, 2000.
Accordingly, the Company has recognized net revenue of $206,397 for the period
ended June 30, 2000 as the fair value of the warrants is amortized against the
related service revenue over the service period.

7. SUPPLEMENTAL CASH FLOW DISCLOSURE:

The Company paid no taxes and $73,201 for interest during the six-month
period ended June 30, 2000. During the six-month period ended June 30, 2000 the
Company wrote off fully depreciated computer equipment and software totaling
$474,322.

8. SUBSEQUENT EVENT:

On July 27, 2000, the Company acquired the ChemSymphony and MetaSymphony
software programs and components (in both source code and object code form),
customer agreements and contracts and all world-wide intellectual property
rights related to the acquisition from FamilyGenetix Limited for $1.0 million
cash.

The acquisition of these assets will be accounted for as a purchase on the
basis of an asset valuation. Goodwill will be amortized over three years.

F-28
94

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

5,500,000 SHARES

[NETGENICS LOGO]

COMMON STOCK

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

PROSPECTUS

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

CHASE H&Q

UBS WARBURG LLC

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

, 2000
---------------------

YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.

NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF OUR COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.

UNTIL , 2000 (25 DAYS AFTER THE DAY OF THIS
PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
95

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Set forth below is an estimate (except for the registration fee and NASD
filing fee) of the fees and expenses payable by us in connection with the sale
of common stock being registered.

Registration fee............................................ $ 21,708
NASD filing fee............................................. 8,723
Nasdaq Stock Market Listing Application Fee................. 95,000
Blue sky qualification fees and expenses.................... 12,500
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 300,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 102,069
----------
Total............................................. $1,200,000
==========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES

Pursuant to the authority conferred by Section 102 of the Delaware General
Corporation Law, our certificate of incorporation contains a provision providing
that none of our directors shall be personally liable to us or our stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- under Section 174 of the Delaware General Corporation Law; or

- for any transactions from which the director derived an improper personal
benefit.

Our certificate of incorporation also provides that if Delaware law is
amended to further eliminate or limit the liability of directors, then the
liability of our directors shall be eliminated or limited, without further
stockholder action, to the fullest extent permissible under Delaware law as so
amended.

INDEMNIFICATION AND INSURANCE

Section 145 of the Delaware General Corporation Law contains provisions
permitting (and, in some situations, requiring) Delaware corporations such as us
to provide indemnification to their officers and directors for losses and
litigation expense incurred in connection with, among other things, their
service to the corporation in those capacities. Our certificate of incorporation
contains provisions requiring us to indemnify and hold harmless our directors,
officers and employees to the fullest extent permitted by law. Among other
things, these provisions provide that we are required to indemnify any person
who was or is a party or is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding") by reason of the fact that the
indemnitee is or was acting in an official capacity as our director, officer,
employee or agent, or is or was serving at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including service with respect to any employee benefit plan
against all expenses, liability and loss, including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and

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amounts paid in settlement) reasonably incurred or suffered by the indemnitee in
connection with such proceeding to the fullest extent permitted by the Delaware
General Corporation Law, as the same exists or may be amended (but, in the case
of any amendment, only to the extent that the amendment permits us to provide
broader indemnification rights than law permitted us to provide prior to the
amendment). These provisions also provide for the advance payment of fees and
expenses incurred by the indemnitee in defense of any such proceeding, subject
to reimbursement by the indemnitee if it is ultimately determined that the
indemnitee is not entitled to be indemnified by us. We have entered into
agreements with our directors and executive officers providing contractually for
indemnification consistent with our certificate of incorporation and bylaws.

Our certificate of incorporation also permits us to secure insurance on
behalf of any director, officer, employee or agent for any liability arising out
of actions in his or her capacity as an officer, director, employee or agent,
regardless of whether Delaware law would permit indemnification. We have
obtained an insurance policy that insures our directors and officers against
losses, above a deductible amount, from specified types of claims.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since August 1, 1997, we have sold and issued the following unregistered
securities:

1. From August 1, 1997 through July 31, 2000, we granted 1,663,001 stock
options to employees, including officers and employee-directors, 25,000
stock options to a non-employee director, and 25,000 stock options to a
board observer under our 1996 stock option plan. Of these stock
options, covering an aggregate of 1,950,501 shares of common stock,
614,975 have been cancelled and made available for future grants,
149,792 have been exercised and 1,015,733 remain outstanding. The
issuances of securities to employees, officers and directors were
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder as transactions pursuant to a written employee
compensatory benefit plan approved by the registrant's board of
directors. We relied on the exemption provided by Section 4(2) of the
Securities Act to issue the securities to the board observer.

2. From August 1, 1997 through July 31, 2000, we issued an aggregate of
149,792 shares of our common stock to employees and one non-employee
director pursuant to exercises of options at a weighted average
exercise price of $0.61 per share.

3. In April 1997, we executed a promissory note in the aggregate principal
amount of $250,000 in favor of John Pappajohn, one of our directors and
stockholders. No interest was to accrue on this note. The principal
amount of this note was subsequently converted into 121,951 shares of
Series C redeemable convertible preferred stock at the closing of the
sale of Series C redeemable convertible preferred stock in June 1997.
We relied on the exemption provided by Section 4(2) of the Securities
Act.

4. In May 1997, we executed a promissory note in the aggregate principal
amount of $250,000 in favor of Edgewater Private Equity Fund II, L.P.,
one of our stockholders. No interest was to accrue on this note. The
principal amount of this note was subsequently converted into 121,951
shares of Series C redeemable convertible preferred stock at the
closing of the sale of Series C redeemable convertible preferred stock
in June 1997. We relied on the exemption provided by Section 4(2) of
the Securities Act.

5. In December 1997, we issued notes in an aggregate principal amount of
$2.75 million and warrants to purchase an aggregate of 68,750 shares of
common stock at an exercise price of $0.60 per share to 10 investors.
We relied on the exemption provided by Section 4(2) of the Securities
Act.

6. In March 1998, we issued 4,423,295 shares of Series D redeemable
convertible preferred stock to 27 accredited investors at $4.00 per
share, for an aggregate purchase price of $17.7 million. We relied on
the exemption provided by Section 4(2) and Rule 506 of Regulation D
promulgated thereunder of the Securities Act.

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97

7. In April 1999, we issued an additional 673,955 shares of Series D
redeemable convertible preferred stock to 10 accredited investors at
$4.00 per share, for an aggregate purchase price of $2.7 million. We
relied on the exemption provided by Section 4(2) of the Securities Act.

8. In October 1999, we issued warrants to purchase 111,940 shares of
common stock to a customer at an exercise price of $6.70 per share. We
also provided an option to this customer to purchase up to 333,333
future warrants at a conversion price of $2.00 per warrant to allow for
the purchase of common stock at an exercise price of $4.00 per share.
As of June 30, 2000, the remaining future warrants available for
purchase were 242,111. We relied on the exemption provided by Section
4(2) of the Securities Act.

9. In January 2000, we issued 4,623,860 shares of Series E redeemable
convertible preferred stock to 25 investors at $4.60 per share, for an
aggregate purchase price of $21.3 million. We relied on the exemption
provided by Section 4(2) of the Securities Act for all but two
investors. These two investors were issued securities in reliance on
Rules 903(a) and 903(b)(3)(iii) of the Regulation S promulgated under
the Securities Act.

10. In February 2000, we issued 6,250 shares of common stock to one
accredited investor pursuant to an exercise of warrants at an exercise
price of $0.60 per share. We relied on the exemption provided by
Section 4(2) of the Securities Act.

The recipients of the above-described securities represented their
intention to acquire the securities for investment purposes only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed with any
subsequent sales of any of the securities. All recipients either received
adequate information about NetGenics or had access, through employment or other
relationships, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----- ------------------------------------------------------------

*1.1 Form of Underwriting Agreement
+3.1 Certificate of Incorporation
+3.2 Bylaws
*3.3 Form of Amended and Restated Certificate of Incorporation
*3.4 Form of Amended and Restated Bylaws
+4.1 NetGenics, Inc. Stock Purchase Warrant, dated as of October
18, 1999, by and between NetGenics, Inc. and International
Business Machines Corporation
*4.2 Amended and Restated Registration Rights Agreement, dated as
of December 21, 1999, by and among NetGenics, Inc. and the
stockholders named therein
*5.1 Opinion of Jones, Day, Reavis & Pogue
+10.1 Form of D&O Indemnification Agreement between NetGenics,
Inc. and its directors and certain executive officers
+10.2 Registrant's 1996 Stock Option Plan
+10.3 Employment Agreement, dated as of June 25, 1996, by and
between Manuel J. Glynias and NetGenics, Inc.
+10.4 Employment Agreement, dated as of November 10, 1999, by and
between NetGenics, Inc. and Vincent P. Kazmer
+10.5 Technical Services Agreement, dated as of October 15, 1999,
by and between International Business Machines Corporation
and NetGenics, Inc.
10.6 Intentionally omitted

II-3
98

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------

++10.7 SYNERGY Software License and Subscription Agreement, dated
as of April 2, 1999, by and between NetGenics International,
Ltd. and Aventis Crop Science (formerly Hoescht Schering
AgrEvo GmbH)
+21.1 Subsidiaries of NetGenics, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
*23.2 Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
+24.1 Powers of Attorney
27.1 Financial Data Schedule

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

* To be filed by amendment

++ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.

+ Previously filed.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes that:

1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of
the time it was declared effective.

2. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

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99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, NetGenics, Inc.
has duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Cleveland, State of Ohio, on September 27, 2000.

NETGENICS, INC.

By: /s/ MANUEL J. GLYNIAS
------------------------------------
Manuel J. Glynias
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed on September 27, 2000 by the
following persons in the capacities indicated.

SIGNATURE TITLE
--------- -----

/s/ MANUEL J. GLYNIAS Chief Executive Officer and Director
- ----------------------------------------------------- (Principal Executive Officer)
Manuel J. Glynias

/s/ VINCENT P. KAZMER Chief Financial Officer
- ----------------------------------------------------- (Principal Financial Officer and Principal
Vincent P. Kazmer Accounting Officer)

* Director
- -----------------------------------------------------
Walter Gilbert

* Director
- -----------------------------------------------------
Anthony B. Evnin

* Director
- -----------------------------------------------------
John Pappajohn

* Director
- -----------------------------------------------------
Nicole Vitullo

* Director
- -----------------------------------------------------
Alan G. Walton

* Manuel J. Glynias, by signing his name hereto, does hereby execute this
amendment no. 1 to the registration statement on behalf of the directors and
officers of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such directors and officers, which are filed
herewith with the Securities and Exchange Commission on behalf of such
directors and officers.

By: /s/ MANUEL J. GLYNIAS

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

Manuel J. Glynias

Attorney-in-Fact

100

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----- ------------------------------------------------------------

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

* To be filed by amendment

++ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.

+ Previously filed